A just energy transition for Africa?

Africa accounts for just 3.8% of global greenhouse emissions, yet it risks bearing the brunt of some of the worst impacts of climate change. Populations in vulnerable areas, such as coastal settlements, as well as many crucial areas of economic activity, could be under significant threat in the coming decades. Yet, many Africans already face significant economic difficulties in their day-to-day lives, even before considering climate change.

For these reasons, and plenty more, the concept of a just transition — that the shift to a sustainable economy must be a shared global responsibility, that its benefits must be distributed fairly and that communities should not be worse off as a result — is particularly important in an African context. It also highlights the importance of challenging assumptions that may be appropriate in developed economies, about what are the most pressing environmental, social and governance (ESG) priorities and solutions.

In developed economies, the concept of energy transition is firmly rooted in reducing carbon emissions as the main priority. For many African countries, this is unlikely to be the case.

Energy access first

As Philippe Valahu, CEO of Private Infrastructure Development Group, an infrastructure-focused development and finance organisation that works in developing economies, observes: “This is a continent where more than 500 million people don’t have access to electricity. To give a more specific statistic, that includes almost 60% of medical clinics not having access to a regular source of electricity. So, there are some massive needs.”

“If you look at energy transition, the most important development would be electrification of the continent,” says Yvonne Ike, head of sub-Saharan Africa (excluding South Africa) at Bank of America. “At present, you have a situation where hundreds of millions of people are living without access to reliable energy sources, which then makes it hard to have any kind of development. In an African context, it’s less about reducing what currently exists in limited quantities and more about how to build a future that is ESG compliant.”

Her colleague, Natalie Mordi-Hillaert, head of ESG capital markets, Europe, the Middle East and Africa, agrees: “Rethinking energy transition when it comes to Africa is paramount. In Europe, the dialogue is one of switching to renewables, but we’re just not there yet in Africa. Energy access is more pressing.” Although she also adds that “this is not to say the conversation about providing energy sustainably should be ignored”.

Localised approaches

As Bhavtik Vallabhjee, head of power, utilities and infrastructure at Absa, stresses, it is important to consider that Africa is not a homogenous set of economies when it comes to energy transition: “Each has its own agenda, its own resources and is at a different stage in its trajectory.”

For instance, he highlights northern Africa, with its “abundance of sunlight” as a natural focal point for solar energy, and points to Morocco as already being a forerunner in this area. This contrasts with South Africa, which has long been heavily reliant on coal power, but has plans in place for transition, and Nigeria which has large natural gas reserves.

There are reasons for optimism, Mr Vallabhjee says, highlighting the fact that “the cost of renewable energy … has certainly come down over the past 10 years. So, a lot of countries are now looking at this and thinking maybe we can generate power far more cheaply if we start adopting renewable energy.”

Another often-made point in the context of African infrastructure development is that many African economies have a relative advantage in being able to implement new solutions without having to deal with legacy infrastructure challenges. Mr Valahu cautions against using this ‘leapfrogging’ argument too liberally, as it can simplify the issues, but agrees that some leapfrogging to newer technologies will be possible.

However, there is a difference between renewables comprising part of a country’s energy mix and a more wholesale reliance. Given that technologies such as solar or wind power are weather-dependent, and therefore cannot guarantee consistent energy supply, supplementary (and often more traditional) energy-generation methods are often still needed. Mr Vallabhjee points out that solutions such as battery storage connected to renewables are likely to be prohibitively expensive for many African countries at this stage.

He suggests that it should be possible for each economy to take a localised approach to energy transition, based on its own situation, and that this should mean certain African economies being able to have fossil fuels as part of their energy mix for longer than may be deemed acceptable for more developed economies.

“Judging Africa by developed world standards is wrong,” he notes, “because these are all countries at different stages in their growth trajectory.” However, the investment environment is now such that it is increasingly difficult to finance fossil fuel-based power generation. This is a problem, he says, as “energy is the backbone of economic growth, and countries’ economic prospects could be held back.”

