Innovative Finance Essential In Growing Africa’s Climate Investment

Africa presents a massive investment opportunity for investors to advance the deployment of climate solutions in the coming decade according to a new report Climate Finance Innovation for Africa. However, this will require innovation in financing structures and the strategic deployment of public capital to ‘crowd-in’ private investment at levels not yet seen.

Current levels of climate finance in Africa fall far short of needs. Africa’s USD 2.5 trillion of climate finance needed between 2020 and 2030 requires, on average, USD 250 billion each year. Total annual climate finance flows in Africa for 2020, domestic and international, were only USD 30 billion (CPI forthcoming), about 12% of the amount needed.

Barriers related to shallow financial market depth, governance, project-specific characteristics, and enabling skills and infrastructure have stifled private investment in African climate solutions to date.

To overcome these challenges will require innovation in financing structures. But there is no one-size fits all. Public and private investors must tailor their financial instruments and strategies depending on the acute or chronic nature of the barriers identified.

Recommended actions for increasing deployment of innovative finance include:

• Identify and understand barriers constraining finance by sector and geography. Private investors must have the data to assess the risks affecting each investment decision based on its geographic and sectoral context. Building on their role as a catalyst for change, public investors should then deploy capital in a targeted way to address the specific barriers constricting private investment.
• Match instruments with barriers. Public and private investors must tailor their financial instruments and strategies depending on the acute or chronic- nature of the barriers identified. The framework developed in this CPI study can serve as a toolbox for investors to access when reviewing investment opportunities in climate solutions.
• Match instruments with project and technology lifecycles. As climate investments are typically long-term opportunities, investors must look to deploy different financial instruments and strategies in direct response to lifecycle-dependent considerations.
• Enhance engagement and co-financing with local stakeholders. International private and public investors must work in collaboration with local stakeholders. This can help build capacity among local investors and inform targeted action by governments to improve investment performance.
• Support innovation by establishing conducive policy and regulatory frameworks. Governance barriers remain one of the key impediments to sourcing climate finance in Africa. Most importantly, policymakers and regulators can foster climate finance innovation by adopting policy frameworks and long-term roadmaps.

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