How innovation can bridge Africa's climate finance gap

At this forum, developed nations pledged to triple climate funding to $300 billion annually by 2035, an increase from the $100 billion set at COP15. However, this pledge fell short of the $1.3 trillion that developing countries sought.

Climate change threatens Africa’s very existence. AfDB estimates that $277 billion is needed annually for Africa to meet the Paris Agreement goals.

According to the Climate Policy Initiative's (CPI) 2024 Landscape of Climate Finance in Africa report, Africa’s climate funding distribution is highly uneven. Ten countries not among the most climate-vulnerable, received 46 percent of the $43.7 billion total climate finance in the 2021/22 period, while the 10 most vulnerable countries got only 11 percent.

Additionally, 76 percent of private sector contributions were directed towards 10 nations, none of which were identified as among the most vulnerable. Domestic investment constituted 10 percent of the total climate finance.

Read: Africa to the world at COP29: It’s time to pay up and power real climate action

To bridge this divide, Africa needs to explore innovative finance solutions that move beyond traditional models. At COP29, Isaac Otolo, PwC Partner and Eastern Africa Transaction Advisory Leader said there is significant funding imbalance, with over 95 percent of adaptation finance coming from public actors.

Otolo highlighted the importance of making local adaptation projects attractive for private investment to reinforce Africa's climate resilience efforts. Private investment doubled between 2020 and 2022 but accounted for just 18 percent of the total climate funding in Africa, according to the CPI report.

This gap underscores the need for innovative finance solutions to promote private sector engagement.

A promising avenue for funding is the broader issuance of green bonds.

These bonds finance environmentally beneficial projects and have demonstrated positive outcomes. In February 2024, Tanzania's Tanga Uwasa launched a $21 million green bond to enhance water supply systems, which saw an oversubscription rate of 103 percent with 65 percent of the subscribers being domestic.

The bond's success was further highlighted by its listing on the Luxembourg Green Exchange, affirming its credibility on the international market. To promote wider use of green bonds across Africa, it's essential to simplify regulations, lower costs, and heighten public awareness.

Blended finance reduces risks in key sectors using concessional or philanthropic capital. The Rwanda Green Fund, praised by the United Nations Framework Convention on Climate Change (UNFCCC), serves as a prime example of this instrument's effectiveness.

With an investment of $40 million, the fund has backed 35 projects, resulting in the generation of 137,500 green jobs and a cut in carbon dioxide emissions by 18,500 tonnes.

It provides grants and innovation funding up to $300,000, necessitating a 25 percent funding match, and offers credit lines at below-market rates.

Read: Creativity is key to boosting climate finance for Africa

The fund partners with the Development Bank of Rwanda, which manages a specific credit line, while the fund acts as an incubator and supports project development. Expanding blended finance across Africa could mobilise private funds and direct climate finance to the communities most in need.

Debt-for-climate swaps offer another innovative approach. Through this mechanism, debt is transformed into investments aimed at climate action, simultaneously alleviating debt burden on governments and promoting environmental objectives.

Kenya, with backing from Germany, invested 60 million Euros for climate resilience initiatives, including the Bogoria-Silali geothermal project, which aims to expand the provision of renewable energy to households, as reported by ‘Germanwatch’, a climate advocacy group.

Scaling up this model could amplify its effectiveness.

Climate risk insurance, though underutilised, could transform Africa’s response to climate crises. Mozambique’s parametric insurance model compensates farmers based on predefined weather triggers rather than actual damage assessments after the events, enabling quicker payouts.

AfDB’s Africa Climate Risk Insurance Facility for Adaptation (Acrifa) targets $1 billion to expand coverage tackling the continent's vast insurance protection gap for smallholder farmers estimated at 97 percent.

This climate-smart insurance model, combined with affordable premiums and reliable payouts, could reduce investment risks, enhance financial inclusion, and attract private investment into Africa’s agri-food sector.

Closing Africa’s climate finance gap calls for development of innovative, locally- tailored solutions that attract private investments, boost domestic involvement, and promote international trust. Transparency in governance and effective resource stewardship are essential in amplifying impact and enhancing resilience.

By scaling innovative finance approaches like those mentioned, Africa can take the lead in sustainable development, close its climate finance deficit, and secure a resilient future for its people while contributing significantly to global climate action.

The authors are under PwC Strategy & Operations Consulting, PwC Kenya