Lenders Remain Cautious About Backing Risky Climate Projects, But Blended Finance Deals Are Helping to Open Up Opportunities in Areas Like Renewable Energy
Finding solutions to an ever-expanding climate crisis is a global dilemma, but especially pressing in Africa. Despite contributing just 4% to global greenhouse gas emissions, the continent is disproportionately impacted by global warming. To cope with the escalating challenges posed by climate change, Africa is expected to need close to $3 trillion in investment by 2030. Yet, current commitments stand at only about $300 billion, leaving a vast gap that must be addressed urgently.
The Financial Landscape: A Challenge for African Nations
The majority of African countries are already cash-strapped and heavily indebted, which complicates the financing landscape. Most of the existing funds come from abroad through development banks or multilateral mechanisms like the UN Green Climate Fund and the Loss and Damage Fund established at COP28. Local and regional commercial banks are gradually increasing their participation in green finance, but the pace is slow.
Rachael Antwi, group head of Sustainability & ESG, Climate Finance at Ecobank, highlights a noticeable shift in the mindset of stakeholders across the African banking sector. “Initially, there was a tendency to view climate action as a secondary concern, often overshadowed by more immediate economic challenges. However, this is rapidly changing as the impact of climate change becomes more apparent with extreme weather events, resource scarcity, and food insecurity,” she explains.
Despite this shift, lenders remain cautious about backing climate projects, often perceiving them as expensive, high-risk, and low-return investments. Kenny Fihla, deputy chief executive of Standard Bank Group, emphasizes that the largest funding gap is in adaptation projects, which are crucial for ensuring resilience against climate impacts. “Most often, projects are not seen as commercially bankable or feasible and require innovative solutions,” he states. Standard Bank aims to mobilize $14 billion in sustainable finance by the end of 2026, reflecting a growing commitment to addressing these challenges.
Blended Finance: Pooling Resources for Impact
A European Investment Bank (EIB) study found that while 66% of sub-Saharan African banks view green finance as a growth opportunity, only 15% have tailored products to tap into this market. This highlights the need for blended finance, which combines public and private capital to address the challenges ahead. Johan Malan, principal of Sustainable Finance Solutions at Nedbank, argues that collaboration between development finance and private finance is essential. “Blended finance offers advantages in risk mitigation and pricing,” he notes.
Collaboration also enhances the expertise needed to structure and develop large-scale projects effectively. “Development finance institutions or donor funding may be catalytic in getting projects to a bankable phase,” Fihla explains. “Guarantees or insurance wraps may render projects commercially bankable or reduce costs of funding such that private sector appetite can be crowded in.”
Several types of blended finance are currently being utilized to support climate initiatives across the continent, including concessional loans, green bonds, technical assistance grants, intermediated lending, and equity investment. Aliou Maiga, regional industry director for the Financial Industries Group at the International Finance Corporation (IFC), notes that “a lot of funds are popping up across Africa to invest in climate transition, particularly renewable energies.” The demand for such investments is growing rapidly, as nimble teams of experienced professionals can often mobilize resources more efficiently than larger banks.
Renewable Energy: Africa’s Leapfrog Opportunity
The renewable energy sector stands out as a prime area for investment. With over 600 million people in Africa lacking access to electricity, there is a significant opportunity for new technologies to help users leapfrog from zero power to solar energy without connecting to a national grid. This transition mirrors the rapid shift many Africans have made from cash-based economies to digital money, skipping traditional banking systems altogether.
Amid geopolitical insecurity and the decline of traditional energy companies, economies in the Sahel region are particularly well-suited for adopting renewable energies. Maiga observes a rapidly expanding number of solar panels and batteries in the region. “Two years back, maybe I would have said Africa was not ready, but now I see an opportunity for the continent to leapfrog in the energy sector the same way it did in the mobile sector,” he asserts.
Other promising areas for investment include sustainable agriculture and irrigation, transport, recycling, and smart construction. Last year, Africa-based climate tech enterprises raised $1.1 billion, according to regional network Africa: The Big Deal. In the first half of this year, climate tech captured 45% of all funding raised by African startups, outpacing fintech.
Notable deals in recent months include solar energy provider d.light, which raised $176 million in July; electric vehicle maker Spiro, securing $50 million; agricultural insurance firm Pula, with $30 million in May; and SunCulture, a manufacturer of solar-powered water pumps, which raised $27.5 million in April.
Regulatory Adjustments and Challenges
As various players seek to engage in African climate finance, they face largely undefined regulatory frameworks that force them to improvise. Ibrahima Cheikh Diong, UN assistant secretary-general and director-general of the African Union’s African Risk Capacity (ARC) Group, notes, “Today in the business of green economy and climate finance, every institution, commercial banks included, is trying to find out where it fits, and the traditional way of banking is not going to cut it.”
Most jurisdictions lack specific guidelines or regulations for climate finance, leaving it up to banks to follow international best practices, such as the International Capital Market Association’s principles for green bond issuance. However, mandatory rules may be on the horizon. “Like elsewhere in the world, there is a trend of regulations starting as voluntary and then becoming mandatory,” Malan observes.
The continent’s largest economies, which also have the most developed banking sectors, are leading the way in regulatory adjustments. In April, the Bank of Morocco and the World Bank released a report assessing the impact of climate change on the financial sector, revealing that a third of Moroccan banks are exposed through loans to sectors like agriculture and households in high-risk areas. The report offered recommendations on how to integrate climate risks into institutions’ strategies and policies.
South Africa has also made strides, passing a climate change bill early this year that sets out a roadmap for climate action. In 2022, the country issued a green taxonomy, and since then, the South African Reserve Bank has published guidance on disclosure and climate-related risk management.
Conclusion: A Path Forward
The African banking sector is increasingly acknowledging the significant challenges posed by climate change, recognizing both the economic and financial risks it entails. By pricing in climate risks, banks can better protect their portfolios from potential losses, ensuring greater financial stability. However, these steps must be sustained to create a regulatory environment that builds investor confidence and supports growth.
Despite the urgency of the situation, only about 3% of global climate finance currently reaches Africa. “There is still a long way to go, but we’ve also achieved a lot,” Malan concludes. Looking ahead, there is potential for further growth in sustainable finance, climate debt swaps, and nature-related instruments. As blended finance continues to evolve and adapt, it may well be the key to unlocking the vast opportunities that lie ahead in Africa’s climate finance landscape.