What We Get Wrong About Climate Financing

Justin Norman: The economic toll of climate change is mounting and no country is immune.

News Montage: There is no developed country. We are all in the same boat.

Justin Norman: Africa, a continent responsible for just 3% of global carbon emissions, yet finds itself disproportionately exposed to the consequences.

News Montage: And the impact could be catastrophic.

Justin Norman: Reports suggest that climate change is set to cost the global economy $38 billion per year by 2049, and that emerging markets need close to $2.4 trillion per year by 2030 to meet the climate goals. That's 4 times what is currently invested. 

News Montage: African leaders want to change what they say is an unfair system of climate finance.

Justin Norman: Africa, with its abundance in sunlight, fertile land, and vast renewable potential could be poised to make an outsized impact on the global fight against climate change. But one pressing question remains, how will Africa fund this transformation?

Justin Norman: Let’s say you want to build a new energy project, and you need to raise money to finance your project. If you wanted to build your project in the US or Europe, your weighted average cost of capital, the average rate to finance these assets using debt and equity,  might be as low as five percent, or less.

But if you wanted to build that same project somewhere in Sub-Saharan Africa - the cost would be up to 4x as much, due to the real and perceived risks of investing on the continent. These high capital costs are stalling clean energy investment across Africa.

James Mwangi:  I heard Ajay Banga make the case and Kristalina Georgieva of the IMF. They both make the point that if the world basically rolls out or invests in renewables and green technology in Africa at Africa's price or cost of capital, it will underinvest in green energy assets, period. Right?

Justin Norman: That’s James Mwangi, CEO of Africa Climate Ventures, whose investment firm invests in climate businesses across the continent. 

James Mwangi: And green energy assets are a global public good. So we need to find a way to allow people to access global, globally competitive cost of capital for this transition because it's the most efficient way to green the global energy system. 

Justin Norman: And Africa, because of its energy abundance, has a critical role to play. 

James Mwangi: We have an almost mind-boggling amount of untapped renewable energy, from hydro, to wind, to geothermal. 60 percent of the world’s best solar potential is in Africa. The cheapest energy is going to be where the energy is being made. And that probably suggests that we're gonna see a migration of industry from the old centers to places that have an abundance of renewable energy. 

It just so turns out that's going to be the tropics, which are the exact places which are bearing the brunt of climate change and didn't cause it. So in a weird poetic justice kind of way, the places that didn't cause the challenge hold in their hands the key to solving it.

Justin Norman: These energy-dense regions allow for cheaper energy generation.

James Mwangi: If you just look at the cost of that amount of battery power and the amount of PV and wind blades or whatever else you're gonna need to generate the same amount of renewable electricity, at a base load level. In Germany versus Kenya, there's a cost differential of something like 3 x. Because you're gonna need fewer solar panels to generate the same amount of power every day, and you're gonna need a heck of a lot less storage because guess what? No winter, much less variability.

So you're getting structurally a cheaper electron available in Africa than anywhere else in the world, and the question is what do you use it for? 

Justin Norman: There are many emerging businesses looking to leverage affordable renewable energy to solve local problems across the continent. But the funding challenges exist for renewable energy projects and startups alike. 

And this is further compounded by Africa’s infrastructure deficit where, startups like Giraffe Bionenergy - an early-stage company building a bioethanol refinery in Kenya - is having to build across their value chain in order to bring their product to market.

Linda Davis: I came to understand about the problem of the lack of clean, safe, and affordable cooking fuels in Africa while I was working in the ethanol industry in the United States. 

Justin Norman: That’s Dr. Linda Davis, the Founder and CEO of Giraffe Bioenergy. 

Linda Davis: When I learned that Africa is adopting the use of ethanol for cooking, then the memories of my own upbringing where I used charcoal, where I used firewood to cook, just came flooding to me, and I knew the inconvenience. I knew about the problem of dirty cooking first hand. My mind was made up that I would move home and be part of the solution.

So I started to investigate the cassava value chain with a view of deploying best practices from other countries in terms of a commercial farm and an outgrowing practices from other countries in terms of a commercial farm and an outgrower program. But that was not even possible because we did not have adequate cassava seedlings, and therefore, I had to even go further and build the value chain so that we could have a reliable feedstock for our ethanol facility.

Justin Norman: So in order to solve this problem, a company like Giraffe has to integrate backwards and build across the entire value chain. This is expensive and compounded by the access to finance challenges experienced in Africa. Startups like Giraffe are driven both by the pursuit of social impact and profitability. These companies secure funding through blended finance, leveraging private equity, debt, and philanthropic capital to drive their growth.

Linda Davis: So fundraising for the entire value chain has really been character building. But, I'm grateful for angel investors who understood the vision or who decided to deploy patient capital, and they understand exactly where we need to start, how we're actually going build the entire value chain.  We've been able to raise venture capital as well as grant capital.  We've also been able to have assets financing because the program is very asset heavy. So we've been able to raise debt as well.

Justin Norman: Ultimately, driving Africa's green revolution and building climate resilience will require the power of investment on a multilateral, multinational level. Bogolo Joy Kenewendo, formerly the Cabinet Minister of Investments, Trade, and Industry of Botswana, and a Special Advisor to the UN Climate Change High Level Champions, is working on tackling some of the institutional challenges to directing more capital to climate action in Africa.

Bogolo Kenewendo:  Many African countries are caught in the structural cyclical issue of debt. Whenever African countries try to borrow, the cost of capital remains really high.  So how do we finance these things?

We need three levels of, capital. We need grant for some of the resilience and adaptation work. We need the extra concessional lending and should also be purpose driven. And then the this piece is guaranteed and credit enhanced capital. And now this where the private sector comes in. 

We recognize that private capital is expensive. Last year, we launched around a task force on credit enhancement that we support the private sector to come into markets that are deemed otherwise risky. And we provide guarantees through, DFIs MDBs, and we ensure where a government does not have the fiscal capacity to finance those projects the partners do so. 

Because again, we recognize that they are financing adaptation and resilience through debt of a problem that they did not cause. And this is a reality, but we are here together now. It might appear that this problem is not at your doorstep, but it will eventually be because climate action and failure for us to act today will be your problem tomorrow.

Justin Norman: Ultimately, these debt challenges exist in part because of the perception of risk.

Bogolo Kenewendo: We know, and it's been proven that the risk of default in the continent is very low. There's experiential evidence coming from Afreximbank, from Standard Bank, that shows this. And yet, many still posit that it is very risky to invest in the continent. We know that we're going to have more and more climate shocks happening in the next,couple of decades, but we have to prepare ourselves for those risks. And that's why we are bringing in different financial instruments to try to deal with that risk.

But if we don't deal with those projects, the risks only increases. The risk and the cost of inaction today will actually be a lot higher. It's important we invest in adaptation and resilience now so that we invest less on loss and damage later.

 There's strong business case for investing in Africa. The pipeline of projects are there. Let us just unpack the real issues that deter investment in the continent. There are many people that have done it. So can you.