Bridging Africa’s climate finance gap
With numerous strains on public finance, the role of private financing to reduce the climate finance gap cannot be overemphasised, writes Davinah Milenge Uwella, principal programme coordinator, and David Ashiagbor, chief financial sector strategy officer, climate change and green growth, African Development Bank.
Mobilising finance to address climate change is increasingly difficult for African countries – particularly in the current global context of rising interest rates, inflation and geopolitical tensions. Africa receives roughly 3% of global climate finance, with only 14% of climate finance in Africa from the private sector – the lowest in the world. Given the multiple demands on public finance, both domestic and international, the continent urgently needs to increase private finance flows in support of climate action to meet its commitments under the Paris Agreement, estimated at $3tn by 2030.
With public sector financing expected to provide a quarter of the required climate finance resources, the role of private financing in bridging the climate finance gap cannot be overemphasised. This calls for innovative approaches to attract and steer financial flows consistent with a pathway towards low-carbon, climate-resilient development.
To this end, the African Development Bank launched the African Financial Alliance on Climate Change in 2018 to foster a transformation of financial portfolios towards green financing. In 2023 alone, AFAC has provided training and capacity building to over 900 bankers, insurers, and financial sector regulators from across the continent.
At COP27, African financial sector stakeholders called for enhanced support to enable their full participation in the continent’s transition to green growth and to ensure their voice is heard in the global climate risk management and finance discourse. AFAC’s new strategy is part of AfDB’s response to this call. AFAC’s vision to make financial flows consistent with a pathway toward low greenhouse gas emissions and climate-resilient development will be achieved through five pillars.
First, leadership and awareness; which will ensure that African financial sector stakeholders and policy-makers are aware of climate change risks and opportunities for their economies and have a strong voice in the international discourse on climate finance. Second, access to comprehensive and comparable climate-related data as a basis for disclosure. The third pillar is climate risk regulation, wherein an enabling policy environment is built to ensure climate risk management is mainstreamed in financial operations. Fourth and fifth are climate risk management and green finance, which both work to ensure that capital is effectively allocated for sustainable development and to build the capacity of the African financial sector to address climate risks and vulnerabilities while taking advantage of the opportunities offered by the transition.
Over 200 African financial sector stakeholders – including members of the Nairobi Declaration on Sustainable Insurance, the Association of African Development Finance Institutions, the
AFAC has also established partnerships with leading international platforms including the Global Centre for Adaptation, Glasgow Financial Alliance for Net Zero, Financial Sector Deepening Africa and United Nations Environment Programme Finance Initiative, and expects to announce new partnerships and members in the near future.
Despite all African countries being signatories to the Paris Agreement, the global commitment to mobilise climate finance to the tune of $100bn per year for developing countries is yet to materialise. The window is also quickly closing to remain within the threshold of 1.5 degrees. However, African leaders are up to the challenge. At the Africa climate summit in September 2023, Africa committed to deal with this global threat as an equal partner, leveraging its vast pool of resources.
Africa is now calling on global partners to increase Africa’s renewable generation capacity from 56GW in 2022 to at least 300GW by 2030 – both to address energy poverty and to bolster the global supply of cost-effective clean energy for industry. These are opportunities for private investment.
The AfDB has made ambitious commitments on climate change and green growth. AFAC is a critical part of these efforts, but it can only achieve its objectives if it is owned and led by the African financial sector. We look forward to working with the African financial sector to scale up climate sensitive finance flows that simultaneously meet the continent’s development objectives.