2. Context and Background

Climate change is a significant challenge to Africa’s sustainable development. Addressing it requires increasing climate finance from national, regional, and international organisations. However, past and current climate finance pledges do not meet expectations and financing requirements. At the 15th United Nations Climate Change Conference of the Parties (COP15) in Copenhagen, Denmark, in 2009, developed economies committed to channelling USD 100 billion a year to developing economies towards climate adaptation and mitigation. This was confirmed in the Paris Agreement at COP21 in 2015, and again at the COP26 held in Glasgow in 2021. This target has, however, never been reached despite the adverse impacts of climate change being more prevalent in Africa.

The African Development Bank (AfDB), in its African Economic Outlook Report (2022)2, estimates that the cumulative financing needs for Africa to respond appropriately to climate change range between USD 1.3 trillion and USD 1.6 trillion, averaging USD 1.4 trillion in 2020–30. Broken down annually, USD 127.8 billion is needed. However, this is hardly sufficient as adaptation costs alone are estimated at USD 259–407 billion. Furthermore, if the international-to-domestic commitment ratio of 2020 remains constant, the adaptation financing gap in Africa from international sources will range between USD 166 billion and USD 260 billion in 2020–30.

Although international climate finance is increasing steadily, only USD 79.6 billion of the USD 100 billion committed by developed countries was mobilised in 2019, two-thirds of which was for mitigation. Moreover, the USD 100 billion pledged does not reflect the estimated financing needs in Africa to reach the net-zero transition by 2050. Aware of the climate finance shortfall, developed countries,

2 African Development Bank (AfDB). (2022). African Economic Outlook 2022: Supporting Climate Resilience and a Just Energy Transition in Africa. https://www.afdb.org/en/documents/african-economic-outlook-2022 through the Glasgow Climate Pact, pledged to double funding provided to developing countries for adaptation by 2025, increasing the annual figure to approximately USD 40 billion. However, although this pledge is commendable, it remains to be actualised.

Africa’s share of international climate finance flows is minimal compared to other developing regions such as Asia. Africa’s climate-related investment needs are estimated at USD 2 trillion over the next 30 years. Investments in adaptation are significant, ranging from USD 259 to USD 407 billion between 2020 and 2030, representing an annual average requirement of between USD 26 and USD 41 billion (AfDB 2022). The Global Commission for Adaptation (GCA)3 found that even if the Paris Climate Agreement goals are achieved, the economic costs of climate change in Africa will be most severe (as a % of GDP) compared to other regions globally.

The continent’s share of global climate finance flows increased from 23% (between 2010 and 2015) to 26% (between 2016 and 2019), representing a mere 3% improvement. Between 2016 and 2019, African countries received approximately USD 73 billion in climate-related development finance, with an annual average of about USD 18 billion. Total climate finance due to Africa to compensate for historical and future emissions is estimated between USD 4.76 trillion and USD 4.84 trillion through to 2050; this translates into an annual figure of between USD 163.4 billion and USD173 billion for 2022–50 (AfDB 2022). Insufficient climate finance means that most African countries will not meet their conditional Nationally Determined Contribution (NDC) targets.

There are numerous challenges and barriers for African countries to access international climate finance. These include (but are not limited to): a lack of political commitment from developed countries; the maturity and depth of local capital and financial markets, debtbased lending, US-dollar-based lending (with a few options for local currency lending); the complexity of administrative and regulatory processes; poor creditworthiness of many

African countries; lack of climate data and information on exposure to climate risks; insignificant debt reforms or restructuring.

Since it is challenging for the region to access international climate finance, African countries must strengthen the capacity of their regional development finance institutions. Increased effort is needed to capacitate African development banks to mobilise public and private financing for climate mitigation, adaptation, and resilience projects. Elsewhere in the world, other development banks have played a significant role in climate financing. Examples include Germany’s Kreditanstalt für Wiederaufbau (KfW), Brazil’s Banco Nacional de Desenvolvimento Econômico e Social (BNDES), and China’s China Development Bank, China Eximbank, and the Industrial and Commercial Bank of China. Although Africa has many development banks – 95 in total – only a few, such as the AfDB and Afrieximbank, play a notable role in contributing to climate finance for the continent. There is, therefore, a pressing need to scale up and consolidate African development banks’ role in addressing the continent’s climate financing needs. This offers the most promising route to building an African arsenal of strategies and institutions that can implement an African-driven climate-resilient development agenda.

2.1 Green Finance in Africa

Africa’s green finance sector is relatively underdeveloped compared to other regions such as Asia. Support for developing green bond market investments can induce the catalysation of larger funding volumes to provide more opportunities for DFI investments and commercial investments. In addition, recognised green financial principles and stronger transparency standards domestically and internationally could boost investor demand for green finance products in Africa, enabling financial institutions to benefit from more favourable financing rates.

