Summary

Objective of the study

Finance in support of technological and societal changes for a net-zero, climate-resilient future is a contested political battleground globally. Climate finance is a delicate policy issue, where even the definition is contested: Distributional conflicts are determined by which financial flows should count as climate finance, with further procedural and recognitional legitimation questions including Who gets what? Who qualifies to unlock funds classified as climate finance, and how?

This report investigates the emerging climate policy arena and maps actors, coalitions and contestations associated with implementing nationally determined contributions (NDCs) in Africa. We focus on the current status, practical experiences and perceptions of state and nonstate actors in Africa in securing climate financing to implement the NDCs. While there is no broad global consensus on the definition of climate finance, the closest is provided by the United Nations Framework Convention on Climate Change (UNFCCC). The UNFCCC defines climate finance as “local, national or trans-national financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change”.^[1] Another definition provided by the UNFCCC Standing Committee on Finance (SCF, 2014)^[2] is as follows: climate finance is financing “that aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing [the] vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts”.

Africa is one of the world’s most vulnerable regions to climate change. The Glasgow Climate Pact agreed at COP26 resulted in global governments pledging to phase down fossil fuels and increase financing for climate change adaptation. Likewise, developed economies pledged to double their support from 2009 levels by 2025. However, Africa remains highly dependent on external financing to implement its NDCs and meet net-zero goals under the 2015 Paris Agreement. Meeting those goals is also confounded by the limited fiscal space available to governments in the sub-region to implement the NDCs. We undertake this study within the context of limited domestic fiscal resources and a challenging external environment with the aftershocks of the ongoing Russia-Ukraine war.

The report focuses on two areas:

The methodology used in producing this report encompassed qualitative, quantitative and political economy analysis. First, we conducted an extensive literature review to understand the main stakeholders and their responsibilities or mandate concerning climate finance policy formulation and investment attraction on the continent. We then undertook selected stakeholder interviews with individuals and organisations engaged in the respective national policy debate on these issues at the country level. This exercise also helped identify possible misalignment in stakeholder interests and motivations vis-à-vis climate financing and the energy transition.

That research was followed by an analysis and reconciliation of climate finance information collected from multilateral, bilateral and national stakeholder institutions. The findings from the qualitative and quantitative analyses were further analysed using a Problem-Driven Political Economy Analysis (PDPEA) to identify the root causes or bottlenecks to attracting and accessing climate financing. They thus allow us to propose possible intervention areas (recommendations).

We expect the report to contribute to discussions before and during COP27 by providing empirical evidence to support negotiating positions around equity and fairness in accessing finance and effectiveness.

Key Findings

Global narratives on climate change and climate finance and its application to Africa

