Pillar: Financial Markets

‘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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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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