Figure 1: ESG Bonds by Sub-Saharan African Issuers
SSA countries received insufficient financial pledges at COP26 to cover their full climate adaptation needs, but they did receive substantial commitments
UNFCCC estimates indicate that about USD125 trillion of direct capital investments are needed to transform the global economy and avoid the worst physical impacts of climate change by 2050. Of this, about USD32 trillion of investments is needed by 2030, out of which USD1.7 trillion (5.3%) of this amount is required in SSA - that is, USD170 billion per year. This equates to 100% of the region’s GDP in 2020. Renewed pledges for adaptation made at COP26 equate to USD40 billion in funding by 2025, but this falls short of estimates by the UN Environment Programme (UNEP) that annual adaptation costs for developing countries would total USD70 billion.
Despite the huge financing challenges ahead, some SSA countries did manage to secure important financing deals at COP26 to support their individual energy transition plans. South Africa - the continent’s most industrialized economy and largest carbon-dioxide (CO2) emitter - secured a USD8.5-billion deal under the Just Energy Transition Partnership with the United States, the European Union, and several individual European countries, a climate-finance swap to close several coal-fired power plants and launch renewable projects to replace them. However, to unlock this funding, the South African government is very likely to be required to build a viable pipeline of eligible projects.
SSA governments face growing difficulty in attracting funding for carbon-intensive projects since investors are focusing increasingly on environmental, social and governance (ESG) objectives
There is a broad consensus among the world’s leading donor countries to end international financing of projects producing carbon-intensive fossil-fuel energy sources, namely coal and upstream oil. The pursuit of ESG objectives has already resulted in the withdrawal of financing commitments to projects in the sub-Saharan Africa region. For example, in November 2021, China announced that it would no longer finance a 3-megawatt coal power plant in South Africa’s Limpopo province.
Narrow support for midstream and downstream natural gas projects remains, but upstream natural gas projects face even greater financing challenges. The The EU green taxonomy deems natural gas a ‘transition’ energy source, making the investment in natural gas projects compatible with the EU’s 2050 net-zero goal. Similarly, the World Bank stated that it would, in “exceptional circumstances”, support upstream natural gas projects. Nonetheless, financial disclosure requirements regarding carbon emissions, pressure from shareholders, and concerns of ‘greenwashing’ among potential investors when raising capital appear increasingly likely to reduce the appetite of regional and domestic financial institutions, including sovereign wealth funds, to continue supporting hydrocarbon projects. Consequently, fossil fuel projects are likely to face increasing difficulty in finding investment guarantees, political risk insurance, and performance bonds,typically sought to mitigate project risks, perceived to be high in SSA.
Regional multilateral development banks (MDBs) and private capital sources are unlikely to fill the gap left by traditional financing sources
Given that funding is increasingly likely to be prioritized and shifted towards clean energy, innovation, and energy efficiency, some SSA countries should benefit from the opportunities of mitigation and decarbonization in key sectors such as power, transport, agriculture, construction, mining, and natural gas
Figure 2: Sub-Saharan Africa: Minerals for Energy Technology
This article was published by S&P Global Sustainable1 and not by S&P Global Ratings, which is a separately managed division of S&P Global.