Climate Finance in Action: A Look at the INVEST Portfolio
As USAID is accelerating its efforts to meet the urgency of global climate change, INVEST is providing support through activities focused on encouraging the flow of private capital toward climate adaptation, resilience, and mitigation. A closer look at three activities — Power Africa in Kenya, ThirdWay Africa Rural Development Corporation in Southern Africa, and USAID Colombia’s Energy for Peace program — demonstrates how USAID is working with the private sector to scale and speed climate actions that result in climate benefits that are equitably shared.
By Robin Young, INVEST Senior Investment Advisor, and Carolanne Chanik, INVEST Communications Advisor
Climate change is not a new challenge, but its effects have felt particularly visible in recent months — flooding in New York, Western Europe, and China; hurricanes pelting the Caribbean; wildfires in the American West, Central Canada, Greece, Turkey, and Siberia; drought in Madagascar. No corner of the world remains untouched.
Since taking office in January 2021, the Biden Administration has marked the climate crisis as a key priority, quickly signing an Executive Order on Tackling the Climate Crisis at Home and Abroad. The Executive Order made clear the necessity of working with and through other nations, including countries in the developing world and frontier markets to reduce emissions and combat the effects of climate change. “As a global community it is imperative that we act quickly and together to confront this crisis,” said Vice President Kamala Harris at the virtual Leaders Summit on Climate in April 2021. “This will require innovation and collaboration around the world.”
One approach is catalyzing and directing funding flows toward climate efforts. Climate finance refers to a blend of public and private capital that helps unlock reductions in greenhouse gas (GHG) emissions. This can occur through deploying existing clean energy technologies like solar panels, battery backups, and wind power; leveraging funding to protect sustainable landscapes, like forests and wetlands; supporting innovation for climate-smart agriculture and the circular economy; and fostering new technologies to accelerate a global transition to a net-zero emission economy. Climate finance can help to mitigate the future effects of climate change, establish resilience, and support communities in adapting to its unavoidable and recurrent effects.
Through INVEST, USAID is testing a range of approaches to climate finance, seeking to catalyze private sector funding toward better development outcomes. As of September 2021, USAID and INVEST have mobilized $112.5 million from the private sector for renewable energy and the circular economy and are projected to mobilize $327 million for climate action by 2025. By supporting projects like Power Africa in Kenya, the ThirdWay Africa Rural Development Corporation, and Colombia Energy for Peace, USAID and INVEST are deploying models of support to fill the gaps left by traditional public funding and reduce GHG emissions in developing and emerging nations like Kenya, Mozambique, and Colombia.
Power Africa Kenya: Transaction Advisory Services for Inclusive Growth
A quarter of GHG emissions come from electricity production. Gases like carbon dioxide, methane, and nitrous oxide are released during the combustion of fossil fuels like coal, oil, and natural gas to produce electricity. However, access to electricity is not a guarantee for communities around the world. In fact, more than two-thirds of the global population without access to electricity resides in sub-Saharan Africa. Governments must grapple with providing their populace with affordable and reliable access to electricity, while also considering how to do so sustainably.
Unfortunately, the funding needed to electrify sub-Saharan Africa surpasses the combined amount available from African nations and international development agencies. Kenya, for example, has one of the most developed power sectors in sub-Saharan Africa. With its market open to Independent Power Producers (IPPs) and an active private sector, it is well positioned to offer renewable energy interventions to off-grid customers, an essential solution to energy gaps faced by households and businesses in the country’s most underserved areas.
However, energy-focused businesses often lack access to the expertise and support needed to navigate the complicated financial and operational realities that accompany growth, and they often fail to reach this potential. In countries where off-grid energy businesses operate, local banks are unfamiliar with the sector, and their terms for issuing debt for working capital are often expensive.
Working through Power Africa in Kenya, INVEST partners CrossBoundary and Open Capital Advisors sought to identify four high-potential off-grid solar energy businesses — Azuri, Green Light Planet, PowerGen, and M-Kopa Solar — and provided them with the transaction advisory services required to raise capital to finance enterprise growth. USAID supported the four selected enterprises to prepare for their capital raise, determine appropriate capital providers, negotiate term sheets, and close on their capital commitments.
Together the businesses raised $105.3 million in debt and equity investments, with $59.1 million allocated to the Kenyan market. While the activity initially targeted 125,000 new electricity connections, it resulted in 1.2 million projected new and upgraded off-grid solar energy connections.
Colombia Energy for Peace: Designing with Indigenous Peoples & Community Engagement
USAID’s Mission in Colombia and INVEST are similarly working to provide off-grid populations with access to an alternative renewable energy source, but they are taking a different approach than in sub-Saharan Africa. Under the Colombia Energy for Peace (E4P) activity, USAID is working with local communities to develop energy productivity hubs in remote, conflict-affected regions lacking access to electricity. While only a small portion of the Colombian population lacks electricity — less than three percent — these rural communities have been under the control of armed groups for decades, and have been unable to improve production processes, upgrade tourism infrastructure, link their products and services to markets, or increase their educational attainment.
