Chapter 1
COP27: How do we close the climate change funding gap for Africa?
COP26 renewed global commitment to mitigate the worst effects of climate change while funding moved front and centre. What’s next?
COP26 in Glasgow in November 2021 can be remembered for a couple of reasons. One was a renewed commitment by the global community that rapid action is needed if we are to mitigate against the worst effects of climate change. The second was the fact that funding moved to the front and centre of the fight against climate change, with South Africa alone seeing an $8-billion commitment from the international community to speed the so-called Just Transition.
It's now commonly accepted that every country in the world will have to transition to green energy, transport and manufacturing systems. The problem is that green technology, infrastructure and finance are not equitably distributed around the globe – and this is a major roadblock in the world’s efforts to achieve the Paris goals.
The fact is that access to adequate financial resources is crucial to address both climate change mitigation and adaptation. Since the Copenhagen Accord, and then extended by the Paris Agreement, developed countries were expected to scale up climate finance for developing countries toward a collective goal of USD100 billion per year by 2020, with a balanced allocation between adaptation and mitigation.
But as the IPCC’s sixth assessment report made abundantly clear earlier this year, the amount of finance being mobilised internationally to support climate change efforts in African countries is billions of USD less than what is expected and needed. In Africa, analysis of OECD data indicates total commitment for 2014 to 2018 was only around $50 billion over the period, with nearly two-thirds of this money (61%) being spent on mitigation, and only a third on adaptation.
This funding gap is expected to be a major talking point at COP27 – the so-called Africa COP - in Egypt later this year.
One major challenge that may relate to the shortfall has been issues around capacity to develop fundable projects on the continent. Only six African countries have National Adaptation Plans (NAPs) in place. And even when proposals have been submitted, they have the lowest percentage of approvals (39%) compared to all other regions. This must be addressed as a priority.
Further compounding the problem is that most of the funding for Africa-related climate research originates outside the continent, and goes to research institutions outside Africa. The IPCC report estimates that between 1990-2020, around USD 1,3 billion was spent on Africa-related research on climate impacts, mitigation and adaptation. This is only 3.8% of global funding for climate-related research. During this period, 78% of funding for Africa-related climate research flowed to institutions in Europe and the United States, whilst only 14.5% flowed to institutions in Africa.
This is especially dire, as Africa has contributed among the least to historical greenhouse gas emissions (GHG) responsible for anthropogenic climate change, and has the lowest per capita GHG emissions of all regions currently. Yet Africa has already experienced widespread impacts from climate change, with the report naming West, Central and East Africa as hotspots of high human vulnerability.
“We’re seeing significant calls for projects around climate change, but ensuring the right resources and capacity to deliver on plans exists locally should be another priority,” says EY Eastern Africa Markets Leader Frank Mwiti. “The continent will be looking to COP27 to resolve many of the funding issues, and to move our continent’s transition forward meaningfully.”
Chapter 2
Time to address the economic impact of climate change on Africa.
The risks of climate change to biodiversity are all interlinked and pose a grave threat to the economic prosperity of the continent.
We see the effects of climate change all around us. Oceans are warming and becoming more acidic. Ice caps are melting. Rainfall patterns are changing, resulting in both floods and droughts. Parts of the world are seeing more frequent and severe heat waves.
But one of the unseen effects of climate change is its impact on economies – with a particular impact on developing economies like Africa, where increased average temperatures and lower rainfall have measurably reduced economic output and growth. Exact impacts vary from country to country, but the IPCC’s sixth assessment report suggest that GDP per capita is on average 13.6% lower for some African countries than it would be if anthropogenic (that is, caused by humans) warming since 1991 had not occurred.
We’re increasingly seeing how climate change is leading to irreversible and existential impacts across Africa in areas like food security, biodiversity and health. This will have significant repercussions across all sectors, from tourism to transport.
Food production is one of the hardest-hit areas. If global warming reaches the 2 deg C mark, for example, it could lead to a decline of between 10-30% decline in marine fisheries catch potential for the Horn of Africa region and southern Africa. Wheat, maize and rice yields across the continent will drop to levels below 2005 yields. It would also be a crushing blow to biodiversity, as half of all assessed species would probably lose more than 30% of their population, range size or area of suitable habitat.
Business disruption from these impacts is significant. Productivity levels, which are already low on the African continent, will be further affected, with outdoor workers being the most vulnerable to higher temperatures. Africa already lacks key critical infrastructure, and adverse weather events affect infrastructure quality and access. Recent floods in South Africa’s KwaZulu-Natal province washed away rail infrastructure, roads and bridges, causing billions of rands in damage.
These events will further impede trade and transport on the continent, which are critical for achieving the aims of the African Continental Free Trade Area (AfCFTA).
