Unlocking climate finance for Africa: A call for action

By Dr. Amar Inamdar, Managing Director, KawiSafi Ventures Fund | December 4, 2023

After the Africa Climate Summit in Nairobi this year, one message stands out. The potential for green inclusive growth in Africa is unrivalled. Yet our potential is held back by a lack of investment and risk aversion by the world’s capital allocators. Why? And what can we do to unlock our potential?

Let’s put some numbers to it.  Just three percent. That is the proportion of global climate investment that flows to Africa.  A continent that is home to 20 percent of earth’s people.  Three percent. That’s also the contribution Africa has made to cumulative global greenhouse gas emissions. An uncomfortable coincidence. One thing is for sure. People in Africa are increasingly frustrated at the promises and talk of global action. We need to see that translated to products and services that build resilience, enable adaptation to climate challenges, and create opportunity on the ground.

Africa is diverse. Yet there is an underlying unity. Across the continent, you’ll find fast-growing, increasingly well educated, predominantly young communities. Entrepreneurial people hungry for opportunity, and with extraordinary potential. McKinsey estimates $US3 trillon of climate investment opportunities – in energy, infrastructure, agriculture, and mobility. It’s an incomprehensible number. $US 250 billion a year is what the African Union estimates is needed to meet Africa’s climate ambition.  One thing is not in doubt. African economies are developing – and in most cases, growing much faster than OECD countries.

The opportunity lies in building a green economy to meet the essential needs and aspirations of 1.5 billion people. The mantra – electrify everything, decarbonize manufacturing, and generate low carbon power – applies almost more to emerging economies than it does to developed ones. An Ethiopian family uses, on average, one one-hundredth of the energy of a family in the US.  Achieving even the ordinary, moderate aspirations of a middle-class life requires significant economic growth. We know that the emissions intensity of ‘business as usual’ economic activity is 10 times higher in Africa than it is in Europe. If we grow with this historically intense carbon footprint, there is no chance of the world staying within liveable atmospheric limits.  So we have a one-time chance to leapfrog into a clean future.

There is no need for a debate about development versus a liveable planet for all. Renewable generation has plummeted in costs by over 90 percent; the cost of battery storage has declined 75 percent in the last 10 years; and innovation in energy efficient appliances have created a Cambrian explosion of real business investment opportunities. Africa has led the way. Economies such as Kenya and Ethiopia are predominantly based on renewable generation.   Decentralised residential solar power – financed by mobile payment systems that were invented and scaled in Kenya – have scaled prodigiously. Over half a billion people worldwide now have access to electricity because of these innovations. Electric mobility – especially in the two-wheeler segment ubiquitous across African cities for moving people and products from place to place – is cheaper than the comparable petrol bike.

So, the market is there, the technology and businesses can deliver, the regulatory frameworks are largely in place.  Yet investment is woefully inadequate. The Bridgetown Initiative provides some sobering analysis.  In OECD countries, 81 percent of green investment is funded by the private sector; yet in emerging economies that proportion drops to 14 percent.  National governments, endebted by COVID-19 and macro-economic shocks do not have space on their balance sheets for the public investment needed for rational climate ambition.

Interest costs for private lending to businesses and governments in emerging and developing markets are punishingly high. As noted by Persaud, the average interest cost in leading emerging countries is 10.6 per cent per annum, against only 4 per cent in the EU for a similar solar farm. A two and a half times multiple.

For venture-backed private businesses the numbers are worse. It is not unusual to see 16-18 percent coupons on dollar denominated debt in emerging markets. In local currencies, expect mid-twenty percent returns and higher. Given these costs of capital, you wonder how many businesses in Europe or the US would be profitable.

The consequence of these high costs of capital are two-fold. First, people in emerging markets, often with the lowest purchasing power, have to pay more for essential products and services such as electricity than their counterparts in the developed world.  Second, there are fewer businesses in emerging markets that will meet these profitability hurdles and appear to be economically rational to an international investor seeking to allocate capital. Hardly the world that we would want to see.

What to do about all this? There are three pragmatic solutions which we believe can make real progress at COP28 and can be implemented now.

  1. Make capital cheaper. Use blended structures to pool public and private funds and crowd in capital.  There are already thoughtful examples – such as the Green Climate Fund’s blended finance initiative –  of how to incentivize the private sector to meet public goals through, for example, first-loss guarantees and results-based financing. It is particularly notable that local finance from insurance companies and pension funds in young, fast growing markets are increasingly available  – which is the opposite of ageing economies in Europe and Japan. Yet these funds are typically risk averse and have fiduciary mandates that restrict them from participating in the types of businesses that will make the biggest difference to people and planet.
  2. Make Article 6 work for those that need it the most, not just the few. Carbon markets and climate capital have an outsized role to play given the economic asymmetries highlighted here. Many businesses across Africa are developing innovative ways to monetise carbon assets in a way that improves livelihoods, affordability and financial sustainability. For example, Biolite and Koko Networks use carbon markets to reduce the cost of cookstoves by 50 percent, sometimes more, in their markets. For a low-income family, this $US30-$US50 of saving has an outsize impact on a household budget.  Yet the difference between compliance and voluntary carbon markets is deeply asymmetric and disadvantages innovation in emerging markets. The Africa Carbon Markets Initiative and Voluntary Carbon Markets Initiative are leading the charge in redressing the balance but we need to see further progress now.
  3. Remove subsidies on fossil fuels. The IMF recently estimated implicit and explicit fossil fuel subsidies globally at $7tn.  Until recent reforms, Nigeria spent $US12bn annually in fossil fuel subsidies. The world can’t afford it.

These are some pragmatic suggestions that will make the planet-sized difference we need to address a planet-wide problem. Achieving this is challenging, but possible. And, in Africa, we can show the way.  Let’s build a liveable planet.

Amar Inamdar, PhD: Amar is an investor that focuses on building businesses that tackle our biggest social and environmental challenges. He is currently the managing director of KawiSafi Ventures, an impact investment fund created by Acumen.