Unveiling the Dynamics of Private Climate Financing for Sustainable Green Growth in Africa

This article explores the major findings of African Development Bank Group 's report on Private Sector Financing for Climate Action and Green Growth in Africa .

Africa, a continent endowed with rich biodiversity and diverse ecosystems, finds itself at the forefront of the global battle against the climate crisis. As nations grapple with the urgent need for climate action and green growth, the financing landscape becomes a critical focal point. The financial flows for climate action and green growth in Africa paint a picture dominated by the prevalence of public finance sources. In the 2019/2020 period, Africa witnessed an average influx of $29.5 billion for climate action, accounting for 4.5 percent of the global climate finance. However, the glaring imbalance between public and private finance becomes evident when dissecting these figures. Public finance, towering at $25.3 billion, outshines private finance, which stands at $4.2 billion, making up a mere 14 percent of the total. This discrepancy underscores a significant reliance on public funds, signalling the need for a more diversified and robust financing landscape.

Different kinds of financing for different countries

The regional disparities in climate finance sourcing reveal a stark reality. North America, Western Europe, and Latin America and the Caribbean showcase a more substantial reliance on private sources, contributing 96 percent, 59 percent, and 49 percent, respectively, to the total climate finance. In contrast, Africa's private finance comprises only 14 percent. The concentration of private climate finance paints a nuanced picture, with more than half (56.2 percent) flowing into five countries: Egypt, Kenya, Morocco, Nigeria, and South Africa. These nations, characterized by more developed financial markets and larger economies, absorb the majority of private funding. On the other hand, 34 other African countries receive less than 1 percent each, reflecting a concentration that leaves vulnerable nations with insufficient resources for climate resilience.

Sectoral disparities within private climate finance allocations further highlight the challenges facing Africa. Mitigation projects, particularly in the energy sector, command a lion's share (81 percent) of private funding. This leaves other highly vulnerable sectors, including agriculture, forestry, and water, with only a quarter of the total climate finance flows. Agriculture and forestry, essential for climate resilience, receive a mere $0.3 billion and $0.4 billion in private investments in 2019-20, with over 90 percent originating from international public financing sources. These sectors' limited private investment stems from challenges such as small-scale, cross-sectoral projects that are challenging for financiers to value and invest in.

Despite some countries, such as Zimbabwe, South Africa, Djibouti, Algeria, and Eritrea, attracting higher shares of private finance, a staggering 30 African countries witness private sector contributions to total climate finance of less than 10 percent, with nine receiving no private climate financing at all. This highlights the prevailing reliance on domestic public resources, with most African countries allocating 2-9 percent of their GDP to climate adaptation.

Differences of financing in different sectors

The financial distribution among different sectors reveals a significant tilt towards mitigation, particularly in the energy sector, where renewable energy, energy efficiency, and sustainable transport projects dominate private climate finance flows. In 2019-20, 74 percent of private climate finance, approximately $3.1 billion, poured into energy systems, primarily renewables. This, however, constitutes only 13 percent of the $24 billion annually invested in African fossil fuel companies. Buildings and transport infrastructure, crucial for green growth, receive only $0.3 billion (7 percent), highlighting the challenges posed by high capital requirements, governance barriers, and lengthy construction processes.

The vulnerability of sectors such as agriculture, forestry, and other land use (AFOLU) and water to climate change is also important to note. Despite their susceptibility, these sectors receive a combined total of only $0.7 billion in private investments, with more than 90 percent sourced from international public financing. The complexity of these projects, often small-scale, cross-sectoral, and difficult to value, contributes to the low private investment.

Cross-cutting areas such as capacity building, education, health, and food, crucial for holistic climate action, are primarily driven by grants and donor funding, receiving $0.4 billion. The low private investment in industry and information and communication technology (ICT) buildings underscores the need for a more diversified approach to channel private funds into these essential areas.

The financing needs and instruments in the continent

As Africa grapples with the enormity of climate action and green growth, the financing needs are staggering. The Nationally Determined Contributions (NDCs) indicate a cumulative financing need of about $2.7 trillion over 2020-30. Annually, this translates to an average of $242.4 billion, with lower and upper bounds of $234.5 billion and $250 billion, respectively. These needs are distributed across mitigation (42 percent), adaptation (44 percent), loss and damage (13 percent), and other needs (less than 1 percent, particularly capacity development).

However, these estimates could be conservative. Africa's actual climate finance needs may be underestimated by up to 60 percent due to limited statistical capacity in some countries, particularly in quantifying adaptation and other needs such as capacity building, monitoring, reporting, and verification (MRV). Data gaps persist, with over 20 countries lacking detailed sectoral breakdowns of mitigation and adaptation needs.

Estimating financing needs for "growing green" poses additional challenges, as many African countries are yet to develop and cost their Long-Term Strategies. The United Nations estimates that at least $1.3 trillion annually is needed between 2020 and 2030 to achieve the Sustainable Development Goals (SDGs) in Africa, with a focus on green growth. Specific projects, like making 35 major cities cleaner, compact, and more connected in Ethiopia, Kenya, and South Africa, require investments of $280 billion by 2050.

The current sources of private sector finance in Africa primarily involve corporations and commercial financial institutions. These entities account for the lion's share of private climate finance, particularly in the energy sector. Institutional investors, individuals, and funds such as private equity, venture capital, and infrastructure funds are gradually increasing their presence in the climate space. Venture capital investments, despite a setback in 2020 due to the COVID-19 pandemic, rebounded in 2021, reaching their highest level in over eight years with $3 billion investments and 308 deals. The energy sector remains the primary recipient, with more than 80 percent of funding directed towards it.

Corporations and commercial financial institutions, however, dominate private climate finance, accounting for the largest share. This trend raises concerns about the concentration of funding in specific sectors, potentially leaving critical areas without adequate support. To diversify investments and spur growth in sectors beyond energy, significant policy and market interventions are necessary.

The financing instruments employed by the private sector in climate investments provide insights into the preferences and challenges faced. Non-concessional debt and equity constitute 90 percent of private climate financing in Africa, highlighting a preference for these instruments. Grants make up 6 percent, and concessional project debt constitutes only 1 percent. This differs significantly from public finance, where grants and low-cost project debt contribute more than 60 percent of total climate financing in Africa. Notably, half of Africa's top 250 listed firms have set emission targets, with the rest expected to follow suit within three years. To achieve these targets, corporates are taking steps to reduce their carbon footprint by investing in energy systems, predominantly renewable energy projects. However, this concentration raises concerns about the neglect of other sectors crucial for comprehensive climate resilience.

Without substantial policy and market interventions, private finance for climate action and green growth is likely to be allocated in the form of equity and non-concessional debt. Creating incentives and conditions to catalyze private investments in climate change-limiting and green growth-enhancing sectors such as infrastructure, transport, and agriculture becomes imperative for Africa's green and inclusive growth agenda.

To wrap it all up, Africa's journey toward sustainable green growth demands a paradigm shift in the climate financing landscape. The disparities between public and private finance, regional imbalances, and sectoral concentration underscore the need for concerted efforts. By fostering a more diversified, inclusive, and innovative approach to climate financing, Africa can unlock the full potential for robust and sustainable climate resilience. Collaboration among governments, financial institutions, and the private sector will be instrumental in realising a climate-resilient and prosperous Africa. The challenges are immense, but the opportunities for transformative change are equally significant. As Africa navigates the path towards a sustainable future, it must seize these opportunities and forge a resilient and green trajectory for generations to come.

References

African Development Bank Group - https://www.afdb.org/sites/default/files/aeo_2023-chap2-en.pdf