Investing in Africa’s green economy – opportunity beckons

(Published in Trade & Invest Africa, February 2015 )

By Stef Terblanche

In Africa – and indeed all around the world – the green economy has become the focal point for a new breed of investors and entrepreneurs. Rapidly rising out of its infancy, it promises an entirely new generation of businesses and opportunities, also widely predicted to be the much-needed major force for future job creation.

Or, as the South African-based Impact Trust puts it, the growing demand worldwide for renewable energy solutions as well as for technologies and products that address climate change, promote sustainability and improve environmental quality has given rise to an abundance of opportunities for environmental entrepreneurs or “ecopreneurs”.

“Equally essential to the success of efforts for sustainable, inclusive growth and development is exposure to and understanding of the opportunities that could and do exist in the green economy and how these could be accessed.” The Impact Trust is a non-profit public benefit advocacy organisation.

Like the term “climate change” a few years ago, the words “green economy” have more recently become rather fashionable buzz words, thrown about with almost reckless abandon. Yet many people are still in the dark as to its exact meaning, how it is applied in practice, and what its benefits may be, especially for business.

The European Environment Agency (EEA) says at its most basic level, a green economy is one that generates increasing prosperity while maintaining the natural systems that sustain us. The Green Economy Group (GEG) takes it a step further and says “a green economy rigorously applies the triple bottom line of people, planet and profits across all corporations at the microeconomic level and throughout the entire economy at the macroeconomic level”.

For traders, investors and other business people the bottom-line would be sustainable profits from business or investment that contributes to a low-carbon economy supporting  sustainable development without degrading the environment.

Much happening

Some question whether the green economy really differs all that much from previous business, growth and development models, saying it is much the same, only with more environmental and social conscience thrown into the mix. In essence, however, it requires an entirely new focus and approach, new technologies, new business models, new legislative frameworks and more.

A report published by the International Institute for Environment and Development (IIED) and the Green Economy Coalition (GEC), says governments, businesses, investors and others are embracing the ‘green economy’ idea, but differences in the way they interpret it still pose barriers to sustainable development.

Nonetheless, in almost every corner of the world, and certainly across Africa too, much has already been happening around this concept. And in-between and among the many definitions, concepts, studies, conferences and talk-shops an entire new world of business opportunities is unfolding.

It is also widely anticipated that the World Green Economy Summit to be held in Dubai in April next year will be be a further milestone in the transformation towards global green economies.

Meanwhile the United Nations Environment Programme (UNEP) says already more than 65 countries are now actively pursuing green economy policies and 48 of them are taking steps to develop national green economy plans.

The new trade

UNEP’s Trade, Policy and Planning Unit says it is seeking to identify opportunities at the crossroads of green economy and trade.

“If we are to reverse the global decline of biodiversity, mitigate the release of greenhouse gases, halt the degradation of terrestrial ecosystems and protect our oceans, then international trade must become sustainable and responsible.”

Furthermore, it says, when accompanied by appropriate regulation, international trade and the green economy can interact in a bi-directional, mutually beneficial way.

“The green economy transition opens up rich new opportunities for regional and global trade. For example, the global market in low-carbon and energy efficient technologies is projected to nearly triple to US$-2.2 trillion by 2020. At the same time, the Rio+20 conference identified international trade as an engine for development, sustained economic growth and the transition to a greener economy.”

In May 2013 UNEP  launched the report Green Economy and Trade – Trends, Challenges and Opportunities (GE-TOP Report), which explores triple-win situations arising from the shift to a green economy in six key economic sectors. The report finds that many developing countries in Africa and elsewhere are well positioned to gain from mainstreaming sustainability considerations in their trade-driven growth strategies, including through the export of certified commodities in the fisheries, forests or agriculture sectors, increased investments in sustainable production and supply chains, or the expansion of eco-tourism. 

On the basis of the report’s empirical analysis, UNEP is undertaking national Green Economy and Trade projects in three pilot countries, one of which is Ghana in West Africa.

Impact investing

A variety of authoritative studies have shown that approaching business and economic development from a green, low-carbon perspective such as investing in low-carbon technologies, green buildings, and renewable energy, can create more jobs and stimulate economic growth while reducing environmental damage.

The Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town Graduate School of Business in South Africa uses its Investing for Impact (IFI) Barometer to measure the allocation by investors of capital into investments that combine financial returns and positive impact on society and the environment.

In a statement the GSB said this year’s edition of the IFI Barometer, which included Nigeria, gave “a clear indication of how fast IFI is advancing in Africa’s two biggest economies”.

“We surveyed more than 1,200 funds managed by investors in South Africa and Nigeria,” says Dr Stephanie Giamporcaro, Research Director at the GSB and the brain behind the Barometer. “We found that almost half of them do speak about IFI. But the question remains, what do their conversations and terminology refer to in the real world?”

The 2014 Barometer, released in September, found that already 41% or R717-billion (approximately US$67-billion) of the money managed by South African asset managers and private equity players was described as being committed to IFI. In Nigeria, IFI constitutes approximately 34% or US$2.3-billion of invested funds.

The Barometer found that the private equity  sector is leading the way with  62% of IFI funds in South Africa being in private equity, almost double the 36% in asset management (AM), and 39% in Nigeria.

However Africa still requires much more investment in this regard, says the Barometer.

Climate Challenge

Meanwhile, two UNEP researchers Dr Richard Munang and Jesica Andrews say that despite serious climate change pressures, Africa can significantly expand its trade, but that countries  will have to use their ecosystems to protect the continent’s productive sectors from the negative impact of climate change.

 

They point to the devastating effect of the 2011 drought-induced famine linked to climate change in the Horn of Africa  which cost  257,000 lives and over US$1-billion in damage claims. UNEP’s recent Africa Adaptation Gap report warns that climate change could reduce total crop yields in Sub-Saharan Africa by as much as 20% by 2070 and an adverse effect on Africa’s trade potential. If the projected 70 cm sea-level rise in Tanzania by 2070 materialises, it could destroy the port city of Dar es Salaam. Not only will it remove a major component of trade and infrastructure along Africa’s east coast, it will also cost the port city upwards of US$10-billion in damages and losses.

While food production offers a vast growth opportunity for Africa according to the World Bank, the agricultural sector will have to come up with climate-proof strategies, say Munang and Andrews. That is apart from the need to remove trade barriers, a move the World Bank says could easily add an extra US$20-billion per year to its current annual food production of US$50-billion.

One ecosystem approach already gaining popularity, for example, is the use of “native pollinators” which can increase crop yields by as much as 5%. And in Zambia farmers have already successfully  increased their crop yields by as much as 60% by switching from monoculture practices to intercropping and other sustainable methods.

Green Funding

New concepts are all very well, but funding is always a critical issue. However, new funds and funding initiatives are also emerging and keeping pace with developments, with billions of dollars becoming available for funding green projects and businesses in Africa.

The government of South Africa, through its Department of Environmental Affairs (DEA), in 2012 allocated R800-million to establish its Green Fund with the objective of providing catalytic finance to facilitate investment in green initiatives that will support South Africa’s transition towards a green economy. The fund is to assist with the South African economy making the transition to a low carbon, resource efficient and climate resilient development path delivering high impact economic, environmental and social benefits.

The DEA has appointed the Development Bank of Southern Africa (DBSA) as the implementing agent of the Green Fund. The fund was designed to respond to market weaknesses currently hampering South Africa’s transition to a green economy. In its first round of receiving funding proposals the fund received a total of 590 applications  totalling R10.9-billion (US$970-million).

Successful proposals submitted to the fund are aligned with three funding windows, namely Green Cities and Towns; Low Carbon Economy (LCE) initiatives which address cleaner production and energy efficiency; and Natural Resource Management (NRM) projects including biodiversity and ecosystem services management. The fund supports innovative initiatives that are catalytic and can be implemented on a wider scale.

The African Development Bank’s (AfDB) ten year strategy (2013 – 2022) has two aims, namely to support inclusive growth and the  gradual transition to green growth. Last year it launched the Africa Fund with an initial US$3-billion that will finance projects of up to US$100-billion.

South Africa’s state-owned Industrial Development Corporation (IDC) recently reported that despite difficult operating conditions locally and internationally it had grown its funding approvals by 6% to a record R13.8-billion for 22 projects in the 2013/14 financial year. The biggest part of this,  R5.7-billion, went to  South Africa’s burgeoning green industry, reflecting expansion of approval levels for green projects of 50% year-on-year.

