Partnering for transition 

We have identified a growing number of global investors that have committed to align their portfolios with net zero outcomes, are actively seeking investment opportunities in emerging markets (EMs), including Africa, and which provide a compatible risk-adjusted return alongside support for the regional transition. Despite the established need for private capital, many investors are yet to be convinced by the current range and depth of EM transition investment opportunities.

Across the many countries that make up the African continent, and the Global South more broadly, investing for transition supports critical economic and social development, from the delivery of renewable energy sources and improvements in energy efficiency, to the enhancement of economic infrastructure and resilience to the effects of global warming. Shifting just 3.7 percent of the $100 trillion of global assets under management by institutional investors each year could enable achievement of the Sustainable Development Goals.¹

Mercer’s view is that there is a need for a broader definition of transition within such frameworks − expanding from investment approaches that target carbon reduction alone, to address economies that have yet to see their emissions peak, nature loss, physical risks and adaptation, engage in a circular economy and support principles of equality for sustainable development. 

Encompassing the above interrelated issues requires investors to recalibrate what investment risk management and return maximization means today for investment in Africa and beyond.

With the focus on Africa through COP27 and COP28, the case for investing in climate transition and adaptation, with a particular focus on areas such as renewable energy technologies, including solar, onshore wind, small hydro, biomass and landfill gas, to meet sustainable development aims and contribute to economic prosperity is clear.² Mirroring the proposal to broaden the definition of transition, investment will also be needed to support a wide array of sectors as they transition to be compatible with a low-carbon and sustainable economy. Asset owners seeking to manage risk and build resilient portfolios recognize the need for closing the funding gap between Global North and South to achieve global financial stability. In response, we are seeing investments emerging that address transition through nature-positive investing, physical risks and adaptation, circular economy and fair share considerations. Further investors are understanding the social impacts of investing and the need to support a Fair or Just Transition.

Drawing on the strengths of and lessons gleaned from the range of frameworks developed over time, Mercer view the following elements as supportive of increased capital allocation into the African transition:

• Market participants advocating for transition in Africa (alongside other emerging markets and developing economies). Investor advocacy should focus on the importance of these regions in delivering the global transition to a low-carbon economy, the current financing gap and the role that private capital can play in delivering tangible economic, social and environmental impacts alongside financial returns.
  
  
• Investor commitments through establishing credible Net-Zero/transition finance frameworks to build demand signals for investable projects and innovation. Importantly, investor-specific frameworks should be flexible to local context, recognizing a “fair share” of the available global carbon budget and the associated trajectory for emissions reductions. Example commitments could include a target allocation to climate solutions, with specific allocations to different regions, including Africa.
  
  
• Alignment of policies and approaches with these commitments, using frameworks to categorize assets that fulfil the objective (e.g. taxonomies) as well as incorporating awareness of sectoral and regional differences. 
  
  
• Collaboration of multiple stakeholders (e.g. development banks, climate finance sector and local private sector) to build local knowledge and work to establish an enabling regulatory/investment environment, supporting overall accessibility. Current collaborative initiatives, such as the G20 Sustainable Finance Working Group Private Sector Roundtables, GIP’s Africa Chapter need to be built upon and scaled to crowd in private sector funds at the level required.
  
  
• De-risking of investments (e.g. blended finance, guarantees and long-term FX hedging) to support the flow of capital, supporting overall affordability.
  
  
• Reporting by asset owners against target allocations to climate solutions in Africa and emerging markets.

At COP28, we look forward to joining discussion and supporting advances in the development of an investor-specific transition framework for Africa, bringing together stakeholders from across the global investment management and asset-owner arena to deliver this critical lever in order to increase capital flows in Africa, and to ultimately support global climate goals.