The Climate Opportunity in Africa

11 Nov 2019

Africa stands to be amongst the regions worst-affected by the climate crisis[1]. The World Bank argued in a 2016 report[2] that sub-Saharan Africa and South Asia are most vulnerable to climate change-induced poverty, given that they have the highest initial number of people in poverty, and face the steepest projected increases in agricultural prices caused by expected yield losses. In a 2018 report[3], the World Bank also argued that a worst-case scenario could see internal climate change migrants within sub-Saharan Africa number 86 million. The wide-ranging impact of climate change on Africa’s prosperity, from health and water-supply to agriculture and forestry[4], is clear, as is the challenge that Africa’s governments face in meeting the projected costs of adaptation, with potential annual adaptation costs of US$20-50bn by mid-century in the event of a 2°C warming, and up to US$100bn in the event of a 4°C warming[5]. For the worst effects of climate change to be mitigated, Africa must shift towards climate-informed development, such that new projects are adaptable to (and do not exacerbate) climate conditions, with steps also being taken to reduce people’s vulnerability to the impact of climate change[6].

What role can private capital play, then? Consider renewable energy. With two-thirds of Africa’s population not having access to electricity, investors have taken important steps to financing renewable energy projects in Africa. For example, the Desert to Power Initiative, launched by the African Development Bank and supported by institutions such as the Green Climate Fund and the Africa50 Infrastructure Fund, seeks to provide 10 GW of solar energy to the countries of the Sahel region by 2025, providing access to green electricity to over 250 million people, from Senegal to Ethiopia[7]. Meanwhile, the Kathu Solar Park was inaugurated earlier this year in South Africa. Providing up to 179,000 households with constant power, the 100 MW plant will prevent the emission of six million tonnes of carbon dioxide into the atmosphere over the next twenty years and was financed by a consortium that included PE firm Metier, development finance institutions FMO and DEG, as well as South African government-owned asset manager, the Public Investment Corporation[8].

Climate-focused energy funds have also appeared on the African scene. Climate Fund Managers, for example, recently announced the final close of Climate Investor One’s Stichting Development Fund and Coöperatief Construction Equity Fund U.A. at a combined US$850mn and will look to deliver renewable energy infrastructure across Africa, South Asia and Latin America, preventing the emission of 1.9 million tons of carbon dioxide per annum. Similarly, GPs such as Metier and AIIM (in partnership with SOLA Group and Nedbank Energy Finance) have launched funds focused on developing clean energy and resource-efficient infrastructure, while outside of renewable energy, firms like FMO have extended financing to companies seeking to massively boost forestry plantation in Africa[9].

However, structural challenges remain for climate change funds active on the continent. According to Andrew Johnstone, Chief Executive Officer at Climate Fund Managers:

"There is still a huge need for private sector investment in renewable energy in Africa. Pension fund regulations restrict the amount that can be allocated to alternative illiquid investments to around 5% of total assets, meaning that infrastructure, real-estate, and climate-related assets are all competing within a relatively small allocation. Also, accounting standards and regulation require that for investments made in illiquid assets, the investor must reserve on the balance sheet a corresponding amount in liquid assets such as cash or bonds, which in the current environment are earning very low yields. This raises the cost of capital for alternatives.  For example, if you’re a European Institution looking to invest in a renewable energy project in Morocco, the matching capital that dollar needs to put in reserve is probably earning a negative yield, so the active investment would need to achieve a return high enough to deliver am acceptable average return. Also, there is insufficient capital available for renewable energy projects in early project development stage, resulting in projects stalling or trading and flipping, which is detrimental to both momentum and embedded cost.

Another critical element of the climate challenge in Africa will centre on harnessing technology to adapt the continent’s key industries for a warmer future, particularly when one recalls that sub-Saharan Africa’s population is projected to grow by 1.05 billion by 2050, representing 52% of the added global population[10]. Here, sectors like agriculture, which still accounts for 55% of sub-Saharan Africa’s employed population[11], stand out. One example is the Climate Finance Lab, a public-private partnership which counts the AFC and African Development Bank amongst its partners, which is developing the West African Initiative for Climate Smart Agriculture as a blended finance solution to support the adoption of climate-smart practices by smallholder farmers in West Africa. Companies like the Kenyan agritech start-up Lentera, which is currently raising a US$560,000 funding round, are also developing climate-smart solutions for Africa’s farmers, using remote weather sensors, satellite data, and drone imagery to provide farms with information about the health of their crops, which crops to plant and when to plant them[12]. As institutions like the IMF[13] have noted, climate-smart agriculture can help soften climate change’s impact by helping farmers to produce more nutritious crops in a more sustainable and efficient way.

