By Olufunso Somorin
Humanity is constantly reminded that climate change remains the biggest threat it is currently facing. The reminders come through frequent episodes of flooding, droughts, sea-level rise, pandemics, and biodiversity loss, amongst others.
In recent times, many global leaders, scientists, and communities, have called for renewed commitments and responsibilities to ambitious climate mitigation goals by developed countries and adaptation goals for the vulnerable ones. These commitments will cost significant financial resources, particularly for Africa.
Africa needs up to USD 3 trillion between 2020 and 2030 to implement its climate action as stated in the nationally determined contributions (NDCs) of its member countries. That is about USD 277 billion annually to respond to a changing climate that costs the continent 5-15% of its annual gross domestic product (GDP). It is thus understandable that discourses around climate finance in Africa are often heated and contested. The divergent views of different African stakeholders are not completely devoid of their interests and preferences.
As Kenya prepares to host the forthcoming African Climate Action Summit in September 2023, along with the Africa Climate Week, climate finance will be a key discussion – finding a lasting solution for limited climate finance flows to the region that needs it most. Let’s reflect on three key questions of climate finance in Africa.
Is it adequate?
The question of (in)adequacy is arguably a demand and supply crisis. Africa currently receives about USD 30 billion in annual climate finance flows, which is only 11% of what it needs annually. While evidence shows a relative year-to-year increase in global climate finance, unfortunately, the gulf between the needs to be urgently met (especially adaptation needs) and available resources keep getting wider.
One would imagine that the inadequacy in climate finance supply is because there is a general inadequacy in the global financial system. The reality is otherwise. This is because, in the first 18 months of the Covid-19 pandemic, developed nations spent more than USD 22 trillion responding to its impacts. In 2021, the top 100 banks globally managed balance sheets of about USD 120 trillion. Global private asset managers hold USD 210 trillion in financial assets, which is roughly twice the global. The financial resources urgently needed for Africa’s low-carbon and climate-resilient development are not necessarily scarce. They are just unevenly distributed.
In solving this concern, Africa, through its institutions, must creative engineer ‘new and additional’ climate finance sources through new frameworks that facilitate flows from ‘where money is most abundant, perhaps less needed, to ‘where money is most needed but less abundant’.
Is it effective?
Even when there is an adequate supply of climate finance, there is always a concern about the quality and form in which it is conditioned in. Compounded by the impacts of the Covid-19 pandemic and rising costs of food and fuel due to the Russia-Ukraine war, climate-vulnerable communities and countries in Africa have limited fiscal space to adequately respond.
It implies that these countries are expected to take on almost USD 1 trillion in debts over the next 10 years – a 50% increase on current debt levels as a percentage of GDP. The principle of climate justice would suggest that additional climate finance, for it to be effective, should not lead to an elevated debt burden on economies already severely impacted by climate change.
Effectiveness also speaks to whether the available resources are trickling down to communities to generate desired adaptation and mitigation outcomes and impacts. One critical element of this is the increasing operational and management costs of implementing climate actions on the ground. A higher management cost (up to 50% in some cases) reduces scaling local results and beneficiaries.
Is it innovative?
Expanding and deepening innovative climate finance instruments hold promises for scaling up the supply of public and private capital for climate actions. In the last few years, new instruments such as green bonds, resilience bonds, green equity, debt-for-nature swaps, and carbon markets, have been used to finance projects. Diversity of instruments is beneficial for accessing untapped capital for climate investments.
Additionally, innovativeness in climate finance lends to the idea that blending development finance or public capital with private capital can de-risk many of the sectors that hold high economic, social, and environmental benefits for communities, but low commercial viability/financial returns. In the same vein, innovative instruments offer a unique opportunity for crowding-in non-traditional public and private sources, such as pension funds, capital markets, asset managers, venture capitalists, and philanthropists.
In conclusion, Africa needs to continue asking the right questions on climate finance as it seeks to ramp up both domestic and international capital through strategic partnerships for its low-carbon and climate-resilient development pathway.
For Africa, it comes down to two things: Scale and Speed.
Dr Olufunso Somorin is the Regional Principal Officer, in charge of Climate Change and Green Growth (East Africa), the African Development Bank.
