Sustainable Views: The Africa COP

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I am pretty confident that most of us know what COP is. The United Nations Climate Conference, the conference Conference of the Parties, COP. It meets every year and has been doing so since 1995, though COVID disrupted plans 2 years ago. It is where government representatives meet and climate commitments are announced. But it isn't just a gathering of heads of state, ministers, public sector officials, and environmental observers. Increasingly, business and finance have been turning up, organizing side events and making announcements of their own. Last year in Glasgow, GFANZ, the Global Financial Alliance for Net Zero, spareheaded by former Bank of England Governor Mark Carney, said that it had the support of banks and investors with a combined $130 trillion in assets. COP26 became a sort of Finance COP. This year, COP27 will be hosted by Egypt in Sharm el-Sheikh. Some hope it will become known as the Africa COP. I'm recording this a week from COP. And over the past few weeks—months, really—there have been growing talks about the responsibility of the world's richest countries towards developing economies. Like many other emerging markets, African countries' contribution to climate change is minuscule, but they are among the most exposed to its effects. They are also under pressure to decarbonise, to keep fossil fuels in the ground. As things stand, this would slow their economic growth, while support from industrialised economies is largely lacking. Some of those African countries are pushing back. One of our writers, James King, has recently looked at African governments' point of view on all of this. James has reported on and traveled across Africa for a number of years.

You know, Africa bears almost zero responsibility for the current climate crisis. I think estimates put Africa's emissions since the industrial era at around 2% of the global total. So it's almost nothing. But today, the continent is being hit possibly harder than anywhere else in terms of the consequences of this emergency. And you can see that with respect to sea levels rising faster across Africa than elsewhere, and also in terms of droughts and other climate disasters that are hitting the most vulnerable communities on that continent the hardest. And so from the perspective of African governments, this is an extremely urgent question. And I think that we saw a meeting of Africa's climate and finance ministers gathering in Cairo in September They pointed to the fact that they are bearing the brunt of the crisis, but developed markets have failed to live up to their promises, particularly around funding. So back in 2009, the advanced economies promised Africa $100 billion a year in total financing to support their climate needs, and so far they have failed to live up to that promise and they're falling still well short of that total. So I think there's some real frustration on the part of African governments about that failure. And I think that they're pushing back now and they're saying, look, we, we can't have an abrupt divestment from fossil fuels when we bear no responsibility. And we're also getting no support from, from the advanced markets.

And it's not just a matter of fairness. What happens in Africa in terms of climate change is likely to have repercussions elsewhere in the world.

It really does in a way, because there's been some, some fascinating research around this in terms of the future, uh, of Africa's growth trajectory in terms of its economy, but also in terms of its population. And what's interesting is that when you look at the world today, across Europe and large parts of Asia as well as Latin America, we're seeing population growth either stall or even reverse in some cases. But in Africa, it's actually the opposite picture. So population growth according to the UN is expected to really accelerate between now and 2060, with the total number of people increasing to 3 billion by 2060 from 1.3 billion today. And with that population growth, we're going to see CO2 emissions rise in tandem, and there's some research by Jack Goldstone, who's from George Mason University, that suggests that based on that trend, and Africa's CO2 emissions could be equivalent to what the US is putting out today if its per capita increases on the continent match that of India today. So basically, it does matter And, you know, it will be, as Jack Goldstone says, the battle for Earth's climate will be fought in Africa.

So what can be done? Private capital, as always, has a role to play. Many, including the Net-Zero Asset Owner Alliance and Investor Group, are calling for greater use of blended finance. This type of financing means that a development bank would absorb part of the risk of an investment and by doing so attract larger pools of private capital. But there is more to it. Yeah, it's a very complicated issue.