Here, private capital can, and should, do more. The Technical Centre for Agricultural and Rural Co-Operation (CTA) and Dalberg Advisers[14] recently pointed out that only a fraction of the addressable market for agricultural digitalisation in Africa is currently being realised, with estimated realised revenues of EUR127mn compared to total addressable market revenues of EUR2.3bn. Moreover, they estimated private sector investment into African or Africa-focused agricultural digitalisation enterprises to be EUR47mn in 2018, with Africa-based start-ups in this sector receiving only 3-6% of all Africa tech start-up investment in 2018. By way of comparison, they noted that nearly EUR1.8bn was invested globally in agricultural technology in 2017.

Another challenge relates to raising awareness amongst farmers about the benefits of climate-smart advancements. According to Jerry Parkes, Managing Principal at Injaro Investments:

“The uptake of technology is not as high as one would like with smallholder farmers in West Africa, who still prefer to use seeds leftover from the previous year, as opposed to using drought-resistant, professionally-produced seeds; they observe that droughts are not regular and culturally remain wedded to traditional approaches. However, when there is a drought, we’ve seen demand for drought-resistant seeds rocket the next year. This technology is particularly popular in Sahelian countries like Burkina Faso and Mali, where there is more concern about the impact of climate change. Climate impact, awareness and the ready availability of mitigating solutions vary greatly even just within West Africa, in our experience.”

In order to safeguard the continent’s transition to an era of climate-informed development, then, the challenge for private capital is to continue to finance, nurture and encourage the enterprises of innovation that are utilising existing and emerging technologies not only to reduce development’s carbon footprint, but also to protect Africa’s peoples and industries from the worst impacts of climate change. The good news is that many of the key themes that draw private capital to Africa, such as population growth, the youth demographic and rapid urbanisation, also harbour great potential for harnessing the opportunities of investing through a climate-focused lens to build climate resilience and adaptation into Africa’s economic growth.

Watch out for the full AVCA Climate in Africa report coming in 2020! 

References

[1] The African Development Bank, 2011. The Cost of Adaptation to Climate Change in Africa. Available at: https://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/Cost%20of%20Adaptation%20in%20Africa.pdf

[2] World Bank Group, 2016. Shock Waves: Managing the Impacts of Climate Change on Poverty. Available at: https://openknowledge.worldbank.org/bitstream/handle/10986/22787/9781464806735.pdf

[3] World Bank Group, 2018. Groundswell: Preparing for Internal Climate Migration. Available at: https://openknowledge.worldbank.org/handle/10986/29461

[4] African Development Bank, 2018. “Desert to Power Initiative” for Africa. Available at: https://www.afdb.org/fr/news-and-events/desert-to-power-initiative-for-africa-18887

[5] World Bank, 2016. The Africa Climate Business Plan: Key Messages. Available at: https://www.worldbank.org/en/region/afr/publication/africa-climate-business-plan-key-messages

[6] World Bank Group, 2016. Shock Waves: Managing the Impacts of Climate Change on Poverty. Available at: https://openknowledge.worldbank.org/bitstream/handle/10986/22787/9781464806735.pdf

[7] African Development Bank, 2019. Three Questions to Wale Shonibare, Acting VP, Power, Energy, Climate & Green Growth. Available at: https://www.afdb.org/en/news-and-events/three-questions-wale-shonibare-acting-vp-power-energy-climate-green-growth-30044

[8] African Review, 2019. Engie stars operations of Kathu solar plant in South Africa. Available at: http://www.africanreview.com/energy-a-power/renewables/engie-starts-operations-of-kathu-solar-plant-in-south-africa

[9] AVCA Newsroom, 2018. FMO Launches Global Forestry Program to Mitigate Climate Change with West African and SE Asian Investments. Available at: https://www.avca-africa.org/newsroom/member-news/2018/fmo-launches-global-forestry-program-to-mitigate-climate-change-with-west-african-and-se-asian-investments/

[10] UN, 2019. World Population Prospects 2019: Highlights. Available at: https://population.un.org/wpp/Publications/Files/WPP2019_Highlights.pdf

[11] World Bank World Development Indicators: International Labour Organization, ILOSTAT Database, 2019. Employment in agriculture (% of total employment) (modeled ILO estimate). Available at: https://data.worldbank.org/indicator/SL.AGR.EMPL.ZS

[12] Space in Africa, 2019. Kenya’s Lentera is Fundraising to Scale Climate-Smart Solutions for African Farmers. Available at: https://africanews.space/kenyas-lentera-is-fundraising-to-scale-climate-smart-solutions-for-african-farmers/

[13] IMF Blog, 2017. Helping Feed the World’s Fastest-Growing Population. Available at: https://blogs.imf.org/2017/01/31/helping-feed-the-worlds-fast-growing-population/

[14] CTA & Dalberg Advisors, 2019. The Digitalisation of African Agriculture Report, 2018-2019. Available at: https://www.cta.int/en/digitalisation

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