• Wednesday, April 24, 2024
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Private sector financing critical for climate action, green growth in Africa – AFDB

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Sustainable development, economic growth, and climate action are critical for Africa, and concurrently achieving these priorities requires commitments to green growth pathways, says a report by the African Development Bank (AfDB).

Since the beginning of the 21st century, Africa’s population has almost doubled and its GDP has quadrupled. However, Africa currently contributes only about 4 percent of global greenhouse gas emissions, much less than China (30.9 percent), the United States (13.5 percent), the European Union (7.5 percent), or India (7.3 percent).

The continent has also been severely affected by recent global events and risks, including the COVID-19 pandemic, and the disruptive effects of Russia’s invasion of Ukraine. So, although Africa has committed to addressing climate change, significant environmental and social issues and inequalities remain that can be addressed only by promoting green growth.

Africa’s potential

First, it has some of the world’s fastest-growing economies, and its real GDP growth is projected to surpass the global average in 2023–24, even as headwinds persist, the AfDB said. Embedding climate change in policy frameworks could catapult the continent to a higher and greener growth trajectory over the next few decades.

“Second, the continent has an important human capital base, with its population projected to increase to 2.4 billion by 2050. As most of the current population is young, compared with other regions’ aging populations, Africa is the current and future frontier market in green growth opportunities,” the bank said.

“Third, Africa hosts 25 percent of the world’s natural biodiversity and 30 percent of the world’s mineral resources, most of which will be essential for a green transition.”

Fourth, Africa has a large renewable energy potential—including wind, solar, hydropower, and geothermal—and the world’s highest solar energy potential, the AfDB said.

“Last, African countries have the greatest potential for investments in green infrastructure and technology due to their low levels of development, low legacy high-emissions infrastructure, and low frequency of infrastructure and project finance default rates, estimated at 5.5 percent,” it said.

Despite all the potential and urgency of green transitions, Africa’s progress toward green growth has been slow.

Between 2010 and 2021, Africa was among the least performing regions in achieving green growth targets, lagging behind Europe, North America, East Asia and the Pacific, Latin America, and the Caribbean but above South Asia and the Middle East.

In particular, the continent has underperformed in the promotion of green economic opportunities, such as green trade, green innovation, and green investment. The continent’s share of exports of environmental goods to total exports—a proxy for green trade—was the world’s lowest, at 1.5 percent on average over 2010–20, well below an average of at least 3 percent in other world regions.

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“Underperformance is similar in green employment, measured by the share of green jobs in total manufacturing employment, which averaged 2.5 percent in Africa between 2010 and 2018, less than half the average of 5.5 percent for the rest of the world,” the AfDB said.

“Despite progress on efficient and sustainable resource use, and on the promotion of social inclusion, the continent has not yet been able to catch up with other world regions on green growth.”


According to AfDB, balancing allocations of private sector investments across areas that generate economic, social, and environmental outcomes are critical.

“High volumes of finance are needed for sustainable infrastructure (clean energy and transport systems, green buildings, and industry),” it said.

“But achieving just transitions to green growth will also require countries to direct investments toward other infrastructure that generates social and environmental development outcomes—such as health, education, social protection—to catalyse private investment.”

The African bank added that using innovative financing instruments and mechanisms to leverage emerging sources of private-sector financing is needed.

“Holding promise for mobilising private financing are emerging innovative financing instruments in green and sustainable finance (social bonds, green bonds and loans, sustainability bonds and sustainability-linked bonds and loans), carbon pricing, debt-for-climate swaps, and blended finance,” it said.

Private sector financing

AfDB added that African governments should formulate, cost, and implement long-term strategies (LTS) to provide high-level and predictable policy guidance to domestic and international private and public actors on priority investment sectors.

“They should also design and implement conducive policies and regulations and develop markets to attract private investments, particularly in priority sectors for climate action and green growth, while strategically deploying available public finance to direct investments toward these sectors,” it said.

“Given their importance in employment creation, micro, small, and medium enterprises (MSMEs) should be an integrated part of any national climate and green growth strategy, for instance, through affordable finance and skill development programs.”

The African Development Bank added that regional integration through the African Continental Free Trade Area (AfCFTA) will also leverage cross-boundary opportunities for private investments.

“Multilateral development banks (MDBs) and development financial institutions (DFIs) should accelerate their alignment with the Joint MDB Paris Alignment Framework and commit to implementing the Bridgetown Initiative by leveraging their convening power to de-risk investments for green growth in Africa,” AfdDB said.

“This can be done through grants, concessional finance, and credit and risk guarantees that support capacity development and innovation to increase private sector confidence in African markets.”

According to the AfDB, this will require MDBs and DFIs to transform into more risk-agnostic institutions to increase investments in priority sectors.

Also, international and domestic private investors should exercise stewardship to identify barriers, investment risks, and opportunities for green growth in different African contexts to inform investment decisions.

“They should commit to aligning their investments with the Paris Agreement by ensuring that financial allocations directed toward Africa embed climate risks and contribute to green transitions, sustainability, and climate resilience,” it said.

“Credit rating agencies could expand their framework to reflect the potential for the African market. Reforming rating procedures to ensure that risk and credit ratings include the true potential of Africa’s green growth markets would play a catalytic role in attracting private sector financing for climate and green growth.”

According to the AfDB, the increasing calls to reform the rating agencies and the progress toward establishing an African Rating Agency are steps in the right direction.

“Governments in developed countries should honour their Paris Agreement commitments to mobilize $100 billion of climate finance annually for developing countries,” the bank said.

“They should also commit to a higher post-2025 climate finance target sufficient to meet needs in developing countries and target flows toward climate action and green growth.”