ESG in emerging markets: Africa

Financing the transition in Africa: pathways to sustainable prosperity

Mist rising above the Katse dam wall in Lesotho

For emerging markets looking to take the next step in their economic and industrial development, sustainability implies more than just reducing carbon emissions. Kristina Holzhäuser, Commerzbank’s Regional Head for African & Middle Eastern Financial Institutions, discusses the challenges and the opportunities for African economies as they reckon with evolving global priorities.

The increased global focus on sustainability has meant that many emerging markets are having to rethink their current economic growth strategies. How will African nations reconcile their existing economic goals with changing global priorities surrounding ESG?

Kristina Holzhäuser: The increasing global focus on sustainability undoubtedly comes at a sensitive time for emerging economies. Many developing markets – African countries among them – have pursued an economic development strategy tied to the export of commodities such as agricultural products, crude oil and minerals. As they look to further develop their societies and grow their economies, many African countries are coming under pressure to recalibrate their model for development to incorporate ESG principles.

But the transition towards sustainability also offers opportunities to African nations. Economies across the continent can “leapfrog” their developing competitors across the world which have already dedicated substantial time and resources to pursuing a fossil-fuel-led – and potentially outdated – growth path. There is enormous untapped potential for those countries to develop sustainable supply chains without the burden of investing in unsustainable legacy infrastructure.

What would this look like in practice? African economies can build their manufacturing industries around renewable energy, for example, and therefore make themselves more appealing as a centre for international investment. The South African government, for instance, is looking to implement a major energy transition across the board through its “Integrated Resource Plan”, which envisages a shift away from coal and towards renewables. 1 African businesses could also seize an opportunity to become world leaders in circular economic practices, which involve ensuring resources and products retain their value for as long as possible.

To what degree are African markets affected by ESG regulations and standards drawn up in other parts of the world?

KH: There is certainly a large impact. Global supply chains are growing longer and becoming more intertwined, so ESG commitments made in one part of the world can have a profound impact further down the line. Businesses are increasingly evaluating their suppliers’ sustainability credentials, and the implications are clear. No matter where they are located, if suppliers want to remain competitive, they must adjust their strategies to align with changing environmental priorities. Particularly as access to competitive funding will become more and more challenging without fulfilling certain ESG criteria in the future.

Given their global impact, it is important that ESG regulations drawn up in advanced markets account for the differing needs of other countries. For example, advanced economies tend to prioritise environmental issues, even though social and governance concerns are more pressing in many African countries.

The African continent boasts immense resources that can be utilised to produce clean energy. What progress has been made regarding renewable energy production in Africa and are any countries emerging as pioneers?

KH: The continent certainly has enormous potential for renewable energy development, and each country has its own distinctive profile that lends it a unique competitive advantage.

In North Africa, Morocco has become an important market for solar power. The country is home to the world’s largest concentrated solar power farm, and already obtains a third of its electricity needs from renewables. 2 Morocco is also naturally well-disposed to the production of wind power thanks to strong onshore winds from the Atlantic.

With this potential for renewables, it is no surprise that Morocco is also being seen as a future hub for green hydrogen production, and the country attracting significant investment from international companies in the development of green hydrogen plants. 3 The Germany-Morocco Hydrogen Agreement was signed in 2020 and involved German investment of €300 million into the joint venture that will source hydrogen from Morocco. The EU also signed a Green Partnership deal with Morocco in October 2022.

Morocco is not the only North African pioneer. Egypt’s role as leader in this space came under the spotlight as the country hosted the COP 27 climate summit in 2022. Egypt’s banking sector has also committed to reducing the carbon footprint of its portfolios, and banks are increasingly incorporating ESG risk analyses into their credit decisions.

While the North of Africa is currently exhibiting the strongest progress throughout the continent – in no small part due to its favourable weather conditions – there is hope that this progress can act as a catalyst for developments throughout the continent. By no means does this mean that progress is limited to this area, though. Ethiopia has harnessed the power of the River Nile to build several hydroelectric dams, similar to Angola. In fact, the Grand Ethiopian Renaissance Dam – opened in 2022 – is now Africa’s largest piece of hydroelectric infrastructure.

