Following the recent COP28 summit, where world leaders gathered to address the pressing issue of climate change, African leaders have turned their attention to the role of finance in shaping the continent’s future, particularly when it comes to climate and the environment. Wale Shonibare, director for energy, financial solutions, policy and regulation at the African Development Bank, went so far as to suggest that the continent needs to “create a new financial architecture”. But does Africa really need a climate-centric financial architecture and if so, what should it look like?
The most apparent answer among African leaders is that changes need to be urgently made as vulnerable populations are suffering. Not only do they believe that more is needed to ensure Africa is in a position to build climate resilience as a developing country, but progress is slow, with countries still to agree on measurable targets and guidelines. What’s more, despite contributing just 4% of global greenhouse gas emissions and being among the regions most affected by climate change, Africa is being held to many of the same standards as more developed nations.
AFRICA IS SHORT-CHANGED
Further warnings from Dr Akinwumi Adesina, president of the African Development Bank Group, state that Africa stands to lose up to USD25 billion per year due to the new EU carbon border tax. This tax could put immense pressure on Africa’s trade and industrialisation progress by penalising value-added exports such as steel, cement, iron, aluminium, and fertilisers. He further emphasises that, with Africa’s energy deficit and reliance on fossil fuels, the continent may be forced to export raw commodities to Europe. This could lead to further de-industrialisation in African countries.
With these concerns noted, there may very well be a need for a comprehensive financial architecture to address these challenges. Private-public sector partnerships are important in delivering a new financial architecture, with examples such as the (PAPSS).
However, there’s still a need for the rest of the world to take steps to close the adaptation gap with quality financing so that Africans do not get left behind.
One of the key aspects of these warnings is the impact on Africa’s ability to participate in the global energy transition. The continent received only 2% of the USD3 trillion of global investments in renewable energy over the past 20 years. This trend will negatively impact Africa’s competitiveness in exporting to Europe. As such, there is a need for Just-Trade-for-Energy Transition (JTET) policies to enable Africa to pursue its renewable ambitions without compromising its trade prospects.
DIGITISATION A CRITICAL ASPECT
It can also be argued that Africa’s best trade opportunities lie within the continent itself. According to reports, the new Africa Continental Free Trade Area (AfCFTA) is estimated to increase intra-Africa exports by over 80% by 2035. This presents a compelling case for exploring how intra-Africa trade can contribute to global investment and bridge the finance gap required for sustainable development across the continent.
Digitalisation is another critical aspect to consider around the topic of Africa’s financial architecture. The digitalisation of payments and the facilitation of cross-border intra-Africa payments play a vital role in the continent’s economic growth and align with the goals of the AfCFTA to promote sustainable trade and economic integration. This is where private-sector initiatives, along with those of public entities, can play a pivotal role in shaping a financial architecture that’s not only resilient to climate-related challenges but also fosters sustainable development.
Another point to consider is the potential consequence of rapid decarbonisation on merchandise exports, which could essentially cut merchandise exports by a staggering USD150 billion. This further underscores the need for a financial architecture that balances environmental sustainability with economic resilience.
IMPACT ON AFRICAN FINTECHS
The climate crisis is also impacting African fintechs. African fintechs are vulnerable to the same disruptions as the average African business or individual. The digital infrastructure, on which fintech heavily depends, can be compromised as climate change intensifies. As such, proper systems and governance need to be adhered to for African fintech companies to properly address these challenges.
Despite these issues, African fintechs have been able to provide solutions to several challenges facing the continent, enabling the delivery of financial solutions that were not available before. By incorporating climate resilience into their technological infrastructure, businesses can ensure continuity and contribute to Africa’s broader efforts to mitigate the impacts of climate change. Seeing fintech businesses as part of the solution to the deficit Africa has in funding can contribute to climate resilience and promote decarbonisation.
The call for climate-centric financial architecture becomes more compelling as Africa navigates various climate change challenges within its complex financial landscape. However, it should be a collaborative effort involving both the public and private sectors. There should also be an emphasis on intra-Africa trade, digitisation and sustainable business practices. While the African continent faces many challenges, it is also a region brimming with opportunities for investment and growth. But, in order to truly seize these opportunities, crafting a financial architecture that aligns with these values could be necessary to position Africa as a key player in sustainability.
Funmi Dele-Giwa is general counsel, head of GRC
