Welcome to the LSEG Sustainable Growth Podcast. I'm Jane Goodland and I'm thrilled to be taking over as host from Keesa. My day job at LSEG is Group Head of Sustainability and I'm really excited to have in-depth conversations with some of the brightest minds, leaders and researchers across the spectrum of sustainable business, finance and investing. Now that COP 27 is wrapped up. We wanted to do a bit of a debrief. So to help make sense of what took place and more importantly, where we go from here. Today I'm talking with my colleague, Ibukun Adebayo, Head of Strategic Initiatives at LSEG, and Wale Shonibare, a director at the African Development Bank. So, let's get into it.
Well, it is great to see you and speak to you today. And while I thank you so much for your time, I can't wait to get into the conversation with you because you're reasonably fresh back from COP, and I'm really kind of keen just to get your perspectives and your insights from your time there. So, let's start with you Wale if we can. What were your impressions of COP, and did it meet your expectations?
Thank you very much, Jane. Yes, COP did meet my expectations. I wouldn't say 100%, but I'd say maybe 80%. There were five key things that came out of the gathering. The first one being the need to strengthen the rules around weak carbon markets to enable countries to be able to trade carbon. The second was the establishment of the Loss and Damage fund. Thirdly, there was a call to tweak the mandates of multilateral lenders such as the African Development Bank and the World Bank to better align with energy transition. And then we also have to do more about mitigation, setting clear targets for mitigation. And lastly, there was the issue around the possibility of missing the 1.5 degrees target. So those came out as important highlights for me.
Okay, and Ibukun, does that kind of resonate with you? You were also there in Egypt.
Yeah, I was, and I think I'm a tad more optimistic than Wale I'd go for, at least 82% in terms of meeting my expectations. What I really liked was the focus on coalitions and campaigns and partnerships in particular were announced. And just to call out one or two of them, I thought, really exciting the news about the energy transition accelerator. So this is the initiative being led by John Kerry in partnership with the Bezos Fund and the Rockefeller Foundation. Also, Africa specific, the African Carbon Market Initiative, which is this expert steering group of about 13 individuals really to help deliver robust objectives around how to grow and develop Africa's carbon markets. But I thought equally on the more objective side, it exposed some of the shortcomings of some previous announcements of coalitions and partnerships at COP 26. So one of those, for example, was the Just Energy Transition Plan for South Africa, which is this 8.6 billion funds towards a transition away from coal, which we've seen as now been exposed as it was more or less of a loss and damage repatriation and more of a set of loans, concessional financing. So now there are great honest discussions on how to appraise and fix these in line with the renewed commitments from wealthy nations. So I hope this is going to help things like the Indonesian JETP plan, which was launched at COP 27 to avoid some of those pitfalls. So I was quite excited by that element and thought it was overall a very, very substantive cop.
Okay, that's interesting, and you touched on loss and damage there. And of course, that was the first time that that topic has been part of the official COP agenda. So I think it's good to see that those kind of conversations are looking to really encompass the broad spectrum of things that really we as nations need to think about as we tackle kind of global climate change. So I think from my perspective, kind of really pleased that that's on the agenda, too. Obviously, you guys are thinking a lot about sustainable energy in the context of Africa, and of course that really speaks to sort of thinking about loss and damage and where climate impact is felt versus where it is, where some of the damage is created. So perhaps we can turn our attention to Africa and sustainable energy and come to you Wale, help us understand why it's so important for Africa and maybe think about kind of just energy more generally for Africa as well. So just shed some light on it for us.
Thanks, Jane. I think in Africa, the main thing for us is that there are over 600 million Africans without electricity. So one of the key aspects that we have to focus on is energy access. Energy access for Africans should not be overshadowed by this discussion around energy transition. We know that Africa has to grow in a sustainable way. But even the word energy transition for many African countries doesn't mean very much because they don't have access to electricity. So, what are you transitioning from? Africa has contributed less than 3% to global emissions, and so it's very important that Africa is given that room to grow and to industrialize. Africa needs very strong baseload, there will be renewable energy, but you need baseload upon which to anchor the renewable energy. So it's very important for the agenda to take account of Africa's needs, which is to drive energy access for the over 600 million people without access today.
I think that's a really, really good reminder that actually tackling climate change and transitioning to sustainable sources of energy means really different things in different parts of the world. And, that's a staggering figure that 600 million Africans don't have access to electricity. To me, that's just a real kind of big, stark reminder of actually some of the prioritization and some of the very real debates and decisions that national goverments need to make. So coming to you Ibukun, I know that you've been working on thinking through what sustainable energy looks like for Africa. So tell me about that and particularly how we get the money to fund it.
