Nairobi City County Government will float a Green bond that will be used to build a mass transit system and expand the infrastructure for waste management and water distribution.
Speaking at the Nairobi Securities Exchange (NSE), Nairobi Governor Johnson Sakaja said the exact amount to be raised will be announced later.
“We need to offer the residents of Nairobi solutions that clear the mess that has been witnessed over the years. We intend to float a green bond, and what we raise will be used to create order and also open up opportunities for our people and also make Nairobi work for everyone,” the Governor said.
He was speaking during the launch of the enhanced NSE marketplace.
The Governor added that part of the green bond will also be used on sorting out the garbage issue in Nairobi by converting waste into energy. The intention, he said, is to deal with waste collection as well as create employment.
The Governor said the Kenya Kwanza Government has placed a special focus on domestic capital mobilization which is critical in supporting medium to long-term fiscal consolidation plans.
“The visit by His Excellency the President to NSE highlights the Government efforts to stimulate private investments in public assets and projects with a view to strengthening the fiscal position of the country, reduce reliance on foreign debt as well as boost economic recovery through capital markets,” Sakaja added.
According to Sakaja, the Nairobi Water and Sewerage Company alone will need a capital investment of about Ksh 30 billion to be able to offer services and develop proper water and waste management system that will serve the people of Nairobi.
“We look forward to partnering with the Ministry of Investments, Trade and Industry and associated state corporations and agencies to conceptualize and explore county financing options through the NSE to facilitate the mobilization of low-cost and long-term private capital to finance, or refinance the County’s projects,” said Sakaja.
What is a Green Bond
A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects.
These bonds are typically asset-linked and backed by the issuing entity’s balance sheet, so they usually carry the same credit rating as their issuers’ other debt obligations.
Green bonds are also designated bonds intended to encourage sustainability and to support climate-related or other types of special environmental projects.
More specifically, green bonds finance projects aimed at energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, clean water, and sustainable water management.
They also finance the cultivation of environmentally friendly technologies and the mitigation of climate change.
Green bonds may come with tax incentives such as tax exemption and tax credits, making them a more attractive investment
The Green Bonds Programme-Kenya
The Green Bond Programme – Kenya, which aims to promote financial sector innovation by developing a domestic green bond market, is brought together by the Kenya Bankers Association (KBA), Nairobi Securities Exchange (NSE), Climate Bonds Initiative, Financial Sector Deepening (FSD) Africa and FMO – Dutch Development Bank.
Other partners who provide technical assistance and guidance include International Finance Corporation (IFC) and the WWF – Kenya.
The Green Bonds Programme – Kenya is endorsed by the National Treasury, Central Bank of Kenya and Capital Markets Authority with the Central Bank of Kenya Governor, Dr Patrick Njoroge serving as the patron.
‘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.
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.”
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:
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.
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).
On the sidelines of the 27th United Nations Climate Change Conference (COP27), which has been taking place since 6 November 2022 in Egypt, the Dutch investment company Cardano Development has signed a partnership with the British InfraCo Africa. The collaboration involves a joint investment of USD 20 million in a new company dedicated to the development of sustainable infrastructure in Kenya.
A new company will be created to support sustainable development in Kenya. This is the aim of a project led by InfraCo Africa and Cardano Development. The two investment companies have announced that they are raising $20 million to set up the new company, which will be modelled on InfraCredit Nigeria, which supports infrastructure development in Nigeria from its headquarters in Lagos. To set up the Kenya company, InfraCo Africa, which is part of the Private Infrastructure Development Group’s (PIDG) portfolio of companies, is contributing $15 million.
Amsterdam, Netherlands-based investment company Cardano Development is contributing $5 million. The deal is supported by PIDG and FSD Africa, a financial services company based in Nairobi, Kenya, that focuses on financial sector development in sub-Saharan Africa. The UK Department for International Development-funded company is supporting the establishment of the new entity with a $297,000 grant to Cardano Development.
“In addition to bridging the infrastructure access gap in Kenya and East Africa, the new company will issue guarantees for projects aligned with the Paris Agreement, helping to link financial flows to global efforts to mitigate and adapt to the climate crisis,” explains Philippe Valahu, PIDG’s managing director. According to Valahu, the model of local currency guarantees that the future company will provide has been proven in Nigeria, where InfraCredit has issued about 114 billion naira (more than $259 million) in local currency guarantees in its first five years of operation.
In its first few years, the future company will focus on Kenya before expanding its activities in the rest of East Africa. As part of this expansion strategy, the new company is looking to issue up to $100 million in local currency (Kenyan shilling) guarantees in its first years of operation. The company is also expected to be supported by GuarantCo, a PIDG guarantee company that plans to provide a contingent capital facility. The company is being created with the support of the UK government and a clear agenda. It is to implement sustainable projects that improve climate change mitigation and adaptation while contributing to the achievement of the UN Sustainable Development Goals (SDGs).
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.“
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.
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.
Funding new models of green finance for the African continent creates channels for private finance to flow into previously neglected areas of climate action and conservation.