1. Africa has contributed the least to global climate change – the region is not a significant source of greenhouse gases (GHGs) – but it stands to bear the severest negative consequences of it. Available data from various global organisations indicate that Africa’s contribution to global GHGs stood at less than 4% as of 2020. In contrast, the top ten developed economies, with 75% of global economic output as measured by GDP, account for two-thirds of annual global GHGs: China (26%), the United States (13%), India (7%), European Union (7%), Russia (4%), Indonesia (4%), and Brazil (3%), among others. Within Sub-Saharan Africa (SSA), CO₂ emissions per capita have barely increased over the past three decades despite the two-fold increase in the sub-region’s population from 509 million in 1990 to 1.11 billion in 2019. This mismatch reflects the continent’s development deficit and pervasive energy poverty. At a sectoral level, most of Africa’s GHG emissions come from land-use change and forestry (LUCF: 36%) and the energy sector (35%). These sectors are followed by agriculture (21%), industrial processes (4%) and waste (4%).
2. Climate financing inflows into the region have been far short of what is needed. Conservative estimates indicate that Africa needs US$2.5 trillion (74% of the continent’s US$3.4 trillion GDP in 2021) or US$250 billion annually in conditional and unconditional financing between 2020 and 2030 to implement its NDCs under the Paris Climate Agreement. Current reported annual climate finance inflows to the continent amount to US$30 billion (equivalent to only 12% of conservative annual required flows). That amount is woefully inadequate to address the continent’s needs as per the NDCs. Of the US$30 billion amount, the Climate Policy Initiative recently estimated that public finances mostly from multilateral development finance institutions, comprise 86% (US$25 billion), while private sector financing (mostly corporates) contributed 14% (US$4.2 billion). Private financing clearly needs to be stepped up on the continent by addressing the constraints to securing such financing.
3. Constraints to securing such financing at the national and sub-national levels encompass governance and regulation, infrastructure/technical, and financial risks. Governance includes political instability/political risks; limited awareness and limited technical capacity of climate change policies and climate financing instruments at the national and sub-national levels (information asymmetries); lack of inter-agency coordination at the national and sub-national levels (information asymmetries); inadequate regulatory frameworks – e.g., low tariffs for off grid renewable energy (RE) power. Technical constraints, especially in attracting the private sector to finance adaptation and mitigation projects (private finance), include low grid capacity (inability of the grid to handle the load) and commercial risks (engineering, procurement and construction and operational risks). Financial risks, on the other hand, include high sovereign credit risk - FX volatility (currency instability), inflation, credible off-takers, lack of local financing in most cases due to the state of local financial institutions, not enough sovereign wealth funds sovereign wealth funds to finance large-scale, long-term projects and a lack of a bankable pipeline of projects (especially for mitigation-related financing).
4. The arduous funding approval process also drives the limited capacity to access climate funds. Countries can be disadvantaged at several stages, especially regarding project justification. Interactions with stakeholders revealed that most climate funds require proposals to be backed by scientific data, which must justify the need for funds. However, those data are rarely available on demand and would necessitate member countries conducting prior studies for such justifications. These studies may require substantial funding and are likely to be beyond the capacity of those applying for the funds.
5. African countries are calling for an equitable transition and are already closely scrutinising volumes of climate finance flows this year, given the inadequacy of funds and a significant proportion of loans offered at commercial rather than concessional rates. Moreover, it has become more challenging for African governments to mobilise external financing given penalisation in the market and weaker credit ratings, even if these are not representative of the project-specific risks on the continent. Lenders and investors in Africa have often cited country risk and poor credit ratings as key challenges to attracting financing. Many of the lenders and investors often use top-down assessment processes, typically involving sovereign-based indicators produced by Fitch, Moody or Standard & Poor to assess stability and creditworthiness. However, those ratings are often not sensitive to a project’s specific context and can overestimate the risks for developing economies such as those in Africa, raising financing costs. Furthermore, environmental, social and governance (ESG)-related norms and regulations have a penalising effect of forcing certain investments, such as natural gas financing, away from Africa. Ahead of COP27 in Egypt, African leaders must continue to lobby for a needs-based assessment to drive long-term financing pledges – mainly as grant funding – to implement the NDCs, which include a shift to clean energy for some countries in the region.

Country case studies

Ghana

6. Ghana’s government has outlined several key policies that set targets, action plans and financing strategies for climate action, of which mitigation actions such as increasing RE penetration are paramount. The energy sector has received much attention in the policy documents due to its role in GHG emissions reduction in the country. The technologies highlighted in the energy sector include RE integration, clean cooking technologies, biogas and reduced gas flaring. Other vital sectors include agriculture, forestry, land use, water resources and disaster management. In addition, many of the policy documents have associated strategies for raising finance; however, the flows are still comparatively small.
7. Ghana’s updated NDC includes 19 policy actions, classified under eight socio-economic outcomes, which translate to 47 programmes of action (of which 13 are adaptation and 34 are mitigation actions). Seven of the 13 adaptation actions are unconditional, requiring financial mobilisation from the government of Ghana. Nine of the 34 mitigation actions are unconditional.
8. Estimated financial needs to support the program of actions range between US$9.3 billion and US$15 billion (down from an estimated US$22 billion in 2015). The reduction in the financial requirements is due to clarity in cost assessment and developments after the initial NDC in 2015. However, Ghana’s Fourth National Communication Report to the UNFCCC (2020) estimated the total financial inflows for climate action between 2011 to 2019 at about US$1.3 billion. About 87% of that amount was allocated towards mitigation activities. In comparison, adaptation efforts received about 4% of the inflows while the 9% remaining was earmarked to support means of implementation activities, especially for capacity development of the receiving institutions.
9. Ghana has received the largest share of climate financing from bilateral channels. Between 2011 and 2019, bilateral financing contributed 45.1% of the total US$1.3 billion financing received, with 29% contributed by multilateral funding and 11.6% from global projects. Important is also that about 92% of the financing received from 2011 to 2019 went through government institutions, including ministries, public corporations and regulators. Beyond those institutions, international non-governmental organizations operating in the country received 3.3%, while universities received 2.6% of the funding. It is likely that frontline communities that are affected by climate change are not getting the needed resources as most of this funding seems to be concentrated at the top with little trickle-down.
10. The main barriers to climate finance include inadequate capacity to develop bankable projects and nascent and weak institutional capacity for undertaking climate investments. Additionally, a lack of public knowledge about climate finance means there is no clear understanding of the available climate finance opportunities available to the private sector via accredited institutions. As of October 2022, the Green Climate Fund (GCF), the world’s largest climate fund mandated to support developing countries raise and realise their NDCs, had funded only six projects in Ghana worth US$89.4 million. Stakeholders indicated that some projects had suffered project funding rejections due to weak documentation. Furthermore, climate financing by local commercial banks in Ghana is still nascent, mainly because the banks have traditionally prioritised yield and risk.
11. Stakeholder engagements indicated that the nature of climate financing from local banks has been largely private-sector focused, i.e., de-risking capital flow to private businesses and entities with investments spanning across climate-resilient agriculture, clean energy and green infrastructure. Moreover, some banks are integrating sustainability into their traditional lending operations to make room for providing flexible funding for climate-related projects in efficient green buildings, sustainable waste management, sustainable land use and clean transportation.

