Winfred Kinuthia on the state of climate finance in Africa

What notable trends and patterns have you seen in the current landscape of climate finance into Africa, distinguishing between public and private sources?

Multiple studies estimate Africa’s climate finance needs at US$ 2.8 trillion between 2020 and 2030 to meet the continent’s Nationally Determined Contributions (NDCs), about US$ 250 billion per year. According to the Climate Policy Initiative (CPI), Africa received climate finance flow of USD 30 billion in 2019/2020, only about 10% of the demand. Of this, the public sector contribution was 86% while the private sector contribution was 14% which is comparatively minimal. A report by the Africa Development Bank Group estimates that the private sector needs to mobilise approximately US$ 213.4 annually to close the climate finance gap supplementing public finance sources.

The flow of climate finance from the private sector is heavily skewed to mitigation projects (81%) at the expense of adaptation. This is driven by the economic viability of mitigation projects compared to adaptation projects which are perceived to render more of a social benefit. Given the continent’s high vulnerability and low contribution to climate change it is paramount to catalyse the flow of climate finance from the private sector aligning the flow to the continent’s NDCs and adaptation needs.

What are the primary risks hindering the flow of climate finance from the private sector into African Markets, and how can these be mitigated?

Sustainability of investment

The climate space in Africa is largely affected by macro-economic challenges as such the sustainability of investments is not guaranteed.

Weak policies, institutions, and regulatory frameworks.

Delay in development and implementation of appropriate institutions, policies and regulatory frameworks that support investment in climate change deters investment from the private sector.

Technical capacity gaps leading to scarcity of feasible projects.

Few enterprises are able to put together strong project concepts and proposals that would lead to financing from risk averse private capital investors in the climate space.

These risks can be mitigated by utilizing a combination of appropriate funding instruments and interventions that de-risk the climate space catalysing private climate finance flows. These are utilized by the Mastercard Foundation Fund for Resilience and Prosperity. The Fund aims to support Small and Medium-sized Enterprises (SMEs) across the agriculture, climate adaptation and digital economy sectors in 20 countries in Sub-Saharan Africa. The main objective is to unlock enterprise growth and catalyze, scale-up and sustain the creation of dignified and fulfilling work opportunities for young women and men.

How significant is the role of grant funding coupled with technical assistance in de-risking SMEs operating in the green economy?

Grant funding is patient capital which when directed to SMEs in the climate space allows for evidence of sustainability. This acts to de-risk SMEs and lays the foundation for other funding instruments such as loans and equity, increasing private finance flows to SMEs within this space. When coupled with technical assistance the capacity of players in the field is enhanced leading to development of feasible projects that can attract private investment.

The Mastercard Foundation Fund for Resilience and Prosperity (FRP) will be offering direct financial support through a challenge fund that has a grant aspect to address the resource flow barriers faced by SMEs looking to scale-up and, in turn, create and sustain employment opportunities for young women and men.

Matching funds refer to the grant recipient’s contribution to the costs of implementing a project. Grant funding set up with a matching fund element ensure that recipient organizations co-invest in the funded project meaning risks are shared and incentives are aligned. The Mastercard Foundation Fund for Resilience and Prosperity (FRP) has a matching fund element which works to further show evidence of sustainability catalysing the flow of climate finance from the private sector.

With a focus on climate smart agriculture within the agribusiness challenge fund and the larger climate space in the climate impact challenge fund, the fund is aimed at upscaling climate finance flow in Africa.

How do you assess the scalability of de-risking SMEs in the green economy through grant funding?

There are some key factors to consider when assessing scalability of grant funding in de-risking SMEs in the green economy. Firstly, the effectiveness of the business models and the operational capacity of the SMEs is important when assessing scalability. Where these fall short steps should be taken to reinforce them.

The Mastercard Foundation Fund for Resilience and Prosperity is designed to reinforce these through the Technical Assistance Facility which allows the Fund to add value beyond financial support through technical assistance and capacity building to address the barriers concerning human capital and access to markets.

Secondly access to markets as well as networks and partnerships determines the scalability of the de-risking aspects of grant funding for SMEs in the green economy.

The Mastercard Foundation Fund for Resilience and Prosperity is designed to reinforce these through the Connect Fund which allows for provision of investor readiness support to the SMEs and negotiation of partnerships with potential financiers to ensure sustainability and growth.

Lastly an important determinant of scalability that needs to be assessed is the policy and regulatory environment within which the SMEs in the green economy operate. The Mastercard Foundation Fund for Resilience and Prosperity is designed to reinforce these through the Convening and influencing intervention which brings together relevant stakeholders to encourage an enabling business environment through experienced partners and digital platforms to drive systematic change and address the issues that impede the creation of work opportunities for the youth, especially young women.

You worked with a diverse pool of clients on programs all over Africa, how have these partnerships enhanced the mobilisation of climate finance?

Climate finance flows to Africa are far below the projected climate finance needs with estimates showing a climate finance gap of 90%. With majority of climate finance flowing from the public sector there is need to catalyse private sector investment in order to fill this gap.

Through the management of various Challenge Funds implemented across Africa funding enterprises within the green economy, we have been able to de-risk the climate space allowing for crowding in off funding instruments from the private sector to these enterprises.

The Mastercard Foundation Fund for Resilience and Prosperity is contributing to climate finance through the Agribusiness Challenge Fund which is looking to support SMEs within the climate smart agriculture space as well as through the larger Climate Impact Challenge Fund.