I think, let's put this into context in terms of money to fund it. Between 2000 to 2020 about $2.8 trillion globally was invested into renewable energy, and that's across wind, solar, geothermic and all the infrastructure developments. In that same time, only about $60 billion was invested into Africa, and that's about 2% of that global total that I've just mentioned. Whilst Africa's contribution to greenhouse gas emissions is about 6%, so it's somewhat disproportionate in that sense. So, there's a key importance to start bringing capital to Africa, mobilizing African capital towards this challenge that Wale's mentioned, but also towards the energy transition for existing energy because Africa's population is set to double by 2050, 2.5 billion people. And most of those energy demands at this point in time are probably going to be met by high carbon, fossil fuel type power generation. So the key thing to mobilizing capital is really around the risks, understanding those fully and finding a series of key mitigants to those risks. So for overseas capital today, the biggest challenge is around currency risk. Bringing in overseas capital and repatriating it requires mechanisms that provide some form of safeguards against things like macro shocks and currency devaluation. So a lot of work needs to go in there. And I think in terms of local capital, it's really finding the right vehicles, whether it be capital markets and the right types of products across capital markets to really mobilize the African savings that's there. But the private sector should be the real route to doing this, along with a demonstration of additional support from the public sector as well, i.e., governments across Africa.
So let's pick up on that kind of governmental funding with Wale and look at the role of multi-development banks and blended finance. What's the role of that in all of this?
Well, multilateral development banks such as the African Development Bank play a very important role because we're able to channel financing into projects in Africa. So, for instance, working with the likes of the Green Climate Fund, which was established by the UN in 2010 to help redress the balance, channeling some money from the more developed world who have contributed to most of the emissions into emerging markets. And so the multilateral development banks blend the concessional funding coming from the Green Climate Fund and other climate funds with the more commercial funding available and to make it more affordable for countries because apart from the access problem, there's also an affordability problem. So a lot of consumers find it difficult to afford the cost of electricity. So part of what the financing has to do is to try and make sure that tariffs are as low as possible. That's where the blended finance comes in, in order for these tariffs to be affordable and also to create the confidence that foreign and local investors need to come in to support governments because there isn't always the confidence that government will be able to pay their bills on time. So when you have institutions such as ourselves, it provides that confidence, the catalyst that the private sector needs to come in.
Ibukun you mentioned earlier, so while we were talking about blended finance, obviously bringing the private sector in alongside government money. But Ibukun you mentioned earlier about risks and challenges of private sector. Is some of that to do with kind of the perception of how risky these sorts of markets are both and kind of Africa in particular. Is that true? Are investors kind of working their way through that or is there still some sort of legacy perception that these are markets which are just a bit too risky?
I think that's the case certainly for overseas investors, and there's actually a number of key studies which have demonstrated that over the last 20 years. Africa's project finance risk is actually one of the lowest only behind the Middle East. There's much higher project risk in more developed worlds and scenarios. But as with everything, perception is everything. So there needs too absolutely be a demonstrable set of covenants put in place in order to try to reverse those, but also creating products and creating concerted effort at bringing new products to the market. And whilst there are some excellent tools for the private sector, such as MIGA guarantees or guarantees from local governments or indeed from institutions like Wale's they don't always tend to work in symbiosis or are necessarily affordable for or appropriate for private finances. So an attempt needs to be or there needs to be some more coordination, I think, between those establishments in order to create the right set of mitigations for private finance. The other very interesting route is the route of African capital markets, which I touched on before. And I think this according to the World Bank, there's about $450 billion worth of African private savings, and that's about 25% of Africa's GDP. To put it into context, with the right products, with the right policy and regulation regulatory environments, removing some of those challenges that exist in African capital markets, that could be an excellent source of capital. The best propagant of an investment for an overseas investor, is the local market investing in that asset class. So if that mobilization of capital through African capital markets into renewable energies can begin, then I think it will create a virtuous circle, which again, will help on that risk perception issue that you mentioned, Jane.
So picking up on your point there about domestic investment, can we bring in Wale again here and sort of ask, have we got local currency funding in place? If not, why not? What's going on?
