Climate change and environmental degradation are now posing significant challenges and risks will be greater in the medium and long term. Faced with the urgency of action, Benin multiplies its chances to benefit from innovative solutions as well as the dynamics of financing from development institutions.
African countries account for less than 4 per cent of greenhouse gas emissions, but suffer the worst effects of climate change. Benin, like most African countries, is facing a double challenge: to boost economic growth after the COVID-19 pandemic, while giving priority to climate resilience and the transition to a green economy. While climate resilience is needed due to the upsurge in natural disasters, a just transition to a green economy is more urgent than ever for economic growth and the labour market. Droughts and floods are hitting the country harder and harder. In the current year, heavy rainfall had caused a rise in water levels in Benin and flooding in several cities in the country. The forecasting and warning unit updates its bulletin every day with alarming levels of water readings. Nearly a million people are threatened by floods. The water has risen in the river basins up to 9 meters, the peak recorded in Zagnanado. About 100 kilometres from Zagnanado, it has been reported that some 50 squares have been swept by the waters making many homeless. Planters have lost several hectares of their crops, several trails leading into the fields are inaccessible, swallowed up by the water. According to the Minister of the Interior, the alert can quickly turn red. The situation is not limited to these five municipalities and could extend to several others because of the rising waters in the river basins. The priorities for Benin therefore concern adaptation and mitigation of the effects of climate change.
Green and blue bonds to be issued
Benin’s commitment on climate finance is focused on the Government’s Programme of Action and the National Determined Contributions (NDCs) document. The country is also one of the first to finalize its NDC document in 2017. These documents, updated after the re-election of President Talon in 2021 and the development of the Sustainable Development Goals (SDGs) framework for action, were of paramount importance. These instruments enabled Benin to be the first African country to issue international bonds dedicated to financing projects with a high impact on the achievement of the SDGs in July 2021. The issuance of international bonds dedicated to financing projects with a high impact on the achievement of the United Nations SDGs has made it possible to mobilize an amount of 328 billion CFA francs, with a repayment deadline set at 2035. According to the Minister of State for the Economy and Finance, Romuald Wadagni, the funds mobilized will be used exclusively to finance various social and environmental projects contributing to Benin’s commitments to achieving the SDGs. In April 2022, the African Guarantee Fund for Small and Medium Enterprises (AGF) granted a portfolio guarantee line totalling 1.6 billion CFA francs to Ecobank Benin to support SMEs, female entrepreneurship and the green economy in Benin. In January 2021, the West African Development Bank (BOAD) launched the first sustainable development bond on the continent, known as the Green Bond. The operation raised EUR 750 million over a 12-year maturity at a very attractive rate of 2.75%, well below the market price. The resources raised are invested in projects with a high social and environmental impact, in line with the United Nations Sustainable Development Goals (SDGs). Priority sectors include agriculture and food security, renewable energy, basic infrastructure, health, education and social housing.
Challenges are Immense
At the 6th edition of the Green Finance Conference held in Cotonou, Jules Ngankam, Managing Director of the African Guarantee Fund Group, deplored great disparities. Every year, $300 billion in green issues are issued around the world. Africa captures only 1% of them. “When you are a poor country and you have the pressure of its people to provide electricity, the temptation to have a plant that runs on heavy fuel oil is unfortunately strong. On the other hand, we cannot go from an investment cost of 750,000 to 2 million euros for a megawatt. It’s more than double, “says Romuald Wadagni on the same occasion. For him, financing is not easy to mobilise for a gas-fired power plant as part of the transition. Investment costs for the green transition in Africa are high. Today, to produce a megawatt of electricity based on heavy fuel oil, the cost is about 750,000 euros. One million euros is needed for a gas-fired power station and 2 million euros for solar power. In Benin, the green economy encompasses activities in a variety of areas, from agri-food to energy, waste management, water, health and tourism. To meet the triple objectives of environmental, social and economic profitability, green actions require large investments or generate significant production costs. For example, renewable energies require significant upfront investments, although their operating costs are low, unlike fossil fuels. On the one hand, the private sector is called upon to finance climate-resilient projects in Africa. There are investment opportunities to be seized to create resilience. On the other hand, the difficulties of the green economy are linked to access to finance or high interest rate practices due to investors’ reluctance to face high risks. In order to promote the profitability of investments in the green economy, financial efforts and a revision of development models are important. The financial and fiscal provisions that currently penalize the development of this economy can be transformed into favourable factors for the latter.
Opportunities for financing the green economy
Green activities create new markets and create jobs. The transition to a green economy, rather than simply maintaining the status quo or hindering public policies, could only improve economic growth. For example, several economic instruments have emerged, including the clean development mechanism and the carbon market resulting from the Kyoto Protocol. The financial sector is essential to enable this transition because it can provide effective capital and risk-sharing mechanisms. Incorporating a just transition logic into financial sector operations can generate positive social and environmental outcomes, while minimizing and addressing potential negative consequences such as frozen assets, job losses and the decline of the local economy. Public financial institutions, sovereign wealth funds and development banks have begun to channel some of their investment in the green economy towards its development, although it is still modest.
The African Agriculture and Trade Investment Fund (AATIF), one of the ILO’s long-standing collaborations with impact investors, seeks to finance agricultural enterprises that are considering climate change adaptation and mitigation activities. As part of this commitment, AATIF recently updated its impact measurement framework to include an environmental dimension that contains climate change mitigation and adaptation indicators. Through technical assistance, AATIF supports its owned companies in understanding and managing climate risks in their activities. For example, AATIF helps financial institutions undertake a climate risk analysis of their loan portfolios to understand the potential impacts of climate change on their loan portfolios. The objective is to develop solutions to identify, adapt and mitigate potential risks, in line with the recommendations of the Working Group on Climate-Related Disclosures.
In December 2021, the Bank launched the Just Transition Initiative, which is supported by the Climate Investment Funds. In this context, consultations will be conducted with African stakeholders, with a view to building consensus on a practical definition of a just transition that can be effectively implemented. On the sidelines of the Africa Climate Week, Gareth Phillips, Head of Climate and Environment Finance at the African Development Bank, stressed the need to view the transition just from an African perspective and ensure that it is relevant to all Africans. “The African Development Bank will support Africa’s contribution to the fight against climate change and to limiting global warming to a level well below 2 – and ideally – 1.5 degrees Celsius, so that it is fair and inclusive, and thus respond to the social, gender, economic and environmental concerns of the continent,” he said to an audience of regional actors. The African Development Bank, in partnership with the Global Centre for Adaptation, aims to continue to fund climate adaptation and climate resilience to a very high level, providing up to $25 billion by 2025, of which approximately $12.5 billion is from the Bank’s own resources. Given its level of financial commitment to climate in Africa, the Bank was selected to host the African regional office of the Global Centre for Adaptation. The AFDB has developed a wide range of financial instruments to enable investments in climate action. These are loans, partial risk and credit guarantees, green bonds, green credit lines to financial and technical institutions that support the private sector. The Bank also provides climate finance, including through the Sustainable Energy Fund for Africa (SEFA), a special multi-donor fund that provides catalytic financing to support private sector investments in renewable energy.