African climate tech money coming in hot

Climate change is affecting the globe. Climate tech is a big deal in global venture capital circles right now. Photo: Muthengi Mbuvi/Unsplash

Climate change is affecting the globe. Climate tech is a big deal in global venture capital circles right now. Photo: Muthengi Mbuvi/Unsplash

Published Apr 9, 2024


Meet Abraham Augustine

Happily, “The Trajectory Africa” podcast has recently resumed publication. The show’s ever-insightful Nigerian-American producer and host, Tayo Akinyemi, has launched the latest season by inviting Abraham Augustine to unpack the premise that digitalising African economies is the continent’s prime investment opportunity.

Augustine, the Nigerian journalist, who covered Africa’s emerging digital economy for TechCabal, researcher, writer and partner at digital economy research lab trendAf, now leads marketing communications and programmes at Norrsken East Africa in Kigali, Rwanda. He also happens to be taking the helm as this week’s guest TechTides Africa columnist.

In other news, climate tech is a big deal in global venture capital (VC) circles right now. Augustine has been watching VC bullishness develop in the space within the African context for some time. And, yay us, he has some armchair observations he’s happy to share.

Here’s what's on Augustine’s mind, in his words:

Hot ticket

2024 may well be the year that total investment in climate tech surpasses fintech funding in Africa or at least comes close to sharing the top spot. Venture capital investors, ever the trend-spotters, are paying attention and money to the poorly understood opportunity space loosely referred to as “climate tech”.

Of the $211.6 million (R3.94m) reported by The Big Deal as start-up funding raised in the first two months of 2024, more than 23%, or $49.5m, has been landed by climate tech start-ups.

Per Big Deal data, close to 30% of all VC investments branded as climate tech in Africa since 2019 happened in 2023 alone.

Looking back

Climate-related investments in Africa are not new. According to the International Monetary Fund (IMF), as early as 2020, African countries south of the Sahara received $15.7 billion in concessional climate finance.

If you throw in other forms of climate financing, the figure is higher, averaging $29.5bn between 2019 and 2020.

While it may be a far cry from the $50bn per year the IMF says Africa needs to fund climate adaptation, it is no trivial sum. To put it in perspective, the total foreign direct investment the continent received in 2020 was just $39bn, according to a UN Conference on Trade and Development (Unctad) report published in 2022.

Industry brand update

What is new is the clearer brand messaging for and packaging of the capital being deployed as climate investments.

For instance, take Africa’s leading stock exchanges planning to trade carbon credits, cooking stoves and nature conservatories rebranding as carbon offset farms, and electric vehicle adoption becoming a crucial part of national climate policy and fiscal debate in leading African markets.

However, the impact or event output of the investments is not always apparent, which is why it might shock to tally the billions that have gone into climate finance in years past.

Addressing a Said Business School audience at Oxford University a few weeks ago, Dirk Holshausen, the coverage director for South Central Africa at the UK’s development bank, British International Investment (BII, formerly the CDC), said: “Five years ago at BII, we did a lot of work in the renewable energy investment, but we did not necessarily bucket it under climate finance. (But) as we go forward, at least a third of our investments is going to be in the climate finance space.

“This is a huge amount of capital that we’re going to see heading towards Africa.”

Counting the cost

The mainstreaming of climate accounting is forcing a trend towards better attribution of investment spending, hence, the growing need to specify what climate finance is and what it is not.

Increasingly, like the BII, more incumbent financiers, especially development banks, are broadening the scope of what in the mid-2000s were called clean or renewable energy investments.

That genre of investment now includes the financing of “climate adaptation”. Similarly, VC funds that invest in climate tech in Africa are starting to favour investment in technology that supports climate adaptation.

It’s not surprising, given that some of the funds are backed by development banks that have investment mandates that specify the support for climate adaptation projects. In short, over the next while, a lot of cash earmarked for Africa will probably target projects that claim to make it easier for people affected by climate change to cope with and thrive despite the adverse effects linked to the phenomenon.

That does not necessarily mean climate change mitigation solutions (that claim to reduce or prevent drivers of climate change) will not attract investment. But it does mean that many smart people are betting that expanding the climate financing spectrum will lead to better opportunities for positive investment returns.

Learning from the past

But smart people with hot money can be wrong. In the not-too-distant past, talking up small-to-medium-scale renewable energy projects was fashionable. And billions were poured into funding project trends like pay-as-you-use solar and micro rural off-grid solar projects. Many of the investments and initiatives failed to mature or floundered and left essential lessons in their wake for today’s climate tech crowd to pick up.

One of those lessons is the enduring market failure that manifested in the mismatch between small-scale distributed solar and the need for grid-level power supply that can lift economies. That market failure has not changed because solar panels or electric batteries are cheaper – even though it has created a relatively small market opening for battery-swopping start-up models.

Two other lessons that might easily be forgotten are the role of market timing and the degree of dependence on external macro factors. For instance, how do you model the risk of technological dependence in a world where EV supply chains are constantly in flux and dominated by a single player with extensive manufacturing capacity, that is China? And to what extent do Western geopolitics drive prevailing market trends? Does a climate market exist independent of such dynamics?

Investors and entrepreneurs need to be willing to grapple with commonly held business case assumptions. In the globally connected context of the climate industry, all things are decidedly not equal.

In other words, entrepreneurs creating solutions that indiscriminately ride on popular trends may unwittingly build medium- and long-term vulnerabilities into their business models. Even outside the climate tech sphere, the best ventures are often those that find ways to create, deliver and capture value despite shifts in global investment agendas.

One thing is sure, though, as more Africa-focused venture capitalists begin to turn their sights on Africa’s climate sector, either to satisfy mandate updates from their limited partners or because they have conviction around climate-oriented theses for Africa, they will need to keep their wits about them to learn from the past and sort through the current hype to back venture propositions that are market-relevant and commercially viable.

Andile Masuku is co-founder and executive producer at African Tech Roundup and head of community at Africa-focused early stage tech-investor, Founders Factory Africa. Connect with Andile on X (@MasukuAndile) and via LinkedIn.