View all newsletters
Receive our newsletter – data, insights and analysis delivered to you
  1. Analysis
3 February, 2022

Could Western investors’ ESG strategies keep the lights off in Africa?

The headlong rush by Western investors to adopt ESG strategies could hamper Africa's industrialisation efforts and leave many trapped in dire poverty.

By Jason Mitchell

One of the unintended consequences of the Covid-19 pandemic has been Western governments and companies starting to push a decarbonisation agenda. However, if they push too hard, African countries could be denied the energy required for their industrialisation processes.  

During the past year, resource-rich African states have become increasingly concerned about the gathering pace of the global decarbonisation agenda, accelerated by the Covid-19 pandemic. Experts say that the closure of industries throughout the world at the height of the crisis prompted a reduction in greenhouse gas (GHG) emissions for the first time in recorded history. The International Energy Agency (IEA) estimates that global GHG emissions plummeted by 8% in 2020 compared with 2019, down to the same level as a decade before. At the peak of the worldwide Covid-related lockdowns in early April 2020, daily global emissions nosedived by 17% compared with the mean 2019 level, according to the Global Carbon Project.

These declines have had a powerful demonstration effect on the global thinking about climate change issues and provided a major impetus to decarbonisation strategies. Many Western investors – including governments, development finance institutions, pension funds, private equity groups and multinational enterprises – have now adopted, or are in the process of adopting, environmental, social and corporate governance strategies, better known as ESG, with a strong emphasis on the ‘E’.

African economists say that these trends raise serious questions about the pathways to economic development that low-income and emerging economies must pursue. For decades, development has unequivocally been pursued through the deployment of human and natural resources – including fossil fuels – to promote industrialisation, a thesis that is now being challenged by the ‘green economy’ approach. Experts say that not only does a tension exist between the ‘E’ and the ‘S’ in ESG but between the UN’s Sustainable Development Goals (SDGs) and the net-zero targets. SDG7’s objective is to achieve ‘universal access to affordable, reliable and modern energy services’ by the year 2030, but many Western governments and institutions have now committed to net zero by 2050.

A chasm in thinking is opening up between the rich, industrialised world and developing countries that have not yet enjoyed the fruits of industrialisation. The decarbonisation agenda is being driven by the developed world, but it will have a profound impact on some of the poorest states in Africa. Experts liken this to the Covid-19 pandemic, which resulted in far more deaths in the developed world than in Africa but had a deep economic impact on the continent through lockdowns and the freezing up of global trade.

Africa needs a 'just transition'

African leaders are pushing for a 'just transition', which would mean giving their countries – whose major source of revenue in most cases is resource-based – enough time and funding support to switch to renewables and to 'green' their economies. They argue that their economies are still heavily dependent on fossil fuels and in particular want to use natural gas, the cleanest fossil fuel, in the transition to renewables. Their countries cannot just leapfrog to renewables.

They say they require powerful and resilient national grids and standalone grids for infrastructure projects, heavy industry and mining, for example. Solar and wind – although in many cases cheaper than fossil fuels – are not yet capable of doing this. Furthermore, battery storage systems around these two energy sources are prohibitively expensive for Africans, who insist that universal access to affordable energy cannot be accomplished without natural gas, which can provide baseload support to grids.

They also say that scientists must be more certain about the modelling around global warming, as the data is having an adverse material impact on the effort to industrialise Africa and to alleviate poverty. The region's economies must expand at more than 7% a year to significantly reduce poverty, but lots of reliable energy is needed to do that. Could wind and solar really provide it?

On the other hand, the developed world is pushing African countries to shelve all new hydrocarbon projects – in oil and gas as well as coal – to limit global warming to a projected 1.5°C. On 4 November 2021, at the COP26 Summit in Glasgow, more than 20 countries and institutions – including Canada, the US, the UK and the European Investment Bank – pledged to end direct international public finance for 'unabated' coal, oil and gas by the end of 2022 and prioritise finance for renewables. This could free up to $18bn a year of preferential, government-backed support for renewables.

“If governments are serious about the climate crisis, there can be no new investments in oil, gas and coal, from now – from this year," said Fatih Birol, the IEA's executive director, in an interview in May 2021. “More and more countries are coming up with net-zero commitments, which is very good, but I see a huge and growing gap between the rhetoric [from governments] and the reality.”

The IEA is one of the world's leading energy organisations but is part of the OECD, whose members states are all developed-world countries.

African governments fight back 

African leaders are fighting back. In January 2022, at the World Economic Forum in Davos, Switzerland, Yemi Osinbajo, Nigeria's vice-president, said: “For many gas-rich African countries, one of the biggest shocks is the notion that fossil fuels, including gas, should be defunded, especially by international financial institutions. We think that gas as a transition fuel is absolutely crucial, not just for an effective transition but also for our economies.”

