Country: Ethiopia

Africa’s climate finance must hit $277bn to meet 2030 goals – Study

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If Africa is to meet its 2030 climate goals and implement the Nationally Determined Contribution (NDCs), climate finance on the continent must hit $277 billion, a new study on the Landscape of Climate Finance in Africa says.

The study, commissioned by the Financial Sector Deepening Africa, the Children’s Investment Fund Foundation, and UK Aid finds that total annual climate finance flows in Africa – both domestic and international was $30 billion, which is just 11 percent of the needed $277 billion.

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How to fund sustainable growth in Africa

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‘How to fund sustainable growth in Africa’ was a recent event held at London Business School’s Sammy Ofer Centre by the Royal African Society (RAS) and Standard Chartered which saw Bill Winters, CEO of Standard Chartered, in conversation with Arunma Oteh, OON, Chair of the RAS, about how to fund sustainable growth in Africa. The event was supported by London Business School’s Wheeler Institute for Business and Development and the LBS Africa Club.

The issue of sustainable growth is a significantly important topic for investors, banks and corporates around the world. Promoting sustainable finance to emerging economies is a growing priority for the global investment community, bringing together public and private sectors to ignite and grow climate and environmental finance, promote good governance, and support broader development goals. Standard Chartered Bank’s CEO Bill Winters addressed these issues and more on 5 October, and later engaged in discussion Royal African Society Chairperson Arunma Oteh.

Africa’s massive financing gap

The UN’s Economic Report on Africa 2020 estimated that the continent needed about $1.3tn a year to achieve the Sustainable Development Goals (SDGs) by 2030, a figure that could increase by 50% to $19.5tn as a result of population growth. A more recent report by Climate Policy Initiative (CPI), funded by CIFF and FSD Africa, Climate Finance Needs of African Countries, has estimated that the cost of implementing the continent’s NDCs (nationally determined contributions) under the Paris Agreement could be around $2.8tn between 2020 and 2030; the UN now estimates the figure to be over $3tn over the same period.

It is not fair or possible for Africa to meet these funding requirements. Africa accounts for only 2-3% of current global emissions (and about the same level of cumulative emissions) and yet is the continent most at risk from climate change. CPI’s report explains that African governments have committed $264bn of domestic resources for implementing NDCs, leaving a funding gap of $2.5tn. In comparison, the combined annual GDP across the continent is $2.4tn. If African countries were to fund the gap themselves, the annual expenditure of $250bn would more than double their combined spending on health. The CPI report notes, however, that “total annual climate finance flows in Africa, for 2020, domestic and international, were only $30bn, about 12% of the amount needed,” and that “most current climate financing in Africa is from public actors (87%).” In other words, there is a pressing need for much greater involvement of private finance in closing the funding gap.

Attracting private finance

For Standard Charters’ Bill Winters, there are three things that are required to access private finance at scale:

First, there needs to be continued development of a set of agreed standards against which to measure projects and their impacts. CPI’s report (cited above) emphasises the need to improve the quality and granularity of the data on the financing needs of each country, classifying them by economic sector and subsector and by public and private sources of finance.
Second, there needs to be a more effective model for public-private partnerships with MDBs (multilateral development banks). At present, there are two main challenges – the scale of MDB financing available and the ratio of private to public funds in the projects. Winters explained that MDBs currently contribute around $9bn annually (out of a total requirement of $1.3tn) and that for every 95c received from the World Bank only around $1 of private capital is contributed. When asked in the discussion’s Q&A session what he would do if he were newly elected president of a US MLB, he said he would ask his shareholders for at least a doubling of capital, request permission to increase funding for sustainable projects by fifteen times, and tell them that the expected loss on those projects would need to increase from approximately zero to 6-7%, the loss rate one would expect from a risky tranche of such projects. In this way, public financing would be catalysing, rather than substituting.
Finally, non-bank capital needs to be accessed at scale. With less than 2% of the AUM of the 300 largest asset managers targeted at Africa, there is scope for much greater involvement of private investors, but only if the products available can be standardised, understandable and rated.
The potential global benefits of Africa’s sustainable growth

A recent Standard Chartered report, Just in Time, has estimated that developing markets, of which Africa represents a large proportion, need $95tn between now and Net Zero. If the countries were to fund it themselves through taxation and borrowing, it could reduce household consumption by an estimated 5% p.a. This would be an especially unfair burden, given Africa’s low contribution to global emissions. If funded by public and private capital from developed countries, on the other hand, GDP could be increased by 3.1% in emerging markets and 2% worldwide (equivalent to $108tn to 2060). This would represent a welcome contribution to global growth in the mid-21st century.

