MICHAEL FOUNDETHAKIS: Finance a key focus at ‘Africa’s COP’

Developing countries are among the most vulnerable to the effects of climate change, especially weather extremes, food insecurity, and a lack of energy and water. Financial assistance to support developing countries in the transition to a low-carbon, climate-resilient future will be an important topic at the COP27 climate summit in Sharm El Sheikh, Egypt, that starts on Sunday.

In 2009, rich nations pledged $100bn in annual climate financing for developing countries, which was due to be met by 2020. However, according to the Organisation for Economic Co-operation & Development (OECD), they are likely to reach this goal only by 2023. The OECD’s Forward-Looking Scenarios of Climate Finance report notes that climate finance provided or mobilised by developed countries totalled $79.6bn in 2019. Of this, only about $20bn was provided to Africa between 2016-2019. The shortfall is due to rapidly evolving challenges that have increased the climate financing requirements for developing nations, while making it more difficult for developed nations to commit to their pledges.

At COP26 in 2021, the EU, France, Germany, the UK and the US pledged $8.5bn in first-round financing to assist SA with energy transition projects. In October the SA cabinet approved an investment plan for the financing package, the details of which will be announced at COP27. The SA deal is expected to serve as a model for other emerging markets, in particular the structure of the financing — grants, loans and concessional funding. Discussions are under way to establish a similar partnership in Sénégal.

A drastic increase in climate financing is required. The African Development Bank (AfDB) notes that about $1.6-trillion is needed by 2030 to assist the continent in adapting to and mitigating the risks of climate change, and for African countries to effectively implement their Nationally Determined Contributions (NDCs) under the Paris Agreement. Updates on these commitments are expected at COP27 (“Africa’s COP”).

 Infrastructure financing

To achieve a low-carbon future Africa requires massive investments in sustainable infrastructure, clean energy, climate-change adaptation and biodiversity restoration. However, a report by Baker McKenzie, New Dynamics: Shifting Patterns in Africa’s Infrastructure Funding, shows that the main providers approach to infrastructure lending in Africa has changed. The data reveals that multilateral and bilateral infrastructure lending for the continent declined to $31bn in 2020 from $100bn in 2014. Gaps in energy provision, internet access and transportation mean new sources of financing, outside traditional lenders and international partners, are urgently required.

Development finance institutions

The report outlines how development finance institutions (DFIs) are increasingly anchoring the infrastructure ecosystem in Africa because they can shoulder political risk, access government protection, enter markets that others cannot and are uniquely capable of facilitating long-term lending. However, the amount of capital needed to build climate resilient and sustainable energy infrastructure is significant and DFIs cannot bridge it alone. Private equity, debt finance and specialist infrastructure funds are primed to enter the market, and multifinance and blended solutions are expected to grow in popularity as a way to de-risk deals and broaden the number of lenders. Mobilising finance from the private sector requires investor-friendly policies and incentives to reduce barriers such as uncertain licensing processes, lack of market liquidity and bankability.

In 2018, the AfDB started the African Financial Alliance for Climate Change, a platform to mobilise climate finance and incentivise the shift to low-carbon and climate-resilient investments. The bank is also involved in enabling Africa’s private sector to participate in the implementation of NDCs, and has launched various tools to promote climate-conscious lending by African financial institutions.

 Major players

Despite the reductions in infrastructure funding, rich nations recently reaffirmed their commitment to financing strategic, long-term projects in Africa. Earlier this year a $600bn lending initiative, the Partnership for Global Infrastructure Initiative (PGII), was unveiled to fund sustainable infrastructure projects in developing countries, with a particular focus on Africa.

The US is mobilising $200bn for developing countries over the next five years as part of the PGII. The funding will be in the form of grants, financing and private-sector investments. One of the main pillars will be “tackling the climate crisis and bolstering global energy security”, Some deals have already been announced, including a $2bn solar energy project in Angola.

In February, the European Commission announced €150bn in investment funding for Africa. The package is part of the EU Global Gateway Investment Scheme and is said to be in the form of combined member funds, member-state investments and capital from investment banks. In 2020 the European Commission published its Comprehensive Strategy with Africa, outlining the region’s plans for its new, stronger relationship with the continent. Some of the focal points in this strategy are assisting the continent with the green transition and improving access to clean energy.

China and Africa have also recently agreed to co-operate on improving the continent’s green, low-carbon and sustainable development. At the 2021 Forum on China-Africa Co-Operation, green development was one of nine programmes identified as part of the China-Africa Co-Operation Vision 2035.

With financing pledged from the worlds rich countries, the participation of DFIs to facilitate the financing process and the increasing mobilisation of the private sector, African countries will hopefully begin to access the huge financing they need to fortify themselves against climate change. Attendees at “Africa’s COP” will hear that achieving this is essential, not only to mitigate and adapt to climate change, but also to unlock the continent’s potential.

• Foundethakis is Africa steering committee chair, partner, and global head of projects, trade & export finance at Baker McKenzie Paris.