Amplifying Africa's Voice Initiative
July Meeting
By Rob Floyd, African Center for Economic Transformation (ACET)
African policy institutes gathered on July 8 as part of the Amplifying Africa’s Voice (AAV) Initiative to discuss the bioeconomy and natural capital in the context of global financial architecture reforms.
The focus was on how these agendas and instruments can support African governments' efforts to access more finance for development. For example, there is an urgent need to integrate natural resources into government debt markets. The creation of a new category of environmental and climate Key Performance Indicator (KPI)-linked government debt securities can generate funds through improved fiscal capacity. Similarly, biodiversity-adjusted sovereign credit ratings can demonstrate how biodiversity loss affects market risk. Although there has been extensive discussion about debt sustainability analysis (DSAs), failing to consider nature-related risks in these analyses may lead to a misdiagnosis of the true risks to debt sustainability for many countries.
Participants were joined by colleagues from Nature Finance, who outlined the various aspects of today’s bioeconomy, such as nature markets, nature risk, sustainability-linked sovereign debt instruments, and nature liabilities. They also emphasized the disproportionate impact environmental degradation will have on sub-Saharan Africa.
The presentation highlighted the historical emphasis on climate finance and the current need to shift from natural markets to the bioeconomy, which involves the crucial integration of technology. This transition has already started, to some extent, with Brazil aiming to establish high-level principles and a roadmap for promoting a fair and sustainable global bioeconomy during its G20 Presidency.
Current Economic Focus
In many countries, the primary focus is still on a nature-based economy, which includes agriculture, fisheries, forestry, and bioenergy. This market is mature in many economies, with significant investments linked to traditional industries. A less developed model is an advanced bioeconomy that would use innovative technology and advanced biological processes to develop alternatives to fossil-based products. In the future, there could be a third model, a high-tech bioeconomy that creates sophisticated bioproducts using genetics or biopharmaceuticals.
Several countries in Africa, including South Africa and Namibia, have implemented bioeconomy strategies. South Africa's strategy focuses on the interconnectedness of different sectors and their outputs, while Namibia aims to use the bioeconomy to drive inclusive growth and create job opportunities.
Financial Instruments and Reforms
Many financial instruments can support the financing of the economy, and many of them are connected to the ongoing global financial reforms. For instance, bonds linked to Key Performance Indicators (KPIs) related to biodiversity could benefit countries rich in natural resources, as could markets for biodiversity credits. Currently, there are biodiversity credit projects in nineteen African countries.
The discussion covered a wide range of important issues. For instance, participants talked about the shift from focusing on how to fund nature-based projects to how to influence financial markets and actors to be more nature-friendly. They also discussed the challenge of price discovery, highlighting the "Africa risk premium" in global markets, and the issues with risk ratings. There is a need for more research on how pricing nature into markets affects natural capital in the face of climate change. Currently, there is little demand for nature-based sovereign debt instruments, partly due to high structuring costs and a lack of investment opportunities.
Policy Considerations
The discussion about policy focused on the fact that governments usually only consider certain aspects of the bioeconomy, such as renewables, agriculture, or waste management. However, when they fail to develop policies for the bioeconomy as a whole, it becomes challenging to plan transformation pathways. Similarly, organizations that typically provide advice to governments on policies, like the World Bank or African Development Bank, do not currently have well-defined strategies for the bioeconomy.
Data Integration and Global Strategy
The discussion also covered the topic of data, such as ongoing efforts to assess how capital flows from climate funds affect debt positions. While there are attempts to incorporate more nature-based data into debt decisions and balance sheets, there are still uncertainties. Integrating assets that are not currently priced or valued by markets or official mechanisms could have unintended consequences. There are various interconnected initiatives addressing the data issue, including the Task Force on Climate, Development and the IMF; the Expert Review on Debt, Nature, and Climate; and the UNDP-led Credit Rating Agencies Initiative for Africa. Further work is necessary to understand how the preservation of nature assets can influence borrowing decisions.
With South Africa set to assume the G20 Presidency in 2025, there is significant interest in whether the government will prioritize championing the bioeconomy as part of its primary themes. It appears that South Africa will advocate for global finance reforms, but it is less clear whether it will strongly support the bioeconomy agenda.
A variety of research collaboration areas were discussed, including:
- Mapping Africa’s progress in nature-based economy v. advanced bioeconomy v. high tech bioeconomy.
- Addressing policy and regulatory gaps to foster the transition from nature-based economies to advanced bioeconomies.
- Analyzing the impact of nature being priced into markets versus the impact of decreasing or degraded natural capital due to climate change.
- Moving the policy dialogue from addressing parts of the bioeconomy to transformational pathways for financing the bioeconomy.
- Supporting dialogue with credit rating agencies, to include issues related to financing the bioeconomy.
- Better understanding data needs and the impact of nature data inclusion.
- Supporting the South African G20 to ensure the bioeconomy remains a priority agenda.
Additional reading materials to learn more about the bioeconomy and its connections to global financial architecture issues: