Can Africa navigate climate finance amid high costs?

Africa is faced with a daunting $2.4 trillion climate finance gap, hindering the continent's green sector as financing costs remain 5-6 per cent higher than in comparable markets. CNBC Africa delved into this complex issue with Katie Hill, Partner and Associate Director of Climate at BCG-Nairobi. Hill shed light on the challenges plaguing green finance in Africa, emphasizing the higher cost of debt and return expectations for investors, making climate projects more capital-intensive. This, in turn, dampens investment in crucial sectors like renewable energy, e-mobility, and regenerative agriculture. Despite the continent being rich in green minerals, the 'zip code premium' that elevates costs in Africa poses a significant challenge. Hill pointed out that Africa holds a unique advantage in the global shift towards green industries, with vast renewable energy potential, critical minerals, and young, educated workforce. However, she stressed the importance of building local value chains to maximize these resources' benefits domestically. When comparing African nations attracting climate funding effectively, Hill highlighted countries like South Africa, Nigeria, Kenya, and Egypt, which receive 80 percent of capital inflows on the continent. However, macroeconomic uncertainties and volatility deter potential investors. While stability and predictability are essential for attracting capital, de-risking strategies at the project level and innovative finance instruments can further bolster investments. In terms of capital inflows, both equity and debt play critical roles in funding green projects across the continent. Hill underlined the need for Africa to enhance strategies to attract more foreign direct investment, especially when compared to other developing markets like Asia and Latin America. Moreover, she emphasized the importance of portfolio value creation to support companies and projects for sustainable growth and investor returns. Despite the dominance of energy investments, Hill urged for greater focus on sectors like agriculture, mobility, infrastructure, and manufacturing within the broader spectrum of green industries. While energy projects attract more capital due to their maturity and impact potential, agriculture and biodiversity sectors remain underfunded, signaling a need for diversified investment portfolios and enhanced focus on sustainable development. Unlocking Africa's green finance potential requires a concerted effort to address challenges such as high financing costs, macroeconomic instability, and investment gaps in crucial sectors. By leveraging the continent's natural resources and skilled workforce, coupled with strategic financial interventions and regulatory frameworks, Africa can navigate the climate funding gap and emerge as a key player in the global green economy.