Net Zero and Africa’s energy policy

During a Q&A session moderated by Arunma Oteh, Winters was asked about how the drive for Net Zero would affect the nearly 800 million people with no access to electricity, many of whom are in countries looking to increase the levels of emissions-generating industrial, educational and urban activities as part of their growth agendas. Winters acknowledged that Africa’s power deficit was enormous and that a just transition must be central to any successful sustainability action, and he accepted that the strong economic growth that was on offer would also entail a rise in emissions, before a reduction. But, given the target of a 45% reduction in emissions by 2030, he hoped that big investments in better power, manufacturing and agriculture would be made now. When asked specifically about natural gas, Winters explained that – as in the IEA’s likely scenario – gas usage would increase due to underlying growth and would represent an essential transition fuel for the continent.

COP26 and the Taskforce on Scaling Voluntary Carbon Markets

When reflecting on COP26, Winters felt that notable successes had been achieving greater involvement of the private sector, developing a clearer model for public-private relationships (and in the process overcoming some initial antagonism between the parties) and establishing good frameworks for measurement and assessment. One of the areas in which he felt there was more to do was Article 6 on market mechanisms and non-market approaches. COP26 saw the adoption of guidance, rules, modalities and procedures to be overseen by a Supervisory Board, and the introduction of instruments (ITMOs) similar to carbon credits in the voluntary carbon markets, but there remain some areas to clarify around past credits and the potential for double counting, amongst others.

Winters was then asked about his role as Chair of the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), the private sector-led initiative working to scale an efficient and effective voluntary carbon market. He explained that it contains 450 members from a range of fields – NGOs, academia, private sector actors, including emitters, and intermediaries – who are seeking to get tens or hundreds of millions of dollars into environments at risk and to incentivise the development of carbon-reducing technologies that would otherwise lack investment. The first focus of these activities has been the Amazon, the Congo Basin and the Indonesian rainforests, currently home to the world’s largest existing carbon sinks.

Looking ahead to COP27

Oteh then asked Winters about his thoughts on COP27 and what his criteria for success would be for that meeting. He hoped to see ongoing focus on public-private partnerships, that is, an acknowledgement that the problem was too large to be solved by either party alone. Then he asked for greater specificity in the definitions in Article 6 about how national accounting reconciles to carbon markets. Finally, he said that governments had to deliver the funds they promised, if they were to have any chance of catalysing private sector financing in the volumes required.

Overall, Winters was positive that the required momentum was building behind this issue. As we look forward to COP27 and think about Africa’s journey towards sustainable growth, both he and Oteh were optimistic that Governments and MDBs can catalyse private sector finance to enable a just transition top Net Zero on the continent. We will be watching COP27 to see whether these hopes are realised.

This event was curated by the Royal African Society (RAS) and Standard Chartered and supported by the Wheeler Institute for Business and Development and the LBS Africa Club.

David Jones MBA 2022 is a Classics graduate and has worked as a teacher in Malawi, an accountant at Deloitte and in the finance function at the Science Museum in London. He completed an internship with the Wheeler Institute’s Development Impact Platform in Zambia over summer 2021 and is now continuing as an intern for the Wheeler Institute, contributing to the creation of content that amplifies the role of business in improving lives.

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FSD Africa Announces Arunma Oteh as Board Member

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FSD Africa has announced that the former Director General of the Securities and Exchange Commission (SEC) Nigeria Arunma Oteh, has joined its Board of Directors to support the organisation as it works to strengthen and deepen Africa’s financial markets, particularly in the area of green finance.

FSD in a statement noted that Arunma is passionate about the role of financial markets in catalysing Africa’s success.

Commenting on the announcement, FSD Africa Chairperson, Dr. Frannie Léautier, said: “I am thrilled to have such a highly experienced and qualified person join our Board of Directors. Arunma’s detailed knowledge of global economics and the African financial sector will be invaluable to our organisation as we continue our efforts to improve access to capital and climate financing across the continent. I would like to extend a very warm welcome to Arunma and look forward to working with her.”

On her part, Arunma Oteh said: “FSD Africa is doing incredibly important work across the African continent. Ensuring reliable and self-sufficient financial markets is essential to ensuring sustainable growth and FSD Africa’s programmes and research are at the forefront of addressing this gap. As someone who has worked in this sector my entire career, I understand the immense value of financial markets. I am also delighted to contribute my expertise to guiding FSD Africa in its unique contribution to Africa’s economic development.”

