Empowering Africa: Tackling Climate Risks and Investments

The section on Climate Investment and Climate Risks in Africa from Uncertain Times, Resilient Banks provides an in-depth analysis of the evolving landscape of climate finance across the continent. It highlights the capital flows, investment patterns, and significant risks that Africa faces in the context of climate change. Africa’s experience with climate finance has been shaped by a combination of international support, an increasing awareness of environmental risks, and the slow but steady involvement of local financial institutions. However, the challenges are immense, especially given the scale of climate-related vulnerabilities in the region.

A key theme that emerges from the report is the limited involvement of the private sector in Africa’s climate finance. Currently, international funds, particularly from multilateral development banks, dominate the climate investment landscape, providing 90% of the necessary capital. Private sector contribution stands at a mere 4%, reflecting a critical gap that hinders the region’s ability to develop a sustainable and resilient green economy. Most of the private investments that do come into Africa are directed toward renewable energy projects, primarily in larger economies such as Morocco, Nigeria, South Africa, Ethiopia, and Kenya. This concentration of funds leaves smaller countries significantly underfunded, exacerbating regional inequalities and slowing down the continent’s collective progress towards climate resilience.

Moreover, the report identifies the dominant instruments used in Africa’s climate finance: balance sheet debt and project-level debt, which comprise the bulk of financing for climate-related projects. These instruments have been instrumental in financing large energy projects, such as solar and wind farms, that are seen as having predictable returns. However, the report also points out that the private sector’s interest in energy projects far outweighs its involvement in adaptation initiatives—projects aimed at helping African economies and communities adapt to climate impacts. Adaptation financing tends to be less attractive to private investors due to the perceived high risks and long return periods, which stifles funding for essential projects like flood defences, drought-resistant agriculture, and resilient infrastructure. This financing imbalance between mitigation (carbon reduction) and adaptation projects reflects a global trend but is especially concerning for Africa, where the impacts of climate change are already being acutely felt.

One of the most significant insights from the report is the contrast between physical and transition risks facing African banks. Physical risks, including the immediate effects of climate change such as extreme weather events, flooding, and droughts, present a much greater threat to African financial institutions than transition risks, which involve the economic impacts of moving toward a low-carbon economy. This is a direct result of Africa’s current low carbon footprint—transition risks, such as job losses in fossil fuel industries or changes in regulatory frameworks, are less pressing. However, physical risks are rampant. West African countries are among the most exposed to these risks, with a high frequency of natural disasters directly threatening economic stability and financial systems. Thirteen out of twenty-one African nations surveyed have been categorized as having high physical risk, a situation that is likely to worsen as climate change intensifies.

Despite these challenges, African banks are beginning to integrate climate risk into their operations. The report reveals that 59% of African banks have adopted climate strategies, with an additional 22% planning to introduce them shortly. These strategies are a positive step towards acknowledging the importance of climate finance, but their effectiveness is often limited by the same factors that hinder broader green financing efforts—namely, a lack of long-term capital, insufficient technical expertise, and the perceived high risk associated with green projects. Many African banks still struggle to find viable, bankable green projects, particularly in the adaptation space, where the immediate benefits of investment may not be as tangible or immediate as in renewable energy.

The report also notes that firms and industries across Africa face significant hurdles in accessing climate finance, primarily due to a lack of knowledge about how to develop projects that can attract funding. Many businesses, particularly small and medium-sized enterprises (SMEs), do not have the technical capacity to structure projects in a way that meets the criteria for green financing. This is a critical issue, as SMEs are often key drivers of local economies, and their inability to access climate finance hinders both economic development and the transition to a more climate-resilient economy.

A significant takeaway from the report is the need for a balanced approach to addressing climate risks in Africa. On one hand, adaptation projects must be given more attention and funding, as the physical risks posed by climate change are already manifesting in various parts of the continent. On the other hand, Africa must continue to invest in renewable energy and other mitigation efforts to reduce future risks and align with global climate goals. The report calls for stronger collaboration between governments, international financial institutions, and the private sector to develop comprehensive climate finance strategies that balance these two priorities. Moreover, there is a clear need for capacity-building initiatives to help African banks, businesses, and governments develop the technical skills necessary to manage and implement green projects successfully.

The role of multilateral development banks is particularly emphasized as essential in closing the climate finance gap in Africa. These institutions can de-risk green projects, making them more attractive to private investors. Instruments such as blended finance, which combines public and private funding, can be a critical tool in this regard. Blended finance allows for the distribution of risks between the public and private sectors, making green projects more viable and ensuring that adaptation projects receive the attention they require.

Ultimately, the section on Climate Investment and Climate Risks in Africa presents a clear picture of the opportunities and challenges facing the continent as it navigates the complexities of climate finance. The report stresses that while progress is being made, particularly in the renewable energy sector, much more needs to be done to address the acute physical risks posed by climate change. Both public and private sectors have roles to play in scaling up climate investments and ensuring that the financial systems are resilient enough to withstand the inevitable impacts of climate change.

The need for stronger policy frameworks, increased private sector involvement, and greater attention to adaptation projects are key recommendations from this section, highlighting the urgency of building a climate-resilient future for Africa.

This article by Brickstone reviews the European Investment Bank publication on climate risk and investments in Africa.
 
Read the complete publication here.