He made it clear that gas is “without doubt the only pathway” for Africa to transition out of more hazardous fuels such as coal and heavy oil. In another interview last year, Osinbajo said that European and US oil and gas majors are developing natural gas in Africa – for example, in Ghana, Mozambique, Nigeria and Senegal – for export to Asia and Europe but, at the same time, their governments are seeking to choke off financing to gas projects for domestic use within Africa.

Steve Kayizzi Mugerwa, an adjunct professor in global human development at Georgetown University in Washington, DC and former chief economist at the African Development Bank (AfDB), says: "The net-zero concept has moral, economic and geopolitical questions: how will the Western world and its development institutions (read the World Bank, the UN, industrial development organisations and so on) help eradicate economic poverty in Africa while on the other hand preventing the continent from developing its abundant energy resources – in other words, natural gas in Tanzania and Mozambique and so on?

“Does this not in effect perpetuate energy poverty, which has been a huge driver of the decimation of forests in sub-Saharan Africa? In terms of industrialisation, how will that happen without cheap energy? Will African countries be punished for using the same carbon-intensive techniques that powered Western affluence?"

According to the UN Economic Commission for Africa, doubling electricity generation from gas in the region would allow the multiplication of solar and wind investments by 38 times. The corresponding increase in global emissions would be less than 1%.

The deployment of natural gas could also be one of the best ways to wean poor Africans off the use of biomass – mostly firewood – which is destroying the region's forests.

Africa only accounts for 2% to 3% of global emissions

The whole of Africa accounts for only 2–3% of the world’s current carbon dioxide (CO2) emissions from energy and industrial sources, according to the UN (its historic contribution is even lower, at about only 0.5% of all past global emissions). It is roughly the same proportion as Germany and a lot lower than China (27%), the US (15%) and India (7%). The region’s per capita emissions of CO2 were 0.76 metric tonnes (t) in 2018, compared with 4.4t globally, according to the World Bank (in the US it was 15.52t and in Australia 17t). Africa's total population is about 1.3 billion people, compared with China's 1.4 billion, but that one Asian country's total carbon emissions are ten to 14 times higher than Africa's.

The reality is that many African countries are already at net zero. More than 640 million Africans have no access to energy, corresponding to an electricity access rate of just over 40%, the lowest in the world, according to the AfDB. In some African countries the rate is even lower – 11% in Malawi and 7% in South Sudan. Globally, about 87% of the population have access to electricity. Per capita consumption of energy in sub-Saharan Africa (excluding South Africa) is 180 kilowatt-hours (kWh), compared with 13,000kWh in the US and 6,500kWh in Europe. About 900 million Africans also lack access to clean cooking, the use of modern stoves and fuels.

At 39%, natural gas constituted the biggest element in Africa’s electricity generation mix in 2019, followed by coal (29%), hydro (15%) and oil (10%), according to the African Energy Chamber. While nuclear energy accounted for another 2%, the share of renewables in the mix (5%) is growing, albeit at a lower pace than in other regions. Most renewables growth came from solar, wind and geothermal power plants and is expected to continue into 2030. Africa generated 830MW, 5,748MW and 7,236MW of geothermal, wind and solar installed capacity, respectively, in 2019, signifying growth rates of 17.4%, 26.1% and 60.2% since 2010.

Two of Africa's biggest oil-producing countries have already committed to net zero – by the year 2050 in the case of Angola and 2060 in the case of Nigeria.

The Oxford Smith School of Enterprise and the Environment forecasts that the share of non-hydro renewables in African electricity generation will likely remain under 10% by the year 2030. It predicts that fossil fuels will account for two-thirds of all generated electricity across Africa and a further 18% of generation will come from hydro projects in the year 2030.  

The total estimated climate change mitigation and adaptation costs to reach net zero for African countries are expected to greatly exceed the continental GDP of $2.2trn in 2020, according to Mugerwa. Wealthy countries have made a $100bn yearly commitment to help vulnerable African countries finance the mitigation effort, but that sum is not nearly enough and even that may never materialise.

African countries will not give up hydrocarbons without a fight

African countries have not yet given up the ghost when it comes to hydrocarbons. For example, in Nigeria, the Aliko Dangote oil refinery project is in progress and is expected to be commissioned by the third quarter of 2022. The Lagos plant has been described by Akinwumi Adesina, the AfDB's president, as a game-changing initiative that would enable Nigeria to break free from the import of petroleum products.

At the start of February 2022, Total, the French oil and gas major, and its partner China National Offshore Oil Corporation signed final investment decisions with the Ugandan and Tanzanian governments to invest more than $10bn in crude oil production in East Africa.

