Climate Finance in Africa improving but more needs to be done

By Steve UMIDHA

The total annual climate finance flows in Africa for 2020, domestic and international, were only USD 30 billion, just 11 percent of the USD 277 billion needed every year, the latest findings by the Climate Policy Initiative have shown.

While the financing gap is significant, Africa’s rapid urbanization, expanding infrastructure, and energy-access needs offer significant investment opportunities.

This comes barely weeks ahead of 2022 United Nations Climate Change Conference, more commonly referred to as COP27, slated for 27th United Nations Climate Change conference, from 6 to 18 November 2022 in Sharm El Sheikh.

Egypt, an oil and gas producer considered highly vulnerable to climate change, has positioned itself as a champion for African interests as it prepares to host the summit in Sharm el-Sheikh in November.

Commissioned by FSD Africa, the Children’s Investment Fund Foundation, and UK Aid, the Landscape of Climate Finance in Africa is a first-of-its-kind analysis to map climate finance flows in Africa by region, by sector, and by source.

By improving the understanding of the volume, sources, thematic uses, and sectoral allocation of these flows the research will help investors and climate negotiators identify entry points, financing gaps, and opportunities for new investments.

Crucially, the research also provides a baseline against which to measure progress on climate finance and the success of particular interventions.

Private sector financing remains too low

It contributed only 14% (USD 4.2 billion) of total climate finance in Africa, much lower than in other regions like South Asia (37%), East Asia and Pacific (39%), and Latin America & Caribbean (49%).

CPI estimates that Africa requires $277 billion dollars annually to implement its Nationally Determined Contributions (NDCs) and meet its 2030 climate goals.

However, the most recent data show annual climate finance stands at only $30 billion. This gap is likely even greater. Countries often underestimate their climate finance targets, especially in relation to adaptation, due to data and methodological problems in costing their NDCs.

Investment gaps vary between countries, but all regions receive significantly less finance than they need. The Southern African region bears the largest financing gap in absolute terms. This is mainly attributed to high climate finance needs of South Africa alone, estimated at USD 107 billion, combined with one of the lowest regional levels of climate investment.

Climate finance is concentrated with 10 countries accounting for more than 50% of Africa’s climate finance. These include Egypt, Morocco, Nigeria, Kenya, Ethiopia and South Africa.

Africa strikes a better balance between adaptation and mitigation than other regions. Mitigation accounted for 49% (USD 14.6 billion) of climate finance flows in Africa, followed by 39% (USD 11.4 billion) towards adaptation, and 12% (USD 3.5 billion) to dual benefits.

This is a positive trend, given Africa’s disproportionately high vulnerability to climate change. Yet funding for both adaptation and mitigation must still increase by at least six and 13 times, respectively.

There is huge potential to translate Africa’s sustainable energy needs into investment opportunities and reduce investments in fossil fuels.

Africa will need around USD 133 billion annually in clean energy investment to meet its energy and climate goals between 2026–2030 (IEA, 2022). However, annual investment in renewable energy — arguably the most attractive sector for commercial investors — stands at a mere USD 9.4 billion.

Stakeholders need to boost funding for Agriculture, Forestry and Other Land Use in particular. Despite the sector’s economic and social importance, and implications for food security, gender, biodiversity, and water security, it drew only 16% of the total climate finance in Africa.

To address the current climate financing gap and accelerate investment into Africa’s diverse opportunities, we propose the following immediate priorities:

Adapt strategies to address current and future country realities

Currently, debt accounts for more than half of climate finance. This exacerbates already high debt vulnerabilities amid other ongoing crises such as the Covid-19 pandemic, food insecurity, and exchange rate vulnerabilities.

Guarantees, insurance, and currency hedging could better address current fiscal realities and catalyze more private investment (OECD, 2020a). Stakeholders should tailor their solutions to local factors like depth of capital markets and implementation capacity.

Boldness to fund hard-to-abate sectors and less mature markets. While lending via traditional instruments (debt, equity, and grants) is critical, concessional finance players should take on greater risk, and, once they are de-risked and the project is operational, exit.

Public actors should continue to lend to energy projects when needed and focus grants on adaptation and AFOLU projects. Stakeholders should commit concessional finance to hard-to-abate sectors like industry and urban infrastructure; sectors where the transition has hardly begun — like natural capital in carbon sinks, biodiversity, and ecosystem preservation; and nascent areas like the blue economy and green-fintech.