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Ethiopian Securities Exchange set to launch in two years

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At least 50 companies are expected to list on the Ethiopian Stock Exchange (ESX), which will provide a platform for the privatisation of the country’s state-owned enterprises.

Ethiopia’s giant new sovereign wealth fund, Ethiopia Investment Holdings (EIH) is working with the country’s Ministry of Finance and Nairobi-based Financial Sector Deepening Africa (FSDA) to set up the Ethiopian Securities Exchange (ESX).

EIH has set up a Project Team with FSDA (which is backed by British government development aid), and has invited consultants to bid for a fundraising drive to raise capital for the new bourse.

A Capital Markets Proclamation (No. 1248/2021) says the exchange will be established as a Share Company (public company in Ethiopian law) by government in partnership with the private sector, including foreign investors.

Between 25% and 55% of the ownership of the ESX will be for corporations, capital market intermediaries and operators of international securities exchanges, while government will not own more than 25%. It will be a for-profit entity.

The Project Team is to develop the ESX business plan and its structures, as well as outlining the market segments. It will also lead development of the ESX trading rules, policies and procedures, the trading and operating systems, and other ICT infrastructure. It will establish ESX operations and launch it.

Fifty companies expected to list on ESX

According to FSDA, “At least 50 companies, including banks and insurance companies, are expected to list at the launch of the exchange. The exchange is designed to provide a fundraising platform for small and medium-size enterprises, which are the backbone of the Ethiopian economy. The exchange will also offer a platform for the privatisation of Ethiopia’s state-owned enterprises.

“In the past few years, the Government has implemented several reforms to open the economy and the launch of a securities exchange will be a catalyst for attracting new investment from the private sector.”

The ministry, EIH and FSDA signed a cooperation agreement to launch the bourse in May. Ethipia’s finance minister, Ahmed Shide, said the cooperation agreement “is a first concrete step towards realising our vision.”

Mark Napier, CEO of FSDA, added: “Our assistance will leverage FSD Africa’s vast expertise and experience in developing capital markets infrastructure across Africa. This support signals our long-term commitment to a thriving capital market that is deep, liquid, and efficient.”

The next day a local agency, FSD Ethiopia, was launched to maintain the momentum.

Ethiopian capital market authority to be established

Meanwhile, work continues to build a capital market authority regulator. In November 2021, Meles Minale, a senior macroeconomic advisor at the National Bank of Ethiopia (central bank) was appointed to chair a team of 14 experts to explore the establishment of the authority. They report to Yinager Dessie, governor of the central bank.

Ethiopia’s prime minister, Abiy Ahmed, will appoint a director and a deputy director for the authority, which will be a federal agency accountable to parliament. Its role includes safeguarding investors and overseeing the integrity of the capital market and supervising securities brokers, investment advisers, collective investment scheme operators, investment bankers and securities dealers.

EIH is a key shareholder in the ESX and is also likely to boost the exchange with a pipeline of listings, at least of minority stakes, from its $38bn business portfolio (see below).

Observers believe it could still be two years before the ESX opens its doors for trading. It is expected to trade equities, derivatives, financial and debt securities, and FX (currency exchange) contracts. The country lacks stockbrokers, investment advisors, fund managers, custodians and many others.

A team from Ethiopia, including Ethiopia Investment Holdings CEO Mamo Esmelealem Mihretu and FSD Ethiopia CEO Ermias Eshetu, attended the Alternative Farming Systems Information Center (AFSIC) 2022 conference in London in October to meet potential investors and discuss progress on the stock exchange.

Setting up of Ethiopia Investment Holdings could be turning point for Ethiopia

The establishment of EIH, one of Africa’s biggest sovereign wealth funds, could be the start of a massive turnaround in Ethiopia’s long-established economic heterodoxy. It was set up in late 2021 and will control assets worth some Birr2trn ($38bn), or 34% of Ethiopia’s GDP, generating annual revenues of $6.2bn.

It has some of Ethiopia’s largest and most productive state-owned enterprises in its portfolio and with its active participation in the establishment of the country’s first securities exchange, is likely to pave the way for the liberalisation of the economy and increase the pace of privatisation.

EIH was set up in December 2021 by an Act of Parliament to act both as a sovereign wealth fund for Ethiopia and to improve the running of the portfolio of state-owned enterprises from the point of view of the shareholder, including the way capital is deployed and the decision-making, accountability and performance of management systems.

