Pillar: Financial Markets

Africa getting little of $382m renewable energy projects cash

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Renewable energy projects attracted investments worth $382 billion globally in 2021, according to the International Energy Agency, but only $13 billion, or three percent of that, funded projects in Africa, highlighting a major funding gap foiling green transition and energy access on the continent.

With only 48 percent of African population having access to electricity, experts say investment in the continent’s renewable energy sector could both leapfrog the green transition efforts and connect more people to the grid.

Despite this, it has been established that investors with the capacity to invest in this sector shy away from the African market, a problem which brought together several stakeholders in the energy sector in Nairobi this week, attempting to change the narrative.

At a forum convened by the World Resources Institute (WRI) and the Children’s Investment Fund Foundation, participants drawn from the private sector, government, civil society organisations from Kenya and beyond deliberated on how investors can be mobilised to support Africa’s green transition through investments.

Reluctant to invest

Rebekah Shirley, WRI’s deputy regional director told the forum that private sector players are reluctant to invest in this sector, creating a funding gap of billions of dollars every year, despite the wide access gap.

“Even in other regions of the world where energy access is still a challenge like the Southeast Asia, we don’t see funding gaps of this magnitude, why Africa?” she posed.

Alex Wachira, principal secretary for the state department of energy, said that there is a list of challenges contributing to the energy gap, even in Kenya, which slow down economic growth in the country.

“We (the Ministry of Energy) are aware of the many challenges attributed to this, including limited incentives to attract private sector investors,” he said in a speech read by a representative.

Lack of political will

Another challenge identified is the lack of political will for appropriate legislation and implementation of policies to incentivise private sector investment in renewable energy projects, especially in rural areas.

For instance, only two of Kenya’s 47 counties have drafted energy plans that would give way to appropriate energy policies, deprioritising renewable energy projects at the local governments.

This, according to Eva Sawe – a senior programmes officer at the Council of Governors, is because lawmakers have not been sensitised on why renewable energy projects should be a priority.

But even with the right policies and incentives to support private sector investment in renewable energy on the continent, investors said there is a still a shortage of talent in Africa limiting the production capacity of companies investing in the sector.

“If an investor is coming into the country to do any renewable energy project, the first hurdle they will face is the lack of skilled people,” said Andrew Amadi, the chief executive of Kenya Renewable Energy Association.

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FSD Africa Targets to Back $400 Million of Green Bonds This Year

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  • Africa needs about $300 billion in climate financing annually
  • Private funding for green projects in Africa is very low

FSD Africa is in talks with potential green-bond issuers across the continent to raise at least $400 million for climate-linked projects this year.

The agency backed by the UK’s Foreign, Commonwealth & Development Office will be a transaction adviser on the deals it expects to come from countries, including Tanzania, Zambia, Nigeria and Morocco. The amount to be raised will be about 70% higher than what FSD Africa said it helped to mobilize in climate- and gender-related financing in 2022. 

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Climate finance regulation: Morocco, an example in the Maghreb

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Morocco has once again emerged as a leader in the Maghreb in matters of climate finance systems and regulation to support climate action, according to the “Climate Finance Readiness Index” report

The report, published recently by the Toronto and Casablanca-based consulting firm Green For South, highlighted that Morocco is, in its sub-region which also includes Algeria and Tunisia, the first to have adopted “appropriate regulations and guidelines (mostly voluntary at this stage), an interesting volume of climate finance activity (dealing with international funds and issuing green bonds) and effective awareness raising schemes.”

The report also highlighted Morocco’s efforts to improve its climate resilience, particularly in terms of mitigation, which requires significant investment, recalling in this regard the total cost of climate mitigation and adaptation actions included in the NDC (Nationally Determined Contribution) as published in June 2022. The amount is estimated at $78 billion, divided between mitigation measures ($38) and warning measures ($40 billion).

Tunisia also has appropriate regulation (on a voluntary basis), an interesting volume of climate finance activity, the report said, noting, however, that there has been no issuance of green bonds or “Sukuk” and awareness provisions are still limited.

As for Algeria, the report noted that the country “has no regulation in the financial sector to support climate action and that climate finance activity is still limited,” estimating that overall, the North African region is at an early stage of implementation of these actions.

