The Green Climate Fund (GCF) and the Development Bank of Southern Africa (DBSA) signed an agreement today which will kick-off the programme to break market barriers and accelerate investments into climate projects.
The Southern Africa region is exceptionally susceptible to adverse effects of climate change, such as extreme droughts and rainfall fluctuations. Moving national economies away from fossil fuels, which still dominate the energy mix in the region, will come at a high price. It is estimated that in South Africa alone, more than USD 349 billion will be needed to reach national 2050 goals established in the country’s Nationally Determined Contribution (NDC).
Significant investments beyond public resources are needed to tackle the challenge, and mobilising private sector investments is crucial. Nevertheless, a series of market barriers in the region are hindering private investments in climate action. They include a lack of affordable long-term financing, perceived financial and technology risks, high up-front capital cost, among other things.
The DBSA Climate Finance Facility (CFF), into which GCF is investing USD 56 million, will break these barriers by providing credit enhancements such as subordinated debt tranches and tenor extensions to de-risk and increase the bankability of climate projects in order to crowd-in significant investments from commercial banks and projects sponsors.
CFF will be the first-of-its-kind climate finance facility in Africa using a pioneering Green Bank model. The programme will target South Africa, Namibia, Lesotho, and Eswatini, but has a strong potential to be replicated in other developing countries to rapidly scale up private sector climate investments.
“The DBSA Climate Finance Facility is a great example of GCF support for financial innovation which helps promote transformative climate action in the private sector,” said GCF Executive Director Yannick Glemarec. “The banking sector in South Africa alone has total assets exceeding USD 380 billion. CFF has the potential to accelerate Green Banking and shift significant private capital into climate investments. I’m very excited to see the GCF and DBSA partnership turning these innovative financial models into reality,” he added.
“Climate change is a severe and growing threat that affects Africa’s economies, natural resources, livelihoods and social stability. The signing of this agreement today is a significant milestone that represents our concerted effort to address climate change and contribute to the broader low-carbon and resilient development trajectory in Southern Africa,” says Patrick Dlamini, Chief Executive of the DBSA.
“The CFF will enable the DBSA to increase our finance support to climate friendly projects in the region and crowd in private capital investors.”
Mobilising private sector investments in climate projects is at the very core of GCF activities. GCF can take higher risks to support transformative climate projects and the crowding-in of private sector investments at scale. To date, GCF private sector investments already exceed USD 2 billion, covering a variety of financial instruments such as loans, grants, guarantees, and equity.