Government has transferred ownership of 27 firms, including some of Africa’s biggest and most successful companies, such as Ethiopian Airlines and the Commercial Bank of Ethiopia, to the new entity. It will also act as co-investor to foreign investors coming into Ethiopia.

EIH is in addition a key shareholder in the new ESX and likely to float minority stakes in many of the companies it owns over the coming years.

Wide portfolio

EIH’s portfolio includes:

  • Ethiopian Airlines, formed in 1945, generating $2.3bn in annual revenues and 11% return on invested capital. It flies to 127 international and 22 domestic destinations.
  • Commercial Bank of Ethiopia, with revenues of $1.6bn and a return on assets of about 1%. Over 80 years it has grown to have more than 35m customers.
  • Ethio Telecom, which first introduced telephone services in the 1900s and was monopoly provider until 2020, before a licence was awarded to Safaricom Telecommunications Ethiopia in 2021. Ethio Telecom has 44m mobile customers and over 23m internet subscribers, with revenues of $1.05bn a year.
  • Ethiopian Shipping and Logistics Services Enterprise, formed in 2016 out the merger of four companies. It has nine cargo ships and two oil tankers, as well as heavy trucks, seaports and dry ports. Revenues are $490m and return on invested capital is put provisionally at 24%.
  • Ethiopian Electric Utility, which carries out power distribution, sales and service for a country where only 44% of Ethiopians have access to electricity. Revenues are $332m and return on assets only 0.2%.
  • Ethiopian Sugar Industry Group, a grower of sugar cane, which refines it into sugar and byproducts such as ethanol, molasses and power. Revenues are some $178m across 13 plants.
  • Ethiopian Insurance Corporation, in the sector for 45 years, which is the dominant force. Revenues are $98.7m and return on assets is some 7% over 30 types of non-life policies and 15 kinds of life insurance.

Other businesses include Ethiopian Construction Works Corporation, which builds infrastructure including for transport and for water, irrigation and dams as well as buildings; Ethiopian Trading and Business Corporation, which controls businesses in areas such as coffee, grain, consumer products, fruit and vegetables; and Federal Housing Corporation, which administers over 18,000 properties.

EIH companies also dominate tourism, petroleum imports and supply, printing, the production and distribution of education materials, and the toll roads built in recent years.

CEO Mamo Esmelealem Mihretu, appointed in February, said the firm is a milestone toward a vision of “modern and dynamic institutions to cultivate a marketplace that meets needs and rewards ingenuity and effort”.

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Why governments should deepen domestic financial markets

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To understand the challenges to debt sustainability and financial market development posed by Covid-19 and the war in Ukraine, FSDA recently completed a study of the experience of five case-study countries: Ethiopia, Ghana, Kenya, Nigeria, and South Africa.

Chronic fiscal and current account imbalances had arisen well before the Covid-19 pandemic, already severely hampering the ability of country authorities to respond to unexpected shocks.

Counter-cyclical fiscal measures in response to Covid-19 then led to the accumulation of even higher levels of public debt. Even though all countries are exposed to liquidity and solvency risks, debt simulations show that the most important risk to be monitored is the risk of external debt distress.

The availability of foreign exchange required to fund current account deficits and the servicing of external debt is constrained by low public sector revenues and large trade deficits. Prospects for alleviating such liquidity pressures in the short to medium term are limited, as they depend on structural changes aimed at reducing current account deficits.

Indeed, it is anticipated that these pressures will become even more acute in 2022/2023 due to rising interest rates on external borrowing. With the tightening of credit markets worldwide and yields at historically high levels, Ghana, Kenya and Ethiopia are particularly exposed, as they face sizable refinancing risks on their Euro-borrowing.

Nigeria and South Africa are in a less precarious situation than the other three countries. Nigeria entered the Covid-19 crisis with a lower level of public debt while South Africa’s deep domestic financial market makes it possible to absorb higher levels of public debt. However, even with its more developed taxation system, South Africa is also exposed to liquidity risk, as reliance on foreign portfolio investment in domestic government debt exposes South Africa to risk, due to the ‘vagaries’ of foreign portfolio investors.

Table 1 below gives an overview of the gravity of the liquidity and solvency risks facing the five-country case studies explored in this paper:

Colours: Red-very urgent Yellow-urgent Green-relatively urgent.

