Money can grow trees in Africa: What’s needed to finance Africa’s climate transition

07 December 2023 PwC

COP28 has been underway for about a week, and we’re already seeing significant climate finance progress being made for Africa

Africa has the youngest median population globally. While many believe this is the continent’s greatest advantage, many African countries are currently faced with the challenge of providing for these growing populations. Economic development is one of the greatest key challenges in this space, which has meant that providing affordable, accessible green energy that aligns with global net zero commitments, and enhancing resilience to climate change impacts has not been a priority.

Matt Muller, PwC South Africa Sustainability and Climate Change Senior Manager, says: “Africa’s climate agenda needs a major shift, and in order to ensure it becomes a greater priority for governments, change makers, business and civil society on the continent, internal and external financing is urgently needed to support this agenda.”

Developing Africa’s climate finance landscape

In mid-2022, African governments had pledged slightly more than USD250bn from domestic public funds for climate finance purposes. This accounted for roughly 10% of the USD2.8tn needed to fulfil Africa’s share of the Paris Agreement's nationally determined contributions between now and 2030, and to mitigate the worst impacts of climate change.

The main sources of public climate finance for Africa in 2019 and 2020 were multilateral development financial institutions (DFIs) and climate funds (49%), which were followed by bilateral development partners, which included bilateral DFIs (22%), foreign governments (16%) and climate funds (4%). Lullu Krugel, PwC Africa Sustainability Leader, says: “These metrics are a stark contrast to how climate finance is raised in developed countries where the majority of the finance comes from the private sector.”

Additionally, African countries frequently face interest rates up to eight times higher when seeking financing from international lending organisations. “Considering the urgent need for climate finance, it is important that when climate finance is provided it is offered at rates that do not place additional pressure on a country’s balance sheet,” Krugel says. “At the same time, African countries need to support international finance by improving governance structures that enable the effective use of the financing provided, and also look to attract more private investment.”

She says that to increase this private funding, measures could include adapting banking regulations to favour private sector lending, as well as implementing governance reforms that enhance public finance management and debt transparency. These changes could create a more stable and attractive environment for private investors.

“Innovative financial models can address Africa’s funding gaps,” Krugel adds. “Some of these solutions include climate-related debt relief (such as debt-for-climate swaps), different types of bonds (like green and blue bonds) and dedicated climate funds.”

Establishing a climate finance foundation

Earlier this year, Africa held its first Climate Summit in Nairobi. A key focus was on financing Africa’s transition towards a low carbon economy. Global leaders discussed closing the climate finance gap, harnessing the continent’s natural resources for economic growth and achieving a greener economy.

Hasan Cassim, PwC South Africa Sustainability Associate, says: “During the summit, African leaders called for accelerated efforts to revamp the global financial system. They also advocated for a global carbon taxation system, covering fossil fuel trade, maritime transportation and aviation. Also notable was climate investments that were pledged to the tune of around USD26bn by donors. These pledges came from the United Arab Emirates, Denmark and the United Kingdom, as well as financial institutions like the African Development Bank and the Bezos Earth Fund. A variety of climate efforts are covered by these pledges, such as targets for climate financing, clean energy, carbon credits, green projects and adaptation.”

COP28 money talks

While COP28 has only been underway for about a week, we’ve seen some significant progress in the climate finance space for Africa — and we expect more to come in the upcoming days.

Some of these announcements are:

- Loss and Damage Fund: The operationalisation of the Loss and Damage Fund, with over USD400m in initial pledges, which was announced on day one. The purpose of the Fund is to assist developing countries that are particularly vulnerable to the adverse effects of climate change in response to economic and non-economic loss and damage associated with those harmful effects, including extreme weather events and slow-onset events.

- Climate-resilient debt clauses: A groundbreaking move by major financial institutions like the World Bank and African Development Bank to adopt climate-resilient debt clauses. These debt clauses pause debt repayments in the wake of natural disasters and offer a financial lifeline to African nations, allowing them to allocate resources towards immediate relief and recovery without the pressure of debt repayments.

- The UK’s climate finance and global partnerships: The UK’s pledge of over GBP480m as part of a GBP1.6bn climate aid package, along with the pioneering introduction of the first climate-resilient debt clause in Africa in partnership with Senegal and Guyana to support Africa’s journey towards climate resilience and sustainable development.

- Green Climate Fund replenishment: The replenishment of the Green Climate Fund, with commitments including USD3bn from the United States.

- The World Bank’s enhanced climate financing: The World Bank’s pledge to boost climate financing to 45% by 2025 signals more robust support for Africa’s climate adaptation and mitigation projects.

- First Movers Coalition’s USD12bn pledge: Launched by the World Economic Forum, the First Movers Coalition has pledged USD12bn to green technologies offering significant potential for Africa's hard-to-abate sectors like steel and shipping.

- Carbon market coalition: The collaboration to strengthen carbon crediting standards can significantly benefit Africa by unlocking financing opportunities, leveraging its natural resources for sustainable growth and climate resilience.

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