Announcing the  annual results in Johannesburg in September,  IDC Executive Officer Mvuleni Geoffrey Qhena said the IDC had played a leading role in establishing the country’s renewable energy sector, both through early stage development funding and through loan and equity funding for implementation.

The IDC also approved R2.3-billion in funding for projects in 16 other African countries and says over the next five years it would be looking to invest up to R100-billion in the local and regional economy.

Energy

With African countries having made considerable progress in recent years towards becoming low-carbon economies, this has entailed big investments in renewable energy projects. Heavily dependent on coal-fired power stations that contribute to South Africa being Africa’s biggest emitter of CO2 emissions, and among the worst offenders globally, the energy sector in South Africa has become a prime focal area.

Legislative frameworks, research and development, funding, state assistance, multinational partnerships, investment and business strategies in the sector are all geared to promote renewable energy schemes in the country, driven both by the state and independent power producers. These have opened up substantial new investment opportunities that include solar, hydro and wind.

In South Africa’s Cinderella province, the Northern Cape, which has the smallest population and smallest economy of all South African  provinces, the IDC has invested heavily in renewable energy. This is helping to turn the province into South Africa’s future renewable energy hub.  The IDC has already approved funds for 12 solar and hydro power projects in the province, while the renewable energies sector already makes up R5.5-billion of the IDC’s estimated R14-billion exposure in this province, second only to mining, which stands at R7-billion.

The aim of the IDC’s Strategic Business Unit is to develop, grow and invest in green industries, focusing on projects intended to enhance the environment and support the reduction, avoidance and adaptation of carbon emissions, it says.

Meanwhile substantial new clean or renewable energy projects are underway or planned in countries across Africa, from Mozambique to the Democratic Republic of Congo, Ethiopia, Morocco, The Gambia, Kenya and more.

A meeting attended by specialists from the UN, World Bank and business leaders in Dakar, Senegal last year, exchanged strategies for Clean Development Mechanism (CDM) projects on the continent. These are greenhouse gas-reducing initiatives that industrialised countries can support in a trade-off for their excess emissions. But while a recent World Bank report details the enormous potential of the continent – for instance more than 170 gigawatts of additional power-generation capacity – the infrastructure necessary for large-scale renewable energy power plants is still lacking.

Trends and projects

Since the 2012 Rio+20 Summit many countries in Africa have been energetically exploring  the various options and paths available to them for establishing green, low carbon economies.

Zambia, for instance, has been laying extensive groundwork to develop a Zambian Inclusive Green Growth Strategy as part of its Sixth National Development Plan and defined as ‘inclusive development that makes sustainable and equitable use of Zambia’s natural resources within ecological limits’.

In South Africa growing the green economy has been prioritised in all of the strategic frameworks, plans and programmes of the South African government, including its National Development Plan. The key sectors identified by the South African government as likely to drive the green economy are  agriculture,  green building, transport including electric vehicles and bus rapid transit systems, green cities, forests, energy supply, water, fisheries, industry and manufacturing, tourism, waste management, retail, natural resources, consultancy, policy, research and governance.

Meanwhile a discussion paper presented at a conference in February by researchers Emily Benson, Steve Bass, and Oliver Greenfield of the Green Economy Coalition  identifies a number of trends. One, it says, is that the World Bank has increased its research and lending  portfolio on green growth and that this year it issued its first Inclusive Green Growth Development Policy Loan (DPL) to Morocco for US$300-million.

Another trend  is that national green economy plans are attracting substantial investment from regional development banks. As mentioned already, the AfDB last year launched the Africa Fund with an initial US$3-billion that will finance projects of up to US$100-billion.

And the Green Growth Action Alliance, a collaboration of 50 financial institutions, corporations, governments and NGOs has come together to work with governments “to help them adopt a systematic approach that rewards green sectors through sound policies and improves their access to finance”. The African Centre for a Green Economy (AFRICEGE) based in Cape Town, South Africa has established national multi-stakeholder alliances that are mapping grassroots, local and national initiatives and business models of the ‘new economy’.

All across Africa, opportunity certainly beckons for investors with vision and a solid understanding of what the green economy is all about.