Integrating environmental, social and governance principles into its financial markets is an ambitious yet urgent mission for Africa. The paradox is stark: although Africa contributes only 5% of global emissions, the continent faces disproportionate impacts from climate change, including intensifying droughts and rising sea levels.
Yet, the 2024 Absa Africa Financial Markets Index highlights how African nations are advancing sustainable finance despite shallow market depth, high debt levels and data scarcity. Panellists at a recent OMFIF roundtable on sustainable investment emphasised the continent’s specific hurdles as well as its steady progress. The discussion considered critical developments in the region, including those related to green bonds and climate stress testing as well as how to promote regional collaboration.
Strengthening ESG frameworks and initiatives
Regulatory advancements are effectively driving ESG growth across Africa. According to AFMI, 23 countries now integrate ESG measures into their financial market frameworks, a notable increase from previous years. Moreover, 15 countries offer incentives for issuing ESG assets, such as tax breaks, to encourage sustainable investments.
Countries like Mauritius and Cabo Verde are leading this regulatory push. Mauritius introduced sustainable bond guidelines and listed its first green bond in October 2023. Meanwhile, Cabo Verde launched the Blu-X platform and listed its first green bond in November 2023, building on its 2022 blue bond success in ocean conservation. These efforts highlight a growing trend, with 71% of AFMI countries listing ESG assets in 2024, up from 57% in 2021, reflecting an increased commitment to sustainable finance.
In a milestone for the continent, Rwanda issued Africa’s first sustainability-linked bond in 2023, linking interest payments to key performance indicators on ESG compliance and gender equality. Kenya, in partnership with the World Bank, is also developing similar bonds targeting rural electrification and social goals. As highlighted during the roundtable, KPIs play a critical role in fostering transparency and ensuring resources are directed where they are most needed.
Addressing climate risks through stress testing
As climate risks intensify, African nations are adopting climate stress testing to bolster financial resilience. The 2024 AFMI report reveals that eight countries now have climate stress testing guidelines, up from just one (South Africa) in 2021. Rwanda and Zambia are recent additions, with Rwanda introducing mandatory climate risk management guidelines in March 2024. Zambia’s central bank conducted macroeconomic stress tests in May 2024, including an assessment of El Niño-induced drought impacts.
The Bank of Mauritius is advancing its climate stress testing framework, focusing on helping financial institutions address risks like floods and cyclones. However, panellists at the roundtable noted continuing data challenges, with the central bank relying on proxies and International Monetary Fund support to finalise its framework.
Other countries are in the early stages of integrating climate risks into stress testing, with support from international institutions. Cabo Verde is part of an IMF programme, while the World Bank is assisting Kenya through training. While these initiatives are critical for integrating climate risks, panellists emphasised that effective stress testing requires a sound financial infrastructure as a foundation for climate-specific analysis.
Unlocking potential of regional collaboration
Regional collaboration offers major potential to accelerate ESG adoption and strengthen Africa’s financial markets. Panellists at the OMFIF roundtable even highlighted the need for a regional equivalent of the Bank for International Settlements to pool resources and standardise ESG frameworks. An entity similar to the BIS could facilitate knowledge-sharing, provide technical assistance and support smaller economies in building capacity and accessing capital. This ensures that ESG principles are embedded more uniformly across Africa’s diverse financial systems.
Meanwhile, the West African Economic and Monetary Union has published a taxonomy for green, social and sustainability bonds that applies to countries in the union including Benin, Senegal and Côte d’Ivoire. Kenya and Cabo Verde are also developing their own taxonomies to align with international ESG standards.
The South African Reserve Bank is also advancing ESG efforts both domestically and regionally. It has integrated ESG factors into its investment strategy, notably investing €150m in a green bond as part of its reserve management framework. As part of its efforts to promote the greening of financial sectors, the SARB is also collaborating with central banks within the Common Monetary Area and the Southern African Development Community by instructing banks to improve their ability to withstand climate risks.
Elsewhere, encouraging intra-African trade using stable regional currencies could further mitigate currency risks associated with ESG bonds. As one panellist noted, ‘Collaborative frameworks will enhance market accessibility and investor confidence’.
With abundant natural resources and pressing climate risks, Africa is in a powerful position to not only adopt but shape global ESG standards. A panellist from the roundtable mentioned, ‘Sustainability is not an option; it’s the only way forward’. While challenges remain, Africa’s ESG journey promises to reshape its financial markets and offer valuable lessons to the global sustainable finance movement.
Yara Aziz is Economist, Economic and Monetary Policy Institute, OMFIF.