I think, you know, blended finance certainly has a role to play, particularly in terms of catalyzing, you know, more private sector participation in Africa's climate finance needs. Looking at some research today, I think, you know, private, the private sector contribution to Africa's climate finance is around 14% of the total today, so it's extremely low and it's low relative to other emerging regions. So I think that's an interesting point to emphasize there. And the other question here is, you know, around the risks, either real or perceived, that exist when looking at sort of the investment landscape in Africa. And I think that, you know, a lot of the issues that are sort of highlighted by perhaps the investment community are valid in some sense because you could look at somewhere like South Africa, which has really extensive climate finance requirements today and one of the largest needs actually on the continent. But as we speak, the government is potentially facing greylisting by FATF, which would have an absolutely devastating impact on that country's investment climate. And that links back to poor governance and that's corruption and that's other issues issues which are domestic in nature and which will have in turn a pretty significant impact on the country's potential as a climate finance destination, if you like. I think there's a complex web of issues here. In terms of local capacities, in terms of the financial marketplaces and so on, there definitely is a role for development finance institutions and other players to step up. And to try and improve, you know, some of those local capacities, expertise, and know-how when it comes to climate finance. So I think there's a few dimensions to that question, but none of them are easy to solve.

That was James King, one of our Sustainable Views correspondents. I also recently caught up with Gillian Macell. She has a consultancy, Resilience Capital Ventures, based in Washington, D.C. Gillian has an athletic career. She's worked in Finance at JPMorgan, in Development Finance at the World Bank Group. She has worked in academia and has led projects across emerging markets, including Africa. I first virtually bumped into Gillian on social media. We started talking. She has strong and interesting views. She even wrote an opinion piece for Sustainable Views on sustainable finance and how it is just a first world option. You will find the link to her piece in the show notes. So I asked Gillian about blended finance too.

The facts are that there is $80 billion of financial capital that comes to emerging markets. These are estimates that are actually quite current. And of that, only $14 billion come from the commercial sector. So in fact, developing banks, philanthropists, foundations, and governments you know, so old-fashioned bilateral development aid, it's doing maybe 5 times as much as commercial finance. And so while there is this conversation about the need for there to be more political will and for different kinds of architectures and so on, that's not the issue. Because the part of the financial system that is actually mispricing risk is the commercial side of the equation. And that has always been the case. So for example, commercial investors would have completely missed the African telecommunications revolution 20 years ago. Because their own systems of pricing risk are not very familiar with the conditions on the ground in emerging markets, and they actually look at some of the wrong metrics. And so, yes, having blended finance architectures would help, but you would have to have the kind of blended finance architectures that we speak about at Resilience Capital, which is blended capital finance that is not only concerned about where are the sources of financial capital going to come from, but actually seeing blended finance as a strategy that involves more than financial capital. Because unless you are actually shifting perceptions, unless you are improving the ability of the sources of capital to actually allocate financial capital, which means that you need knowledge capital, political capital, social capital. You need more contextual understanding. You need to have subject area specialists in those transactions. You need not only to hire emerging market specialists, because that would suggest that you're still maintaining the same structure of the financial system. What you need to be doing is to be building up and strengthening the financial ecosystems around the world. So you need to have transactions where the structure of the transaction involves, you know, the leading players as well as domestic and regional players, because then it's not about, you know, I'm not going to call any names, but it's not about bulge bracket banks. I've worked for them hiring emerging market specialists. It's about the financial markets in the developing world being strengthened. Okay.

Financial markets in the developing world need to be strengthened. As we continue talking, Gillian said that she's seeing some signs of progress in some parts of those markets, which is encouraging. But what about COP? Is it going to help discussions around climate financing? Is it going to be the Africa COP?

