Among the continents and regions that need financing to help support sustainable development and climate mitigation, Africa has perhaps the greatest need.
The vast continent, home to a 1.5 billion people across 54 countries, continues to experience deep financing gaps, undermining its ability to make material progress on the UN’s Sustainable Development Goals (SDGs) and develop greater resilience to climate change.
Perversely, Africa is among the lowest contributors of greenhouse gas emissions globally, yet African countries are experiencing some of the most pernicious effects of rising temperatures such as severe floods and droughts.
To help address this and bridge the gaps, a significant increase in public and private sector financing is needed, particularly in transition finance and from sustainable finance, specifically green, social, sustainability and sustainability-linked (GSS+) bonds and loans.
At its simplest, transition finance is focused on financing greenhouse gas emission reduction, directly or indirectly, in high-emitting and hard-to-abate sectors. Sustainable finance, by comparison, has a broader focus, financing both what is already environment-friendly today and what is transitioning to environment-friendly performance levels over time.
Both types of financing are at early stages in Africa, but sustainable finance, specifically GSS+ bonds, have recorded rapid growth in recent years. In the first quarter of this year alone $4.9 billion of GSS+ bonds were issued – led by three green, social and sustainable bonds worth a combined $3.1 billion from the African Development Bank (AfDB) and the Ivory Coast’s $1.1 billion sustainable bond – according to research from the Climate Bonds Initiative.
Impressively, this was 1692% higher compared to the same period in 2023, outstripping the global GSS+ issuance growth rate in the quarter by some margin.
Yet, while growth rates have been high, especially compared to global levels, the total size of the African GSS+ market remains tiny, representing less than 1% of the near $4.5 trillion global market for bond financing in these formats. By comparison, Europe’s market share is about 40%, North America’s is about 30%, and Asia-Pacific has about 25% of the market.
There are multiple reasons why the African market is the size it is, not least the broader challenging context around the continent.
Africa is confronted by a formidable set of economic, financial, and environmental challenges hindering its path to sustainable development
“Africa is confronted by a formidable set of economic, financial, and environmental challenges hindering its path to sustainable development,” says Omar El-Husseiny, head of treasury group, CIB, an Egyptian bank. “The continent grapples with high unemployment, soaring inflation, exorbitant interest rates, currency devaluations, social inequality, and environmental degradation exacerbated by climate crisis, droughts, starvation, and global geopolitical instability.”
More specifically, there is also a lack of needed regulatory infrastructure especially around green or sustainable taxonomies and reporting, and the scale, sophistication and maturity of local capital markets across much of Africa – aside of South Africa – are key barriers to growth of sustainable finance.
Together with these, there is also a lack of sustainable finance expertise and institutional capacity, a lack of project development and management capacity, and subdued broad-based demand for capital markets financing, whether in local or foreign currency, due to high costs from elevated rates.
In the short-term, these barriers to more rapid growth of Africa’s GSS+ market are unlikely to be overcome. Longer term, however, there is hope and an expectation that the market can grow to a larger size and provide greater support to the continent’s climate change defence and sustainable development.
Growth potential
“Sustainable finance is not going to be the silver bullet to solve Africa’s very large financing needs to mitigate and adapt to climate change,” says William Attwell, director, climate research at Sustainable Fitch. “But it will certainly help address the climate adaptation needs of countries, together with financing from bilateral lenders, multilateral development banks and other international financial institutions.”
In terms of the size of that financing need, recent research by the Climate Policy Initiative, an international climate policy organisation, estimated that Africa needs $277 billion annually to meet its 2030 climate mitigation and adaptation goals.
According to Attwell, Africa received only $30 billion in 2020 – the latest available data – with 86% of that coming from public sector sources, such as development finance institutions and bilateral donor governments.
An agreement between nations at COP28 in Dubai last year to commit some $800 million to an Adaption Fund and Loss and Damage Fund will help support climate adaptation and mitigation measures by African countries. But even with this commitment, there is still a significant shortfall in the financing needed to help African countries, and others in developing regions of the world, to combat climate change and progress sustainable development.
Sustainable finance is not going to be the silver bullet to solve Africa’s very large financing needs to mitigate and adapt to climate change. But it will certainly help address the climate adaptation needs of countries, together with financing from bilateral lenders, multilateral development banks and other international financial institutions.
Given this, sustainable finance has an important role to play in helping to close the financing gap, which is why it is a market that needs to be developed.
That is underway and has been since 2014 when the City of Johannesburg issued Africa’s first labelled bond – a ZAR1.5 billion green bond – which was the second only from an emerging economy after Brazil earlier that year.