South Africa

12. Private finance in clean energy plays the biggest role in South Africa’s climate finance flows. According to recent studies, two-thirds of the tracked private investments were raised as debt and a quarter in equity. Three local banks, the International Finance Corporation and the African Development Bank count as the main financing institutions for renewable energy and are involved in parts of the negotiations around the Just Energy Transitions Partnership (JET-P). Some local studies and interviews with stakeholders confirm an alarming underfinancing of adaptation funding in comparison to mitigation funding. There is a high risk that adaptation finance will be overlooked as reducing the coal dominance of the electricity sector is determining funding.
13. South African climate finance composition stands out, compared to other African countries, with its predominant focus on mitigation. Climate finance flows in South Africa are predominantly focusing on mitigation, by a factor of 10, over adaptation funds. Most of the current mitigation funding is from private investments in the renewable energy sector. Only 5% of South Africa’s climate finance comes in grants. South Africa’s ecosystem is already fragile as a result of exposure to recurring drought and flooding, yet finance for adaptation projects is relatively marginal. Furthermore, 90% of the adaptation funds were public funds, with only 10% coming from so-called “blended finance” approaches, where public or philanthropic finance mobilises additional private funds in public-private partnerships. This imbalance may be problematic as South African society is highly vulnerable to the impacts of climate change: Drought and flooding are already acting as stressors, especially in communities that are experiencing deprivation.
14. Political contestation emerges from the definition of climate finance. Climate finance in South Africa is defined in broader sustainable and green finance terms. A green finance taxonomy is currently under development to make green and climate-related investments more transparent.
15. South Africa’s diplomacy determines the international climate finance landscape. Bilateral relationships with Europe and the US and new multilateral groups dominate the policy arena. JET-P is currently the most prominent outcome. The impact of these innovative climate finance frameworks has yet to be proved. Additionally, ambiguous diplomatic positions that try to satisfy expectations from western nations and BRICS countries have become polarised with Russia’s invasion of Ukraine.

Zambia

16. Zambia has commenced the preparation of a green growth strategy. It is envisaged that executing the strategy will contribute to the efficient use of natural and other resources, reduce GHGs, enhance coping with climate change and sustainably drive economic growth. Furthermore, the country has made strides, albeit insufficient, to formulate sector-specific national adaptation plans. Thus far, only the Health National Adaptation Plan (HNAP) has been developed. The HNAP identifies climate risks and adaptation measures relevant to the health sector and sets out the road map for implementing the HNAP. It also acts as a vehicle for resource mobilisation for addressing health climate risks.
17. Climate finance is now recognised in Zambia. The flow of climate finance in Zambia increased from less than US$20 million per annum in 2010 to more than US$50 million per annum in 2021. This increase has been attributed to institutional strengthening, such as the establishment of the Ministry of Green Economy and Environment, which has consolidated all environmental sustainability functions and enhanced coordination, including climate finance. Climate financing is implemented through the National Designated Authority (NDA) for the GCF and the Adaptation Fund, the focal point institution for the Climate Investment Fund. Further, there has been an improvement in the skills required for generating bankable projects for the mobilisation of climate financing. However, a lot still needs to be undertaken to reach an optimal level of climate finance and enhance the execution of mitigation and resilience-building actions to reverse the adverse impacts of climate change.
18. Attaining the ambitious targets outlined in Zambia’s NDC will require strong institutional coordination. Currently, even if non-state actors are represented in the Technical Committee, the representation is weak as it does not address the varied categories of non-state actors in the broad segments such as the private sector, civil society and academia. Additionally, there is a case for including non-state actors in the Steering Committee.
19. As in Ghana, the main barriers to climate finance in Zambia include inadequate capacity to develop bankable projects and nascent and weak institutional capacity for undertaking climate investments. These barriers are related to there only being one national NDA to the GCF, which was only accredited in 2021 and has not yet effectively participated in GCF climate finance mobilisation. A further drawback springs from there being real and perceived corruption that is preventing players from participating in this space. Additionally, there is inadequate information on and, particularly in the private sector, no clear understanding of the available climate finance opportunities.
20. Stakeholders indicated that most climate finances had been channelled to the energy, agriculture, forestry and water sectors. It was also observed that the allocation and channelling of climate finance to the highlighted sectors were consistent with the prioritised sectors in Zambia’s national policy documents, such as the eight national development plans, the NDC and the National Policy on Climate Change. Further, stakeholders observed that the private sector held the best opportunities for Zambia to mobilise climate finance. It was also indicated that institutional investors such as pension funds had the potential to invest in green infrastructure projects. However, stakeholders emphasised the need for enhanced engagement of the private sector through capacity building and awareness-raising meetings on climate finance. There is also a need to build the business case, particularly for adaptation, to ensure that the private sector participates in climate finance. Lastly, stakeholders stated that there was huge potential to mobilise climate finance from bilateral partners, particularly the governments of the USA, the UK, Germany and the EU.

