Client
Expertise
Sustainable finance
Impact
Enabling climate smart decisions across investment portfolios in Africa.
Challenge
How can financial institutions in Africa better anticipate and mitigate climate risks in their investment portfolios?
Climate-related events like droughts are expected to intensify, and will continue to disproportionally affect the African continent, increasing the exposure of African businesses to climate risks. Climate action and building climate resilience are vital, with climate smart decisions becoming increasingly important to businesses and investors alike. With the majority of finance flowing from the Global North, vulnerability to climate risks – both physical risks and transition risks from growing climate policies can be a barrier for investment.
Nonetheless, many financial institutions lack the tools, processes, and capacities to anticipate and manage climate-related risks in their investment decisions. It makes de-risking and greening investments a complex process.
AfricInvest is a multi-strategy investment platform operating in Africa for the past 30 years, which has supported over 230 companies, completed over 130 exits, and created and sustained over 750,000 jobs across 35 countries. As part of its commitment to contributing to a just Net Zero future, AfricInvest is actively working to decarbonise its investment portfolio. Working with the Carbon Trust and with the support of DEG, AfricInvest wanted to deeply embed climate considerations into its investment strategies.
Financed emissions
Financed emissions are the greenhouse gas emissions related to the investment and lending activities of a financial institution. They often make up the majority of emissions for financial institutions, such as investors, banks, and insurers. The Partnership for Carbon Accounting Financials (PCAF) classifies emissions associated with the following seven asset classes as ‘financed emissions’ in the ‘Global GHG Accounting and Reporting Standard’: listed equity and corporate bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages, sovereign debt, and motor vehicle loans.
Climate-related risks and opportunities
The Taskforce on Climate-related Financial Disclosures (TCFD) has divided climate-related risks into two major categories. Firstly, risks that relate to the transition towards a Net Zero economy, such as policy, legal, technology and market risks. Secondly, risks linked to the physical impacts of climate change on an organisation. Businesses and financial institutions are increasingly required to disclose their climate-related risks and opportunities under the TCFD recommendations.
SOLUTION
Developing dedicated tools to calculate financed emissions and assess climate-related investment risks and opportunities
The first step towards decarbonising a financial institution’s portfolio is calculating its financed emissions exposure. AfricInvest recognised that by understanding the emissions of its portfolio, it could better manage climate risks, support its portfolio companies to take valuable climate action – going from grey to green – and attract capital from a broader investor base. Together, we:
Developed a financed emissions tool which AfricInvest can use to measure its portfolio-wide footprint. The tool itself conforms to PCAF’s GHG Accounting and Reporting Standard.
Designed a tool that evaluates climate risks and opportunities aligned with the TCFD recommendations. The tool leverages best practices to identify and examine risks from different sectors and geographies.
Delivered a series of workshops and training sessions for employees across the organisation, including Investment Managers and Senior Executives. These sessions covered how to use the tools and highlighted best practice for climate risk management.
Advised on the next steps AfricInvest should take to advance its just Net Zero ambitions. These included quantifying footprints, setting science-based targets to reduce emissions in line with the latest climate science, and TCFD-aligned reporting.
IMPACT
Addressing financed emissions in Africa to encourage climate smart decisions
Helping AfricInvest to understand the climate impact of its portfolio has played a critical role in the company building climate considerations into its investment approach, from initial deal sourcing all the way to exit. The firm now benefits from critical tools to assess the emissions and climate-related risks of its existing and potential investments. This collaboration enabled AfricInvest to:
Establish a sturdy foundation to manage the group’s emissions exposure, set near-term science-based targets for its Scope 1, 2 and 3 emissions and ultimately accelerate its decarbonisation trajectory.
Make more informed investment decisions. A greater understanding of the climate risks and opportunities across the sector helps AfricInvest assess the impact of its existing and future investments.
Build internal support and buy-in for AfricInvest’s just Net Zero ambitions and the efforts required.
Facilitate greater engagement with portfolio companies to encourage carbon footprinting and raise their climate ambition.
You cannot get to Net Zero with zero financing, zero process and zero training. With support and tools from the Carbon Trust, we were able to quantify our financed emissions and assess the impact of our portfolios, as well as potential investments. The Carbon Trust’s collaborative approach was much appreciated as they tried to immerse themselves in the project to better understand what we do, what we need, and where we want to go.