In responding to the Covid-19 pandemic, governments adopted a combination of policy responses to mitigate the negative impact of increased government borrowing: (a) reducing policy interest rates, (b) central bank purchases of long-term government bonds and sale of short-term securities (quantitative easing) in Ghana and South Africa, (c) drawing on central bank overdraft facilities or financing government expenses by issuing securities directly to the central bank (debt monetisation) in Ethiopia, Nigeria and Ghana; and (d) relying on financial repression measures, such as foreign exchange controls, payment of negative real interest rates on government securities, and the imposition of investment requirements on banks and institutional investors in Ethiopia and Nigeria.

Increased domestic borrowing

Since it is very unlikely that governments will implement required fiscal consolidation measures in the near term, it is expected they will need to resort to increased domestic borrowing, and under current macroeconomic circumstances, increased reliance on government debt issuance is likely to put upward pressure on the yield of government securities, thereby crowding out the supply of credit to the private sector.

Under these circumstances policies designed to increase the absorptive capacity of domestic securities, and markets have an important role to play. Debt managers can contribute to this process by ensuring that debt instruments are best tailored to the needs of the domestic and external investor base.

It is in this context that it is important that countries, such as Nigeria and Ethiopia, cease central bank financing of government deficits

Equally important is that domestic money and primary markets have sufficient depth to absorb liquidity shocks as well as the issuance of large volumes of government securities on the primary market.

The more debt issuance by the government is tailored to meeting the needs of a diversified institutional investor base – both the needs of domestic investors and foreign portfolio investors buying domestic securities the needs of foreign investors buying securities issued by the government externally (on the Euro-market) – the more government debt financing costs will be shielded from sudden changes in market sentiment.

Risks and challenges

Nonetheless, the deepening of domestic financial markets presents risks and challenges. Not only will the authorities need to demonstrate their commitment to market-conform policies – aborting policies such as financial repression and excessive monetary financing – but they will also need to prioritise the management of public debt with a view to fostering market development and minimising crowding out that reduces the availability and raises the cost of private sector credit.

There is evidence that, in the short term, increasing the supply of government securities tends to put upward pressure on the sovereign yield curve, thereby raising the cost of borrowing both to the government and the private sector. Increases in the sovereign credit risk premium will also tend to raise the cost of capital for private issuers.

It is in this context that it is important that countries, such as Nigeria and Ethiopia, cease central bank financing of government deficits both to lessen inflationary pressures and to re-confirm commitment to the primary mandate of central banks in controlling inflation.

Even though financial repressive policies, such as requiring investors (banks and institutional investors) to purchase government securities used in Ethiopia and exchange controls as relied upon by Nigeria and Ethiopia may curb the growth of public debt in the short term, they discourage the formation of savings and encourage financial disintermediation in the medium term.

By lessening market responses or introducing market distortions, repressive financial policies reduce immediate responses to shocks in terms of market signals, but at the cost of reducing confidence in market-based finance. Over time, such distortions undermine the role of financial markets in allocating scarce resources to their optimal uses and may be difficult to unravel, as they are associated with opportunities for rent-seeking

Short-term tension

Nonetheless, in making these recommendations, it is important to recognise that adoption of policies designed to support market development will give rise to tradeoffs. In the short term, there are tensions between the gains associated with market development and fiscal costs and risks.

Policies like discontinuing financial repression and refraining from monetary financing while supportive of the financial market development will oblige the governments to find alternative funding sources. Such short-term costs may hamper the authorities’ willingness to implement policy reforms, even when the benefits associated with fostering financial market development, particularly in terms of enhancing the sustainability of the government’s debt, substantially outweigh the costs in the medium to longer term.

Implementing the conditionalities associated with debt relief negotiations more effectively than in the past will be important

In addition, authorities may be hesitant to undertake the transition towards more market-conform financing of their fiscal deficits, as the transition will inevitably raise awareness, transparency, and accountability regarding their funding.

Going forward, implementing the conditionalities associated with debt relief negotiations more effectively than in the past will be important in avoiding a situation where the benefits of debt relief once again only remain temporary. Anticipated external debt levels pose a threat to debt sustainability in four case-study countries, and in the case of South Africa, foreign portfolio investment poses a risk to macroeconomic stability.

Short-lived efforts

Previous attempts to ease the adjustment process and at the same time provide the opportunity for market development have involved debt relief and increased access to external concessional financing. Such debt relief efforts have been accompanied by conditionalities designed to put countries on a path of fiscal consolidation and stabilisation of their external debt positions aimed at ensuring debt sustainability in the future.

