With abundant solar, wind, hydro, biomass, and geothermal resources, Africa can become a trailblazer in renewable energy solutions. Green Small & Medium-sized Enterprises (SMEs) in Africa can provide products and services to promote the transition to a green economy. Sustainable finance matters for SMEs because it can enable them to produce green products and services, adopt green business models, and improve their environmental performance. Sustainable finance facilitates directing funds towards sustainable activities and projects while considering the impact on the environment, society, and governance.

Green startups are crucial to addressing climate change. Sub-Saharan Africa has only been responsible for .55 percent of total global CO2 emissions, yet the continent is expected to suffer significantly from climate change. Additionally, agriculture in Africa is affected by climate change, and Agri-business SMEs can play a vital role in addressing the effects. Agricultural Green SMEs can also help farmers reduce their carbon footprint by providing products or services that promote greener practices. 

Green SMEs are diverse and encompass various industries, including waste management, organic farming, solar power, and eco-friendly manufacturing. Startups like NeedEnergy, a Zimbabwean startup that uses data intelligence to provide smart and clean energy solutions, and Octavia Carbon, a Kenyan startup that designs, builds, and is set to deploy machines that can directly capture CO2 from the atmosphere in the Kenyan Rift are some of the many businesses that are reshaping Africa’s green business ecosystem.  Their influence extends far beyond financial performance. They combine the roles of community organizers, climate warriors, and environmental champions into one. Consider them SDG superheroes, taking on global issues like pollution, resource scarcity, and climate change head-on.

What will it take for African green small firms to access financing? The article examines the challenges and opportunities for sustainable funding and offers recommendations for enabling Africa to achieve its climate adaptation goals through Green SMEs. Green/sustainable SMEs are not limited to those producing climate-smart products or services; they also include SMEs making a concerted effort to adopt green practices in their business operations. 

The green SME market in Africa is expanding and is not limited to startups and small businesses producing climate-smart products or services; they also include SMEs making the necessary changes to include circularity in their business operations. There are many opportunities, great potential, and challenges to overcome in this region. According to research, there has been a noticeable growth trajectory, and green SMEs are becoming essential participants in sustainable development projects all over the continent, especially in agriculture, where productivity is expected to decrease due to environmental changes.

Recent data indicates that the agro sector alone offers a stunning possibility of US$1 trillion for the digital technology market, demonstrating the enormous need and potential for innovation and growth in this field. With droughts and flooding from rainfall increasing, some regions have experienced drought every 2.5 years. Climate-smart SMEs are critically needed to help address the changes from the effect of climate change. 

However, despite their potential, green SMEs need help, especially when attempting to access finance to start or grow their businesses. Limited investments, institutional capacity limits, and poor management capacity exacerbate these financial issues. To effectively overcome these hurdles, it is imperative that stakeholders work together.

Challenges in Financing Green SMEs

SMEs worldwide face challenges that inhibit their access to finance, and for African green SMEs, these challenges can prove significant because they can also affect their survival and profitability. Financial institutions, governments, and development finance institutions must address these barriers to enable Climate-smart SMEs to realize their potential and contribute to sustainable development.

Climate Adaptation Financing – Analysis from the Nationally Determined Contributions (NDCs) indicates that Africa’s adaptation finance needs over the period 2020 – 2030 are close to $580 billion. Without an increase in financing, a gap of $453 billion will accumulate. Without general funding for Africa’s overarching climate adaptation goal, financing green SMEs would ultimately prove difficult.   

Climate Change Legislation – Climate change laws are important because they provide binding obligations and tools for action. Climate change laws that contain dedicated climate change references or considerations have been enacted in nineteen African countries, including Kenya, the Republic of Benin, Nigeria, South Africa, Uganda, and Mauritius. Legislations would mandate each country to take clear climate actions. Targeted actions would then be taken by major actors in the country, including large financial institutions and other corporations, who would recognize the need to finance and work with Green SMEs. 

Lack of Awareness: Awareness from local banks and low government commitment to taking climate action can affect the availability of sustainable financing. Without awareness, local actors can perceive climate-smart SMEs as not being viable. African governments must take the lead in raising awareness of climate change and taking relevant actions to show their nations that everyone should take action to protect the environment. Governments’ strategies and initiatives provide springboards for private sector interventions to finance and support green initiatives and SMEs. 

Additionally, Green SMEs need to be made aware of the various choices for green finance through their chambers of commerce and other networks. Many small and medium-sized enterprises, particularly those in developing nations, need targeted funding options like impact investment, green bonds, and grants to assist sustainable businesses. 

High perceived risk: Traditional banking institutions tend to have a high perception of risk concerning small and medium-sized enterprises, which poses a substantial obstacle for these firms. Additionally, these institutions frequently see green initiatives as riskier investments because of things like changing regulatory environments, unpredictable markets, and the perception of difficulty in quantifying environmental effects. The risk perception worsens the funding gap for green SMEs, resulting in fewer financing options, higher interest rates, and stricter eligibility requirements. Compounding this risk is the poor management capacity of some Green SMEs.  

