Flows of financing to Africa’s climate transition need to speed up, the head of a leading South African bank has warned this week.
There has been about $170bn of investment in climate finance in the continent, said Emrie Brown, chief executive of South Africa’s Rand Merchant Bank, at the Institute of International Finance’s annual meeting in Washington.
But this financing has to accelerate, she said. Other than some large renewable energy projects, most of the investment is smaller transactions by “impact first” investors. “We definitely see large pools of capital but the pace of deployment is slower than expected,” said Brown. “The capital is there, but we need to increase the flow.”
The way to do that is by mounting projects that can bring large institutional investors in at scale. But risks, real or perceived, are putting investors off.
“There has been some tremendous currency devaluation in some countries, for example,” said Brown. “The way developed markets investors compensate is by either not investing, or by getting returns that can make projects unviable. There’s only so much a project can repay.”
One way to draw international investors is for local investors to take the lead. “Those local investors understand the risk,” said Brown. “If we can get more of those in, then international investors will crowd in.”
Vital role for SWFs
Sovereign wealth funds, such as those in the Middle East, could play a big role in climate financing in Africa, said Joseph Abraham, chief executive of Qatar’s Commercial Bank, at the same IIF event.
“Historically, they have focused a lot on Western markets,” he said. “But for geopolitical and diversification reasons, there is a greater emphasis on other regions and projects with a sustainable angle. As they enhance their familiarity with the region, there will be a lot more investment into new areas like Africa.”
The Qatar government’s Qatar Airways has been working for five years on a deal to buy 49% of RwandAir, the flag carrier of Rwanda. In 2019, it also bought a majority stake in Rwanda’s Bugesera Airport, still under construction.
Through one channel, international investors are supportive: government sustainable finance bonds. Last year Gabon executed Africa’s first sovereign debt-for-nature swap and Benin issued a sustainability bond in 2021.
“We have a number of countries claiming to be working on sustainable finance frameworks,” Yvette Babb, emerging markets debt portfolio manager at William Blair in the Hague, told GlobalMarkets. “Development finance institutions are working hard with them to try and devise these products and even provide credit enhancements to make them more accessible.”
Jeff Grills, head of US cross-markets and emerging markets debt at Aegon Asset Management in Connecticut, said: “It’s a great way for challenged countries to get some lower cost financing.”