Brian Waswani Odhiambo, Partner at Novastar Ventures, proposes solutions to close the climate funding gap between Africa and the Global North.
With New York Climate Week in full swing this week, I reflect again on Africa’s first climate summit, which concluded earlier this month in Nairobi, Kenya’s capital. It was here where more than a dozen African heads of state issued a declaration that called for an urgent restructuring of the way the Global North engages with the continent.
The declaration emphasised that rather than being a victim, Africa – with its rapid growth, young, tech-savvy population and abundant natural assets – is in fact poised for leadership on environmental stewardship. But to make that happen, the world’s industrialised nations, which are largely responsible for the greenhouse gas emissions causing climate change, must provide climate financing to Africa through investments- not aid when disasters strike.
Despite past pledges, the Global North continues to fall short on financing targets, while Africa faces increasingly severe climate-related challenges – the consequences of which have widespread global impact.
We know that the Africa is disproportionately affected by global warming, accounting for only 2.7% of global carbon emissions, but projected to heat up 1.5 times faster than the rest of the world.
Moreover, energy demand in sub-Saharan Africa is set to expand dramatically over the next few decades. Adopting the same carbon-intensive path taken by other economies would undermine the global effort to contain warming.
As stressed in the Nairobi Declaration, any viable global solution to climate change will need to have Africa at its heart. Africa requires US$2.8 trillion, or US$250 billion each year, between 2020-2030 to implement its nationally determined contributions (NDCs) under the Paris Agreement.
Yet, annual climate finance flows in Africa stand at only US$30 billion and most current climate financing in Africa is still from public actors – this leaves a huge gap, or opportunity, for the private sector to seize.
So, why does the funding gap persist and what is needed to mobilise this much needed private capital? Here are some thoughts:
To catalyse additional investment dollars to the continent, funders will need to be creative with how they deploy capital. This can include first loss guarantee funds by governments and development finance institutions and/or concessionary funding specifically for climate-related solutions.
Climate businesses will need to build infrastructure, be vertically integrated, scale rapidly and in some cases, provide credit to end customers to increase accessibility. While equity can be used to plug some gaps in the early stages of a company, fast-growing businesses will soon need other forms of capital to sit alongside the equity.
Enhancing regulatory clarity
Attempts to force fit new climate technologies into existing regulatory frameworks is likely to fail. Africa learnt this lesson as many countries tried to regulate financial technology companies using existing financial services, which led to conflict between entrepreneurs and regulators and slowed growth for many promising enterprises.
Inevitably, governments had to amend existing regulations or adopt new ones including “start-up acts” that have become law in several countries including Nigeria and Kenya.
Clear and supportive regulatory measures that could foster climate tech innovation include: tax incentives, regulatory sandboxes, intellectual property protection, green procurement policies that prioritise the purchase of climate-friendly technologies and the development of a compliance carbon offtake market.
Access to the right kind of capital
This is especially critical for early and growth stage businesses that require flexible and fast capital to iterate business models and catapult innovative technologies to scale quickly – the kind of innovative technologies and business models that are needed to grow new, decarbonised economies fast.
The good news is that we are seeing more Africa-focused investment funds emerge with a climate-specific mandate, and climate tech investments are the second largest growing investment category behind fintech. Nonetheless, the pool of available capital is still a fraction of what Africa needs to move the needle on climate change.
Accelerators and incubators
Supporting the creation of incubators and accelerators focused on climate tech, providing start-ups with mentorship, resources, and access to networks. The venture ecosystem significantly benefitted from incubators such as iHub, ccHub, BongoHive, Nailab and others which provided spaces for entrepreneurs to develop ideas, collaborate with other innovators and take their products to market, sometimes with funding attached. The climate tech space will need similar programs to chaperone early stage or first-time entrepreneurs.
To effectively bridge the Africa climate-funding gap and mobilise private sector capital, a multi-faceted approach is necessary. It requires a commitment from various stakeholders to work together to create conducive environments for investment and channel resources toward climate-related opportunities.
But it also requires these commitments (and the myriad intentions and the pledges) to translate into real, measurable and urgent action. Africa has huge potential to harness its natural assets for the good of its young, growing population and to make sure it is part of and contributing to the global transition towards net zero, and nature positivity, but it needs capital to do so, and it needs the capital now.