Making climate investments pay
African populations are particularly vulnerable to the effects of climate change, but what potential does private markets hold to commercialise sustainability solutions?
African populations are particularly vulnerable to the effects of climate change, but the continent also holds many of the potential solutions to mitigating and adapting to some of the worst impacts. So what’s the latest thinking in private markets as to how these could be commercialised?
Investing to mitigate and adapt to climate change incorporates a whole range of investment types and sectors, from renewable energy and water efficiency through to nature-based solutions. While there are clear routes to generating returns from some of these areas, others are far more nascent and will require the creation of a market to reach commercialisation.
“Private markets have a pivotal role to play in decarbonising Africa’s economies and in building adaptation and resilience to climate change,” says Dorothy Kelso, Managing Director of SuperReturn. So where are GPs and LPs focusing today? And could we see the creation of new asset classes that harness the power of nature to solve man-made disasters? Here are some of the developments in Africa’s vibrant markets.
“Investing behind the climate and achieving the SDGs are core to Africa’s development,” says Anne-Marie Chidzero, Chief Investment Officer at FSD Africa Investments. “The continent has such a wealth of natural capital, from the sun, sea and coastline, to forests and mangroves. We need to find financial solutions to unlock the value that nature can provide, while driving economic growth.”
Established by FSD in 2022, the African Natural Capital Alliance is one attempt to find some of these solutions and get financial firepower behind them – its members include insurance companies, banks and private markets firms. As Chidzero says: “We are investing to build out the financial system and working closely with other investors to create asset classes around climate and biodiversity. We need financial services businesses to shift their thinking – insurance companies, for example, are finding their bottom line is hit by unusual weather patterns, such as huge hailstorms, flooding and drought – and we need to create a financial response to the opportunity. Mangroves are so important for capturing carbon dioxide, but we need to find ways of making them an asset.”
“By definition, natural forest is biodiverse,” says George McPherson, Managing Director of Criterion Africa Partners. “There is often criticism of plantations, but these can also contribute to biodiversity because they reduce the deforestation pressure on natural forests.” He points to one of the firm’s investments in Tanzania as an example. “It manages 28,000 hectares of forested land, on which it has planted 8,000 hectares of teak,” he explains.
“That protects 20,000 hectares of natural forest – that’s plain to see because when you look at the land beyond the 28,000 hectares, all the forest has gone.”
McPherson also says that firms the changing the way they assess forestry investments. “Historically, as an industry, we have underwritten companies based on the cash flows attributable to wood flows if you are selling, say, logs, plywood or lumber,” he says.
“But now, in addition to this, we can look at carbon flows so you can manage forestry assets in a way that maximises both wood flow and carbon flow. That is opening up the investable universe for forestry assets.”
Norfund, for example, started investing in water two years ago. However, says, Investment Manager Rivhatshinyi Mandavha, Norfund is not just deploying capital in water assets. “We are investing in agriculture because it accounts for 80% of the water wasted in Africa,” he says. “If we are looking at sustainable farming and climate resilience, we have to make water efficiency a priority.”
“When you consider climate resilience and mitigation together, the positive outcomes are compounded,” says the Chief Investment Officer (CIO) at a renewables alternative investment platform. “Infrastructure today needs to be climate resilient. As we saw last summer when the Rhine water level dropped, the hydro-power plants couldn’t run and the barges couldn’t transport goods. Africa does not have the legacy infrastructure that Europe is now having to address. That means we can plan for climate resilience from the outset, giving us the chance to leapfrog using innovation, just as the continent did with mobile telephony.”
And this is leading investors to new areas. “Climate adaptation, mitigation and resilience interventions are offering new and expanding opportunities in sectors adjacent to renewable energy, including in transport, agriculture, forestry, water and waste management - which are all of importance today,” says Teni Noti, Coverage Manager for Southern Africa at British International Investment.
“Blended finance will be an important tool,” adds Davis. “This is especially so in the early phases of green technology and investment because even where it is well proven, there usually still some early-stage risk. Blended finance can help manage that down for GPs.”
“Carbon credits are an interesting space,” says the CIO. “There is appetite for these, but we’ve found that the accreditation process is complex – and especially so for Africa-based developers. There is a question mark around how viable they can be as a source of revenue for many projects on the continent, at least in the short to medium-term.”
For others, though, their use could be more immediate. “Despite the negative headlines about carbon credits recently, they remain the least bad means of putting a price on carbon and monetising the benefits of carbon mitigation,” says Maxime Bayen, Operating Partner at Catalyst Fund. “Start-ups, for example, can use carbon credits to subsidise their products and there can be strong additionality.”
“It’s currently a leap of faith because we don’t have sufficient data, but we also don’t have the luxury of time,” says Chidzero. “It’s very difficult for financial institutions to understand and underwrite the risk they are taking because they don’t have the data. These are new markets – forests, mangroves and scaling up solar energy for people who don’t have access to power. The good news is that Africa can leapfrog on data because of the digital landscape.”
Davis agrees that there is a data gap, but that there is an interim solution before information on African markets starts coming in. “Sometimes, you have to be pragmatic and use proxies, even if they are not based on Africa,” he says. “Over time, technologies such as AI, blockchain and even drones will make data more available and reduce the costs of collecting it.”