2.1.1 Sustainable banking

Over the last decade, numerous African governments have either developed sustainable banking principles or joined sustainable banking initiatives. For example, South Africa’s National Treasury published a technical paper titled Financing A Sustainable Economy in

2020; the Bank of Ghana launched the Ghana Sustainable Banking Principles in 2019; the Kenya Bankers Association adopted sustainable finance guiding principles in 2015; and, Nigeria established sustainable banking principles in 2012. African countries also use national development banks and other public financial institutions to raise and channel green finance. For example, the Development Bank of Southern Africa, a state-owned bank in South Africa, became a green development bank in 2021 and launched two green bonds in the same year. The Rwandan government also developed the Rwanda Green Fund, an investment facility that provides loans and credit lines to commercial banks for green projects across various sectors.

2.1.2 Regional green finance initiatives

African economies have established regional initiatives and joined international initiatives to increase private and public flows of green finance. Several African states’ central banks and supervisory authorities are members of the Network for Greening the Financial System, an international group of central banks and financial supervisors that aim to accelerate the scaling up of green finance. International organisations are crucial in providing guidance on and defining green finance. Many African financial institutions have partnered with international financial organisations. In 2021, the African Development Bank (AfDB) and the Global Centre of Adaption launched the African Adaption Acceleration programme. The AfDB also established the African Alliance for Climate Change, which links stock exchanges, sovereign wealth funds, central banks, and other institutions across the continent that aim to mobilise capital and shift portfolios towards green investment. In addition, 34 African financial institutions across nine African countries (Nigeria, Egypt, Morocco, Ghana, Togo, Kenya, Namibia, South Africa, and Mauritius) are now members of the United Nations Environment Programme Finance Initiative (UNEP FI).

2.1.3 International financial institutions and green finance in Africa

International institutions are also partnering with African commercial banks to finance large investments in green infrastructure and small investments in small and medium-sized enterprises (SMEs). For example, in 2020, the International Finance Cooperation (IFC) and the Dutch Entrepreneurial Development Bank (FMO) provided USD 225 million to First Rand Bank in South Africa to finance the development of climate-friendly infrastructure involving SMEs. The IFC also invested USD 200 million in Standard Bank’s (another South African Bank) green bond placed on the London Stock Exchange in March 2020. It was Africa’s largest green bond and South Africa’s first offshore green bond issuance. In addition, the European Bank for Reconstruction and Development (EBRD), in partnership with the Climate Investment Funds and Global Environment Facility, created a USD 250 million funding framework for private-sector renewable energy development in North Africa and the Middle East. Bilaterally, DFIs are also supporting the greening of Africa’s finance sector. For example, the Dutch FMO signed an MoU with the Kenya Bankers Association in 2017 to advance environmental and social risk management and sustainable financing practices in the country’s banking sector.

2.2 African DFIs and Climate Finance for Africa

Africa has a plethora of development finance institutions, totalling approximately 102 institutions with an estimated USD 188 billion in assets, of which 13 are multilateral development banks (MDBs) whose volume of assets matches all national institutions’ assets combined. It is, however, difficult to determine the exact amount of funds that African DFIs – including MDBs, national DFIs, and funds – spend on addressing climate change as a centralised database does not exist, and different research methodologies produce varied results. Between 2016-2020 the African Development Bank (AfDB) spent about USD 13 billion between 2016 and 2020 on climate projects, and over the next five years (up to 2025), they aim to spend USD 25 billion, increasingly prioritising adaptation projects.

Determining the specific financing needs of each African country is critical to identifying financing gaps and opportunities for African DFIs to effectively assess, allocate, and mobilise climate finance. In this regard, “51 out of 53 African countries that submitted Nationally Determined Contributions have provided data on the costs of implementing their NDCs. Collectively, they represent more than 93% of Africa’s GDP. Based on this data, it will cost approximately USD 2.8 trillion between 20202030 to implement Africa’s NDCs.”4

African governments have contributed about USD 264 billion of public resources, covering only about 10% of the total cost.5 International financial support, required beyond national sources, is defined as a “climate finance need.”6 While most African countries have expressed high needs, “these could be underestimated due to a lack of data from subnational governments and vulnerable communities.”7 “Robust estimations of climate finance needs can be an important driver of financing and policy decisions. While most African countries have taken steps to understand their climate finance needs, there is significant scope to improve the quality of those estimates and translate them into clear financing road maps – both national and international – that can underpin NDCs and ultimately [the] implementation of the Paris Agreement.”8

4 Sandra Guzmán, Greta Dobrovich, Anna Balm, and Chavi Meattle. (2022). The State of Climate Finance in Africa: Climate Finance Needs of African Countries. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/ uploads/2022/06/Climate-Finance-Needs-of-African-Countries-1.pdf

5 Sandra Guzmán, Greta Dobrovich, Anna Balm, and Chavi Meattle. (2022). The State of Climate Finance in Africa: Climate Finance Needs of African Countries. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/ uploads/2022/06/Climate-Finance-Needs-of-African-Countries-1.pdf

6 Sandra Guzmán et al. (n.d.). The State of Climate Finance in Africa: Climate Finance Needs of African Countries

7 Sandra Guzmán et al. (n.d.). The State of Climate Finance in Africa: Climate Finance Needs of African Countries

8 Sandra Guzmán et al. (n.d.). The State of Climate Finance in Africa: Climate Finance Needs of African Countries