However, as documented in this paper, the outcomes of efforts to avoid future debt accumulation and the dangers to debt sustainability were short-lived. Although well-intentioned, these efforts failed to resolve macroeconomic imbalances, and countries were ill-prepared to meet recent shocks.

Table 2 provides an assessment of the severity of the policy challenges faced by the five case-study countries in addressing fiscal imbalances and supporting market development.

Colours refer to the degree of urgency in implementing the reforms: relatively urgent, urgent, and very urgent.

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United Kingdom Steps Up Climate Adaptation Finance Support for Africa

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The United Kingdom has announced a significant increase in its financial support to the poorest African countries that bear the brunt of climate change.

Speaking alongside African leaders at COP27 in the Egyptian city of Sharm El Sheikh, British Foreign Secretary James Cleverly confirmed the UK will provide £200 million to the African Development Bank Group’s Climate Action Window, a new mechanism set up to channel climate finance to help vulnerable countries adapt to the impacts of climate change.

A number of countries on the continent have experienced extreme weather conditions from severe drought in Somalia to floods in South Sudan.

Foreign Secretary James Cleverly said: “Climate change is having a devastating impact on some of the poorest countries in Sub-Saharan Africa but historically they have received a tiny proportion of climate finance,” said Cleverly adding, “This new mechanism from the African Development Bank will see vital funds delivered to those most affected by the impacts of climate change, much more quickly.”

The UK Foreign Secretary noted, “Access to climate finance for emerging economies was a central focus at COP26 in Glasgow and I’m pleased to see tangible progress being made, supported today by £200 million of UK funding.”

Climate change has a disproportionate impact on the 37 poorest and least creditworthy countries in Africa. Nine out of ten most vulnerable countries to climate change are in Africa.

The Glasgow Climate Pact included a commitment from donors to double adaptation finance between 2019 and 2025.

Prime Minister Rishi Sunak announced at the weekend that the UK will surpass that target and triple adaptation funding from £500 million in 2019 to £1.5 billion by 2025. This funding package provided to the African Development Bank will be 100% earmarked for adaptation.

The Prime Minister also confirmed yesterday that the UK is delivering on the target of spending £11.6 bn on International Climate Finance (ICF) between 2021/22 and 2025/26.

“I applaud the UK government for this major contribution towards the capitalization of the Climate Action Window of the African Development Fund, as it seeks to raise more financing to support vulnerable low-income African countries that are most affected by climate change. This bold move and support of the UK will strengthen our collective efforts to build climate resilience for African countries. With increasing frequencies of droughts, floods and cyclones that are devastating economies, the UK support for climate adaptation is timely, needed, and inspiring in closing the climate adaptation financing gap for Africa.”

“I came to COP 27 in Egypt with challenges of climate adaptation for Africa topmost on my mind. The support of the UK has given hope. I encourage others to follow this leadership on climate adaptation shown by the UK”, said Adesina.

Distributed by APO Group on behalf of African Development Bank Group (AfDB).

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African insurers pledge $14bn of cover to take up climate change fight

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This commitment comes as Africa continues to face irreversible loss and damage associated with global climate change impacts such as drought, flood and tropical cyclones.

With African nations being among the most exposed globally to the impacts of climate change and nature loss, Africa cannot continue to rely on international aid and developed world climate finance commitments to respond to climate catastrophes.

The ACRF will provide protection for the continent’s most vulnerable communities by providing $14 billion of climate risk insurance by 2030 to African sovereigns, cities, humanitarian organizations and NGOs.

At the same time, the Facility will include a donor-funded Trust Fund that provides premium subsidies, product development technical assistance and policyholder capacity building. The governance of the Trust Fund will be designed to allow swift response to opportunities.

Kelvin Massingham, Director Risk and Resilience, FSD Africa, said: “Mainstreaming resilience into Africa’s economic development is essential to secure future prosperity and sustainable growth. Now is the time for the African insurance sector to play the significant role it should in creating this resilience. The Nairobi Declaration on Sustainable Insurance’s proactive and market-based approach is exactly what we need, and the commitment today is a strong statement to work together to provide an African-led solution to loss and damage.”

Patty Karuihe-Martin, CEO Namib Re, commented: “Irreversible Loss or Damage refers to the calamitous impacts of climate change that cannot be circumvented by mitigation and adaptation alone. So apart from managing risk, crafting affordable risk transfer and risk sharing solutions through compliant, trusted and responsive Insurance and Reinsurance for such loss or damage for the developing countries is a crucial discussion; if not for unfailing and guaranteed resilience then at least to allow for decent work and dignified life to continue.”