For this firm specializing in sustainable finance, green and climate, Morocco and Tunisia are called to further strengthen their regulations and make them mandatory, and encourage green emissions and launch more awareness initiatives and training.

In the Middle East, Egypt is leading the way in making all ESG and climate risk regulations mandatory in the different financial sectors, namely banking, insurance, and capital markets, unlike countries like Jordan, Morocco, Tunisia, and Turkey that generally have voluntary reporting requirements.

The consulting Green for South firm, specializing in sustainable, green and climate finance, has evaluated in its Climate Finance Readiness Index report the regulations and measures taken by 14 countries in terms of climate finance. The assessment, covering 4 regions – North Africa, Middle East, Gulf and Turkey – takes into account the specificities of each territory and sets up appropriate criteria. With a score of 31.33%, the North African region shows promising results, with Morocco representing the most successful model.

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New study: Impact bonds are significant in unlocking climate finance flows to address climate change challenges in Saint Louis, Senegal

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FSD Africa, in partnership with UMOA-Titres (UT), commissioned Genesis Analytics, a consulting partner, to develop a study that determines the feasibility of deploying a financial instrument to address climate change, environmental and/or waste management challenges in the city of Saint-Louis, Senegal.

Both the physical and socio-economic characteristics of the city make it vulnerable to climate change. Numerous government and donor-led resilience interventions have been implemented in Saint-Louis. However, there has been little participation by the private sector at scale.

The UK government through the Foreign Commonwealth and Development Office (FCDO) has provided support to FSD Africa for the study. The new study will be launched at the 2023 West African Economic and Monetary Union (WAEMU) Government Securities Markets Meetings in Dakar, Senegal. It highlights the opportunities to tackle flooding, coastal erosion, heavy rains, land and ecosystem degradation, fishery decline, and poor waste management, to improve living conditions for the communities living in Saint-Louis.

With an estimated population of 1.1 million people living in Saint-Louis, approximately 80,000 of these live in densely populated fishing neighborhoods, high-risk zones which are constantly under attack from flooding and coastal erosion. Between 2019 and 2020 more than 2,000 people, mostly inhabitants of the fishing district of Guet N’dar, north of Saint-Louis, lost their homes due to the rising sea levels. The World Bank estimates that 10,000-15,000 people in the city are either already displaced or live within 20 meters of these high-risk zones. Furthermore, climate change continues to cause rising sea levels, heavier rainfall and higher temperatures in the city, further impacting the livelihoods of local people.

Saint-Louis is the former capital of Senegal and a UNESCO World Heritage site since the year 2000. The city benefits from programs such as the Safeguard and Enhancement Plan (PSMV), the main legal instrument for the protection of the site adopted in 2008 by the government of Senegal. However, it still faces the effects of climate change with the sea levels on the West African coast rising between 3.5 and 4 millimeters annually, which poses an existential threat. The city has an opportunity to capture a greater portion of the international climate finance flows available globally, through the deployment of Impact Bonds.

Impact bonds, the recommended financial instrument for challenges facing Saint-Louis, comprise Social Impact Bonds (SIBs), Development Impact Bonds (DIBs), or Environmental Impact Bonds (EIBs).  Across Africa a high concentration of economic activity and investment in the capital cities has limited the funds available to other regions in need of funding for climate change resilience and adaptation programmes.  To deal with these challenges, the study unveils solutions such as the involvement of the private sector through impact bonds to widen the capital pool for various projects.

Climate Policy Initiative (CPI) estimates that the continent requires USD 277 billion annually to implement its NDCs and meet 2030 climate goals[1]. But annual climate finance flows in Africa stand at only USD 30 billion. This gap is likely even wider as countries often underestimate their financial needs, especially in relation to adaptation, due to data and methodological problems in costing their NDCs (UNFCCC, 2021). Time is of the essence; delaying action will cost the continent more in the future.

Evans Osano, Director, Capital Markets at FSD Africa emphasised that climate action requires significant financial investments, “Africa requires USD 2.8 trillion between 2020-2030 to implement its Nationally Determined Contributions under the Paris Agreement. This is the cost of the continent’s contribution to limiting warming to 1.5°C and addressing the biggest impacts of climate change. However, annual climate finance flows in Africa stand at only USD 30 billion with private sector contribution at only 14%. This study is critical in identifying opportunities  to attract climate finance flows in addressing climate challenges”.