Regulatory barriers and policy: A strong regulatory environment is needed for green SMEs seeking funding. Investors and SMEs face uncertainty due to inconsistent or ambiguous legal frameworks surrounding sustainability standards, carbon pricing, and environmental reporting obligations. Poor incentives and weak enforcement mechanisms further dampen the business environment, making it more challenging to implement climate laws. Hence, governments have a crucial role because they can affect the regulatory environment with climate-specific laws and enforcement that could remove obstacles for investors and improve the business environment for green SMEs to thrive. 

Governments, financial institutions, trade associations, and civil society organizations must work together to address these issues. It is essential to raise awareness of green financing choices through focused education and capacity-building programs to provide SMEs with the information and resources they need to get financing. Building standardized impact assessment procedures, promoting best practices in sustainable finance, and improving transparency can all help mitigate perceived risks and increase investor and financial institution confidence.

Opportunities for Green SMEs Financing

Research shows that the global green technology and sustainability market is forecasted to grow between 2022 and 2030.  

• Now is a good time to invest in Green SMEs: One of the most noteworthy new developments is the growing emphasis on impact investing for green SMEs. Investors are actively looking for ways to direct their investments into businesses that have a demonstrable positive social and environmental impact in addition to a financial return. This pattern indicates a move toward more comprehensive investment strategies that place sustainability and profitability side by side. As a result, green SMEs will have more chances to receive funding from investors who share their climate goals.

• In a 2023 survey by the OECD Platform on Financing SMEs for Sustainability, public and private financial institutions (FIs) stated that they are increasingly integrating climate considerations in their operations, including developing institutional objectives and plans and assessing some or all financing/investment opportunities. Innovative financing approaches, customized products, and capacity-building initiatives can result from cooperative efforts among development finance institutions, banks, and green small and medium-sized enterprises. Financial institutions can provide access to investor networks, risk management experience, and economic solutions tailored to the particular requirements of green businesses. These collaborations promote knowledge sharing and ecosystem growth within the green finance space in addition to improving financial accessibility.

• Government programs are essential for encouraging green entrepreneurship and making it easier for green SMEs to obtain finance. Numerous governments are putting into place financial, incentive, and policy initiatives that are expressly meant to support sustainable corporate practices. These programs support investment in green technologies, renewable energy, eco-friendly activities, and circular economy projects through grants, subsidies, tax breaks, and regulatory frameworks. Green SMEs can get additional funding and build connections with larger national sustainability objectives by utilizing these government initiatives.

Impact of Financing Africa’s Green SMEs

SMEs, on aggregate, account for about 40% of the business sector’s greenhouse gas (GHG) emissions. Supporting green SMEs and SMEs engaging in green operations has a direct positive impact on the environment. These businesses can employ environmentally friendly practices, technologies, and procedures that minimize waste production, cut resource consumption, and lower carbon emissions. Green Small and Medium enterprises (SMEs) are vital in reducing environmental degradation and addressing climate change using sustainable supply chain management practices, efficient resource utilization strategies, and renewable energy sources.

Sustainable financing enables green SMEs to become agents of positive change by striking a balance between social welfare, environmental stewardship, and economic growth. Green financing offers various social and ecological advantages that support inclusive growth because they create jobs and are advocates in their communities, raising awareness for climate action.  By interacting with their community suppliers and stakeholders, these businesses can build awareness for green initiatives like minimizing plastic use or managing water usage. Green small enterprises can also positively impact poverty reduction, social inclusion, and the standard of living in their areas by prioritizing fair labor practices, community engagement, and social responsibility.

Recommendations

To improve the chances of green SMEs accessing finance, it will take a collaborative effort between Development Finance Institutions (DFIs), developed countries (i.e., G8), African governments, Accelerators, and financial institutions. Recommendations to increase sustainable financing for African green SMEs include: 

• Increase climate finance for Africa. 

• Develop targeted funds for Climate-Smart SMEs.
  
• Create an enabling environment for green SMEs through targeted incentives, subsidies, and regulatory frameworks that encourage sustainable practices and investments. This entails creating green finance institutions, providing tax breaks, and expediting the approval procedures for eco-friendly initiatives.

• Create funds for Climate-Smart SMEs that will break down the barriers to accessing finance. 

• Partner with accelerators to create skills development programs to build the capacity of entrepreneurs and founders in the green space. 

Conclusion 

“Green transition requires financing for sustainable investment,” Linus Mofor, Senior Environmental Expert from the Economic Commissions of Africa. SMEs are responsible for more than 80% of the continent’s employment and contribute about 50% of GDP. These businesses have a major role in helping Africa transition to climate-friendly actions and net zero transmissions, but financing is an obstacle. Most entrepreneurs and SMEs reference access to finance as a significant obstacle to their green and net-zero transition. Supporting green and other SMEs engaging in actions to meet climate objectives is critical for these businesses’ growth and impact. 

SMEs are critical to economic growth and climate adaptation in Africa. Financial institutions, investors, and governments can accelerate the development of green SMEs and enhance their impact on the environment and communities by offering targeted financing tools, providing technical know-how, establishing supportive policy frameworks, and encouraging collaborations.

Written by:

Staff Writer