Phillip Lopokoiyit, Group CEO, ICEA LION Group, added: “As private sector insurers, we have a key role to play in ensuring a sustainable future. Our priority lies in providing solutions that will support the resilience of our clients in light of the greatest challenge facing humanity. Coming together as signatories to support the set-up of the Africa Climate Risk Facility, will provide the necessary capacity needed by insurers to the solutions that will respond to climate risk.

“The commitment that we have made, as signatories, to underwrite $14 billion of cover for climate risks by 2030, will protect 1.4 billion people against floods, droughts, and tropical cyclones.This is indeed a testament of our quest to ensure that we contribute to the long term sustainability and economic resilience of our countries.“

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Leveraging the African insurance industry to create resilient African economies

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Speakers
Mr. Babajide Sanwo-Olu, Governor of Lagos State
Dr. Mahmoud Mohieldin, High Level Climate Champion
Hon. Bogolo J Kenewendo, Africa Director, High Level Climate Champions
Dorothy Maseke, Group Head of Risk and Compliance ICEA Lion Group 
Kelvin Massingham, Director – Risk and Resilience – FSD Africa
Lesley Ndlovu, CEO – African Risk Capacity
Patty Karuihe-Martin, CEO – Namib Re
Philip Lopokoiyit, Group CEO – ICEA LION Group

Africa insurance industry to underwrite $14bn of cover for climate risks by 2030

9 November 2022, Sharm El Sheikh – The Nairobi Declaration on Sustainable Insurance (NDSI) signatories have today announced a first-ever financial commitment by the African insurance industry to underwrite $14 billion of cover for Africa’s climate risks by 2030.

The announcement was made at COP27 side event: “Leveraging the African insurance industry to create resilient African economies.” Moderated by Hon. Bogolo Kenewendo, Africa Director and Special Advisor, High-Level Climate Action Champions, the session highlighted the critical role of the African insurance industry in creating climate resilience for the continent.

This commitment comes as Africa continues to face irreversible loss and damage associated with global climate change impacts such as drought, flood and tropical cyclones.  With African nations among the most exposed globally to the impacts of climate change and nature loss, Africa cannot continue to rely on international aid and developed world climate finance commitments to respond to climate catastrophes.

Local, market-based disaster risk finance solutions must be developed and scaled, including risk transfer solutions such as insurance, as these are critical tools in ensuring resilience. In particular, the leverage and immediate deployment of capital that insurance capital allows need to be further utilised.

It is in response to this that the 85+ NDSI signatories are announcing the creation of the African Climate Risk Facility, which will take a targeted approach to respond to climate risk. Through this facility they are committing to underwrite $14bn of cover for climate risks by 2030 to protect 1.4 billion people against floods, droughts, and tropical cyclones.

The Africa Climate Risk Facility is a mechanism that will scale private sector underwriting of climate disaster risk in Africa. It will facilitate the uptake of climate risk insurance by African sovereigns, cities humanitarian organisations and NGO’s to help African countries better manage the financial impacts of climate shocks and increase the resilience of the most vulnerable communities. The Facility will include a donor-funded Trust Fund that provides premium subsidies, product development technical assistance and policyholder capacity building. The governance of the Trust Fund will be designed to allow swift response to opportunities.

Kelvin Massingham, Director Risk and Resilience, FSD Africa said: “Mainstreaming resilience into Africa’s economic development is essential to secure future prosperity and sustainable growth. Now is the time for the African insurance sector to play the significant role it should in creating this resilience. The Nairobi Declaration on Sustainable Insurance’s proactive and market-based approach is exactly what we need, and the commitment today is a strong statement to work together to provide an African-led solution to loss and damage.”

Patty Karuihe-Martin, CEO Namib Re commented: “Irreversible Loss or Damage refers to the calamitous impacts of climate change that cannot be circumvented by mitigation and adaptation alone. So apart from managing risk, crafting affordable risk transfer and risk sharing solutions through compliant, trusted and responsive Insurance and Reinsurance for such loss or damage for the developing countries is a crucial discussion; if not for unfailing and guaranteed resilience then at least to allow for decent work and dignified life to continue.”