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Africa’s climate finance challenge sees hope in DI bonds

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  • As Africa gets just $30bn of required $277bn
  • Continent needs $2.8trn 2020-2030 to implement NDCs under Paris agreement

A new study by FSD Africa in partnership with UMOA-Titre (UT) in which Genesis Analytics was commissioned, has found that deploying Development Impact and Social Impact bonds can significantly unlock climate finance flows to address climate change challenges in Africa.

The study carried out in Saint Louis, Senegal’s port city, aimed at developing a study that determines the likelihood of deploying a financial instrument to address climate change, environmental and/or waste management challenges in Saint-Louis, a coastal town with an estimated 1.1 million people.

The impact bonds recommended as financial instruments for challenges facing Saint-Louis include, Social Impact Bonds (SIBs), Development Impact Bonds (DIBs), or Environmental Impact Bonds (EIBs).

Impact bonds such as social impact bonds (SIBs), also known as social bonds or social benefit goods, are a type of financial security that offers capital to the public sector to fund projects that will create better social outcomes, and lead to savings. The Centre for Global Development (CGD) says these bonds are a new development in finance.

According to Climate Policy Initiative (CPI) estimates, Africa requires $277 billion annually to implement its Nationally Determined Contributions (NDCs) and meet the 2030 climate goals. Published with the title: “Landscape of Climate Finance in Africa,” CPI indicates that, so far, Africa’s annual climate finance flows stand at only $30 billion.

The United Nations Framework Convention on Climate Change (UNFCCC) in 2021 said this gap is likely to get even wider as countries often underestimate their financial needs, especially in relation to adaptation, due to data and methodological problems in costing their NDCs. It warned that time is of the essence; delaying action will cost the continent more in the future.

Africa’s climate finance challenge sees hope in DI bondsThe FSD Africa – UMOA-Titre study found that both the physical and socio-economic characteristics in Saint Louis make it vulnerable to climate change. Numerous government and donor-led resilience interventions have been implemented in the area. However, there has been little participation by the private sector at scale. Also, approximately 80,000 of people of the coastal city live in densely populated fishing neighbourhoods, high-risk zones which are constantly under attack from flooding and coastal erosion. Between 2019 and 2020 more than 2,000 people, mostly inhabitants of Saint-Louis’ northern fishing district of Guet N’dar lost their homes due to the rising sea levels. The World Bank estimated that 10,000-15,000 people in the city are either already displaced or live within 20 metres of these high-risk zones. Also, climate change continues to cause rising sea levels, heavier rainfall and higher temperatures in the city, thereby impacting the livelihoods of the local people.

Saint-Louis is the former capital of Senegal and a UNESCO World Heritage site since the year 2000. The city benefits from programmes such as the Safeguard and Enhancement Plan (PSMV), a key legal instrument for the protection of the site adopted in 2008 by the government of Senegal. However, it still faces the effects of climate change with the sea levels on the West African coast rising between 3.5 and 4.0 millimetres annually, which poses an existential threat.

With the new study, the city has a big chance to capture a greater portion of the international climate finance flows available globally, through the deployment of impact bonds.

Reproducing Saint Louis across Africa

It follows that African national governments can successfully reproduce the Saint Louis research success across the continent. The study is due for launch during the forthcoming West African Economic and Monetary Union (WAEMU) Government Securities Markets meetings in Dakar, Senegal.

There is a continental refrain of limited finance to fund climate change resilience and adaptation programmes. It was to deal with these challenges that the Saint Louis study appears to have unveiled solutions such as involving the private sector through impact bonds to widen the capital pool for various projects.

Evans Osano, the director of capital markets at FSD Africa, emphasised that climate action requires significant financial investments.

“Africa requires USD 2.8 trillion between 2020-2030 to implement its Nationally Determined Contributions under the Paris Agreement. This is the cost of the continent’s contribution to limiting warming to 1.5°C and addressing the biggest impacts of climate change. However, annual climate finance flows in Africa stand at only USD 30 billion with private sector contribution at only 14%. This study is critical in identifying opportunities to attract climate finance flows in addressing climate challenges,” Osano said.

