African people, businesses, and nations are becoming increasingly stressed by climate-related perils like droughts, river flooding, extreme heat, and rising sea levels. This is leading not only to the destruction of assets but also challenges to lives and livelihoods—not to mention disturbing the area’s peace, stability, and national security. And the situation is getting progressively worse, partly due to people migrating out of suddenly unlivable situations.
“Governments and development finance institutions clearly don’t have the capital needed to turn things around—and often don’t have the necessary expertise either.”
How can investors, businesses, and global society confront these challenges?
Governments and development finance institutions (DFIs) clearly don’t have the capital needed to turn things around—and often don’t have the necessary expertise either. For example, a 2023 report from the Global Center on Adaptation suggests that more than $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 climate finance capital investment budget is only about $31 billion, and that amount is intended to cover all areas of concern in all nations, according to the World Bank Group.
Furthermore, the entire gross domestic product of Nigeria, the largest economy in Africa, is only about $37 billion—and that money is used to manage a lot more than infrastructure development and climate adaptation, according to the Associated Press.
Finding the necessary capital
What does this mean? Essentially, this lack of capital means 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 just not realistic.
However, according to Sifma research, more than $120 trillion (with a T) in private money from insurance companies, pension funds, endowments, sovereign funds, and high-net-worth individuals is currently being invested in global fixed-income securities, mostly earning near-zero real yields. How can this capital find bankable projects that allow for private sector development and investment—at huge scale—to help solve these challenges while at the same time providing transparency and accountability?
I’m the faculty chair of Harvard Business School’s Africa Research Center (ARC) and a member of the Finance Unit at HBS. My MBA elective course is called Cities, Structures, and Climate Shocks. This winter, my fellow HBS researchers and I canvassed investors, funders, and businesses in East Africa on this topic, and I presented the findings to colleagues at the Harvard Salata Institute for Climate and Sustainability in March.
Why organizations are investing in adaptation to climate stresses
In August, Pippa Armerding, executive director of the HBS ARC, and I visited multiple sites and businesses in Dakar, Senegal in West Africa and attended an alumni event focused on climate adaptation and urban economic development. This is what we learned:
Adaptation finance is real. People we talked to from organizations like the Global Green Growth Institute, African Development Bank, Africa Finance Corporation, International Finance Corporation, as well as western non-governmental organizations, are now explicitly earmarking 30 to 40 percent of their total funds toward adaptation concepts like dams, irrigation, flood control, reflective roof coverings, and shifts to more sustainable crops based on land alterations caused by rainfall and intense heat. This amount goes beyond the financing of carbon mitigation projects like wind and solar energy efficiency, and the money dedicated to these projects has increased from near-zero just five years ago. The mitigation projects are getting less traction from promoters for their reduction of carbon dioxide emissions than they are getting from their resilience in the face of fuel scarcity and power grid interruptions.
We found that the average man or woman on the street in Kenya or Senegal does not care about global carbon, as that’s considered a “global north” concern. However, people absolutely do care about air pollution, the cost and availability of fuel and electricity, and avoiding the loss of roads, houses, farms, and factories due to floods, sea level rise, or extreme heat.
Enlightened self-interest still drives investment decisions. We spoke to several investors and business leaders, and very few were interested in “green” activities or even environmental, social, and governance initiatives on their own merits, since in many cases, they don’t lead to incremental revenue increases or reduced costs. That said, investing in energy efficiency, solar and wind energy, electric vehicles, drainage systems, and natural ventilation are easy for those entities to justify on their economic return on investment, and that’s why they embrace those ideas.
Additionality matters. The alumni group noted that organizations making investments in renewables or other efficiencies could perhaps 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,” situations in which the investor presence pushed a non-viable project into the viable camp. An example might be a community solar project that would not generate enough cash flow on its own to attract bank debt and thus would not get built—unless the additional capital made it work for the lender. These are additional investments that would not have happened without this capital. That spells impact.
Avoiding future costs is investment-worthy, just like adding future revenue. Most investors and lenders have a good handle on 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 in a new machine or more advertising, for example, 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 prior to the investment, and the investment will earn a return.
Now imagine in the climate space a flat horizontal line that represents net income if there are no new climate-related disturbances. All good. In contrast, however, it appears that bad, costly events like droughts or floods might send the curve far down. What if one invests ahead in defenses like raising bridges, expanding drainage systems, and planting more sustainable crops? Again, the cash flow curve goes down in the short term with the investment, but the net income curve is much higher and more favorable than just letting these evident climate issues take their course. This is a harder investment concept to explain and perhaps justify, but the return on investment is just as real. US analogies include adding seatbelts in cars to save lives, developing medicines for chronic diseases to avoid illnesses, and carrying an expensive backup quarterback on a professional football team as insurance against a starter who may get injured.
Co-benefits are tangible and financeable. Health improvement and time savings, for example, are real benefits. We rode the new bus rapid transit (BRT) system in Dakar, Senegal. Local businesspeople are taking the BRT from north to south, since the buses can travel in dedicated high-speed lanes, making the trip much quicker than driving when the roads are congested. The system is not just relegating those who can’t afford cars to buses. More significantly, this is an all-electric system, so the buses have no tailpipe emissions, and the cars that are now off the road are also not emitting exhaust gases. The hope is that with more people taking the bus rather than their own cars, the remaining traffic will move faster, also reducing tangible air pollution.
These benefits matter to the people and to the government of Senegal. The community has quantified the reduction in health care costs from bad outcomes related to automobile pollution. And they have also quantified the time benefit, finding that the BRT so far has reduced a 90-minute trip to 45 minutes. With a projected average of 300,000 boardings per day, the potential time savings is huge.
Further, being all electric and battery-powered, rather than relying on overhead wires like Amtrak electric trains, the buses also store energy, so the system can purchase from the grid during off-peak hours and deploy energy to turn wheels or to power other uses during peak times. The capital cost for the BRT was funded by the World Bank, and the operations are funded through a public-private partnership with Meridiam, a global infrastructure investor and developer, and the Executive Council of Urban Transports in Dakar, a government agency.
Financing climate adaptation
The bottom line? Investors, businesses, and global society can mobilize the capital and scale projects to help individuals, cities, and nations avoid some of the worst outcomes of climate change.
This can be done with a clear eye toward return on investment, particularly when the return includes less traditional measures like observable improvements in public health outcomes, economic activity, and time savings.
John Macomber is a senior lecturer in the Finance Unit at HBS, where his work focuses on climate adaptation and the future of cities. Macomber is also the faculty chair of the HBS Africa Research Center and a member of the executive committee of the Harvard University Center for African Studies.
You Might Also Like:
Feedback or ideas to share? Email the Working Knowledge team at hbswk@hbs.edu.
Image Credit: HBSWK with assets from AdobeStock/Igor Groshev and AdobeStock/vectorfusionart.
“Harvard Business School is the graduate business school of Harvard University, a private research university in Boston, Massachusetts. It is consistently ranked among the top business schools in the world and offers a large full-time MBA program, management-related doctoral programs, and executive education programs.”
Please visit the firm link to site