Some countries have deeper capital markets than others. So, countries such as South Africa, Nigeria, Egypt, you're able to raise substantial sums in local currencies. So, for instance, South Africa has had a very successful REIPP program to invest in renewable energy. They have raised close to $20 billion and 80% of that money has come from local investors. So in some countries such as Nigeria, we are having to create new products to enable lending in local currency over longer tenures. So the bank, the AFDB, has been involved in creating one such instrument called the Nigeria Infrastructure Debt Fund, and for the very first time you are able to raise 15-year debt in Naira, and in Egypt, we've also seen the participation of the local investors, as well as international investors on the Benban Project, which is the fourth largest solar plant in the world, where close to $4 billion has been raised. So, unfortunately, some of the other small some of the smaller countries do not have the same capacity and are still having to borrow in foreign currency. The problem with that is that countries are reaching their debt sustainability limits and where you have significant devaluations, it makes these projects a lot more expensive. And they also have IMF restrictions on the amount of hard currency loans they can take.
And so notwithstanding those challenges, we are seeing some kind of, we're not going for a blank canvas entirely. We've got some success stories, right? So, Ibukun, I think there's there's some that you were mentioning to me. Where are some of these highlights so far?
So I think there are a number of successes, which I think Wale will be able to talk being more on the ground. But one of the things that I think will bequeath success is, is some of the initiatives that are taking place. And I mentioned very briefly the Africa Carbon Markets Initiative, this is a really interesting initiative which has brought around a very myopic look at how to grow African carbon markets. So things such as how to grow carbon retirements, how to create new jobs around carbon projects, around their development, execution and certification and monitoring, how to raise the quality and integrity of African carbon credits, for example, today, and really to increase that pie. So I think these will be the harbingers of success moving forward. But ultimately there is a real opportunity for Africa to take a very important place within the entire global carbon market infrastructure.
Wale, do you see that as well? Are you seeing that carbon markets could be an important part of the ecosystem to get both access to energy, but also in a sustainable way?
Absolutely, and Africa plays a very important role. As we know, Gabon is 98% forests, and so that's the lungs of the world after the Amazon. So there are initiatives to allow Gabon to monetize the preservation of those forests. And there are other carbon sequestration, carbon capture initiatives that are going on. And also going forward, we're very, very excited about the prospect of hydrogen. Hydrogen has been identified as one of the key routes towards decarbonization and net zero. Studies have been undertaken to show that Africa has the potential to take up 20% of that market of providing hydrogen or its derivatives to the world, and the reason we're able to do that is the natural endowments, the highest irradiation rates for solar in Africa, as well as some of the best sites for wind energy. So countries like Namibia, Mauritania, Morocco, Egypt, Kenya, where you have ability to produce significant amounts of renewable energy, are very well set up to create green hydrogen and export to more developed parts of the world, Europe and the US, where there are particular commercial incentives to import green hydrogen.
I think that's really exciting and really challenges the perception that this is all downside risk for the African continent. To the contrary, actually, there's a huge opportunity here, and it's really about grasping that opportunity, right? So it's really interesting. I think we should be probably coming towards the end of this conversation, which frankly has been fascinating and some of the statistics that you guys have shared. I've tried to scribble down, but I think they're fascinating. Can we just close by maybe giving some parting thoughts as we look back at COP 27, but frankly, more importantly, look forward to COP 28? What are your parting thoughts?
My parting thoughts are that we all have a significant amount of work to do. The world needs to get serious about decarbonization. That is not going to happen by just appealing to people's, good nature. So there has to be some rules put in place around carbon, around carbon emissions, around trading, around the route to net zero through hydrogen and clean energy. And we have to work out where the financing has to come from. The world has accepted that the main polluters, the developing countries, have to pay in order to assist that process. But we also have to build capacity in the emerging markets to take advantage of these opportunities. So for me, we will just have to continue to build consensus and work together to achieve the objectives.
Thanks, Wale and Ibukun how about you?
Yeah, well, just picking up on Wale's last point there, I think partnership and coalition is essential. This is one of those classic cases of no one wins with this conundrum unless we all win. And ultimately, there is a huge opportunity for Africa, particularly around its huge offset opportunity. I think Africa will become the most preeminent low-cost and high-impact carbon offset opportunity and will really create some balance in a very, very complex but very, very important ecosystem. So, thank you.
Thanks, guys. That's been a really, really fascinating conversation. And I think that you really set out the challenge, both the risks and opportunities as well as to really move into a more sustainable energy solution in Africa. So thanks so much for your contributions. Fascinating conversation. Thanks very much.
That's it for this week's episode of the LSEG Sustainable Growth Podcast. If you're not already following us, give us a follow and rate us on Spotify, Apple Podcasts, or wherever you get your podcasts. And if you have any questions, comments, or someone you'd like us to talk to. Drop us a line at fmt@lseg.com.
