Africa’s financial sector must tackle climate change

If 2020 is seen as the year of the pandemic, 2021 will hopefully be seen as the year of successfully financing a resilient, inclusive global recovery from Covid-19, spurred by two important UN climate conferences: the UN Biodiversity Conference in Kunming in China in May and the UN Climate Change Conference (COP26) in Glasgow, UK, in November. 

Finance is being placed front and centre in relation to these issues. When it comes to climate change in Africa, signs that financial sector regulators and policymakers are taking concrete steps towards climate-related policies and frameworks are a positive development. 

The effects of climate change and the resultant environmental, social and governance (ESG) issues are a tough reality for African countries. The severity of weather-related events such as the 2016-17 drought in Kenya and Ethiopia or Cape Town’s water shortage crisis in 2018 have been made more likely because of climate change. 

Most African countries are deemed vulnerable to future climate change impacts because temperature increases on the continent are projected to be higher than global mean temperature increases, and because 23 out of 48 sub-Saharan African countries are classified as low income by the World Bank, characteristics which exacerbate key development indicators such as disease and social inequality.

Yet the continent contributes less than 4% of global greenhouse gas emissions and therefore can do very little to address the climate change mitigation needed to reduce these impacts.

This points to the need for the multi-sectoral problem-solving that takes place through the UN climate conferences, but over the years, the link between climate resilience and financial sector policymakers in Africa – and indeed in the rest of the world – has been weak.

However, this year’s biodiversity conference provides an opportunity for financial policymakers and regulators to not only engage in the wider discourse on climate, but to also play a part in creating an enabling environment for the sector to innovate for climate solutions. 

The renewed global enthusiasm surrounding the UN climate conferences can also motivate the private sector to create Africa-focused solutions that align with and deliver positive ESG impacts.

There are no panaceas for these complex issues, but looking at them through a finance lens is important. For example, at a global level, the Global Commission on Adaptation estimated that $1.8 trillion of investment in the areas of early warning systems, climate resilient infrastructure, improved dryland agriculture, global mangrove protection and resilient water resources could generate $7.1 trillion of avoided costs, and non-monetary social and environmental benefits. 

This presents a significant opportunity for Africa’s businesses, some of which are already leading innovation in these areas, such as M-Kopa, a mobile-based asset financing platform that provides renewable energy access to those excluded from traditional banking. 

While finance is only a necessary but insufficient condition in this context, it also tends to attract decision-makers across a wide range of stakeholder groups, including government departments, the private sector and civil society, which is essential because any climate-related plan needs financing.

Climate finance and Covid-19

Climate finance is even more important in the wake of the Covid-19 pandemic, where calls for a green and inclusive recovery are being echoed by concerned decision-makers across the world, including in Africa. 

For example, 23 former central bank governors and finance ministries from around the world, including Brazil, Colombia, Germany, Kenya, India, South Africa and Bangladesh issued a “statement on debt relief for a green and inclusive recovery”. 

A coalition of finance ministers on climate was formed in 2019 aiming to “bring together fiscal and economic policymakers from over 50 countries in leading the global climate response and in securing a just transition towards low-carbon resilient development”.

The coalition includes ministers from seven African countries (Côte d’Ivoire, Ghana, Nigeria, Ethiopia, Kenya, Uganda and Madagascar) that together made up 33% of Africa’s 2019 nominal GDP. Of particular relevance to businesses in these countries is that the coalition aims to “mobilise private sources of climate finance by facilitating investments and the development of a financial sector which supports climate mitigation and adaptation”.

Multi-stakeholder engagement and collaboration are therefore critical for countries to achieve their desired climate objectives and an optimal financial sector legal and policy framework. Some examples of note in Africa include Kenya’s 2018 National Policy on Climate Finance, which was developed following a series of country-wide consultations and aims to address Kenya’s ability “to mobilise and effectively manage and track adequate and predictable climate change finance”. 

Another example is South Africa’s National Climate Finance Strategy, which is currently under development, and aims to “provide a stimulus for collaborative action by government, [the] private sector and civil society, to respond to South Africa’s climate change priorities and realise its sustainable development goals”. 

Financial sector must play a role

ZeniZeni Sustainable Finance supported early work on the development of the strategy, and it was evident that while the government can work towards establishing the enabling environment for necessary investments to take place, the strategy needs the input of the business sector and civil society actors to be implementable. 

For example, how can smallholder farmers be supported to adopt climate smart, regenerative agricultural practices? What would the costs and capacity-building needs of such a strategy be? Or, as high electricity users, what contribution can the mining sector make to significantly increase the amount of electricity that is generated from renewable sources such as wind or solar power? And, what role can the financial sector play in facilitating this? 

These are all important questions that government cannot answer alone.

While not every country has chosen to develop a national climate finance strategy, the UN Framework Convention on Climate Change provides scope for this within the finance component of the “nationally determined contributions” (NDCs) that all African countries as signatories to the Paris Agreement are required to update before COP26. 

For example, Kenya’s updated 2020 NDC states that of the $62bn required for adaptation and mitigation up to 2030, 13% will come from its own resources, with the balance needing to come from international support.

Africa’s financial sector decision-makers need to take a permanent seat at the continent’s climate change negotiating table to take advantage of the renewed global focus on climate finance and chart a path that results in relevant climate solutions for the continent.

Malango Mughogho is managing director of ZeniZeni Sustainable Finance. 

Jacqueline Musiitwa is a senior associate at ZeniZeni Sustainable Finance.