The United Nations Intergovernmental Panel on Climate Change (IPCC) recently published one of the most definitive reports on climate change to date. It warns that the world is likely to surpass the dangerous temperature threshold of possible no return within ten years unless we collectively take swift and tremendous action. As the Washington Post reports, at that threshold of 1.5 degrees Celsius above preindustrial temperatures, basic elements of the Earth’s system may be irrevocably altered, provoking climate disasters so extreme that people may not be able to adapt.
Even now, climate change is increasingly undermining health, food security, water supply, and nature all over the world, with those in Africa and elsewhere who have emitted the least amount of greenhouse gases paying the highest price. According to the African Development Bank, since 2020, Africa is losing between US$ 7 billion and US$ 15 billion a year because of the impacts of climate change. The number could reach US$ 50 billion by 2030.
Yet Africa’s energy use is projected to increase dramatically. McKinsey estimates that rapid population growth and industrialization on the continent will drive Africa’s energy demand up by 30% as compared to what it is today. In this context, the United Nation’s Economic Commission of Africa has pronounced that "climate-smart development in Africa is the only development model that will unleash the continent’s potential to achieve its development aspirations.” Indeed, thereis enormous potential to channel Africa’s energy needs into sustainable investment opportunities. But climate-smart development can only happen with sufficient financing.
The good news is that green financing is growing sharply. There’s increasing evidence that goals of investing profitably can align with green financing. According to Morningstar, sustainable funds have out-performed traditional funds over the past 10 years, including during the COVID-19 pandemic.
The bad news is that the world faces a green financing gap of US$ 9 trillion annually to have a chance to reach net zero. In Africa, current annual climate finance flows are US$ 29.5 billion – far lower than the US$ 277 billion Climate Policy Initiative estimates the continent needs annually to meet its 2030 climate targets.
Key challenges of securing green finance in Africa
Green financing must be mobilized at greater speed and scaled up significantly for the continent to achieve its mitigation outcomes and adapt to climate change. More public and private financing will be required, but private financing is particularly low in Africa. According to Climate Policy Initiative, the private sector contributed to only 14% of total climate finance in Africa (US$ 4.2 billion), as compared to 49% in Latin America and the Caribbean and 38% in Asia.
A number of concerns have dissuaded some private capital players to date.
First, the regulatory and policy frameworks in many countries have lacked the level of certainty and clarity private companies require to invest there. Green financing can be particularly daunting for investors given its nascent stage in many African states and the absence of standardized reporting and disclosure standards.
Second, the actual and perceived risk of investing in green projects has limited private sector engagement. Some countries have addressed this problem by collaborating with international financial institutions and multilateral development banks to encourage them to take on some of the risk that would otherwise fall on investors. Insufficient collaboration with such institutions and the absence of other de-risking mechanisms has hindered green financing in the majority of African states.
Finally, on the supply side, more bankable green projects are needed throughout the continent. It can be particularly difficult for investors to find investment-ready green projects in Africa because of the high levels of technology they require. Many investors also fear that the projects lack sufficient project preparation and planning to persuade them to invest the significant long-term capital necessary.
A Rwandan response to the challenges of mobilizing green financing
Rwanda, through the Kigali International Financial Centre(KIFC), has positioned herself as a hub for green financing and investment in Africa. A robust legal framework has been established to attract private capital inflows as well as seamlessly enable investors to structure and diversify their investment portfolios. A case in point is the Law Governing Partnerships which was enacted in 2021 to provide for structuring of funds. Rwanda also offers a wide range of incentives to investors, including no currency controls, no restrictions on foreign ownership or assets, 100% profit repatriation and tax breaks for investors who structure their investments through KIFC.
Another potential gamechanger is Rwanda’s Sustainable Finance Road Map, which was launched internationally at COP-27 in Egypt in collaboration with the United Nations Development Programme. Its twin objectives are "scaling sustainable finance”and "making finance sustainable.” It is premised on the beliefs that better Environmental, Social and Government (ESG) scores translate into lower cost of capital and that capital should be leveraged to positively impact the environment.
Rwanda also launched the Green Investment Facility (IremeInvest) through the Green Fund last year. It seeks to de-risk green investments and promote Fintech technologies in order toaddress directly the perception of high risk of green projects and thereby attract financing from commercial banks.
With an initial capitalization of over US$ 100 million, the Green Investment Facility is offering grants to move projects from feasibility to bankability, in addition to credit guarantees and concessional loans. The strategy is meant to ensure that in the long term, the private sector takes the lead on sustainable financing.
Moreover, Rwanda in collaboration with development partners, is establishing a taxonomy (ESG classification) to fast-track the key strategic initiative of improving Rwanda’s corporate ESG disclosure and reporting. The taxonomy will clarify which investments are considered environmentally sustainable in Rwanda and provide companies, investors, and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable.
Next steps
The Kigali International Financial Centre’s unique positioning as a hub for sustainable finance has led to the set-up of the UNDP Timbuktu innovative financing facility that aims to invest $1 billion in over 1,000 African start-ups over the next ten years.
More immediately, global regulators, policymakers, decision makers, founders and investors will gather in Kigali from the 20th to the 22nd of June 2023 for the inaugural Fintech Forum to discuss Inclusive and Sustainable Fintech among other exciting topics.
Antonny Mukulu Nshimye is the Chief Legal Officer/ Company Secretary of Rwanda Finance Limited.
Tafadzwa Pasipanodya is a partner in Foley Hoag LLP's international litigation and arbitration department and chair of its Africa practice.