The volume of issuance since from Africa has been a mix of negligible to material, with most issuance occurring annually since 2021. Indeed, 2024 could be a record year for issuance at over $4 billion even though most of that has come from only two issuers – AfDB and the Ivory Coast.
In time, it is hoped that more African sovereign and corporate issuers from more across industries will take the step of issuing GSS+ bonds – and across a broader range of these formats – a development that ultimately underpins the future growth potential of the market.
Currently, financial institutions and real estate investment trusts – the bulk of which are from South Africa – dominate the market, with about three quarters of issuance in green and sustainable format, and the remainder in sustainability-linked and social format, according to Sustainable Fitch.
A key piece in enabling the expansion of the universe of the issuers and types of formats is the development and implementation of green or sustainable finance taxonomies, essentially a framework of common definitions of economic activities considered environmentally sustainable.
Evolving regulatory architecture
Taxonomies are important for helping to scale-up sustainable investment as they create greater transparency and security for investors and issuers, and mitigate market fragmentation.
Until recently South Africa was the only African country to have a green finance taxonomy. However, other countries such as Rwanda have now launched a green taxonomy, Kenya has launched a draft green finance taxonomy, and Morocco, Mauritius, Ghana have issued green and sustainable finance guidelines, potentially a precursor to full-fledged taxonomies in the future.
Other countries can be expected to follow.
“We are now moving towards a situation where there is some of the architecture required for a credible, sustainable finance ecosystem that people can have confidence in,” says Attwell. He adds that the Kenyan draft green finance taxonomy – only the second from one of Africa’s largest economies – could be seminal, especially if the country issues a sustainability-linked bond. “That could potentially open up that format to East Africa.”
One of the key questions in taxonomy development in Africa, is to whether there needs to be an Africa taxonomy that can be applied across the countries of the continent. The European Union’s green taxonomy, which the Kenyan taxonomy reportedly draws upon, is the best example of an overarching regional framework.
There will be a need to design Africa relevant taxonomies
“There will be a need to design Africa relevant taxonomies,” Eric Usher, head of the United Nations Environment Programme's (UNEP) Finance Initiative, told a Euromoney virtual roundtable earlier this year. “Whether they should be developed at the continental, regional, national or sub-national level, is up to decision makers in politics and business to aggregate around.”
He added: “There probably isn’t a single solution. It is a complicated space, and takes a lot of effort. What is most important is to get that work underway.”
In addition to developing taxonomies, other important and related regulatory architecture that needs to be developed and implemented include voluntary ESG reporting or disclosure guidelines and frameworks.
There has been some activity in this area recently, with ESG disclosure guidelines having been introduced in South Africa, Uganda, Namibia, and Egypt, motivating companies to increase transparency around their ESG performance. Nigeria is also looking to introduce guidelines for the adoption of the IFRS Sustainability Disclosure Standards, developed by the International Sustainability Standards Board, which would be a first for Africa.
“We're starting to see pieces of the puzzle be put in place for a more standardised, comparable, and consistent sustainability-related reporting in Africa, which is another important development that needs to happen,” says Attwell.
A more sustainable future
While Africa’s sustainable finance market is still at an early stage of growth and development, it is growing and developing, supported by the actions of African policymakers, bilateral lenders, development banks and other international financial institutions.
Indeed, at the national level, African governments and regulators are aware and keen to capitalise on the rapid rise of sustainable investing globally, which presents opportunities to attract much-needed foreign investment, often on favourable terms, to support socioeconomic development, climate resilience and other policy outcomes aligned with the SDGs, wrote Attwell in a report published last year on the subject.
Where substantial pools of investors exist locally – notably in South Africa – policymakers are also seeking to encourage domestic capital flows towards socially and environmentally positive outcomes.
“Regulators are therefore taking steps to facilitate growth in sustainable finance in the region, including measures to facilitate issuance of GSS+ debt and create greater certainty and confidence for asset managers and owners,” wrote Attwell.
These are important developments, which are also being supported, and in some areas led on the ground, by the African banking sector.
El-Husseiny at CIB, which represents Africa on the GFANZ [Glasgow Financial Alliance for Net Zero] Advisory Board, believes African banks can “play a catalytic role in the continent's sustainable transition”.
He says this role manifests through various channels from providing climate finance and green lending, to supporting climate adaptation and the proliferation of robust environmental and social risk management frameworks.
As an example of some of what banks are doing, CIB has introduced sustainability-focused programmes, such as Sustaining Sectors and Sustaining SMEs, which are designed to support companies, and economies more broadly, to decarbonize and transition. As part of these programmes, companies are offered tailored financial solutions, capacity building, and technical assistance to drive decarbonization and promote sustainable practices.
“By prioritizing sustainability, banks can contribute to a prosperous and resilient Africa,” says El-Husseiny.