COP27 which was tagged an African COP had the highest number of participants so far in the history of COP. Participants ranging from Negotiators, Parties, Observers, Government officers, and private sector players are all duly represented. However, there is little or no presence of private sector players within Africa including banks, insurance companies, asset managers, and other trade associations. Given the importance of the private sector in the attainment of the Paris Alignment and the impact Climate change will have on Africa and other developing countries, I find it extremely odd that the owner of capital did not deem it fit to infuse themselves into the conversation.
According to the report of the independent high-level expert group on climate finance, emerging markets and developing countries other than China will need to spend around $1 trillion per year by 2025, and around half of the required financing can be reasonably expected to come from local sources. This report further highlights the role of the private sector in domestic resource mobilization and project execution.
I have highlighted below a few reasons why domestic investors are key to climate goals
- Domestic investors face less credit adequacy restriction compared to cross-border investors. domestic investors who are not exposed to exchange rate risk and country risk tend to build more resilience compared to their foreign counterparts
- Countries without effective capital inflow sterilizing mechanisms might find themselves dealing with high inflation, currency appreciation, and an undermined domestic export due to huge reliance on cross-border investors.
- Heavy reliance on cross-border investors exposes the country to huge global risk: Increased interest rate in the US means an increase in the cost of borrowing from the international market. The increased interest rate tends to affect renewables more than the fossil fuel industry because renewables are Capex-heavy.
- Domestic investors create systemic impact: Achieving Net Zero has the potential to destroy existing jobs and domestic investments are better equipped to create new ones.
- Information Cost: The combination of local information and global expertise leads to higher profits
It is high time that private investors including banks, asset managers, and pension funds within the continent come together to drive domestic mobilization. While it is commendable that Glasgow Financial Alliance for Net Zero (GFANZ) – a global coalition of leading financial institutions committed to accelerating the decarbonization of the economy- recently launched its African network, I am looking forward to seeing the domestic players leading conversations. I was disappointed when I looked around the pavilions and booths at COP27 and none of it was devoted to the financial market players in Africa. It is also interesting that right in the middle of COP 27, a leading bank in Nigeria announced a funding stream for oil exploration and export. Combating climate change is a global action and we need everyone as a stakeholder and participant, not a spectator.
Leave a Reply