Between 2021 and 2025, an estimated 428 oil and gas projects are expected to start operations on the continent, according to Energy Capital & Power, the African energy investment platform. The most notable include Shell’s $30bn Tanzania Liquefied Natural Gas (LNG) Liquefaction Project (expected to commence construction in 2023, with completion aimed for 2028) and Mozambique’s $30bn Rovuma LNG Terminal and the $20bn Mozambique LNG facility (expected to begin production in 2025 and 2024, respectively). Another massive project is Nigeria’s $20bn Ogidigben Gas Revolution Industrial Park, a planned downstream refinery and petrochemical complex set for construction in the country’s Delta Region. The Etan and Zabazaba oil fields are also being developed in this region.

Significant pipelines coming into production in Africa soon include the proposed $6bn African Renaissance Pipeline Project, which will link Mozambique’s gas-rich Rovuma basin to Gauteng province in South Africa; the proposed 1,800km Tanzania-Uganda natural gas pipeline project that will transport LNG from Dar es Salaam in Tanzania to Kampala in Uganda; and the planned $2.8bn Ajaokuta-Kaduna-Kano natural gas pipeline, part of the wider Trans-Nigeria Pipeline project.

The sharp rise in oil and gas prices during the past year has started to make many projects more viable: Brent crude oil prices jumped by 51% between February 2021 and February 2022 while the wholesale price of natural gas surged by 67% over the same period.

Could hydrocarbon projects become 'stranded' assets?

However, investors are concerned about backing hydrocarbon projects that could become 'stranded assets' in a decade’s time. These are assets that once had value or produced income but no longer do so, usually due to some kind of external change, including changes in technology, markets and societal habits.

Many oil and gas majors have already started to divest. In May 2021, ExxonMobil, the US oil giant, exited Ghana’s upstream petroleum sector where it has been conducting exploration after acquiring rights in 2018. In the first quarter of 2020, Norwegian oil company Aker Energy said it was indefinitely postponing its final investment decision on the Pecan offshore development project in the Deepwater Tano Cape Three Points block, also in Ghana. Eni is also fighting a government directive issued in April 2020, which ordered it to unitise its Sakofa field alongside the Afina field of Ghanaian energy company Springfield Energy. In August 2021, the Ghanaian government made moves to buy back oil licences that no one else wants.

The Ghanaian government decided to bet on the country's oil production business, as Western investors turned their sights on renewables, and will pay up to $1.1bn to acquire large stakes in the Deepwater Tano-Cape Three Points and South Deepwater Tano oil fields.

Meanwhile, Royal Dutch Shell began talks with Nigeria’s government to sell down its interest in onshore oilfields. Shell plans to divest all of its operated joint venture licences in the country held by the Shell Petroleum Development Company, a symbolic moment for international oil companies in Africa’s oldest hydrocarbons market.

Projects in Nigeria such as Shell's Bonga Southwest/Aparo, Total's Preowei and Exxon's Bosi are all at risk of never being developed. These fields have the potential to add a total of approximately 400,000 barrels per day to Nigerian oil production. In 2020, Norway’s Equinor pulled out of exploration acreage in South Africa’s offshore.

Perhaps no country has more to lose than Mozambique, however. Three massive LNG projects with a combined investment of $55bn are planned for the country, although some estimates put the total investment as high as $100bn. These are huge sums compared with the size of the Mozambican economy – only $14bn in 2021, according to the International Monetary Fund. Total has made its final investment decision on the Mozambique LNG project but, by the start of February 2022, ExxonMobil had still not done so on the Rovuma LNG project.  

Curtailing oil production without compensatory long-term financing would be economically catastrophic for many African countries, says Georgetown's Mugerwa. For example, South Sudan was one of the last countries in Africa to achieve independence in 2011 and is one of the world’s lowest contributors to GHG due to its lack of large industries and modern agriculture. However, it depends almost entirely on oil revenue (90%) to make ends meet.

"While the future seems bright for African countries that produce minerals such as copper and cobalt, which feed directly into the green economy, the future looks outright gloomy for those producing hydrocarbons and coal," says Mugerwa. "Hence, countries such as Uganda, Kenya and Mozambique – once elated about the discovery of oil and gas on their territories and investing several billion dollars in their development – are now worried by the very real prospect of stranded assets, as once enthusiastic investors, including oil majors, are backtracking on their plans under post-Covid pressure from emboldened domestic lobby groups."

Africa awaits EU's 'green taxonomy'

At the start of January 2022, the European Commission opened consultations on whether natural gas and nuclear power projects should be considered as green investments. According to a statement from the European Commission on 1 January, it considers that there is "a role for natural gas and nuclear as a means to facilitate the transition towards a predominantly renewable-based future". The final draft of the EU's 'green taxonomy' is expected to outline an official list of investments that it classifies as sustainable for the planet.

