How to raise investment and beat Africa’s climate crisis
Investments in green sectors in Africa have experienced significant growth since 2017 despite ongoing volatility and macroeconomic risks.
However, there remains a substantial gap in climate financing, which must be addressed.
According to a report by Boston Consulting Group (BCG), an investment of $2.4 trillion is needed to meet Africa’s climate needs by 2030.
The report indicates that only 12% of this funding has been met or committed thus far, posing a significant challenge that must be overcome to ensure a sustainable future for the continent.
Key obstacles hindering investment flow into green sectors are macroeconomic uncertainty, opportunity cost of capital, and investor risk assessment, all of which result in financing costs that are 5 to 6% higher than those in comparable emerging markets.
Factors that impede the growth of Africa’s green sectors
Most companies within the African green industry rely on foreign investment to grow their footprint and impact – but capital inflows have been volatile.
Green sectors are capital-intensive and have long investment horizons (10+ years).
Events such as the 2008 economic crisis and the 2016 US Fed rate hikes drove significant retraction of capital (-10% and -20%, respectively) into safer havens.
As a result, foreign investment in Africa has been flat or slightly declining in the past 10 to 15 years.
At the same time, domestic private credit in Africa has experienced slow growth, so ebbing foreign investment has not been materially replaced by domestic capital.
Solutions to unlock financing
Katie Hill, Partner and Associate Director, Climate, at BCG Nairobi, says that various solutions exist to unlock financing that can be implemented by investors, development finance institutions (DFIs), multilateral organisations, and philanthropic funders.
“Investors can increase Portfolio Value Creation (PVC) (currently half of global levels) to accelerate growth and derisk green companies, which will ultimately bring down the cost of capital,” said Hill.
“Regarding debt, a spectrum of financial instruments are available, ranging from traditional to novel, that can effectively de-risk and mobilise debt into green sectors in Africa.”
Warren Chetty, Managing Director and Partner at BCG Johannesburg, recommends bolstering policy.
“Sufficient resourcing and policies must be appropriately developed so that structured financing instruments can be scaled,” said Chetty.
“Private debt is particularly important for green sectors, which are more infrastructure and working capital intensive.”
Different stakeholders play a critical role in scaling these mechanisms and effectively de-risking capital:
- Governments – Enable favourable regulatory environments, strengthen institutions, ease the issuance of green bonds, and offer sovereign guarantees (if their own credit rating is sound).
- DFIs – Lead on blended finance instruments, providing first-loss capital and loan guarantees to absorb initial losses and execute Contracts for Difference (CfDs) and capped return investments.
- Multilaterals – Scale loan guarantee mechanisms, insurance products, and green bonds to improve availability of capital while de-risking markets to crowd in capital.
- Philanthropic investors – Provide investment readiness support, capped return investments, or debt for climate swaps.
BCG believes that these instruments will be most effective when paired with improved information for private investors.
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