Africa has some of the best renewable energy resources in the world, and yet more than 600 million people lack access to electricity.
That paradox is making green finance a core product offering for the development of the continent. In fact, the way funds are procured and allocated is already changing as both private and public lenders become more attracted to “climate compliant” players and project promoters.
As defined by the UN environmental program, “Green Financing” entails investments in environmentally friendly development priorities from public, private and non-profit sectors observing some of their set standards. In order to reach an acceptable rate of return, special attention is needed when assessing and managing environmental risks and to ensure that projects actually make for the required measurable environmental impacts. There is a growing number of green instruments in the market today with the most popular so far being green bonds, green banks, and carbon credit finance.
There is a strong need for investments in researching, developing, and improving green finance particularly as it is still difficult to determine green projects’ success or failure. To illustrate that concept, think of an economy like China which has been aggressively promoting the use of electric cars. One may automatically assume a positive environmental impact. Now, consider that the success of this initiative is generating the sale of a lot more vehicles than in the previous years and ask yourself a few questions such as how environmentally friendly are the factories producing these cars. Where is the energy coming from not only to make the cars but also to charge them on a daily basis? Is that green energy? Is it perhaps coming from coal plants? What is the expected lifetime of these vehicles and how do you dispose or recycle such a large volume of Lithium batteries? As you can see assessing the impact of a project and qualifying it for green finance is not as straightforward as it seems.
A good understanding of how Green Finance works and accounting for its key elements when preparing a project can lead not only to a positive impact on society but can also enhance Africa’s economy in a long-term financial value.
As Sub-Saharan Africa is forecast to double its population by the year 2050 and considering the extent of regions with no access to electricity, the case for renewable energy investment in the continent becomes very interesting.
Also read: Top 5 Hydrogen Projects in Africa
600 million people lack access to electricity, yet as economies grow, the pressure for basic energy supporting social and economic development makes renewable energy a strong alternative. One that will also help mitigate the effects of climate change.
In order to increase the use of renewable energy in Africa, massive investments are needed. From an investment perspective, the many resources available can create new markets for electricity and transform existing ones, particularly as there are many large hydro plants that are now aging to a point they may need to be replaced.
Development of renewable energy at scale does require cooperation between the public and private sectors, at very least, the setting of a supportive regulatory and policy framework and it has increasingly been seen that in many African jurisdictions, the financial system can support the fight against climate change by mobilizing a portion of the $US1 trillion of institutional capital allocated to infrastructure into new, clean energy installations and clean, sustainable infrastructure across sub-Saharan Africa. Green projects will definitely be a key driver for investors who are interested in investing on the continent over the next couple of decades.
At end of the day, green finance will have a promising future in Sub-Saharan Africa, but only with the right commitment of all parties and the right mind frame.