Deepening gap
90%Small and medium enterprises (SMEs) employ 60-90% of workers in many African countries and contribute upwards of 40% to GDP in countries like Ghana, Kenya, Nigeria, Zimbabwe, South Africa and Tanzania.
More worryingly, it will have significant implications for deepening poverty. Small and medium enterprises (SMEs) employ 60-90% of workers in many African countries and contribute upwards of 40% to GDP in countries like Ghana, Kenya, Nigeria, Zimbabwe, South Africa and Tanzania. The viability of businesses and economic wellbeing of these SMEs is at real threat from climate hazards: devastating windstorms in Ibadan, El Niño-related flooding in Nairobi, drought-induced water supply disruptions in Gaborone, power outages in Lusaka.
The reality is that these risks are all interlinked. A loss in biodiversity leads to a loss in tourism. Lower food security leads to higher food price inflation, which can ultimately spark political and social instability. The continent is among the hardest-hit by the effects of climate change – and to make things worse, there’s a massive funding gap in the amount of finance needed to support climate change efforts in African countries. As we head towards COP27 in late 2022, one thing is clear: we must act fast as a continent and a global community to improve cross-sectoral approaches and enable climate-resilient development. Our future depends on it.
Chapter 3
Making the positive business case for adaptation.
How can we can overcome Africa’s existing backlogs, and move to an adaptation future that positions the entire continent for success?
The climate change clock is ticking faster than ever for Africa. As the IPCC’s sixth assessment report earlier this year showed, the continent is among the hardest-hit by the effects of climate change – and to make things worse, there’s a massive funding gap in the amount of finance needed to support climate change efforts in African countries.
The good news is that if we move fast, there are significant opportunities to deliver significant benefits – and avoid massive systemic damages impacting multiple sectors – if we adopt cross-sectoral approaches to climate-resilient development. Adopting a cross sector/ multi-stakeholder approach can improve the ability of decision-makers to foresee and prevent major climate impacts through adaptation, whilst addressing the root causes of climate change and enhancing our ability to live with it.
There are already numerous feasible adaptation options that are shown to be effective at reducing climate change impacts. They include a range of actions in areas like sustainable water management, resilient infrastructure and technologies, investment in enhanced agricultural practices and crop management.
What makes them even more attractive is that there’s a powerful business case to be made for adaptation. For a start, adaptation is generally cost-effective. The Global Commission on Adaptation found that cost benefit ratios achieved in Africa for adaptation projects funded by the Green Climate Fund (GCF) range from 2:1 to 10:1. While actual returns depend on many factors - such as economic growth and demand, policy context, institutional capacities and condition of assets – the fact is that there are many viable opportunities to deliver projects that will not only enable adaptation, but drive mitigation and socio-economic benefits as well.
By way of example, the IPCC report highlights examples of programmes around agroforestry in Africa, which can store between 20% and 33% more soil carbon than conventional agriculture, while also reducing fire risk. It points to sustainable fishing as a nature-based solution of managing marine commercial species, which maximises the catch and food production and contributes to the UN’s zero hunger goal. There are adaptation projects around urban greening, which show that homes with shade trees in cities where air conditioning systems are common can save more than 30% of residential peak cooling demand.
But despite the positive business case, barriers to adaptation remain. These are largely technology-based and institutional barriers, but they will have to be addressed before the numerous benefits of adaptation can be fully unlocked across the continent.
In addition, we need to improve existing measurement approaches if we are to effectively demonstrate the value that can be generated through adaptation initiatives to support the investment case. There will be a big role for private sector to collaborate with government and other stakeholders in this space to align their sustainability initiatives and Environmental/ Social/ Governance programmes to support improved outcomes for all stakeholders.
That way, we can overcome Africa’s existing backlogs, and move to an adaptation future that positions the entire continent for success.
Chapter 4
The private sector is key to Africa’s adaptation efforts.
COP26 highlighted the funding requirements need to tackle climate change, with the private sector playing a critical role.
COP26 provided a massive wake-up call to the world in terms of what it will take to limit global warming to acceptable levels. It also highlighted the magnitude of the financial support needed to enable developing countries to achieve their transition to low-carbon development pathways and adapt their societies to the impact of a changing climate.
Public funds alone will be insufficient to meet adaptation needs, especially as costs will increase along with the effects of warming. The problem is that while the private sector accounts for 85% of all investments worldwide, and represents close to 75% of global climate finance flows, private investment activity is unevenly distributed.
In Africa, the mobilisation of private finance by developed country governments, through bilateral and multilateral financial support, is significantly lower than other regions. Between 2016 and 2018, Africa made up only 17% of mobilised private finance relevant for climate change, leading to a major funding gap. This is going to have to change.