In coordination with the Government of Colombia, the E4P activity has selected 10 initial project sites to place sustainable solar energy mini-grids with battery storage in partnership with private energy companies and investors. Providing these communities with a source for consistent, reliable energy will allow them access to stable, low-cost electricity for value-added, productive uses and increased incomes. Each hub will be customized to the unique needs of the community it serves, and users will have to pay to gain access. The mini-grid and battery model will provide enough electricity for communities to operate important social services like health clinics, schools, community meeting spaces, or local government offices, which will support lasting peace in the regions.
Through INVEST, USAID is working with a consortium of partners including Tetratech and the Colombian engineering firm Approtec to develop preliminary impact estimates for the 10 implementation sites using the Odyssey mini-grid-focused data processing and analysis platform. While this activity is still in progress, the consortium has projected that the 10 sites have an aggregate generative capacity of five megawatts and will lead to a reduction of 4,460 tons of carbon dioxide per year. The projected investment to build the 10 mini-grids is $15.3 million. These findings will lay the groundwork for USAID to deploy catalytic capital to lower perceived financial risks for potential private investors and provide a model for mobilizing capital for additional mini-grids and productivity hubs throughout the country.
ThirdWay Africa Rural Development Corporation: Synergizing Adaptation and Mitigation Efforts to Maximize Climate Benefits
Twenty-four percent of GHG emissions come from how we produce our food, farm, and use the land. Unsustainable agricultural practices include deforestation for new agricultural land and cattle pastures, methane production from producing crops like rice or animal husbandry, and nitrous oxide emissions from fertilizer and manure leaks into air and water supplies. In order to reduce emissions and protect land and vital ecosystems, we must improve farming practices as a global community.
In Mozambique, ThirdWay Africa, an impact investment and advisory firm, is making smart agricultural investments to increase climate resilient rural development. The organization is implementing a wide range of renewable energy and sustainable agriculture activities for the communities it supports.
Through USAID’s Southern Africa Regional Mission, INVEST is supporting the firm to structure and deploy a permanent capital vehicle called the ThirdWay Africa Rural Development Corporation (TWARDC). TWARDC invests in and scales up existing brownfield farms to transform them into independent, midscale commercial operations that can help to spark rural development.The firm’s investment hypothesis is that eligible farms selected for funding through the permanent capital vehicle will become hubs of economic activity for nearby communities, attracting additional investors to the area.
One of ThirdWay Africa’s interventions includes a partnership with local smallholder farmers in Mozambique to test an off-season solar irrigation pilot program to grow soybeans. Based on the project’s early success, ThirdWay Africa will look to expand the solar irrigation program to include more farmers and more hectares under solar irrigation. In addition, they are partnering with community organizations to protect a 4,500 hectare water catchment area around their first farm asset, making sustainable agriculture practices a priority. Additional planned activities from ThirdWay Africa include reforestation and sustainable community irrigation projects.
Support from USAID has enabled the firm to develop an Environmental, Social, and Governance (ESG) policy and impact framework to ensure TWARDC investments foster a scalable model of agribusiness. The ESG policy combines community impact, environmental stewardship, and a sustainable commercial outlook and measures impact based on improvements to livelihoods, community wellness, education, and climate change.
Why are finance and investment the right approaches?
Let’s give voice to your inner skeptic. Are finance and investing really appropriate tools to combat climate change? We think so.
Climate finance is not the sole solution, but it is a powerful approach. It can help unlock deep reductions in emissions, support the deployment of existing clean energy technologies, and encourage the creation of new technologies to accelerate the transition to a net-zero-emissions global economy. And, it can be used to preserve existing carbon sinks, like tropical forests, wetlands, and ocean ecosystems that capture and store carbon. Blending public and private sector finance can help vulnerable countries cope with climate impacts and trigger economic benefits by creating jobs and ensuring all communities and workers benefit from climate-smart approaches like transitioning to a clean energy economy.
Climate mitigation activities must happen in concert with adaptation and resilience-building, helping countries adapt to the impacts of climate change and ensuring that the benefits of climate action are shared equitably. Lessons learned from USAID and other leading actors from across the climate finance sector can be found in a new resource: the Catalyzing Private Finance for Climate Action: Learning Brief and its corresponding, upcoming series of Case Studies. USAID is committed to capturing learning and sharing models that have been tested across the Agency to promote uptake for what works and supporting efforts to reduce emissions and build stronger, more resilient communities in the face of climate change.