Recommendations (Policy Priorities)

Two classes of recommendations are provided: for the global climate financing community and for African governments.

For the global climate financing community

1. Honour past pledges: Developed countries must redeem their pledge of providing adequate finance to support African climate action. During the high-level consultations at COP26, developing countries criticised developed countries for failing to pledge to commit about US$100 billion annually to support climate action in developing countries. Developed countriespromised to scale up financial contributions to support climate schemes. However, according to some estimates, the funding has fallen short and is unlikely to be attained until 2025. Africa cannot meet its climate obligations without a major increase in international financing. Therefore, international institutions and developed countries must go beyond the promises to fulfil their pledges, including previous commitments on providing adequate financing for climate action. This action is relevant to ensuring that such established funds are continuously replenished and disbursed in line with the needs of developing countries such as those in Africa.
2. Establish clear accounting rules and common reporting standards to account for climate finance: Internationally agreed accounting rules that would allow more transparency on the disclosure of climate financing at the global level, including to African countries, are needed. The UNFCCC working definition of climate finance does not provide clear rules on what can be counted as “local, national or trans-national financing” or “public, private and alternative sources of financing”. In its stead, international organisations such as the OECD^[3] have sought to provide operational definitions of what can be counted and the underlying financing instruments. It is those operational definitions that are currently used in various reporting protocols. However, as the UNFCCC (2020: p.6) rightly noted,“operational definitions for climate finance in use generally reflect a common understanding of what is considered mitigation or adaptation finance but differ when it comes to details of sector-specific activities, certain financial instruments and approaches to public and private finance flows”.^[4] Additionally, several developing countries (suchas India)haverefutedtheclaimsbywealthynations thattheyhavedeliveredaUS$100 billion annual budget to support climate action in developing countries. Critiques have ranged from these figures being ‘‘overstated’’ and the methodological basis being ‘‘deeply flawed’’.^[5] An EU Court of Auditors report^[6] recently indicated that the EU had not met its climate spending targets. Reported spending of €216 billion on climate action in the EU’s 2014-2020 budget was more likely to be around 13% of the EU budget rather than the reported 20% and thus “not as high as reported”. Oxfam also reported in 2020 that “bilateral climate finance could be about 30% lower due to over-reporting of climate relevance”.^[7] The African Group of Negotiators has also called for a clear operational definition of climate finance that allows “tracking and assessing the fulfilment of obligations and the effective functioning of the financial mechanism of the UNFCCC”.^[8] Thus, the UNFCCC reporting architecture needs to provide further granular operational definitions otherwise the practice of each developed country deciding independently on what it reports as ‘climate finance’ is likely to persist.
3. More concessional public and private funding from the international community must go towards mitigation and adaptation efforts to drive low-carbon and climate-resilient development in Africa. Justice and equity require that climate finance be provided to African countries at no to low cost, given their small contribution to global emissions. However, the grant funding ratio is dwindling, and the cost of finance is extremely high for African countries. Sovereign guarantees and other types of risk sharing that governments are required to assume when agreeing to finance are unsustainable. The provision of mitigation-oriented just transition and adaptation-related finance on terms that are costly to the recipient/borrower nations, such as those in Africa, is infeasible in the first place and not fit for purpose. As previously highlighted, most of Africa’s GHG emissions at a sectoral level come from LUCF (36%). To that extent, climate financing coming to and from the continent should not only prioritise low-carbon energy generation sources (mitigation) but must equally prioritise LUCF reductions (in this case, more dual mitigation and adaptation finance such as that for financing forest conservation, protection and restoration).
4. There is a need to look at how to combine adaptation-focused public funds with private funds in new and innovative ways, including at the community level. Gabon, one of the world’s most forested nations, has demonstrated this potential by planning to sell 90 million carbon credits via its sovereign wealth fund to corporations and individuals that wish to offset their carbon emissions using the voluntary carbon offset market under the UNFCCC’s REDD+ mechanism.^[9] At a reported US$20 to US$30 per credit, this plan could fetch Gabon at least US$1.8 billion (11.5% of the country’s 2020 GDP).
5. In an environment of the limited fiscal space available to African countries due to the COVID-19 pandemic and the ongoing Russia-Ukraine war, and with declining official development assistance or aid, developed countries and multilateral institutions must offer debt relief (debt swaps) to African countries in return for the countries undertaking to use the funds for climate actions judiciously. This relief would encompass both adaptation and mitigation funding. Interventions in the past, such as the Highly Indebted Poor Countries initiative, had conditionalities tied to countries channelling debt relief to attaining the Millennium Development Goals. Debt for climate swaps^[10] can be tied to attaining climate goals defined in the respective NDCs and aligned to sustainable development goals (SDGs). In addition, while multilateral institutions such as the International Monetary Fund (IMF) have commendably committed to placing climate change at the heart of their work. Rechannelling of the IMF’s Special Drawing Rights to fight climate change under the Fund’s proposed US$50 billion^[11] Resilience and Sustainability Trust (RST) must be fast tracked. It is encouraging to hear that African countries such as Rwanda will be among the first beneficiaries of the RST.^[12]

