According to a recent report by management consulting company Boston Consulting Group (BCG), Africa needs an investment of $2.4 trillion by 2030 to meet its climate needs. This month, the Helios Climate, Energy Access and Resilience Fund – managed by private equity company Helios Investment Partners – announced that it has secured $200 million in investments for climate mitigation and adaptation projects in Africa from a number of finance institutions, including InfraCo Africa; the Foreign, Commonwealth and Development Office; and British International Investment.
Despite this, only 12% of the investment needed by 2030 has been met so far, presenting a key challenge that needs to be overcome to ensure the continent’s sustainable future. According to BCG, ongoing market volatility and macroeconomic risks pose a significant challenge for Africa to attract investments in green sectors. The report showcases that these challenges result in financing costs 5-6% higher than those in other emerging markets, such as Paraguay, whose comparable sovereign ratings are the same as South Africa yet have a 15% cost of debt for climate projects compared to South Africa’s 20%.
“A major step investors and DFIs (development finance institutions) can take is to increase portfolio value creation to accelerate growth and de-risk green companies, which will ultimately bring down the cost of capital,” stated BCG Partner and Associate Director Katie Hill during a roundtable discussion on climate finance in Africa on August 14, adding, “Regarding debt, a spectrum of financial investments are available, ranging from traditional to novel, that can effectively de-risk and mobilize debt into green sectors in Africa. By using these instruments, the availability of capital can be enhanced, further supporting the growth of green sectors.”
According to Hill, the continent is diverse in its energy endowments, boasts a young workforce and has a significant foothold in leading industries – such as mining. These factors create a significant opportunity for climate investments and are poised to hold strong financial yields in a volatile macroeconomic climate. Moreover, she noted that the persistent gap in climate financing for the continent presents an opportunity to accelerate growth. The gap offers an opportunity to de-risk capital across Africa to facilitate financing from private companies.
“Sufficient resources and policies must be appropriately developed in these areas so that structured financing instruments can be scaled to increase availability of capital and reduce costs. Private debt is particularly important for green sectors, which are more infrastructure- and working capital-intensive,” stated BCG Managing Director and Partner Warren Chetty.
The BCG report notes several mechanisms that could potentially de-risk climate finance and capital in Africa’s green energy sector. Favorable regulatory environments and strengthened institutions by governments offer the potential for sovereign guarantees while development finance institutions can provide first-loss capital to mobilize more private investment. Meanwhile, multilateral institutions can offer green bonds, insurance products and loan guarantee mechanisms to improve the availability of capital while de-risking markets. The report noted that these instruments offer the potential for foreign and local investors to better understand the diversity and opportunities in African markets.
“Realizing 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,” Warren concluded.
