Unlocking climate financing in the developing world’

Every global climate change event begins with words that rival the alphabet for its synchronicity. “Africa accounts for the least share of global emissions, yet it is the region most vulnerable to extreme weather events.” The main solution offered to address these inequalities remains climate financing, as the developed nations are unwilling or unable to cut down emissions to meet their Paris Agreement 2015 commitments.

That train, however, has not left the station; and it may be that the continent looks inwards to ignite the engines.

African nations are battling increasing cases of famine, tropical cyclones, deforestation, declining agricultural yields, rising oceans, increasing desertification, and growing rural-to-urban migration. In some cases, countries are spending nearly 9 percent of their GDP responding to natural disasters caused by climate change. Take for example, Lake Chad – the largest freshwater lake in the Sahara Belt – which has lost 90 percent of its surface area, leading to five million climate-related refugees moving from Cameroon, Chad, Niger, and Nigeria as it shrinks.

Those challenges illustrate the urgent need for climate financing. A study by the Climate Policy Initiative states that Africa requires approximately $250 billion each year to address its combined climate goals. However, annual climate flows in Africa for 2022 were only $30 billion, or just 12% of the required amount. Considering that all 54 countries together have a GDP of $2.4 trillion according to the World Bank’s Annual Report of 2021, it implies that 10% of Africa’s current annual GDP needs to be mobilized above and beyond current flows every year for the next ten years.

Worsening, advanced economies are yet to fulfill their pledges to contribute $100 billion annually to assist countries in the Global South in their efforts to cope with the impact of climate change. Climate change could cause Africa’s GDP to decrease by up to 30 percent by 2050. As a result, climate change is predicted to continue dampening Africa’s prospects for a quick economic recovery and magnify the trends of food insecurity and vulnerability arising from the coronavirus pandemic and Russia’s invasion of Ukraine. However, Africans cannot wait and a new internally focused approach should be adopted. It may also be easier for donor countries to support new investments rather than providing bilateral aid.

Private sector financing

Africa’s rapid economic boom over the last two decades has been fuelled by private sector growth. The IMF-induced SAPs are widely blamed for widening poverty gaps in the late 1980s, but one key contribution – or only one – was reigniting the private sector contribution to GDP. Throughout decades post-independence, African governments embarked on economic policies that closed the market to a few state-run corporations that were poorly managed and riddled with cronyism.

Today’s private sector is the backbone of the continent’s economy and the largest employer. It also carries a significant potential to address climate finance needs. Currently, most internal climate financing in Africa is from public actors (87%, $20 billion) with limited contributions from private actors.

For that to change, there is a need for an improved regulatory and investment environment. Governments must alter their laws to allow the private sector to invest in projects such as renewable energy, solid waste management, and water harvesting. These functions are currently under the purview of state authorities in most nations, and an incessant push to open these sectors may spur rapid investment.

Moreover, African governments must adopt innovative financing opportunities that blend public and private partnerships. They can raise green bonds and blended finance. Crucially, there is already a laid-out model that is a resounding success story.

In 2018, Seychelles launched the world’s first sovereign green bond that raised $15 million, demonstrating the potential for countries to harness capital markets for financing their climate mitigation goals. The World Bank played an advisory role, while three private investors: Calvert Impact Capital, Nuveen, and the U.S.-based Prudential Financial spearheaded the financing.

Speaking at the announcement of the bonds at the Our Ocean Conference in Bali, Vincent Meriton, Vice-President of the island nation of Seychelles – whose economy is dependent on fishing and tourism – said, “We are honored to be the first nation to pioneer such a novel financing instrument. The blue bond, which, is part of an initiative that combines public and public investment to mobilize resources for empowering local communities and businesses, will greatly assist Seychelles in achieving a transition to sustainable fisheries and safeguarding our oceans while we sustainably develop our blue economy.”

The issuance of green bonds worldwide reached $254 million in the first quarter of 2023 according to Moody’s, up 36% from the fourth quarter of 2022. However, Africa accounted for less than 1% of global issuances. To make headways in this direction, nations will need to create a repo market to stimulate demands for green bonds, as advocated by the United Nations Economic Commission for Africa (UNECA).

Swapping debt for climate finance

The debt-climate swap is another internal mechanism that can be activated to raise climate financing. It allows a country’s debt to be reduced or forgiven in exchange for commitments to green investments. The model is particularly vital since a growing percentage of external climate finance for Africa was in concessional loans that pose even greater harm to vulnerable countries with high public debt.

In 2022, the International Monetary Fund (IMF) established a $50 billion climate loan fund to help low and middle-income nations access affordable and longer-term financing to respond to shocks associated with climate change. Rwanda became the first African nation to receive a loan of $319 million.

Speaking at the African Economic Conference (AEC) in early December, Kevin Urama, chief economist and vice president of the African Development Bank (AfDB), raised concern about the debt instruments flowing into the continent and categorized as climate financing.

“Up to 60% of climate financing coming into Africa were debt instruments. Yet African countries did not cause the climate finance problem.”

Refinancing existing debt would create fiscal space for green investment projects in African countries. More African countries need to quickly co-opt this strategy.

Carbon markets

Despite the rapid deforestation taking place, Africa still holds some of the largest carbon sinks in the world, such as the Congo basin which is viewed as the second largest sink globally after the Amazon. However, African nations need to market these facts aggressively while building domestic capacity to better assess the scale of these carbon sinks.

Forest conservation efforts, particularly dealing with coastal mangroves, would need to kick on so that governments engage in high-level carbon trading with private companies worldwide that ranks as the largest emitters.