The United Nations (UN) 2030 Agenda for Sustainable Development (SD) highlights the importance of inclusive and sustainable economic growth, employment and decent work for all (SDG8). Furthermore, sustainable development is considered an important tool to achieve the goals of the Paris Agreement on a global level, as well as the National Determined Contribution (NDC) that South Africa (SA) has committed to, to reach the goal of limiting warming to 1.5°C.

One of the greatest challenges of any developing country is to find the balance between increasing consumption to improve quality of life while ensuring an equitable transition towards a climate-resilient economy. The cognisance of a need for an equitable transition which is aligned with wider social impact has been a priority in South Africa’s sustainable development pathway for several years. The ambitious vision for 2030 forecasts that the country’s trajectory towards a low-carbon, resilient economy will be characterised by a reduced dependency on high-carbon energy sources and non-renewable natural resources, whilst delicately balancing developmental imperatives of employment creation and reduction of poverty and inequality.

It is clear from the vast and complex South African climate policy landscape that a low-carbon
or green economy is not a separate economy, but rather a call to action aimed at greening the current economy to remain resilient and globally competitive. This definition is intrinsic to much of South Africa’s policy environment, given that South Africa’s approach has deliberately been to mainstream sustainable and climate-resilient development rather than develop standalone policy. Five growing sectors are currently leading this mainstreaming of climate-resilient development in South Africa. These are clean energy, low-carbon transport, smart water (supply and demand), circular economy and smart agriculture.

South Africa’s National Climate Change Response Policy (NCCRP) explicitly calls for the inclusion of the financial services sector in shaping South Africa’s climate and green finance architecture alongside project developers and policymakers. In March 2019, South Africa’s 3rd Biennial Update Report to The United Nations Framework Convention on Climate Change (BUR3) highlighted that catalysing the financing and investments required to proceed towards the low-carbon and climate-resilient economy remains an important challenge for the country.

An International Finance Corporation (IFC) study estimated that the total investment needed to achieve South Africa’s NDCs is R8.9 trillion over a 15-year timeframe (from 2015 to 2030). This translates to a required annual investment of R596 billion to achieve South Africans NDCs by 2030.

The Landscape of Climate Finance in South Africa applies the Climate Policy Initiative (CPI) framework for climate finance mapping to the South African economy. It aims to inform ongoing efforts by the Government of South Africa to understand how climate finance flows throughout the economy and the areas on which it could focus to improve effectiveness going forward. This is achieved by mapping the lifecycle of flows, from sources through to intermediaries, instruments, disbursement channels, and final uses.

THE SOUTH AFRICA CLIMATE FINANCE LANDSCAPE

This report tracked annual climate finance totalling R62.2 billion for 2017 and 2018. For this report, climate finance is defined as local, national or transnational financing, which may be drawn from public, private and alternative sources of financing. These financial resources are intended to cover the costs of transitioning to a low-carbon global economy and to adapt to, or build resilience against, current and future climate change impact. This assessment that looks at detailed project-level data – understanding in detail the source, disbursement, instrument and use — can support public and private role-players with information to shape sectoral strategies and selected policies and improve coherence and coordination between public and private level spending in the sectors.

This is a baseline of what is possible in catalysing the financing and investments required to proceed towards the low-carbon and climate-resilient economy, which remains a vital challenge for the country.

PUBLIC FINANCE

Public finance actors committed an annual average of ~R22 billion, or 25% of the total climate finance tracked in 2017-2018. Public finance includes funds provided by governments and their agencies, climate funds, and government-funded development finance institutions (DFIs). These players may be both national and international. Public sector investments were tracked in all ten climate-related sectors, with clean energy (generation), general eco-system support, and cross-sector investments accounting for 75% of the tracked public climate finance. A strong domestic preference continues to exist, with 79% of public finance being raised and spent domestically in 2017-2018.

The South African Government accounted for the majority of the public finance that was
tracked, investing more than R12 billion or 55% of the tracked public investments. As set out in South Africa’s National Development Plan (NDP), Government has committed to investing 10% of gross domestic product (GDP)3 within three key areas, namely, transport, energy and water, until 2030. Although R12 billion is significantly less than 10% of South Africa’s GDP, it is expected that the climate finance in these three areas is higher, but is currently not being accurately tracked. It is also important to note that only direct investments into adaptation, mitigation and dual impact projects were tracked. No not recurring administrative, policy development or human resources expenses were included.

PRIVATE FINANCE

Private actors accounted for an average of R35.3 billion of the funds tracked per year
during 2017 and 2018. 100% of this investment was tracked in climate mitigation sectors
(clean energy, energy efficiency & demand-side management).

Commercial investors are the largest source of private climate investment, accounting for R19.3 billion. Corporates, philanthropists/donors, NGOs and households accounted for the remaining 45% of the tracked private sector investments in this landscape.

RECOMMENDATIONS

Launch a process to develop agreed-upon definitions of climate finance, with guidelines on tagging and tracking investments. In line with the work done on the Green Finance Taxonomy, agreed-upon definitions of climate finance, accompanied by an outline of sectors and sub-sectors, should be launched to build credibility, foster investment, and enable effective monitoring and disclosure of performance. This process should be inclusive of the full market, engaging both public and private sector players, to ensure long-term buyin (the typology and sector breakdown developed in this project will be shared with key stakeholders, i.e. Department of Environment, Forestry and Fisheries, National Treasury, EU Taxonomy working group and the South African Reserve Bank to assist in creating market coordination). Ideally, a central registry of climate finance should be developed to enable the process of long-term tracking.

Improve public-private coordination within South Africa. The Climate Finance Landscape found that climate spending and investment in South Africa, for the most part, remains siloed between the public and private sector. Aside from the intentional efforts of a few development finance players, collaboration is limited. As shown in the Landscape, the R4.9 billion of blended finance – which brings together public and private sources of funding – generally comes from international rather than local sources. With R8.9 trillion of financing needed to achieve its climate targets, South Africa must unite to scale investments towards climate change. There needs to be a coordinated effort to focus resources where there is the most effective and efficient spend on the right sectors meeting social and environmental objectives.

Increase support for blended finance vehicles and develop innovative financial tools. To catalyse the R8.9 trillion required for South Africa, innovative finance tools should be developed, tested and scaled to leverage private sector capital into sectors that are still seen as high risk. Financing instruments deployed by governments should focus on reducing barriers, risks and the potential for market failures with the explicit aim of crowding-in private sector investment. Similarly, more project preparation facilities, which utilise blended finance structures, should be established to increase the number of bankable projects. The DBSA and GCF are making strong strides towards this goal in 2020 onwards, but more support for financial innovation is needed. Such facilities should be focused on the sectors that have been heavily reliant on grants and concessional funding. As an additional bonus, such structures will make great strides in promoting public-private sector coordination.

Increased clarity and consistency around regulation is needed, particularly for smaller
climate sectors and subsectors. Regulations and legislation in South Africa need to focus on creating a more enabling environment for climate finance. Discussions with experts in climate finance revealed that there are gaps in certain sector policies, and legislation needs to be adapted to support the shift and diversify the portfolio of climate projects. More incentives should be created for climate finance spending, both by the private sector and households. As highlighted in National Treasury’s technical paper on Sustainable Finance (2020), regulators and practitioners should collaborate to provide technical guidance, standards and norms to assist in identifying, monitoring and mitigating environmental (and social) risks.