By Katie Hill, Expert Partner, Boston Consulting Group in Nairobi
Africa holds 40% of the world’s solar energy potential—and yet receives just a fraction of the capital needed to unlock it. This is not just an inefficiency. It’s a failure of capital architecture—and a threat to global climate progress. Similarly, Africa is home to 65% of unused arable land and could become the climate-smart global food basket if matched with the right financing.
Traditional private capital, which has proven effective in developed markets, encounters significant structural barriers in Africa. Historically in the United States 20% of climate finance originated from private equity and venture capital investors, yet for Africa, this figure plummets to less than 5%.
This disparity becomes more striking when considering that Africa offers compelling advantages such as natural assets: Africa’s tropical forests sequester three times more carbon dioxide per hectare than temperate forests in developed economies. Further, with limited legacy fossil fuel infrastructure, the continent has an opportunity to build climate-fit infrastructure from the start.
The consequences of this capital deployment gap are both profound and measurable.
Research examining two hundred climate ventures backed by private capital in Africa reveals that 75% remain below $20 million in annual revenue despite operating for up to twenty years. These companies persist at sub-scale not due to inherent business flaws, but because the financing ecosystem has failed to properly match risks with suitable capital structures.
In examining some of the barriers, foreign exchange volatility emerges as the most significant deterrent to international investment in African climate solutions. Recent currency devaluations demonstrate the scale of this challenge: in the past five years, Nigeria and Egypt both experienced currency depreciations of approximately 70%, effectively wiping out dollar-based returns on local investments.
Consequently, global investors price this risk rationally with brutal consequences. Late-stage private equity firms often require 25-50% premiums on returns in Africa above their global hurdle rates. These elevated return expectations create unsustainable pressure on investee companies, forcing them to bear macro risks beyond their control.
The local capital landscape presents equally formidable challenges. Commercial banks in many African markets remain largely closed to private sector lending, with interest rates frequently exceeding 20% when available. This dynamic reflects an underlying misalignment of incentives: local banks and institutional investors hold substantial portions of high-yielding sovereign debt, reducing their motivation to engage in private sector lending. In Kenya, 50% of commercial bank lending flows to government securities, with banks historically earning 13-14% returns on treasury bonds with minimal risk compared to private sector alternatives.
Addressing these structural impediments requires innovative approaches that move beyond traditional private capital frameworks. The concept of risk layering offers particular promise; wherein different institutions assume responsibility for different risk categories. Multilateral development banks and donor organisations could shoulder macro-level risks including currency volatility (as articulated well by, Avinash Persaud and the Climate Policy Initiative in this proposed partial FX guarantee facility), whilst private investors and companies can focus on commercial execution and business performance.
Local capital market development represents another critical avenue for progress. Nigeria’s recent regulatory change provides an encouraging precedent: pension fund regulators updated guidelines to permit 10%-15% allocation to infrastructure and private equity investments, increased from the previous 5%, creating pathways for domestic institutional investors to support local climate infrastructure whilst building more resilient capital markets.
Critically, Development Finance Institutions (DFIs) are uniquely positioned to help climate capital markets evolve. In many lower-income African countries, DFIs play a vital role, often the predominant capital backing regional private equity funds and local companies. Yet, we often don’t see their intended effect of bridging to commercial capital. DFIs could redirect a portion of their principle investing toward derisking opportunities for larger institutional investors. Recognising that DFIs face important constraints on their sources of funds and balance sheet performance, this would require backing at the highest levels, very thoughtful design, and learning from past mistakes.
Finally, asset-light business structures and securitisation models offer additional pathways to capital efficiency. Pan-African off-grid-solar companies, such as d.light and SunKing, demonstrate the potential impact, having raised upwards of $1billion in debt primarily through receivables securitisation, enabling distributed renewable energy access for hundreds of millions of people. Electric vehicle startups similarly pursue franchising models for charging infrastructure to avoid capital-intensive lock-in scenarios.
The climate challenge demands gigaton-scale solutions, yet current financing approaches in Africa produce sub-scale enterprises. Moving beyond venture capital requires coordinated action across the investment ecosystem, from policy makers creating enabling regulation to multilaterals and institutional investors embracing innovative risk-sharing mechanisms. Doing so would translate Africa’s climate advantages—from renewable energy potential to natural assets—into meaningful climate impact and economic growth for the region.
