How will the COP28 resolutions shape Africa’s financial future and how can regulators safeguard it?

Sandra Villars, Partner, Financial Services at Oliver Wyman, examines the concept of nature-related risk and stresses the need for financing for climate adaptation that is relevant to the African context.

Sandra Villars. Financial Services at Oliver Wyman

About Sandra Villars

Sandra is a senior professional with over 20 years’ experience with global top-tier financial-services institutions. She has worked with over 20 financial institutions in the US, UK, Europe, Middle East and Africa. Her areas of focus in Finance and Risk include ESG, treasury and prudential regulation.

The COP28 Summit, which ran from 30 November to 13 December 2023, resulted in a variety of new climate-related financial, nature and infrastructure pledges from global leaders. While much of the focus was on the agreements to transition away from fossil fuels and triple global renewable-energy capacity by 2030, other resolutions will significantly impact Africa’s climate and financial future.

The launch of a Loss and Damage Fund, for example, is something the low-income countries most affected by climate change have long wanted. The idea behind the fund is to help these countries better cope with losses that result from extreme climate events. Despite fears that the technical details might not be ironed out in time, an agreement was reached and several countries immediately announced commitments to the fund. There are, however, several unresolved issues that emerged from the summit. The lack of financing for climate adaptation and resilience on the continent is of particular concern. Another area where more movement is urgently needed is within global financing networks. Resolving those issues will be key to securing Africa’s financial future.

The African challenge

The lack of available financing for climate adaptation is particularly concerning. This financing is desperately needed to accelerate Africa’s climate change adaptability. In part, that’s because Africa is widely recognised as the continent
most vulnerable to climate change. But it’s also because many of the legislative changes adopted by high-income countries and regional bodies could do serious harm to African growth and development. Take the European Union (EU)’s Carbon Border Tax Adjustment Mechanism, for example. The well-intended legislation aims to equalise the price of carbon between domestic products and imports. The primary aim of the mechanism is to prevent European companies from moving their operations offshore to countries with more lax carbon protections. Still, it has profound potential implications for the African continent.

Rural entrepreneurs and farmers need protection from extreme climate events. The African Risk Capacity Group, an agency of the African Union, is trying to build resilience so that farmers can thrive, even in dry conditions. An improved response to climate-related food security emergencies includes providing insurance for extreme weather events. Credit: ARC

The mechanism could place significant constraints on the continent’s ability to export materials such as fertilisers, iron, cement steel, and aluminium to EU countries. Given that the bloc is one of Africa’s largest trading partners, that would force many African countries to revert to exporting raw commodities, a significant step backwards. Considering that the continent produces just 4% of global emissions, it also doesn’t seem particularly fair.

But with the right funding and incentives, that needn’t be the case. African countries will be able to successfully transition and even become leaders in sustainable business. Unfortunately, that funding has been thin on the ground despite years of pledges.

The $100 billion promised to developed countries in 2009 at the COP15 in Copenhagen, for instance, remains largely unfulfilled. Even the much-vaunted loss and damage fund will require billions of dollars more than the $700-million pledged at COP28 if it’s to have any impact on climate losses that low-income countries in Africa and other parts of the world will encounter in the coming years. After all, Nigeria’s 2022 floods alone caused more than $4.2-billion in damages. The World Meteorological Organization (WMO)’s The State of the Climate in Africa 2022 report, meanwhile, shows weather and climate-related damage amounted to $8.5-billion in that year. Given that a report from Carbon Brief shows these extreme climate events are becoming more common and more deadly, it’s clear that more funding will be needed.

African regulators have a role to play

While it’s obviously important that high-income countries play their part when it comes to funding, it’s also critical that African regulators provide the kind of environment that encourages funding and investment. In doing so, they must
ensure that any regulations protect the continent’s natural assets while safeguarding against nature-related risks. Here, transparency and continuous engagement with the financial institutions they oversee as well as with state ministries is critical. This not only means that these bodies get a better understanding of why regulations are
being implemented but also that regulators better understand the realities of the industries they oversee.

African regulators can further enhance their causes by ensuring that they regularly engage with environmental and nature-focused networks, such as the Sustainable Insurance Forum (SIF), the Network for Greening the Financial System (NGFS), the African Natural Capital Alliance (ANCA) and the Task Force on Nature-Related Financial Disclosures (TNFD). These networks not only provide the kind of frameworks that can easily be adapted for regulatory purposes but can also guide regulators, helping them develop regulations that mitigate nature and climate-related financial risks.

African regulators must provide an environment that encourages funding and investment so that business and trade can thrive. Darkshade Photos, Pexels.

Push for funding but focus on self-sufficiency

Ultimately, while there were announcements at COP28 that deserve to be celebrated, it’s clear that Africa still has much work to do when it comes to securing both its climate and financial futures. Pushing for increased funding
from high-income countries will, of course, be important in this regard. Perhaps even more important, however, will be regulators ensuring that the regulations they develop and enforce don’t just help build climate resilience but also the kind of innovation that allows African countries to demonstrate ever-greater degrees of self-sufficiency in this regard.

About Oliver Wyman

Oliver Wyman is a leading international management consulting firm that combines deep industry knowledge and expertise to create breakthroughs for clients across industries.