The COP28 conference has resulted in a variety of new climate related financial, nature and infrastructure pledges from leaders across the world. Discussions around nature-based solutions for the African continent featured prominently at the event. But how should regulators turn those proposed solutions into concrete regulations?
Africa has a long and complex history with nature and finance. For much of that history, the continent’s abundant, extractable natural resources have been touted as an engine for wealth generation and development. While some countries, most notably Botswana, have utilised their natural resources successfully, others have suffered from the “resource curse”, whereby they underperform economically despite abundant natural resources.
More recently, however, it’s become apparent that the picture is far more complicated than that. On the plus side, it’s clear that Africa’s renewable natural resources have immense potential for wealth creation. According to a 2022 report by the International Energy Agency (IEA), for instance, the continent has 60% of the world’s best solar energy resources. That’s without mentioning the immense scientific and tourism value to be found in Africa’s flora and fauna. But the natural world also represents economic risks. For example, a 2023 Emergency Event Database (EM-DAT) report found that droughts affected 88.9 million people across the continent in 2022 and that floods in Nigeria cost US$4.2 billion.
When it comes to safeguarding Africa’s financial future, it’s therefore critical that regulators take an approach that recognises the massive potential of Africa’s natural resources, but also takes nature-related risks (both man-made and naturally occurring) into account.
Understanding the gravity of nature-related risks
Before examining steps regulators can take, it’s worth digging a little deeper into why nature is so key to Africa’s financial future.
There are prominent examples, such as biodiversity. For example, South Africa alone is home to 10% of all plant species found on Earth (per Fauna and Flora International). Meanwhile, the continent as a whole (per The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services) is home to a quarter of the world’s mammal species and a fifth of its bird species. Anything that threatens that biodiversity has massive potential knock-on effects.
According to the World Wildlife Foundation (WWF), reduced biodiversity means more vulnerablefood supplies, increased vulnerability to pests and diseases, and less regular supplies of safe drinking water.
But it’s also worth bearing in mind that, according to the United Nations Environment Programme, some 70% of people in sub-Saharan Africa depend on the region’s forests and
woodlands for their livelihoods. Any disruption to those ecosystems could therefore have a significant negative economic impact.
There are dozens of other examples that could be used, all of which underline how important it is for regulators to protect the continent’s natural assets while safeguarding against nature-related risks. One of the best ways to achieve this is by fostering transparency from both themselves and the financial institutions they oversee.
Collaboration, assessment, and global engagement
One important way regulators can do so is by engaging proactively with state ministries (such as Finance and Environmental Affairs) as well as policymakers within government. This comes with a couple of advantages. First off, it means that regulators are much more likely to get government backing for any proposed regulations. It also means that any interventions put in place by regulators are in line with the political context of the country, helping to ensure that everyone is working towards the same goal.
Continuous assessment is also important. That’s true both for the regulators themselves and for financial institutions. Internally, regulators need to ensure that they understand whether they have the capacity needed to respond to the call for nature-related disclosure transparency by integrating nature risks into financial sector regulation. This is a complex undertaking and regulators need to ensure that they have the resources needed before starting. But regulators also need to assess whether the financial institutions they’re charged with overseeing have the capacity to take action too. Such an exercise is especially useful in identifying capacity gaps and how to address them in the short, medium, and long-term horizons.
Finally, regulators should ensure that they engage regularly with voluntary networks such as Sustainable Insurance Forum (SIF), the Network for Greening the Financial System (NGFS), African Natural Capital Alliance (ANCA), and the Task Force on Nature-Related Financial Disclosures (TNFD). These networks have set up frameworks that can easily be adapted by regulators. It also means that they have a voice in how emerging regulatory frameworks are conceptualised, meaning that they’re suited to African contexts from the start rather than having to be adapted later on.
Guardians of the future
Ultimately, Africa’s natural resources (both extractable and renewable) are likely to remain its greatest economic assets for some time. Those assets need to be protected and regulation is an important part of that. But regulators also need to understand nature-related risks and how an approach that treats those risks in a way that’s open and transparent can help mitigate them and secure the continent’s economic future.