Green hydrogen is also becoming increasingly prevalent in the discussions around African renewables. The African Green Hydrogen Alliance, comprising Egypt, Kenya, Mauritania, Morocco, Namibia and South Africa with more members set to join, was founded in May 2022 to promote this source of renewable energy. 4

The alliance aims to expand the development of green hydrogen production throughout the continent, and a number of projects are already underway. In Namibia, HYPHEN hydrogen energy introduced the 3 GW Tsau Khaeb project following a US$10 billion investment, which is set to displace 5-6 million tonnes of CO2 emissions annually. 5 6 Elsewhere, Mauritania aims to produce 12.5 million tonnes of green hydrogen per year by 2035 and has announced a US$34 billion project set to provide 8 million tonnes of that target.

Building sustainable industries and infrastructure in Africa will require significant capital. What is the role of FIs and how are financial markets responding to the need for sustainable financing in Africa?

KH: Of course, investment is needed, and financial institutions will play a key role in providing it. The African Development Bank (AfDB) estimates that the continent will require US$170 billion in financing annually by 2025 just for infrastructure development.

There are, of course, certain systemic barriers to financing in Africa that should be considered. There are significant upfront capital and transaction costs as well as the perceived project or country risk depending on the location. In fact, between 2000 and 2020, only 2% of the US$2.8 trillion invested in renewable energy went to African nations. 7

The role of FIs is to help businesses overcome these challenges by helping facilitate and deliver finance opportunities that will help countries deliver on their goals. And as the need for sustainable financing grows, the financial markets are responding accordingly. Estimates suggest that global ESG-related debt issuance has more than tripled in 2021 to US$190 billion. Investment in ESG now totals 18% of foreign financing for emerging markets – and that figure is only set to grow.

How important will the collaboration between banks and multilateral development banks (MDBs) be to help bridge the financing gap across the African continent and support green investment?

KH: The funding gap will only truly be bridged if governments, corporates, FIs, ECAs and multilateral development banks (MDBs) work together. Absolutely, MDBs can deploy innovative mechanisms to mobilise private investment and in doing so, can prioritise energy efficiency and sustainable functionality in the projects they finance.

The AfDB, for example, has raised funds for projects across Africa under its Green Bond Framework. These projects serve to promote green growth through several methods including building resilience to climate shocks, providing sustainable infrastructure, creating ecosystem services and making efficient and sustainable use of natural resources. The AfDB funded Egypt’s Gabal El Asfar Wastewater Treatment Plant (GAWWTP), improving public health and environmental protection for the 8 million people in Cairo.

Afreximbank recently collaborated with the China Development Bank to sign a US$400 million loan that will serve to support small and medium-sized enterprises across Africa. The Trade and Development Bank (TDB) also recently secured a US$200 million trade finance facility from the European Investment Bank (EIB) to help fund private sector investment. This financing will be directed to businesses across multiple sectors, including agriculture and manufacturing, both of which have been affected by recent global supply chain disruptions. The TDB has also signed a Memorandum of Understanding with a Finnish development financier, Finnfund, that will encourage investment into areas that will help achieve the UN’s sustainable development goals (SDGs).

How are ECAs helping with ESG projects across the continent?

KH: ECAs are crucial partners for banks looking to finance investment in Africa. The structure of ECA finance works well for infrastructure projects, so it aligns well with the needs of many African nations. Because infrastructure projects in the region are typically quite risky, ECA funding is often the only option for projects with long tenors. And with financing costs generally increasing across the board, ECA-backed financing is not only becoming more competitive – it is fast turning into a strategic requirement.

We are also now seeing more partnerships between ECAs and FIs, with ECAs providing high-quality collateral to the covering bank against bad debt losses through export credit guarantees. This creates cost-effective long-term financing in which many parties stand to benefit.

In a large renewable energy project in Angola, Commerzbank together with German ECA Euler Hermes supported the government in its electrification programme. Another example came in May 2023 when Commerzbank acted as lead arranger for a €178 million loan to the Cote d’Ivoire’s Finance Ministry for the construction of water-supply systems in rural areas, with the backing of Swiss and Dutch ECAs 8.

The opportunities for sustainable prosperity in Africa are there – and innovative and effective investment will be essential to realise them. I am excited to see what the future holds for the continent.