Ms Ike argues that gas could play an important role as a transition fuel in many economies. “If you look at what is discussed in these big dialogues about energy transition, it’s often about moving directly from fossil fuels to renewables. In Africa, there’s a need to have a conversation about moving in stages. The move will be from coal and oil power to gas before other technologies. The question becomes how gas-based energy solutions and technologies can be developed to be as environmentally friendly as possible.”

The social impact of transition

Social considerations are also tightly wrapped up in the transition away from existing energy infrastructure. Fossil fuel extraction and power generation industries currently employ many people in the region. In countries such as South Africa, where current reliance on fossil fuels is high and there are existing unemployment problems, there are considerable concerns about the potential for energy transition to exacerbate the problem.

“Delivering on a transition to a more sustainable future will be very difficult if the local populations are not a part of the dialogue,” says Ms Mordi-Hillaert. “Of course, undesirable assets should be phased out over time, but in the meantime it’s important to look at the number of people these industries employ and the impact of any precipitate winding down.” She adds: “Unless people’s immediate economic concerns are addressed, climate will always be a secondary issue.”

Jayne Mammatt, partner and sustainability and climate change lead at PwC South Africa, says: “The most pressing ESG issues in South Africa, and really the continent, are generally seen to be related to the social aspects: social upliftment, social development and economic growth. South Africa has massive unemployment challenges and massive skills issues. So, when people talk about environmental issues, an immediate instinctive response for a lot of people is, understandably, haven’t we got bigger issues to deal with? Making that ‘just transition’ real, and making it happen without destroying jobs and livelihoods, is really important.”

Kerri Savin, senior manager, sustainability strategy and reporting at Nedbank, agrees. “The just transition is really calling on the South African government and African companies to come up with how we can transition in a way that protects the environment and the climate, but also optimises opportunities on the social front,” she says. “And that is a challenge, particularly given the high unemployment rates.”

Although one positive that she highlights is that green economy jobs tend to come to fruition relatively quickly, so there is the potential for rapid progress.

Climate adaptation

No matter how effective Africa’s own energy transition is, it will remain at the mercy of the wider world. Nneka Chike-Obi, director of ESG research and sustainable finance at Fitch Ratings, says: “Most of sub-Saharan Africa is incredibly vulnerable to the physical risks of climate change, but is not directly contributing that much as far as carbon emissions go.” She adds: “[This is] a region where, as opposed to much of the rest of the world, we talk a lot about climate change mitigation. In sub-Saharan Africa, adaptation — that is building up resilience to the expected impacts of climate change — is a more pressing issue.”

The issue of $100bn in annual climate finance — which developed countries have repeatedly committed to paying to developing countries to fund climate change mitigation and adaptation measures since 2009; and which were due to begin paying from 2020, but have yet to materialise — is a very contentious one.

“There has been considerable debate around the $100bn in climate finance funding from developed economies to those impacted by the transition, especially the timing [of payment]. In the absence of this,” says Ms Mordi-Hillaert, “emerging economies are less inclined to take measures that will ultimately benefit everyone.”

Outside of the $100bn, there is also a broader sense that international funding and investment will be essential to enable Africa’s transition to take place. Yet, in general, Africa’s capital markets remain underdeveloped, alongside broader issues around governance and political concerns, impeding investment flows.

Blended finance

Gonçalo Neves-Correia, CEO of ThirdWay Partners, an investment and advisory firm focused on sustainable development with a significant presence in Africa, believes that the so-called blended finance model — strategic use of development finance funding and structures to mobilise private capital — will play a growing role.

“When we started ThirdWay, we saw that there was a shifting paradigm around the concept of sustainable investment. In particular, Africa was very interesting because there were parallel pools of funding — private sector and development funding — that historically hadn’t worked together much. We wanted to promote the idea of blended finance, which is commonly talked about today, but back in 2013/2014 this was new terminology.”

He believes the growth of blended finance models was spurred by the launch of the sustainable development goals in 2015. These provided something of a framework for investment at a time when investment organisations were becoming aware of the growing demand for sustainable assets and development organisations were becoming shrewder in their interactions with private capital. “The mandate was on both sides of the equation, with development organisations starting to adopt concepts from the investment community,” he says. “On the commercial side, investors also began to realise there was an opportunity to de-risk certain investments by partnering with development funders.

