by The Climate Policy Initiative reported in 2022 that Africa will need $250 billion in climate finance annually until 2030, with UN Secretary-General António Guterres calling at COP29 to transform the continent into a global leader in renewable energy.
In Sub-Saharan Africa (SSA), small- and medium-sized enterprises (SMEs) constitute over 90% of all firms, according to a paper by Sebhatu Kefleyesus Ogubazghi and Willy Muturi. Research by Oluwayemisi Adebola Abisuga-Oyekunle and collaborators, moreover, concludes that SMEs are well-suited for the developmental challenges of SSA because they are labour-intensive while requiring relatively little capital to get started. Successful SMEs, in turn, can generate economic growth through innovation and rapidly growing business as companies scale. These assertions have been echoed by other scholarship on SMEs in Sub-Saharan Africa, such as by Gift Mugano, although the effect of such firms on development and poverty reduction at the global level is ambiguous.
Dr Abel Gwaindepi, Senior Researcher at the Danish Institute of International Studies (DIIS), underscores the importance of African SMEs. He told DDRN: “I can give an example from Zimbabwe, where studies show that 80% of jobs are in the small, informal players. So, currently, if you’re thinking of growth strategy, you cannot ignore small and medium enterprises . . . The real innovators are your small and medium players.” Highlighting SMEs’ crucial role in Africa’s green transition, scholars like Nara Monkam argue that African states need to support local ventures to fully realise the potential of projects funded by international climate finance.
Studying South African Companies and Their Access to Green Finance
The push towards a sustainable future is not without challenges, however. African countries have limited institutional and technical capacity to develop attractive investment projects. Then, there are questions related to the effectiveness of climate finance as a catalyst for domestic firms. Can African companies access climate finance? And, if they do, how does green finance shape their climate responsiveness?
Dr Gwaindepi is investigating the latter two questions, recently obtaining funds from the Danida Fellowship Centre to study how South African SMEs in the agricultural and food (Agrifood) sectors adapt to the demands of climate finance and the adoption of sustainable business strategies. The four-year project, called Green Financing for Agrifood SMEs (GreenFi), will also explore the implications of green financing on the growth of SMEs in South Africa.
The GreenFi project has not yet produced any findings, but Dr Gwaindepi hypothesises that access to green finance will, first and foremost, depend on a company’s bottom line, its profitability. In South Africa, where inequality is very high, according to the World Bank’s Poverty and Inequality Platform, “we anticipate a varied outcome, where we may see that firms from previously disadvantaged regions may fail to meet the requirements to access this green finance,” Dr Gwaindepi notes, potentially reinforcing existing inequalities.
It is currently uncertain, he continues, whether potential access to climate finances makes South African agrifood SMEs step up adherence to sustainable business practices, such as switching to renewable energy—or if these firms were already adapting to changing climate conditions on their own.
The SME Finance Gap
Accessing finance is hard for many African firms, even beyond the agrifood sector. Between 60% and 70% of SMEs in SSA require a loan. Yet, only 17% of small firms and 31% of medium-sized companies can obtain financing, Abisuga-Oyekunle et al. found. This funding gap risks entrenching existing socioeconomic inequality, as noted by Dr Gwaindepi.
Access to finance also intersects with gender dynamics: “Women are active in livestock keeping, primary farming, raising crops and selling food that will eventually go to the market. Despite being such active players in these economies, service providers sometimes don’t look at [women] as viable customers,” says Edel Were, Financial Sector Specialist at CGAP, a think tank focusing on financial inclusion. Brookings lists several reasons for women’s economic exclusion, including poverty, limited formal employment, as well as societal barriers to land and property ownership.
It is important to empower women financially because, as Ms Were explains, “with women, we tend to see a lot of investment back into the community. This could mean health [for themselves and their children], or they could start a side business, using their surplus to accumulate savings or build some long-term insurance.” Such activity affects development because if “you multiply this case times whatever number, it can increase the economic wellbeing and development of that area, that country, that region”, she adds.
Of Africa’s total estimated climate finance needs by 2030—$2.4 trillion—only around 12% has been obtained, according to a report by the Boston Consulting Group (BCG).
Hurdles to Overcome
A major issue for African states and firms is that loans, even climate ones, come at a high, perhaps even unrepresentative, cost. “We don’t have a thorough assessment of risks in developing countries. What that means is that your access to credit, because you have this elevated risk profile, is very hard. [African states are] going to pay, say, 15% while Denmark or Sweden pays below 2% depending on the type of loan. That, then, creates cycles of indebtedness,” Dr Gwaindepi says. Indeed, UNDP estimates that unequal so-called sovereign credit ratings have cost African states more than $24 billion in excess interest and over $46 billion in forgone lending.
Additionally, research by Carmen Broto and Luis Molina Sánchez shows that sovereign ratings are closely linked to borrowing costs for domestic companies, restricting their access to international funds, green or otherwise. For example, African commercial banks can only offer SMEs loans with high interest rates, mirroring the banks’ own steep borrowing costs.
Another hurdle, specifically related to climate finance, is the lack of common frameworks and definitions between money that goes towards projects reducing greenhouse gas emissions—climate mitigation—and funds to develop infrastructure to adapt to climate change—climate adaptation. This incongruity matters, argues economist Francois Bourguignon, because developing countries tend to prefer financial flows that address climate adaptation. While international actors often prioritise emission reduction efforts. Secondly, without distinguishing between the two types of funding, it becomes harder to evaluate the impact of climate finance and how to improve it in the future.
African governments are also not without blame. Dr Gwaindepi emphasises that a reliable regulatory environment and macroeconomic fundamentals, such as a stable currency, low inflation and functioning institutions, are needed to attract financing and achieve development. “One bad policy can cause negative media coverage that creates negative investor sentiments. In such circumstances, capital retreats quickly back to stable markets, mostly in developed economies. And the spiral goes on. That’s what you don’t want,” he says.
Bridging the Gap
Addressing the barriers to climate finance access in Africa will require cooperation from a diverse range of actors working on multiple fronts. Research projects such as Dr Gwaindepi’s GreenFi, for instance, are crucial for uncovering new insights to formulate better policies. Such projects, moreover, push the frontiers of knowledge production through Global South-North research partnerships, allowing for the cross-pollination of ideas and methodologies. Ms Were’s work at CGAP collecting data on rural women’s economic activity to highlight traditionally excluded groups and supporting organisations providing financing for these local actors is another example of ventures that can make a difference. Both efforts are part of Accelerating Business to Empower Rural Women in Agriculture (ABERA), an initiative aimed at promoting inclusive innovation and financial solutions in rural economies.
International solutions will also be key. The African Development Bank’s SME programme, for example, aims to support African financial institutions with credit lines and technical knowledge to provide financing for SMEs across the continent. At the global level, the G77—a coalition of developing countries at the UN—has proposed several reforms to the unequal sovereign debt system.
Global North countries have firmly committed to mobilising climate financing for the green transition, Denmark included. Supporting local, national and international initiatives which increase the accessibility and fairness of climate finance is paramount—for the environment and African development.
Adrian Ganic is a M.Sc., THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE and a DDRN CORRESPONDENT