"Domestic firms and companies outside the leaders in climate policy and sustainable finance – for instance, Russia, China, India, Turkey and the Middle East – are likely to fill any vacuum that may be created by the divestment of companies under the policy dictates of the EU and other champions of ESG," says Ndudi Osakwe, principal consultant at Infoplus Business Research Services, a business research consultancy.

He adds that there are five main scenarios. First, an increased Russian, Chinese and Turkish footprint on the continent. Second, large companies from rich African economies acquire assets left behind by the Western multinationals across the region. Third, a flow of Islamic funding from the Gulf states. Fourth, resource-based African countries chart new courses, seek new pathways and explore avenues such as 'diaspora funds'. Fifth, a 'carrot and stick approach' is implemented as a negotiation strategy by ESG campaigners.

Osakwe says: "While China plans a pull back on major infrastructure projects in coming years, the flow of funds from Islamic development finance institutions has only just begun. Islamic finance is already a $2trn industry."

The vacated space has also opened up an opportunity for new foreign companies to step in. One such player is Afentra, a new Africa-focused company led by Paul McDade, former chief executive officer at Tullow Oil, the London-based oil and gas explorer. It plans to establish itself as as a credible partner for divesting international oil companies.

Elena Ilkova, investment strategist at banking network RMB, says: "This is a difficult moment for financing Africa's industrialisation. African countries do not have sufficient internal financing to do so and more Western investors are looking at energy projects in the region with an ESG lens. This really impacts what they are prepared to invest in and will affect the region's economic development.

"I think in an African context, it is important that investors put a lot more emphasis on the 'S' in ESG; the region's massive social issues must be tackled. It is not clear that Western investors are prepared to back fossil fuel projects, including natural gas as well as oil and coal. They are keen on renewables, which creates a big opportunity for African countries to include renewables as part of their energy mix."

In an African context, experts say it is critical to take account of the 'G' in ESG, as well. One industry insider says: "The 'S' versus 'E' issue is central to African development. However, the one singular element needed to engage the people (too often overlooked), attract investors and get some tangible element of 'S' and 'E' is the quality of the political leadership. Can Africa find leaders who recognise the need to conserve and grow economically and have a viable philosophy of how that is to be done? People of that quality could have global standing and influence. In my view, they also need to be democrats. Can Africa be a new wellspring for democracy, because it is lacking strength and glue elsewhere?"

Development institutions shift to renewables

The Private Infrastructure Development Group (PIDG) is an innovative infrastructure development and finance organisation focusing on the world's poorest and most fragile states, funded by the governments of Australia, Germany, the Netherlands, Sweden, Switzerland and the UK. It is a good example of a development finance institution making the shift to renewables.

Between 2002 and 2020, PIDG had committed $1.46bn to energy projects in Africa. By the start of 2022, 54% of its cumulative commitments had been to renewables. Between 2009 and 2014, 38% of its commitments were to renewables and 62% to non-renewables. By 2015 to 2020, the split was 63% renewables and 37% non-renewables. For the period 2021 to 2026, the split is expected to be 92% renewables and 8% non-renewables.

"We believe that gas does play a role in the green transition but a residual one," says Marco Serena, PIDG's head of sustainable development impact. "The best way to bring energy to the 500 million Africans who live in rural areas is through renewables and decentralised energy systems. In terms of industrialisation, it is not useful to think that it must be achieved in Africa in the same way as it was done in South East Asia, for example. Lightweight agro-processing can be powered through stand-alone renewable energy systems.

"In relation to ESG, there is a short or longer-term perspective. The tension that exists between 'E' and 'S' is around the urgent and visible need to create income-generating jobs but to ensure that these jobs are sustainable in the longer term. We do not want to invest in assets that then become stranded. Our investments must be done in a smart way."

One of the key questions for African leaders is: what kind of industrialisation process do you want for your country? If it involves heavy industry and mining and lots of data centres to power the internet, the country will need a stronger and more reliable electricity grid. In some cases, hydro or geothermal energy could do the trick. However, in many cases, natural gas could well be needed for base generation with solar and wind as intermittent forms of energy. If the industrialisation is centred on lighter manufacturing or agricultural processing, perhaps stand-alone solar or wind-powered systems would be sufficient.

Western investors must be crystal clear about the consequences of the ESG strategies they are adopting – trade-offs between the three components exist. If they put a great deal of emphasis on the 'E' and rule out all fossil fuel investments in Africa, the 'S' is likely to suffer and it could take a lot longer to lift millions of Africans out of poverty.

Topics in this article:
NEWSLETTER Sign up Tick the boxes of the newsletters you would like to receive. Data, analysis and deep insights on foreign direct investment delivered to you
I consent to GlobalData UK Limited collecting my details provided via this form in accordance with the Privacy Policy
SUBSCRIBED

THANK YOU