Green cash and loans to fight climate change is a huge opportunity for African financial institutions

Africa's financial sector has a massive opportunity to mobilise funding to accelerate the continent's transition to clean energy and fight climate change, according to a report.

Seth Onyango, bird

Commercial banks in Africa are increasingly creating specialised lending facilities to bolster private investment in climate-related infrastructure projects and sustainable businesses and this is a big opportunity for the sector, according to a report.

According to European Investment Bank (EID) 2021 report, close to 70 percent of banks in Africa see green finance as an attractive lending opportunity. However, there is a big gap between recognising the opportunity and actually benefitting, according to the report.

"Nearly 55 per cent actively look at climate change when making strategic plans. And more than 40 per cent of African banks employ staff to focus on renewable energy. However, only around 10 per cent have tailored their products to serve green finance," reads the study in part.

However, EID says this market has yet to achieve its full potential, as it remains small relative to equivalent markets in other regions.

Analysis by the United Kingdom’s Overseas Development Institute and the EIB shows that the number and value of issuances in Africa’s green bond market have been increasing almost every year.

It comes as the African Development Bank (AfDB) and the Climate Investment Funds have released a scoping report highlighting the impact of combining green banks and national climate funds to accelerate green financing.

The AfDB is upbeat that entities such as “Green Investment Banks” and National Climate Change Funds (NCCFs) can increase the capacity of African countries to access and mobilise climate finance in support of implementing Nationally Determined Contributions (NDCs) and related national climate and development goals.

NDCs are at the heart of the Paris Agreement and typify each country's effort to reduce national emissions and adapt to the impacts of climate change.

Green Banks will pull finances to support low-carbon, climate-resilient development by raising and blending capital to finance local climate infrastructure while also driving an increase in private investment.

According to the Coalition for Green Capital, green banks can attract more private capital at affordable rates through credit enhancements.

"Financing structures, such as loan loss reserves or loan guarantees, help de-risk investments for private investors, enabling more capital to flow to clean energy projects," it says on its website.

Globally, Sopra Banking Software estimate 2021 could see more than 1 trillion US dollars raised for sustainable financing, with the value of green bonds traded hitting 2.36 trillion US dollars by 2023.

African financial institutions are well situated to add green financing to their portfolios and funnel these funds into local climate-conscious projects.

They could also lose business if they don't.

EID 2021 report warns that Africa and its financial sectors are highly exposed to risks associated with climate change, hence they must play a key role in financing climate adaptation and mitigation.

The African Climate Policy Centre has calculated that an increase in global temperatures of 1 °C would lead to a 2 per cent contraction of Africa’s gross domestic product (GDP).

An increase of 4 °C would lead to as much as a 12 per cent contraction of Africa’s GDP and potentially poke holes into the balance sheets of commercial banks.

The EIB Banking in Africa survey, 2021 reveals that African banks are increasingly aware of the need to address risks posed by climate change, and are beginning to take advantage of opportunities in green finance.

It further shows that other financial institutions, including micro-finance, private capital and insurers, are also filling market gaps in green finance.

Policymakers are supporting these developments through regulatory intervention, technical support and financing, with initiatives at domestic, regional and international levels.

But still, Africa’s green finance sectors remain underdeveloped relative to those in other regions, and more can be done to ensure that the continent’s financial sectors address climate risks and make the most of the opportunities of climate finance.

"This has become particularly urgent in the context of the recovery from the economic impact of COVID-19. International organisations can play an important role by working with financial institutions to finance the climate transition, and by helping to address gaps in knowledge and capacity to provide sustainable finance products," says the EID report.

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