Over $2 trillion investment needed for Africa’s green sector

Only 12% of the $2.4 trillion investment needed by 2030 for climate financing in Africa has been met, according to Boston Consulting Group (BCG).

On Wednesday, a panel hosted by the group discussed solutions to unlocking financial opportunities for investment needed in the green sector.

The discussion was based on the ‘More Money, Fewer Problems: Closing Africa’s Climate Finance Gap‘ report released by BCG in May 2024.

In the report, BCG details how the 12% reflects the possibility of a great risk that needs to be overcome to ensure a sustainable future for the continent

Obstacles hindering investment

It details key obstacles hindering the investment flow into green sectors.

“Macroeconomic uncertainty, the opportunity cost of capital, and investor risk assessment, all of which result in financing costs that are 5% to 6% higher than those in comparable emerging markets.”

According to the report, the cost of debt for climate projects in the country is 20% compared with Paraguay’s 15%, although their sovereign ratings are the same (BB ratings). This can be seen as an indication that investors view the continent as risker than reflected by the global credit ratings agencies.

“The persistent gap in climate financing for Africa presents an opportunity to accelerate growth, however de-risking capital in the region to facilitate financing for private companies is critical to achieve this,” reads the report.

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Investment is required in Africa where there is a massive climate finance gap. Picture: supplied

Solutions to unlock financing

BCG partner and associate director in Nairobi, Katie Hill says there is a need to improve macroeconomic conditions and there are different solutions that exist to unlock financing opportunities.

“A major step investor can take is to increase Portfolio Value Creation (PVC) (currently half of global levels) to accelerate growth and derisk green companies, which will ultimately bring down the cost of capital.”

BCG’s managing director and partner in Johannesburg, Warren Chetty recommends the strengthening of policy. He says policies must be correctly developed in appropriate areas so that structured financing instruments can be scaled to increase the availability of capital and reduce costs.

“Private debt is particularly important for green sectors, which are more infrastructure and working capital intensive.”

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Companies in African countries pay a higher risk premium. Picture: Supplied

Ways stakeholders can play in de-risking capital

• He says the governments can enable favourable regulatory environments, strengthen institutions, ease the issuance of green bonds, and offer sovereign guarantees.
• “DFIs can lead on blended finance instruments, providing first-loss capital and loan guarantees to absorb initial losses and execute Contracts for Difference (CfDs) and capped return investments that can mobilise more private investment.”
• Multilaterals can help by scaling loan guarantee mechanisms, insurance products, and green bonds to improve the availability of capital while de-risking markets to crowd in capital.

Finance instruments that can de-risk capital for private companies in Africa. Picture: supplied

He believes the abovementioned will be most effective when paired with improved information for private investors. When it comes to foreign investors, there needs to be an understanding of baseline asset class performance.

“Realising this potential requires effective scaling, structuring, and use of these instruments that will bolster much-needed climate finance and support the vital growth of green sectors in Africa.”

The report was compiled by Katie Hill, Chris Mitchell, Mills Schenck, Patrick Dupoux and Warren Chetty.

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