The new study highlights the opportunities to tackle flooding, coastal erosion, heavy rains, land and ecosystem degradation, fishery decline, and poor waste management, to improve living conditions for the communities living in Saint-Louis. Funding for the study was provided by the UK government through the Foreign Commonwealth and Development Office (FCDO).

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Former Climate Action Champion, Nigel Topping, to join FSD Africa as Senior Climate Adviser

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Nairobi, 17 January 2023 – FSD Africa is delighted to announce that Nigel Topping, until recently the UK’s High-Level Climate Action Champion, will be joining the organisation as a senior climate advisor to strengthen its offering in developing innovative approaches to addressing the impact of climate change in Africa.

Nigel was appointed as the UK’s High-Level Climate Action Champion in January 2020 ahead of COP26 in Glasgow, stepping down from the role in November 2022 after COP27 in Sharm-el-Sheikh. During this period, working closely with both the outgoing Climate Champion from Chile, Gonzalo Muñoz, and the incoming Climate Champion from Egypt, Mahmoud Mohieldin, Nigel worked tirelessly to promote climate action on the part of non-state actors – civil society and the private sector – and establish the Climate Champions Team as a formidable catalyst for climate action. The Climate Champions Team has been able to amplify its direct impact through an extraordinarily impressive range of innovative partnerships, including in Africa.

In his new role as a Senior Adviser, Nigel will complement FSD Africa’s work on climate finance, and particularly in innovative green financing.

It has been estimated that climate finance in Africa needs to increase by a factor of nine times (by an additional $250bn per annum) to meet the continent’s aggregate Nationally Determined Contributions and, in particular, to increase climate finance coming from the private sector which, at just 14% of the total, is a much lower share than in other regions. There is also a need to spread climate finance more equitably around the continent (as more than 50% of climate finance currently goes to just 10 countries) and to change the mix of climate finance more towards equity (or grants) than debt which the continent can scarcely afford at present.

To achieve this, FSD Africa is planning to both scale up its work in green finance and support new partnerships with organisations looking to drive climate and nature-positive action and which see advantage in leveraging FSD Africa’s financial sector expertise and networks.

Commenting on his appointment, Nigel Topping praised FSD Africa for its trailblazing work in developing Africa’s financial markets and innovation in tapping capital using new instruments such as green bonds and gender bonds. He observed that FSD Africa has been supporting green finance in Africa for several years having initiated green bond programmes in Kenya and Nigeria in 2017. It has used this experience to build out an extensive and diversified portfolio of other projects in the climate and nature space.

He commented: “Climate finance will be critical for enabling Africa to adapt to the growing impacts of climate change and to ensure that its future development path is consistent with the goal of limiting global warming to no more than 1.5°C. I look forward to working with the FSD Africa team of experts across the African market to fast track the development of innovative climate finance and nature programmes and ensure that more benefits are realised by the population and investors across the markets.”

FSD Africa’s CEO Mark Napier welcomed Nigel Topping’s appointment:

“We are delighted to have Nigel joining our team. Nigel is an incredibly impressive and collaborative leader with great sectoral knowledge on climate action. I have no doubt at all that he will be able to accelerate the impact of our work on climate, deepen our technical knowledge in relevant sectors and join us in brokering exciting new partnerships.”

FSD Africa’s Board Chair, Frannie Léautier, joined the CEO in welcoming Nigel Topping observing that a commitment to developing and implementing transformative adaptation programmes to tackle climate change in Africa will be key in tackling poverty and inequality: “Nigel’s decision to join FSD Africa as a Senior Climate Adviser is a fantastic endorsement of the work that our team has been doing for several years to develop solutions to the continent’s most pressing challenge of the day – climate change. We will benefit greatly from his leadership and experience,” she added.

Africa’s carbon finance stream can be scaled up to $200 billion per annum – Osinbajo

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Nigeria’s Vice President, Prof. Yemi Osinbajo, said Africa’s share of the global carbon market can be scaled up massively to reach foreign direct investment (FDI) of between $120 to $200 billion annually.

The Vice President stated this during his keynote speech at the Rockefeller Foundation meeting in New York.

He identified a combination of capital flows, job creation, and the avoidance of long-term climate destruction as critical drivers of African leaders’ interest in supporting this effort.

