Despite a record level of green bond issuance, the African market accounts for less than 1% of global issuance. Unfortunately, this type of financing remains largely under-utilised in Africa, even though it has the potential to foster a just transition and achieve development goals, particularly in the under-resourced infrastructure sector.
Africa is urbanising at a high rate, creating a growing demand for public services and infrastructure for cities and transportation. This demand is all the more important as the African continent is the least well served in terms of infrastructure and there is a large imbalance between demand and supply of good quality and environmentally friendly essential services.
For example, about electricity supply, it is estimated that nearly 600 million people in Africa do not have access to the electricity grid, representing more than two-thirds of the world's population without electricity. While progress is being made to close this gap, much greater financial resources are needed to close this basic infrastructure gap and thus enable the continent to achieve other key development goals,
Indeed, Africa needs to mobilise about $100 billion a year over the next decade to renovate infrastructure, adapt to climate change and foster green economic growth. $60 billion is needed for greenfield infrastructure and $30 billion for the maintenance of existing infrastructure. Only about $25 billion is spent on capital expenditure each year, leaving a significant shortfall to be funded.
The synergy between climate mitigation and economic growth
Paradoxically, Africa, as the continent with the least infrastructure, will have the greatest responsibility in developing and implementing green infrastructure. One of the main challenges for Africa will be to combine sustained economic growth with climate risk mitigation. It is known that about 70% of greenhouse gases are related to the construction and operation of infrastructure, and it is estimated that buildings alone account for more than 30% of global resource and energy consumption.
Indeed, while Africa contributes about 4% of global CO2 emissions, the continent is among the most vulnerable to climate change. According to the United Nations Environment Programme, a warming of 2 degrees Celsius would reduce agricultural yields in sub-Saharan Africa by 10%. Millions more Africans could find themselves exposed to one or more climate risks in a warming world over the next 30 years. There is therefore a need to adapt to sustainable infrastructure in Africa.
These adverse impacts, which will be felt across many areas, from agriculture to healthcare, are likely to be severe because many African states lack, or have low levels of, adaptation capacity, due in part to low levels of investment. There is already a growing recognition of the dependence of cities on green infrastructure, not only because it provides crucial resources such as water, but also because it can act as a bulwark against future climate change impacts. In addition, many African urban centres have expressed their ambitions and committed to the Paris Agreement's 1.5°C trajectories. Urban ecosystems can play a key role in achieving this ambition.
Despite higher design and development costs, green infrastructure and economic development can be positively linked. Low-carbon infrastructure is even more cost-effective in the long term, as it can help build resilience in countries while protecting against exposure to extreme events caused by climate change.
A treasure trove of potential opportunities
In terms of infrastructure financing, Africa is by far the continent that receives the least international direct investment (FDI). Over the past five years, G7 countries have invested about US$22 billion in sustainable infrastructure projects in their own countries, but only US$3 billion in Africa. Private investment by G7 countries in African sustainable infrastructure projects has tended to decline since 2017. Yet the continent has all the natural resources to foster the development of all types of green infrastructure.
Indeed, Africa is home to seven of the ten sunniest countries on the planet, making it a dream landscape for solar projects, and its massive network of rivers is a treasure trove of hydroelectric potential. Africa also has the majority of the world's chromium and platinum deposits, both of which are essential for the development of green technologies such as batteries and fuel cells.
An attractive investment destination for Private investors
In terms of returns, investing in this area has proven to be a very lucrative venture for investors. The green bond market for infrastructure finance is another new frontier for Africa that will help the continent build deeper and more sustainable finance. While Africa receives 23% of official climate finance, it accounts for less than 1% of global green bond issuance and pays more than twice as much as its peers to access the markets,
The infrastructure sector presents a treasure trove of opportunities for long-term impact investors. Studies from the UNECA have demonstrated that a green recovery, based on green investments, can generate up to 420% better returns in gross value added and up to 250% better returns in job creation.
Some of the investment opportunities available for green bond investors are in the following sectors:
• Renewable Energy
• Energy Efficiency
• Sustainable Agriculture
• Water Management
• Clean Transportation
• Biodiversity Conservation
• Urban Development
• Manufacturing
Sustainable infrastructure investment in Africa lacks momentum
Private investment from G7 nations in sustainable infrastructure, 2016 - 2021 (Source Refinitiv/ LSEG Business)
Significant financial resources are needed to close the infrastructure gap in Africa and achieve other key development goals, such as those related to the Sustainable Development Goals (SDGs), but the level of public funding currently available is insufficient. However, the infrastructure gaps that need to be filled provide an opportunity for private sector actors to integrate sustainability into the design and implementation of development projects, which would facilitate inclusive and sustainable growth, and significantly reduce poverty and widening socio-economic inequalities.
The issuance of green bonds is a financial instrument that could help mobilise capital among private investors for meaningful climate action and sustainable infrastructure development, which will also catalyze better integration and interconnection of the continent's economies.
Disclaimer: This article is provided for information purposes only and does not constitute an invitation to invest. Please seek advice from your investment advisor before investing.