So it is the Africa COP. And I'm so delighted to see the kind of positioning and the really sophisticated analysis that is coming out of a number of organizations— the Center for Global Development in Washington, D.C., the Africa Center in New York, the Sustainable Energy for All project all led by really brilliant Africans, so Africans based in the diaspora. And what are the things that they are bringing to the table? They're bringing several things to the table, but I think the most important is that Africa represents— the climate needs of Africa, including energy, represents some $3 trillion by the end of the decade. That's a fairly sizable number. It also would be investment that would be geared at providing electrification systems, because what African leaders are saying is that it is not okay for the West or, you know, advanced wealthy countries to determine what the climate agenda of any developing country region is, and certainly not to determine what the African climate agenda is. Because, for example, the international NGOs who are very strident in their calls for all fossil fuels being left in the ground And, you know, that sort of thing is gathering momentum outside of the continent. And the sanguine voices and the pragmatic voices across the continent, including places like UNEC, are saying, hang on, who gets to decide what resources are left in the ground when you're not making the same calls of Norway Neither are you effective in stopping even coal-fired power plants across Europe. But the patronizing approach, even from progressive NGOs, is to declare that no fossil fuel explorations and development should take place across the continent. And so that's being rejected. Out of hand, because if you look at cumulative emissions, Africa barely features on the radar of cumulative emissions that have actually caused global warming and caused the climate catastrophe. And so therefore, even from a moral point of view, there is no legitimacy for advanced wealthy economies demanding that they have an oversized view in shaping the African agenda. And of course, climate change effects are being felt now. It's not some point in the future. The Sahel is already declared to be uninhabitable. You had over 1,000 lives lost in floods in Durban. There are droughts, there is the effect on agriculture and so on. And so the African continent is already experiencing the effects of climate change. And so there is also a strong support for the loss and damage provision.

So loss and damage is a term used to describe the progress of establishing liability and compensation for loss and damage caused by man-made climate change. As we said earlier, some countries, emerging markets, have contributed far less to the climate crisis but are suffering much more because of it. Gillian would like to see the issue addressed at COP, in addition to other points.

So I think that there are, there are 3 things. One is certainly the loss and damage provision being respected. Secondly, that the private sector and any of the parties to COP that made pledges actually live up to their pledges. That's the second. And then third is coming back to the, you know, the conversation or the issue that we were just discussing, to actually make sure that we are defining deploying climate finance where it is not 70% debt, where we are using sophisticated, reimagined blended finance strategies so that you can have ecosystem strengthening across the world. So that when we're talking about using financial strategies for blue carbon, when we are discussing things like seagrass as a source of carbon sequestration, when we are discussing adaptation funding, that the awareness about that, the technical competence to do it, and also the acknowledgement that the civilizations, the communities that have been stewarding the planet are not the ones that have the financial pools of capital. So that there is, there really is, and I think people, some people, especially around the loss and damage, are very reluctant to sort of get into the narrative, the meta issues around who really has the legitimacy to speak for stewardship of the planet, and so therefore how we now move forward with acceleration. And so I think Glasgow was an excellent example of misuse of power. The large financial institutions swept in private jets and they made announcements, you know, they had, you know, all of that stuff about $130 trillion of assets under management. Nothing has happened. And there are lots of excuses and reasons why that is the case. I'm sure you've been covering and following all of that very closely, where the bulge bracket banks are recognizing that there isn't, in their own societies, support for these issues because it comes At a sacrifice.

What Gillian is referring to in that last point includes the rise of anti-ESG sentiment and a backlash against financial companies because of their environmental policies. We have seen a fair bit of this in the US, where Republican states are cutting ties with those banks and asset managers. Some of them seem to be softening their stance on fossil fuels. There is quite a lot for COP to take on. That's it for this episode. I hope you enjoyed it. Thank you to Gillian and James. I will add links to their articles and any other relevant pieces in the show notes. And thank you to my producer, John Rogers. We'll find each other again in 2 weeks for the next episode of Sustainable Views, the podcast.

This podcast is supported by Federated Hermes Limited, a global leader in active responsible investment. We follow 3 pathways: active ESG, sustainability, and impact. 3 routes to 1 destination: sustainable wealth creation. Capital at risk. Professional investors only.