Phillip Lopokoiyit, Group CEO, ICEA LION Group said: “As private sector insurers, we have a key role to play in ensuring a sustainable future. Our priority lies in providing solutions that will support the resilience of our clients in light of the greatest challenge facing humanity. Coming together as signatories to support the set-up of the Africa Climate Risk Facility, will provide the necessary capacity needed by insurers to the solutions that will respond to climate risk. The commitment that we have made, as signatories, to underwrite $14 billion of cover for climate risks by 2030, will protect 1.4 billion people against floods, droughts, and tropical cyclones.This is indeed a testament of our quest to ensure that we contribute to the long term sustainability and economic resilience of our countries.“

About the Nairobi Declaration on Sustainable Insurance:

Launched in April 2021, The Nairobi Declaration on Sustainable Insurance is the declaration of commitment by African insurance industry leaders to support the achievement of the UN Sustainable Development Goals (UN SDGs). Accredited by the United Nations Environment Programme, Principles for Sustainable Insurance (UNEP PSI) and with over 85 signatories, it is promoting action by the African insurance sector towards sustainability goals.

This Africa focussed initiative was designed to encourage and support the African insurance market players to commit to sustainable insurance practices. It is also a convening platform for a united African voice on the global stage on climate change issues affecting the continent and the insurance sector.

The Nairobi Declaration on Sustainable Insurance is an alliance of senior leaders in Africa’s insurance ecosystem who are committed to accelerate solutions to major sustainability challenges – ranging from climate change and ecosystem degradation to poverty and social inequality – particularly in a post-Covid-19 world.

To date, more than 85 insurers, reinsurers and brokers have signed the Declaration and committed to the five key areas including risk management; insurance; investment; policy, regulatory and industry engagement; and sustainable insurance thinking and practices.

For further details on the Nairobi Declaration on Sustainable Insurance or any interview requests, please contact:

FSD Africa 

Nelson Karanja

Director, Communications & Engagement

FSD Africa

nelson@fsdafrica.org

African insurers take up climate change fight with $14 bln pledge

Posted on by TIMOTHYRADIER

Summary

  • 85 insurers make pledge to extend climate cover
  • Comes as COP27 talks focus on issue of loss & damage
  • African Climate Risk Facility to cover 1.4 bln people

SHARM EL-SHEIKH, Nov 9 (Reuters) – A group of over 85 insurers in Africa has pledged to create a financing facility to provide $14 billion of cover to help the continent’s most vulnerable communities deal with climate disaster risks such as floods and droughts.

The commitment to create the African Climate Risk Facility (ACRF) was made on Wednesday during the COP27 climate talks comes as developing countries push their richer peers to do more to help them pay for the costs of responding to such events.

Demand for compensation for the “loss and damage” caused by global warming has long been rejected by wealthy countries, whose leaders are wary of accepting liability for the emissions driving climate change.

Africa, which accounts for less than 4% of greenhouse gas emissions, has long been expected to be severely impacted by climate change.

Against that backdrop, the African insurance plan is based around creating a scalable, local market-based funding tool to help countries better manage the financial risk of climate shocks and increase the resilience of its more vulnerable communities, the group said in a statement.

“This is the African insurance industry saying let’s come together and try and solve this ourselves,” said Kelvin Massingham, director risk and resilience at FSD Africa, one of the partners behind the launch.

“We have a massive risk gap in Africa and existing solutions aren’t working,” Massingham said. FSD Africa is a UK government-backed development group.

The ACRF will provide protection for 1.4 billion people against floods, droughts and tropical cyclones by providing $14 billion of climate risk insurance by 2030 to African sovereigns, cities, humanitarian organisations and NGOs, the insurers said.

The group is calling for $900 million in funding from development partners and philanthropies to support the project, much of which will go towards providing a subsidy on the cost of the premium to help governments and cities with limited fiscal resources buy the cover.

These donor funds will be held in a trust and managed by the African Development Bank.

“The facility will enable us to cover certain risks like floods, cyclones and droughts…and to help us mitigate the risks we face as underwriters dealing with these climate risks,” said Philip Lopokoiyit, chief executive at Nairobi-based insurer ICEA LION Group.

The insurance commitment is the first from the 85 signatories of the Nairobi Declaration on Sustainable Insurance, signed in April 2021 by the industry to support the U.N. Sustainable Development Goals.

The ACRF will provide a domestically funded alternative to global initiatives like the World Bank’s Global Risk Financing Facility and the Global Shield Financing Facility, a new funding facility that will help countries that suffer heavy economic loss due to climate change-driven disasters, announced by World Bank president David Malpass on Tuesday.

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