As African policymakers and private sector officials assemble in September for the Africa Summit, the subject of sustainable financing will definitely be at the top of the agenda. Sustainable finance supports the implementation of institutions’ green initiatives promoting sustainable growth in Africa, which includes job creation, revenue generation, a healthy environment, and social equity. Most African corporates are unable to access sustainable finance due to barriers such as inadequate knowledge on green financing options. Businesses can develop the skills and processes required for sustainable financing through capacity building.
Sustainable finance is money that supports economic growth while lowering environmental constraints and taking into account social and governance factors. It comprises of financing both what is currently environment-friendly today (green finance) and what is gradually shifting to environment-friendly performance levels (transition finance). Transition finance involves funding private investments to reduce today’s high greenhouse gas emissions or other environmental impacts through green initiatives, with the goal of transitioning to a net-zero and sustainable economy. To meet the Paris Agreement’s target of reducing GHG emissions by 45% by 2030, businesses require long-term sustainable financing to execute green initiatives.
Implementing green initiatives is capital intensive, which African corporates often lack. Green technology is expensive since it is relatively new. However, the cost of green technology has decreased in recent years and will continue to fall as new innovations reap efficiency gains. The greatest advantage of green technology is that it has lower long-term operational costs. Long-term finance for green initiatives is hard to obtain for many companies. African markets are perceived as high risk by sustainable finance investors, resulting in a high cost of capital and high required rates of return. Large African financial institutions that provide long-term green financing perceive SMEs as high risk and therefore unprofitable. As a result, Microfinance institutions which are better positioned to serve SMEs miss out on sustainable funding that could have been utilized to execute their green initiatives- provide green financial products.
In addition, lack of standardized regulations at national and regional levels discourages cross-border private sector investment. Regulations incentivize private-sector investments by signaling stability and political willingness to engage in green growth across all sectors as well as creating an enabling environment for these investments. To make investment decisions, green funders often require data and indicators on a company’s sustainability measures, which most companies lack.
Furthermore, African businesses are unaware of the various opportunities in sustainable finance. Most are unaware of the conventional reporting procedures that investors consider when making investment decisions. To gain the trust of investors, they must also improve their technical and human capacity to implement their green initiatives and develop a good green transition strategy, the lack of which would inhibit the ability to increase the quality and quantity of their production to obtain high returns on investment.
The majority of African corporations are aware of climate change and its commercial ramifications. Most, however, do not take climate action because they lack the financial resources to adapt and do not know what to do to adapt. Through capacity-building support, firms can be advised on how to incorporate sustainability into their operations. They will also be informed about possible sustainable finance options and trained in the required reporting standards such as GRI, IFRS, and industry-specific standards. Furthermore, corporations will be guided in developing funding proposals and presenting information on green projects to lenders. These capacity-building efforts will improve businesses’ access to long-term financing.
The UNFCC promotes capacity building as one method of increasing resilience and raising climate awareness. African countries, however, lack proper institutional capacity-building structures, such as climate change and sustainable finance courses to create awareness and address climate change concerns at the national and local levels. Sustainability consultants are better positioned to provide appropriate capacity-building support among institutions since they can examine the institutions and identify capacity shortfalls. The assessment will also help to improve curricula and policies on sustainable finance.
Partnerships between African financial institutions and Sustainable investors are required to support the transition to a green economy. This will result in the availability of funds that will encourage financial institutions to go green and provide businesses with financial products that will support their green ambitions. The African Green Fund recently launched a dedicated green-guarantee instrument to unlock finance for businesses to invest in low-carbon, green growth, and climate-resilient development. Sustainability consultants need to help companies with developing compelling sustainability strategies and proposals that are essential for accessing Sustainable finance. Businesses in Africa need to invest in capacity building in order to identify strategies for incorporating sustainability into their operations and better position themselves for long-term green funding.