Sustainable finance: Spotlight on Africa – Financial Services

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As part of a series of articles on sustainable finance, here we explore some of the key themes of sustainable finance in Africa and the transaction challenges.

Background

Sustainable finance aims to integrate sustainability criteria into investment decisions and allows investors to tailor their investments to projects that take into account environmental, social and governance (ESG) factors. As a result, it is an important tool through which funders and investors can leverage their capital to maximize social impact.

Part of our wider series of articles When it comes to sustainable finance, this article briefly explores some of the key themes we encounter in sustainable finance in Africa and the transaction challenges ahead.

Sustainable finance in Africa: behind the global curve?

Growing awareness of the importance of ESG factors among market participants has led to rapid global growth in sustainable finance, with a particular focus on financing the transition to environmentally friendly technologies (so-called “finance”). of transition “). The International Energy Agency recently announced that this year, investments in solar energy are expected to exceed those in oil for the first time. This statistic is undoubtedly indicative of a change in mood among investors.

However, until now, sustainable finance has mainly been a feature of developed economies, with transaction volume in developing markets significantly lower than in Europe or America. Perhaps nowhere is this felt more than in Africa, home to 33 of the 46 countries classified by the UN as “least developed countries.” The International Energy Agency estimates that more than 40% of Africa’s population does not have access to electricity and, while Africa holds 60% of the world’s most attractive solar resources, Africa does not has received only 2% of global investment in renewable energy (despite the sharp increase in renewable energy). the pace and scale of solar financing mentioned above).

There are several reasons for this discrepancy. One of these reasons may be the desire to designate “Africa” as a potential jurisdiction for foreign direct investment. To consider “Africa” as a jurisdiction is to miss the point. Africa, made up of 54 countries speaking at least 2,000 distinct languages ​​and trading in at least 42 distinct local currencies, is complex.

Obstacles to sustainable finance in Africa

Burges Salmon’s energy and infrastructure finance team advised numerous sustainable finance operations across Africa. We have observed that lenders and investors face a number of challenges when seeking to deploy their capital in sustainable financing in Africa:

  • Political and regulatory risk: The legal systems of many African countries, particularly developing markets in sub-Saharan Africa, have tended to adopt protectionist policies. Local content requirements pose obstacles for potential international investors, and exchange control regulations complicate the process of paying interest on loans received from abroad.

  • Macroeconomic headwinds: Economies tend to thrive when debt is readily available on favorable terms. Stubborn inflation has led the US Federal Bank, the Bank of England and the European Central Bank to raise interest rates, meaning international debt has become comparatively more expensive. African central banks have raised rates even more than their Western counterparts, curbing liquidity and increasing borrowers’ demand for sustainable financial capital.

  • Execution risk: Finally, a theme that was widely debated at the Africa Energy Forum in Nairobi earlier this year was the number of transactions that never reach financial close (the “transaction attrition rate”). A recent McKinsey Company study estimates that around 80% of infrastructure projects in Africa never move beyond initial planning.

However, none of these problems are insurmountable and we remain optimistic about the future of sustainable finance in Africa. We have successfully advised numerous clients (from development finance institutions (DFIs) and infrastructure debt funds, to some of the world’s largest international banks and sovereign wealth funds) on their key strategic and innovative transactions in the field sustainable finance across the African continent.

An innovative technology that has become widespread in Africa in recent years is the solar mini-grid, which enables small-scale solar electricity generation connected to a local distribution network (often combined with energy storage). The solar mini-grid is a low-cost solution capable of providing high-quality, uninterrupted electricity to unpowered or underserved communities, especially in rural or off-grid areas. The World Bank estimates that solar mini-grids could provide electricity to around 500 million people by 2030. Riccardo Puliti, vice president for infrastructure at the World Bank, said that “solar mini-grids constitute an essential solution to fill the energy access gap.”

Burges Salmon has advised on a number of the highest profile and most complex mini-grid transactions in Africa to date. Last year we advised the EU-funded Electrification Finance Initiative (EDFI ElectriFI, administered by management company EDFI) and the Renewable Energy Performance Platform (REPP, administered by Camco Clean Energy), funded by the UK Government, as joint lenders in their 150,000,000 LSL financing for “OnePower”, which was the second largest solar mini-grid project financing portfolio in Africa. Earlier this year, we advised The Facility for Energy Inclusion on its first solar mini-grid portfolio financing, a $7,500,000 senior debt financing to MySol Grid Zambia (formerly PowerCorner Zambia) to finance the construction of 60 solar mini-grid projects in Zambia, which will see more than 40,000 people connected to electricity in off-grid rural areas.

This article was written by Luke Addison, Associate in Banking and Finance.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your specific situation.

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