African people, businesses, cities, and nations are increasingly stressed by climate related perils like drought, river flooding, extreme heat, and sea level rise. This is already leading not just to destruction of assets but also challenges to lives and livelihoods – as well as peace, stability, and national security issues worsened in part by migration out of newly unlivable situations.
How can investors, businesses, and global society face these issues? Governments and development finance institutions (DFIs) clearly don’t have the capital needed -- and often don’t have the expertise needed. For example, a 2023 report from the Global Center for Adaptation suggests that over $100 billion per year is needed to invest in infrastructure, weather forecasting, and protecting agriculture in Africa to address both poverty and climate stresses. Yet the entire annual World Bank capital investment budget is only about $20 billion – for all areas of concern in all nations, according to World Bank Information. Further, the entire GDP of Nigeria, the largest economy in Africa, is only about $37 billion - for everything, not just infrastructure development and climate adaptation (Associated Press).
What does this mean? That governments and DFIs will not be able to ride to the rescue and prevent further degradation in outcomes. Expecting these international actors to fund everything is not realistic. Yet according to Sifma Research there are more than $120 trillion dollars (with a T) of private money from insurance companies, pension funds, endowments, sovereign funds, and high net worth individuals currently invested in global fixed income securities, mostly earning near zero real yields. How can this capital find bankable projects that allow private sector development and investment – at huge scale – with transparency and accountability – to attack these challenges?
I’m the faculty chair of the HBS Africa Research Center and a member of the Finance unit at HBS. My MBA elective is called, “Cities, Structures, and Climate Change.” This winter, HBS researchers and I canvassed investors, funders, and businesses in East Africa on this topic, which I presented to colleagues at the Harvard Salata Institute for Climate and Sustainability in March. This August, Pippa Armerding (Executive Director of the HBS ARC) and I visited multiple sites and businesses in Dakar, Senegal in West Africa culminating in an alumni event in Dakar entitled, Climate Adaptation and Urban Economic Development. Here is what we learned:
Adaptation finance is real. Every person we talked to from organizations like GGGI, AfDB, AFC, IFC as well as Western NGOs is now explicitly earmarking 30-40% of funds toward adaptation concepts like dams, irrigation, flood control, reflective roof coverings, and shifts in crops as rainfall and heat alter. This is beyond the financing of carbon mitigation projects like wind, solar, and energy efficiency and it’s up from near zero just five years ago. The mitigation projects are getting less traction from promoters for their reduction of CO2 emissions than they are getting from their resilience in the face of fuel scarcity and power grid interruptions. The man or woman on the street in Kenya or Senegal does not care about global carbon; that’s a “global north” concern. However, they absolutely care day to day about air pollution, cost and availability of fuel, cost and availability of electricity, and avoiding the loss of roads, houses, farms, and factories due to floods, sea rise, or heat.
Enlightened self-interest still drives investment decisions. Few investors and businesses with whom we spoke were interested in “green” activities or even ESG on their own merits -- since those don’t lead to incremental revenue or reduced cost. That said, energy efficiency, solar, wind, electric vehicles, drainage systems, and natural ventilation are easy for those entities to justify on the economic ROI and that’s why they execute them. If an investor happened to be counting a green or ESG aspect, fine, but absent that there is not much interest.
Additionality matters. The alumni group noted that organizations making investments in renewables or efficiencies could maybe also attract “green finance.” The commercial terms were seldom better than non-green finance, and for the most part the projects would have been executed anyway. Our alumni were more interested in additionality where the investor presence pushed a non-viable project into the viable camp. These are additional investments that would not have happened without that capital…that’s impact.
Avoided future cost is investable just like added future revenue. Most investors and lenders have a good idea of the cash flow curve for an investment that will eventually add revenue. You can imagine a straight horizontal line that represents steady cash flow over time. An investment for example in a new machine or more advertising would cause short term cash flow to drop below the horizontal line…but if it’s a good decision the cash flow will soon turn more positive than before and the investment will earn a return related to how much higher the new line goes.
Now imagine in the climate space a flat horizontal line that represents net income if there are no new weather or climate related perturbations. All good. But, in contrast, it appears that bad events like droughts or floods may turn the curve very far down…bad cost events. What if one invests ahead in defenses like raising bridges, expanding drainage systems, planting different crops? Again, the cash flow curve goes down in the short term with the investment…but the net income curve now is much higher, more favorable, than just letting these evident climate issues take their course. This is a harder investment concept to explain and analyze but the return on investment is just as real. US analogs include seat belts in cars, medicines for chronic diseases that have no symptoms, or carrying an expensive backup quarterback on an NFL team.
Co-benefits are real, tangible, and financeable. Take health improvement and time savings. We rode the new bus rapid transit (BRT) system in Dakar, Senegal. Local businesspeople are taking the BRT from north to south since it is so much quicker than driving…it’s not just relegating buses to those who can’t afford cars. More significantly in this situation, this is an all-electric system. This means that the buses have no tailpipe emissions – and the cars which are off the road now are also not emitting exhaust gases. The further hope is that regular traffic will move faster, also reducing tangible air pollution.
These benefits matter to the people and to the government of Senegal. They have quantified the reduction in health care costs from bad outcomes from automobile pollution. They have also quantified the time benefit where the BRT is measured, so far, as reducing a 90-minute trip to 45 minutes. With a projected average of 300,000 boardings per day times say 30 minutes saved, this is arguably a savings of 6,000 person-days per operating day. At whatever hourly rate one cares to use, this is beneficial.
Further, being all electric and battery powered (not with overhead wires like AMTRAK electric trains), the buses also store energy so that the system can purchase from the grid off peak and deploy energy to turn wheels or to power other uses on peak. The capital cost for the BRT was funded by the World Bank and the operations are a public private partnership with Meridiam and CETUD, a government agency.
Financing Climate Adaptation. Investors, businesses, and global society can mobilize the capital and the scale to help individuals, cities, and nations avoid some of the worst outcomes. This can be done with a clear eye towards return on investment, particularly when the return includes less traditional measures like observable improvements in public health outcomes, economic activity, and time.