For African governments

6. National and sectoral adaptation plans: Public funding in adaptation efforts must be increased as they are not attracting enough private funding. Adaption finance is already being overlooked, as reducing the fossil dominance of the electricity sector dominates the African narrative on climate financing. Overcoming this caveat necessitates the preparation of sector-specific national adaptation plans (NAPs), particularly for climate-sensitive sectors such as agriculture, water and energy. These plans must identify climate risks and adaptation measures and set out the roadmaps for implementing the NAPs. Sector-specific NAPs and associated investment plans can act as vehicles for mobilising resources to address the sector-specific climate risks. They would allow a delineation of what the bankable projects might be and draw in private sector investment for adaptation.
7. Improved technical capacity: To bridge the climate finance information asymmetry gap, there is a need for continuous professional development to thoroughly build the technical capacity of all stakeholders, especially state agencies and private sector agents. African countries must ensure that private and public-sector entities have the documentation relevant to enhancing their eligibility to receive funds. As we found, climate funds such as the GCF are provided competitively, and adequate documentation is required to access such funding sources. However, the limited capacity of state agencies and private-sector agents to prioritise projects and prepare proposals often affects a country’s ability to access funds. Stakeholder interactions also revealed that some agencies do not have specific project appraisal procedures to guide project evaluation in line with the requirements of external entities. Ongoing technical capacity training by organisations such as the African Development Bank (AfDB), GCF and others must be scaled up, with the overall objective of getting more agencies and the private sector to access international financing. Our interactions with stakeholders revealed that specific foci of the training must include (1) preparation of project appraisal templates and procedures to aid project prioritisation and proposal preparation and (2) accessing financial assistance (such as grants) to collect baseline scientific data to support project justification.
8. Institutional coordination structures: An environment appropriate to attracting investment in green businesses must be created: a deliberate attempt to ensure a well-regulated environment that allows value creation among green companies needs to be nurtured. Again, to raise the needed capital for green projects in Africa, government institutions and businesses should take advantage of the opportunities available to private and public-sector players for trading in the carbon market. To do this, first, respective African nation states must curate available data into a single portal (database) to point the private sector to the available financing options with respect to climate change and how to access them. While recognising that technical capacity is weak at all levels, it is even weaker at the sub-national level and needs to be prioritised. Second, regional integration has the potential to create larger climate financing markets that attract private investments. There is a need to accelerate regional integration to decarbonise some aspects of Africa’s power pools (mitigation financing). For example, such possibilities exist within the South African power pool as it has greater opportunities to decarbonise from largely coal-based generation. Third, African governments must use public funds (catalytic public finance) to create access for those organisations and projects that do not have the financial muscle to reach financial closure or to get their projects to the bankability stage. Examples are renewable energy Independent Power Producer (IPP) projects procured through municipalities and communities.