How to develop a green

project pipeline in Africa

The impacts of climate change continue to compromise
the livelihoods of hundreds of millions of Africans.

This is especially true of those that are dependent on

sectors directly impacted by rapidly changing
environments, such as agriculture. The impact could lower
gross domestic product (GDP) by up to 3 per cent by
2050.

And while there is a growing recognition of the need to

mitigate and adapt to climate change, Africa is not
securing the scale of financing required. The Africa
Development Bank estimates that the continent will
require an average of $1.4 trillion between 2020-30 to
implement Africa’s climate action commitments and
Nationally Determined Contributions (NDCs). Yet climate
finance committed and mobilised for Africa falls short of
the continent’s requirements, creating an estimated
annual climate financing gap of $99.9–127.2 billion
between 2020–30. Why is this financing gap so large and
persistent? And what can be done to address it?

A key bottleneck is the misalignment between the style of

the supply of climate finance and the reality of how
economies run on the continent. African economies are
dominated by SMEs, which make up more than 90 per
cent of businesses and the informal economy, which
accounts for 80.8 per cent of jobs in Africa.

Yet the supply side of climate finance is very formal and

structured and thus understandably has a difficult time
interfacing with this informality. For the supply side,
informality means investment is originated and
implemented in an environment dominated by small ticket
sizes, data holes, information asymmetry, lack of
standardisation, limited line of sight to impact, and
concerns about verification and compliance. Frankly, for
climate financiers, failing to ‘manage and price’ informality
heightens risk and exposure to greenwashing, undermines
commitments to demonstrated climate action, and can
lead to very real consequences from increasingly hawkish
financial regulators.
At the same time, informality in Africa is not disappearing
any time soon. Informality, particularly in the form of micro
and small enterprise activity, is often the only way
individuals and households can earn a living and
consistently meet their needs and goals. This study by
FSD Kenya also shows how informality deliver values by
allowing firms to reduce fixed costs, secure sources of
credit, and deliver competitively priced products to price-
sensitive consumers. Further, while governments may
want firms to formalise and be more reachable, there is no
incentive to do so given low levels of trust.

So given informality will persist, climate finance providers

need to adopt a more flexible approach or risk becoming
participants of a longstanding impasse on the financial
landscape in Africa, where there is a view that there are
very few bankable projects and it takes an inordinate
amount of time, effort and money to get projects ready.

The effects of this impasse are already becoming

apparent; the World Bank estimates Africa has less than 1
per cent of global green bond issuances and pays more
than twice than similarly rated peers to access markets.
This is a shame because the UN Economic Commission
for Africa estimates that investment in Africa’s green
sectors brings a return as high as 420 per cent in value
addition and as high as 250 per cent in job creation.

The good news is that this impasse also presents an

opportunity to improve the financial architecture in Africa
and increase deal flow. At the moment, climate financiers
(public, private, multilaterals etc.), tend to be siloed in how
they originate, prepare and fund deals. Yet, no individual
climate financier can tackle the macro challenges of
informality.

The gamechanger is a shift in mindset from financing

individuals deals to financing the financial architecture
that supports the aggregation of deal flow.

Doing so would jointly create a ‘public good’ of increased

climate finance investments in Africa of benefit to all. Here
is how a Shared Partnership with Africa on climate
investment could work across the project pipeline:

The Shared Partnership on Climate Investment in Africa

The core tenets that would make this partnership work

are:

• The coming together of like-minded climate financiers in

a spirit of enlightened self-interest across project and
investment cycles
• A decision to shift the intellectual approach on climate
investments in Africa from one focused mainly on
securing deals to one that integrates contributing to a
public good.

Institutions with incentives to deepen climate finance

reach in Africa would need to commit to the development
of this type of financial architecture. That would be the
alignment of mandates, compensation, performance
indicators, bonuses, and business models to integrate this
spirit of enlightened self-interest in how they operate.

This is no small ask but is doable and can be a lever that

unlocks the climate investment opportunity at scale and
allows climate financiers to meet their ambitions in Africa.
This intellectual approach will also more meaningfully
engage a continent whose private sector has
demonstrated the ability to become global leaders in
innovation while securing market share on a continent
with the youngest consumers in the world.

Anzetse Were is a development economist and currently

Senior Economist at FSD Kenya.

The views expressed in this article are the contributor’s

own and do not necessarily reflect BII’s investment policy
or the policy of the UK government.