According to him, Africa currently has only a small share of the carbon market. He explained the importance of this projected carbon finance stream, saying:

“For a continent that needs $240 billion annually in mitigation investment alone, this carbon finance stream could be the difference between transitioning and not (transitioning). As all of us in this room understand well, the priorities of the African continent are not just to act decisively on the climate crisis, but to also create significant growth opportunities for our young and growing population.”

“The investment required to advance the energy transition in Africa is huge. World Bank estimates suggest that Africa needs $6.5 trillion US dollars between now and 2050 for mitigation action alone to keep temperatures below 2 degrees of warming.”

VP Osinbajo also highlighted that the carbon market pipeline could create 30 million jobs in the next decade, with the potential to create more than 100 million jobs through climate-aligned projects by 2050.

Africa’s carbon markets: During his speech, VP Osinbajo noted that the rapid progress recorded in Africa benefitted from the support of a very engaged Steering Committee with the United Nations, Global Energy Alliance for People and Planet (GEAPP), USAID, and a range of other public and private actors, which resulted in the successful launch of the African Carbon Markets initiative (ACMI) in Sharm-el-Sheikh, Egypt during the COP-27 event.

“The strong commitment and presence from fellow African leaders demonstrate the willingness and leadership of Africa. We already have 7 African countries (Burundi, Gabon, Kenya, Malawi, Mozambique, Nigeria, and Togo) signed up to develop country carbon activation plans and over $200 million in advanced market commitments, which we must continue to further advance as this is going to be the critical driver of action on the continent.”

“I think it’s an auspicious moment for Africa to be participating more fully in the global carbon market conversation, especially in the light of the slowing pace of green investment flows into the continent. The work several of us have done together in the past few months makes it clear that while other sources of flows are slowing down globally, carbon markets are growing rapidly,” Osinbajo said.

Advancing carbon markets: VP Osinbajo also spoke about the essence of collaborations in developing carbon markets on the continent. He said collaboration is a key to unlocking opportunities in Africa’s carbon markets. He said:

“One of the strong points of ACMI and the way we must structure it going forward, in terms of governance, is the flexibility to smoothly work with other initiatives, and there will be many others. Two days before the opening of Cop 27, Senator John Kerry and I had a conversation about the proposed Energy Transition Accelerator and we both agreed that once the details were worked out, we would work out a collaborative framework with ACMI.

“Carbon markets will play a critical role in the implementation of this (Energy Transition) Plan – in mobilizing the capital required to move to our net-zero economy-wide trajectory. I want Nigeria to have the first Carbon Markets Activation Plan.”

In his contribution, the US Presidential Envoy on Climate Change, Senator John Kerry, commended VP Osinbajo for his leadership on the issue of energy transition. Kerry said:

“We are grateful for the leadership of the VP, grateful for the reception you gave me on my visit to Nigeria. I am honoured to share the platform with you on how to move the African Carbon Market Initiative (ACMI) forward.

“It is possible to create a high-integrity carbon market in a way to address Climate Change and African Development aspirations. We are all joined together looking forward to developing the financing.”

In case you missed it: The ACMI is a new initiative that was launched during the conference of parties (COP 27) event held in Egypt. The ACMI will be led by a fourteen-member steering committee of African leaders, CEOs, and carbon credit experts. The ACMI aims to dramatically expand Africa’s participation in voluntary carbon markets.

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Pension funds, private equity and private debt in Southern Africa

Policy & regulatory development to catalyse larger uptake of private equity and private debt investments by pension funds in SADC.

The primary objective of this study was to review the status quo, understand opportunities and challenges and make recommendations for policy and regulatory development to enable the benefit from the returns and diversification of pension funds in Southern Africa.

We commissioned this research in partnership with the Southern African Venture Capital and Private Equity Association (SAVCA), and the findings presented are drawn from questionnaires conducted with 52 funds in eight countries including Botswana, Eswatini, Lesotho, Mozambique, Namibia, South Africa, Zambia, and Zimbabwe. These funds represent about $160 billion in assets under management (AUM), which translates to 30% coverage of the full AUM of funds in the region. This was complemented by interviews with regulators, pension fund leaders and other experts to collect more specific data and to contextualise the findings. 

Overall, this study paints a picture of a very diverse set of markets in the region with unique challenges, and we aim to strike a balance between providing regional insights with specific issues and opportunities in each market for positive reforms.