‘With the right support we can go further, faster’: financing climate action in SA

To achieve its most ambitious climate action targets, SA will need more than R1.5-trillion in investment over the next five years to transition its electricity sector and automotive industry away from coal and internal combustion engines.

In its most recent Country Climate and Development Report (CCDR), the World Bank estimates the total required development spending is equal to about 4.4% of GDP per annum between 2022 and 2050. 

Given the government’s limited fiscal space, both the domestic private sector and external financing will have an important role to play in these transitions. This will also include grants and concessional loans as seen in the recently announced Just Energy Transition Investment Plan (JET IP).

Going further, faster

“On our own, SA can achieve a certain level of climate action, but with the right support we can go further, faster — and the faster part is essential, because nature and science is against us, we are running out of time to act,” says Dr Chantal Naidoo, founder of Rabia Transitions, a non-profit working with financial actors in developing countries. 

SA’s revised nationally determined contribution (NDC) submitted at COP26 committed the country to reduce domestic carbon emissions within a target range of between 350-million tonnes and 420-million tonnes of CO2 equivalent by 2030, and to achieve net-zero emissions by 2050. That would be a reduction of about 20%-33% from current emissions by 2030. 

Achieving the lower range of the target, which would mean reducing emission by a third by 2030, is aligned with the Paris Agreement to limit global warming to 1.5˚C by 2050, while the less ambitious target is set around limiting warming to below 2˚C.

According to Naidoo, without access to international climate finance SA would be able to achieve the less ambitious target, but to get to the lower end of the range it would need to access international finance.

Loss and damage

One of the highlights of the UN Climate Conference in Egypt in November (COP27)  was the agreement reached on the need to establish a loss and damage fund.

Such a fund would aim to provide financial assistance to nations most vulnerable and affected by the effects of climate change. It may take years to iron out the details of how funds will be distributed, and where the money will come from, but it signals an important move towards providing global support from rich nations to those developing countries hit hard by climate disasters.

It is not clear yet what this might mean for SA. Brandon Abdinor, a climate advocacy lawyer at the Centre for Environmental Rights, says there is bound to be some controversy over which countries would be eligible to benefit from this mechanism as the focus, for now, seems to be on “particularly vulnerable countries”.

This, he says, can lead to some disputes about which countries are “particularly vulnerable” and which are not.

Despite the many uncertainties, the agreement on loss and damage is “not an insignificant victory” for developing countries. “It’s been advocated for, for many years, so any movement like this is good, but it’s still a far cry from what we need,” says Abdinor.

The need for such a mechanism was made clear in the aftermath of the devastating floods that affected large parts of KwaZulu-Natal in April.

Flash floods around Durban killed more than 400 people, caused R10bn in damage to infrastructure and left tens of thousands homeless.

Even though the modalities and the countries that would qualify for a global fund for loss and damage are still to be worked out, SA should use the momentum and awareness created by COP27 to start an in-country conversation about the need for a local loss and damage concession, says Naidoo.

Property owners and businesses in Durban whose properties lie on a flood line are already being confronted with “massive” insurance premiums. For them, and others, waiting for years to see if — and to what extent — SA will benefit from a global loss and damage mechanism is not an option, says Naidoo.

Funding mitigation

Up until now, the planning and sourcing of finance has focused primarily on mitigation needs, specifically the transition of SA’s carbon-intensive economy by moving away from coal, and to a lesser degree on adaptation for which, according to World Bank estimates, SA will need to spend R2.4-trillion between 2022 and 2050.

“At the moment mitigation finance far outweighs adaptation finance,” says Abdinor.

The reason for this, he says, is that mitigation finance (typically an investment in low-carbon technology such as a renewable energy plant) is seen as an investment that can make a return, but with adaptation this is not necessarily the case.

“The intervention might make ordinary people’s lives better and safer, but no-one stands to make a lot of money out of it or see a return, which is why I think there’s reluctance to really commit to [adaptation finance],” he says.

In SA, the needs are considerable, and it ranges from short-term needs such as ensuring flood resilience for a place like Durban and drought resilience for a metro like Cape Town, to longer-term needs like the adaptation of our food production systems.

Dryland maize, the largest farming activity in SA and a cornerstone of food security in the country, is expected to become less viable over time due to global warming, which means farming systems have to adapt to a warmer, drier future.

Over the medium and longer term, there needs to be adaptation to sea level rise. “By the end of the century, things are going to be quite radically different. And if you think about SA’s extensive coastline, and how much infrastructure we have at sea level, those are enormous changes that must take place — all these adaptation needs are going to need considerable funding and considerable management.”

Funding a just transition

Part of the challenge, says Gaylor Montmasson-Clair, senior economist at Trade & Industrial Policy Strategies (TIPS), is to first understand the distinction between climate finance and just transition finance, which is still a work in progress.

“Even pure climate finance, which has been a topic of interest for decades, is still not well defined, but now we also have to start thinking separately about funds for just transition financing and loss and damage.”

What is clear however, he says, is that there is a difference between doing “techno-economic decarbonisation” (which would involve focusing purely on shifting SA’s energy mix from fossil-fuel powered to renewable sources), and doing a just transition.

“‘Just transition’ means doing things differently. It means really considering the socioeconomic impact of the transition and that requires a different way of thinking.”

Montmasson-Clair, who was recently appointed as the facilitator for the SA Renewable Energy Masterplan (SAREM), acknowledges that there is some overlap between the two, but what concerns him is an approach to climate finance and low-carbon transition that fails to consider the social dimension of the transition.

“At the end of the day, it’s about people and we should be cognisant of that from the beginning.”

This aspect is not yet reflected in the type of funding being directed towards the transition in SA, he says.

Using SA’s JET-IP as an example, Montmasson-Clair points out that this is predominantly a decarbonisation plan, rather than a just transition plan.

“This is also reflected in the funding that partners to SA’s Just Energy Transition Partnership (JETP) have committed to. Only about 4% of the initial $8.5bn will be from grants, while the bulk of the funding will be from concessional and commercial loans, as well as guarantees. With that kind of offer, you’re certainly looking more at less risky investments that have a clear track record, and have been tried and tested, and that are going to bring some return on investment.”

Equitable access

To the extent that SA is accessing loans at the sovereign level, international climate finance should afford us resources at more attractive rates than National Treasury could secure on capital markets on its own, says Naidoo.

But, she adds, SA also needs to look at the need for broader finance sector actions within the country.

“The SA financial intermediaries and regulators have a high awareness level of climate, sustainability and increasingly just transition imperatives, but we lack a sense of urgency and cohesion.”

While a number of voluntary disclosures, financial instrument innovations and climate risk management approaches are already in play, she says these require a more systemic and complementary focus to reinforce individual efforts.

There is a need to go beyond disclosures and voluntary approaches, and address the incentive structures such that all finance flows support climate action in an urgent and large-scale manner, according to Naidoo.

Equitable access to finance is also important, as our financial system still favours larger businesses, she says.

Enabling access to finance and better social ownership models that focus on youth and women, vulnerable communities, first responders and smaller businesses (including start-ups) is essential.

“Nature is not waiting for a pipeline of bankable projects or policy coherence, and that should be incentive enough to act — seeing the damage already unfolding.”