Private Sector Investment Flows
85%The private sector accounts for 85% of all investments worldwide, and represents close to 75% of global climate finance flows, while private investment activity is unevenly distributed.
But to make this change happen, public mechanisms will have to be put in place to leverage private sector finance for adaptation. This will include reducing regulatory, cost and market barriers through blended finance approaches, public-private partnerships, or innovative financial instruments and structuring in support of private sector requirements for risk and investment returns, such as green bonds.
EY Africa Corporate Finance Lead Sandra du Toit says the private sector will have to be involved in adaptation discussions as regulations around climate change increasingly affect them – the Climate Change Bills in countries like Nigeria, South Africa and Uganda being a case in point. Without participation, the sector will not be able to shape the investments needed and participate effectively in the opportunities and risk mitigation efforts.
“The private sector has been relatively uninvolved in adaptation discussions to date, but this will clearly have to change if we’re going to unlock the levels of finance needed to meet Africa’s funding requirements. It’s going to have to be a collaborative effort,” said Du Toit.
This type of collaboration is not without precedent. In South Africa, state and non-state actors worked closely together to drive water resilience in Cape Town. Those learnings should be built on to ensure that the evolving coordination mechanisms, including the Presidential Climate Commission and national business bodies, are able to drive significant private sector involvement and enable their diverse capabilities and expertise.
There are major opportunities for the private sector around nature-based solutions for delivering mitigation, adaptation and broader socio-economic benefits to the continent. One example of this is driving carbon offsets through forestation and reforestation.
Clarifying the sector’s priorities and ensuring enhanced measurement approaches that consider not just financial but also environmental/ social impacts for these types of projects will be an essential point to unlocking the finance and skills the continent is going to need on the road to net zero.
Chapter 5
Careful where you plant that forest.
Nature based solutions offer opportunities but there is no silver bullet. Careful consideration of risks and benefits of nature based solutions is imperative.
Nature-based solutions (NbS) have become a major focus area for private sector organisations looking to provide adaptation and mitigation benefits for climate change especially through carbon offsets, as well as contributing to other sustainable development goals.
However poorly conceived and designed nature-based projects could end up making things worse. As the IPCC’s sixth assessment report points out, the wrong project in the wrong place could lead to multiple negative impacts, including creating competition for land and water resources, reducing human well-being or failing to provide mitigation that is sustainable in the long-term.
The report highlights large-scale reforestation and afforestation projects, with ‘tree planting’ typically considered as part of offsets and mitigation approaches through initiatives like AFR100 (the African Forest Landscape Restoration Initiative), which aims to restore around 100 million hectares of land on the continent by 2030. Generally projects that maintain and restore existing indigenous forests are a win-win, maximising benefits to biodiversity, adaptation and mitigation.
The problem is that many areas targeted by projects in Africa have not been identified correctly. Remote-sensing studies can often overestimate land available for tree-planting potential, as they can fail to distinguish between degraded forest and naturally open areas.
Often studies view Africa’s open ecosystems like grasslands, savannas, shrublands as ‘degraded’ and suitable for afforestation. They’re not: these are ancient ecosystems that have evolved over millions of years. These areas do not naturally house forests, and planting forests there could have the opposite effect to that intended, by damaging biodiversity, and increasing vulnerability to climate change and exacerbating greenhouse gas emissions.
Because afforestation prioritises carbon sequestration at the cost of biodiversity and other ecosystem services, it’s uncertain how much carbon can be sequestered as, compared to grassy ecosystems, afforestation can reduce belowground carbon stores and increase aboveground carbon loss to fire and drought. In other words, afforested areas may store less carbon than ecosystems they replace, while reducing livestock forage, eco-tourism potential and water availability. In addition, careful consideration for the species to be planted is essential as certain species can increase fire hazards and decrease biodiversity and water resources.
Another area where decisions will need to be weighed carefully will be in terms of infrastructure decisions. In Africa, the climate risks that the water, energy and food sectors will face will be heavily influenced by the infrastructure decisions that governments make in the near term.
For example, the African Union’s Programme for Infrastructure Development (PIDA), along with other national energy plans (jointly referred to as PIDA+), aim to increase hydropower capacity nearly six-fold. However, these plans could be significantly impacted by reduced water flows that will endanger the delivery of benefits.
What this means is that companies should be careful when devising their approaches to carbon offsets and more broadly climate change projects, says Duane Newman, a partner at EY South Africa. “When it comes to adaptation and mitigation projects, there’s no magic bullet, or obvious choice. Every project should be carefully considered across multiple dimensions, and broad stakeholder discussions will be critical to getting the balance right,” he said.
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Summary
With COP27 around the corner, there’ll be continued emphasis on closing the funding gap in Africa, how to address climate change, and clarity on adaptivity and the private sector.
