Planting the Seed: Unlocking Institutional Investors to Finance Africa’s Climate Action
Just as a seed requires nutrients and care to grow into a healthy plant, the blended finance facilities designed to unlock market-driven finance require seed capital to flourish.
Africa faces significant challenges in financing its climate action plans, or Nationally Determined Contributions (NDCs), with an estimated cost of implementing these plans up to $3 trillion. However, unlocking the necessary market-driven finance for implementing NDCs remains a significant challenge.
African governments often tap into debt finance instruments from international sources — mostly in the form of loans and international / eurobonds. Already, some countries in the continent are in debt distress. The debt-to-GDP ratio for 12 sub-Saharan African countries has already significantly exceeded the International Monetary Fund’s (IMF) recommended threshold of 45% for low-middle-income countries and beyond 70%. Up to 20 countries have unsafe debt-to-GDP ratios ranging from 64.4% to 175.1%. This debt has increased to $702 billion, the highest in the decade between 2010–2020. These loans are invested mostly in infrastructure developments — where the return on investment is mostly from a social lens. In addition, the repayment of these debts is made in foreign currencies. It directly depletes a country’s reserves, weakening local currencies and increasing inflation and cost of living — especially for Africa, which stands out as a net importer. The effect is that citizens’ purchasing power is lowered; hence their investment capacity is hampered. The urgency for the continent to avoid more international debt to drive NDCs implementation actions is critical.
The answer to unlocking market finance for NDCs lies with domestic institutional investors.
The assets under the management of domestic institutional investors in Africa are estimated at up to $1.8 trillion. These are drawn from pension funds, sovereign wealth funds — which are state-owned investment funds, as well as insurance companies. A portion of these assets needs to be allocated specifically to set up the blended finance facilities that are aimed at unlocking more low-risk, affordable private sector-driven NDCs implementation investment from both corporate and informal sector players would be the way forward.
Attracting private sector finance calls for “bankable projects.” Financial and enterprise opportunities that can be tapped from the different NDCs priorities, such as clean energy, water, and transport, must be clearly accounted for. A clear elucidation of the gaps, enabling environment for investment, and opportunities in terms of financial returns on investments is critical.
Unlocking just 10% of the cumulative $1.8 trillion in assets held in institutional investors would translate to $180 billion. This amount is almost equivalent to the entire climate adaptation needs of the continent up to 2030. If used to establish credit guarantee schemes, it would unlock more low-cost private finance for implementing NDCs, resulting in a multiplied impact.
However, creating formidable NDCs investment plans, complete with robust feasibilities that cover not only the traditional aspects of financial, technical, and social viability but also the “feasibility of attitudes,” is critical. This means unlocking the potential of the people to drive sustainable development.
In conclusion, tapping into domestic institutional investors to finance NDCs implementation investments is a viable way forward for Africa. It requires a clear roadmap that defines bankable projects and a feasible plan for attracting private sector finance. Most importantly, it requires a change in attitudes that recognizes the potential of the people to drive sustainable development. By planting the seed capital today, Africa can reap the benefits of sustainable development tomorrow.
Recommendation and Next Steps:
- African governments must prioritize the development of formidable NDCs investment plans.
- The plans must account for bankable projects that clearly identify the gaps, enabling environment for investment, and opportunities in terms of financial returns on investments.
- Domestic institutional investors must allocate a portion of their assets to blended finance facilities aimed at unlocking more low-risk, affordable private sector-driven NDCs implementation investment.
- Credit guarantee schemes must be established to unlock more low-cost private finance for implementing NDCs.
- A change in attitudes that recognizes the potential of the people to drive sustainable development is crucial.