OPINION: What Can Africa Gain From the Energy Transition's Sustainable Finance Movement?

07 Jul 2021
07 Jul 2021

The energy transition away from fossil fuels is not only a planet and life-saving expedition; it is also one that will save us all a pretty penny or two. However, hardly anyone has discussed just how many pennies Africa stands to gain from the energy transition’s sustainable finance movement. Recent reports suggest that divestment from fossil fuels and investment into renewables have resulted increased returns for investors.

Typically, environmental concerns drive arguments for the energy transition toward renewables. However, recent investment reports by BlackRock and Global SWF suggest a powerful economic argument for the transition away from fossil fuels.

Carbon Tracker’s widely acclaimed report shows that if the Earth continues on its current trajectory, irreparable damage would befall the ozone layer, thus altering the climate irreversibly. The report illustrated that in 2011 already, the world had reached about 30% of its allowable carbon emission capacity for the next 50 years. The report also showed the true burden of carbon emissions caused by private and public companies. Specifically, that fossil fuel drilling, producing, and consuming companies are responsible for about 71% of global carbon emissions.

After Carbon Tracker’s report, the transition to renewable energy and its accompanying sustainable finance gained traction. Sustainable finance involves investors taking a business’ social, environmental, and governance practices into account when deciding whether to invest. Most importantly, Carbon Tracker’s report provided the first incontrovertible evidence regarding the true cost of the top 100 listed coal and the top 100 listed oil and gas companies’ activities on the Earth’s climate. The massive carbon footprint of these companies sparked outrage across the globe and jump-started the energy transition and its accompanying sustainable finance drive.

In March 2021, BlackRock and Meketa, two of the world’s largest investment houses, released reports regarding the financial sensibility of the energy transition. The reports showed that, contrary to popular belief, divestment from fossil fuel projects has led to increased returns. The reports revealed that fossil fuel projects have consistently underperformed over the last five years, and projections indicate that this trend will continue in the coming years.

Similarly, Global SWF’s latest report (see Reuters for a summary) detailed how the Norwegian Sovereign Wealth Fund’s oil and gas holdings lost 11% of equity between 2018 and 2020, while the Fund’s green stock holdings brought in returns of 316% for the same period. The numbers in these reports present a pattern of increased earnings for funds brave enough to ditch fossil fuels and take up the green portfolios. Ethical investment not only gives one a cleaner conscious, but also a fatter wallet.

More recently, in May 2021, the International Energy Agency released its first report on the energy transition. The report set the target for reaching net-zero carbon emissions by 2050. However, this report has been controversial, with some embracing it and others rejecting its findings. The Organisation for Petroleum Exporting Countries (OPEC) is a prominent nay-sayer of the report, arguing that the sustainable finance drive deprives the extractives industry of investment. This deprivation, OPEC has cautioned, will lead to supply shortages, which in turn will result in a spike in prices. Given our current reliance on fossil fuel technology, the production and development of renewable energy technology and infrastructure will initially need fossil fuel. An increase in oil prices will make the energy transition more expensive. OPEC argues further that African countries will be disproportionately affected by spikes in fossil fuel prices, and will thus be unable to participate in the energy transition at the same pace as developed countries.

However, in 2020, supermajor investors like the Norwegian Sovereign Wealth Fund, amongst others, announced their plans to divest from companies that do not meet the net-zero greenhouse gas (GHG) emissions standards. Toeing the line cast by their investors, producers such as BP and Shell started working on revamping their operations to 'greener' portfolios.

Legitimized by the Paris Agreement, climate activists across the globe have also advocated for the introduction of Carbon Emission Laws. In May 2021, the Court of the Hague laid down its landmark decision regarding the need to limit climate change. The Court ordered Shell to cut its carbon emissions by 45% in the next 10 years. This precedent-setting judgment, compounded by the decades of research on climate change and corporations’ role in exacerbating global warming, is bound to send the sustainable finance drive into full throttle.

Despite the overwhelming evidence of the economic potential of green energy, the African Energy Chamber continues to advocate for investment in, and exploitation of, Africa’s fossil fuels. The Chamber’s Executive Chairman has noted that Africa contributes about 2% of total global carbon emissions.  Expecting African countries to abandon their mines was unconscionable and out of touch with reality, said the Chairman. Along this line of reasoning, the energy transition and its sustainable finance movement do not seem viable considering Africa’s economic development and energy poverty crisis.

However, a more nuanced view of the elements involved in this discussion is needed. Nalule’s posits that African countries need to transition away from fossil fuels and coal for energy production by using the profits made from fossil fuel and coal exploitation to fund their green/clean energy agendas. Additionally, considering the profitability of green energy presented by BlackRock and other investment houses, this article recommends that African countries diversify their investment portfolios to include green energy stocks. Returns from these investments can be used to further countries’ green agendas or to make up for shortfalls brought about by the sustainable finance movement’s drive for divestment from fossil fuel and coal projects.

African countries should also set policies incentivizing investment in the development of green energy projects. Africa’s existing mining policies can be amended to require investors to develop, or contribute to the development of, a green energy project whilst extracting non-renewable natural resources. Finally, this article also recommends that countries explore the resources for the infrastructure contract model as a solution for developing the needed infrastructure, and technology, and gaining the needed skills to participate in the energy transition.

A resource for infrastructure contract refers to a contract model where a natural resource affluent nation exchanges some of its resources with an investor for a mutually agreed-upon infrastructure project. For example, a country like South Africa could exchange a mutually agreed quantity of its coal with China for a solar power plant and a wind turbine plant. The parties agree to the size of the plant, and the ‘investing’ nation – in this example China – then builds the renewable energy power plant at its own cost to the exact specifications agreed upon by the parties. This mode of contracting finds its foundation in the barter trade system, whereby parties trade a commodity for the development of infrastructure.

In essence, this article recommends modifying the resource for infrastructure contract model to exchange non-renewable natural resources for the development of renewable energy plants. Such a contract must also provide for the upskilling of, and skills transfer to, locals by the country ‘investing’ the infrastructure. Upskilling will ensure that the nation providing the natural resources and ‘receiving’ the infrastructure can sustainably manage, maintain, and operate the project after the infrastructure investor completes the project. These recommendations would benefit from a more detailed analysis in future research by scholars and practitioners.

The Court of the Hague’s decision, the reports by the International Energy Agency and the various investment houses, are the metaphorical three horsemen sounding the bells of fossil fuels and coals’ apocalypse. The end is definitely nigh, but the way African countries and agencies respond to this news does not have to be contrarian. How we position ourselves during this transition will dictate our future and write our history in the next 100 years. The time to debate whether Africa should participate in the energy transition is long past. If Africa does not start actively and meaningfully participating in the energy transition soon, we will get left behind. We risk losing out on the money to be made off green investments, while also producing fossil fuels for which there will soon be no market. African countries must act on their own terms, but we must also remain cognizant that we are part of the global collective. To be sure, there is a lot to gain from the energy transition: a planet to live on and a decent payday.

Written by Leezola Zongwe.