“One could argue, in the grand scheme of things, we are still early days in this kind of blended financing model; but the trend is positive and accelerating.”

Broader DFI impact

Mr Neves-Correia also suggests the significant role that development finance institutions (DFIs) have long played within Africa’s financial ecosystem has had a broader influence when it comes raising capital with sustainable objectives.

“If you are raising capital for a project or a fund, it is likely that you’re going to knock on the doors of DFIs,” he explains. “These are institutions that long included ESG considerations as part of their investment conditions. You’re now starting to see that same dynamic internationally in Europe and the US, where investors are demanding certain ESG criteria are met.

“In Africa, that has been the case for a while, primarily because of that DFI influence. In that sense, in certain areas of the private markets where you see DFI influence, Africa has been punching above its weight, in terms of investments with an ESG link.”

However, he acknowledges that this does not apply across the board. “If you picked an average large and fairly mature African corporate, that doesn’t necessarily interact with DFIs, their need to adhere to an ESG strategy is probably a more recent development — a product of the past two to three years. But that’s really no different to the rest of the world.”

Commercial banking knowledge

Here commercial banks are playing an important role in supporting African businesses, and other organisations, including governments to understand the changing international funding context when it comes to sustainability considerations.

Ms Ike says: “We’re doing a lot of C-suite advisory work helping corporates and governments in Africa to look at what they do through an ESG lens, and consider how the Western world and investors see their business through an ESG lens. There’s a capital-raising element to that as well, which is supporting clients to access a broader range of investors and understand how to access pools of capital that are increasingly discerning about ESG standards.”

As Ms Chike-Obi points out, large commercial banks in Africa are well-accustomed to operating within a context where ESG considerations are a key part of the discourse, and have an in-depth and nuanced understanding of what these headline ideas mean on the ground.

“They’re very sophisticated when it comes to understanding what sustainability really means,” she notes. “They see this as the next phase of a conversation they have been having for years around the Sustainable Development Goals, and even earlier. They have a more integrated approach than just carbon emissions reduction, which is often the primary focus in other parts of the world. There is an understanding of how environmental and social are interconnected. So, if the impacts of climate change are changing weather patterns, what impact will that have on their loan portfolio with farmers? Or if there is an investment shift away from coal mining and oil refining, what impact will that have on these industries currently employing many people?”

Investor maturity

Although financial institutions operating within these markets may have a clear view of what the realities of sustainable transition mean locally, there often remain knowledge gaps on the part of international investors.

Ms Savin suggests that while it is a positive that there is an increasingly “big push” from investors around ESG issues, there is still a need for a “maturing around the type of questions investors are asking, understanding the African context and getting to real ‘hot-button’ issues.” For example, she says, there is a growing focus on biodiversity and land transformation, but “in an African context it’s really important to understand the ownership of the land and who is getting the economic benefits from [it]”.

She also points out that Nedbank is often asked “about our own operations and carbon footprint, and that’s a relatively easy question for us to answer. Much more important is who are we lending to and how are we engaging with them about changing their practices. Those are the types of questions that really challenge us and are useful in driving change.”

Policy and regulation

Ms Mordi-Hillaert also suggests greater levels of guidance at a governmental and regulatory level would be useful for both banks and investors. “It is difficult to make significant progress without policy and regulation. Banks and the private sector in general need to be guided. Africa needs to set its own direction and create its own narrative. Investors will only buy into these projects and Africa’s agenda if they feel confident in the climate roadmap laid out.”

Specifically, she suggests African policy-makers should have the same discussions that have been had within Europe about what can be regarded as sustainable activities for investment purposes and provide clarity to the markets on this.

“The EU’s green taxonomy [provides] a catalogue of what qualifies as environmentally sustainable or green activities, which is to be made more stringent over time. We ought to replicate this approach on a bloc or national level, with the former preferred as this would mean less fragmentation.”