How the Financial Sector can Implement Climate Action in Africa

“Rain does not fall on one roof alone.” Quips an African proverb. The changing climate impacts every country, person, and sector equally. It presents both risks and opportunities and financial sectors are not exempt from these risks and opportunities.

Climate change is already shrinking Africa’s economies and in less than 9 years the gross domestic product of the continent will shrink by 15%. These losses manifest through lost productivity and damage to key economic sectors – like agriculture, infrastructure, and energy. In financing such sectors, financial institutions should demand that certain actors prioritise climate-resilient actions that will buffer against climate change risk.

For example, when it comes to agriculture, climate change threatens to lower yields of key staples by up to 40%. Ecosystem-based adaptation approaches have been proven to buffer against climate-induced losses and increase yields by up to 128%. A good example is the Zaï or Tassa technique, a traditional soil conservation approach that has been proven to increase yields by up to 500%. Alternatively, climate change threatens to lower water available for agriculture by up to 40%. Climate-resilient solutions like solar irrigation will go a long way in addressing water security issues. Solar irrigation has been proven to increase yields by up to 100%, water savings by 40 to 80%, and incomes by up to 80%.

Tapping into an untapped constituency

This cannot be effectively done without tapping into the informal sector players who are the biggest constituency in Africa’s economies. Africa’s informal sector employs over 80% of the population, meaning these bear the brunt of climate change risk. At the same time, they are least served by formal financial systems because they are perceived as high risk. Up to 90% of these informal sector actors trade in cash and are outside formal financial systems in Africa.

There however exists an over $300 billion lending gap in the informal sector that represents an opportunity for formal financers but which remains untapped because of the perceived high risk of this informal sector.

Financers should target financing climate-resilient solutions such as nature-based solutions among these informal sector actors to not only climate proof this significant at-risk constituency but also tap opportunities from their productivity. To diversify risk, formal financing can be channeled through communal cooperatives, which are low-risk structures that are accessible and already highly used by these informal actors.

Tapping into non-traditional sources of financial inflows

Diaspora remittances in Africa have been a steady source of inflows and are between $46 to $65 billion in 2021. These remittances are to ordinary citizens, most of whom are in the informal sector. Banks can start considering account holders who are stable recipients of such remittances and provide credit/loan products based on remittance flows and account balances of clients. Such loans could be tied to adaptation and entrepreneurial exploits to finance the acquisition of climate action solutions that can enhance their productivity – such as the solar dryers for instance to enable climate-proofed value addition.

Policy recommendations

Provision of tax incentives like zero-rating of equipment to develop climate action solutions that are needed at the informal sector level where most of the population is engaged. An example is zero-rating materials and components needed to develop solar dryers or zero-rating solar irrigation solutions that can increase yields up to 100% and incomes up to 80%.

Developing de-risking tools to incentivize local accessible financing structures of communal cooperatives. Africa collects up to $500 billion in taxes. Part of this is the $3 billion spent annually for socially driven resilience-building activities.

Instead of direct social expenditures, part of this can be used by central banks as security to indemnify local financing structures of communal cooperatives and micro-finance institutions so they can offer affordable financing for informal sector players engaged in developing the climate action solutions needed by the informal sector.

Leveraging on school curriculum to inculcate climate action from an enterprise dimension. Entrepreneurship curriculum at all levels of learning needs to integrate a component of how climate actions can become investment and entrepreneurship opportunities. Curriculums also need to prioritise enabling learners to find purpose and develop a passion around climate action.

Data for policy coherence. Data from climate action solutions can inform relevant policy incentives and catalyze further uptake of climate actions. Climate action solutions of solar dryers have been shown to cut postharvest losses, which is an agriculture function, as well as create enterprise opportunities for youth and the informal sector, which is a planning function. This data can be used to inform policy incentives in these sectors that enable the further upscaling of these climate action solutions of solar dryers as tools to achieve these sectorial priorities.

The views expressed in this article are those of the authors alone and do not necessarily reflect those of any institutions with which the authors are associated.