Developing Nairobi as a financial hub will open the region to climate finance
When it comes to the big debates about climate change, Africa is the forgotten continent. It receives less than 3% of global climate finance and yet 30 out of the 40 most climate-vulnerable countries in the world are in Africa. It contributes the least to global warming and yet extreme weather events are growing in both frequency and severity with a shocking knock-on impact on biodiversity loss.
However, while we tend to see Africa merely as a victim of climate change, this ignores the fact that could be a large part of the solution as well.
From the forests of Gabon to the Congo Basin in Central Africa, the continent is rich in natural capital while countries like Kenya have been leading on the shift to green energy with 90% of its energy production already in renewables. Although progress has been too slow and fragmentary, African countries have been getting themselves ready to receive a much bigger share of global climate finance. Once this is invested in green projects, it will benefit the whole planet.
Kenyan President Uhuru Kenyatta’s visit to London has highlighted Kenya’s role as a leader in green finance. The country has already removed tax on interest on green bonds. It has drafted a green fiscal policy incentives framework covering the entire whole economy and is now considering a carbon tax as well. In addition, Kenya’s inaugural sovereign green bond is now imminent.
This is significant in several ways not least that it is about a new type of relationship between sub-Saharan Africa’s 3rd biggest economy and the UK; one based on investment rather than aid, whilst at the same time showing how smart, targeted British support, which has been crucial to the development of the green bond, can help unlock that investment.
There can be no better symbol of that new relationship than the agreement, announced between the City of London and Nairobi’s International Financial Centre (NIFC), backed by one of the UK’s biggest financial institutions. NIFC has been established to make it easier and more attractive for firms to offer financial services and related activities in Kenya and the region, reinforcing Kenya’s position as a hub for investment in the region. The hope is that the NIFC will provide a huge boost to investment in Kenya, and it is expected that an increasing amount of this will be from the UK and green.
For UK investors who may have shied away from what they regarded as risky investments, green bonds offer an attractive route to investing in developing markets because of the greater transparency requirements they need to be verified as genuinely green.
For Kenya and other developing countries, green finance is attractive because of the huge growth in ESG funds chasing investment opportunities. This is particularly important at a time when these countries are having to deal with the financial impact of the Covid pandemic.
If they are to truly capitalise on this opportunity, they will need to provide assurance to investors that they can offer a stable, regulatory environment. Having a clear tax and contract enforcement framework is vital. But they will also need to demonstrate their commitment to a green economic development pathway.
One of the biggest challenges for Kenya and other African countries is to create investment grade projects that are large enough to absorb the capital that is already available. For instance, a large institutional investor in the UK might look for a minimum investment size of $50-150m but they might only be allowed to take a small proportion of the total capital being raised. These two factors together would imply a total deal size that is huge by African standards.
So more effort needs to go into, first, supporting green project transaction development, and, secondly, creating the guarantee structures that will help to get the project financing over the line.
We also need different conduits to pool institutional capital and give big investors diversified exposure to a basket of green projects, so that Africa can get the capital it needs to build a sustainable future. That is where initiatives like the NIFC can play a big role in ensuring that Africa is no longer the forgotten continent but a leader in the green finance revolution.
This opinion piece was originally published in the print version of the East African on 30 July 2021.