Despite the growth in the number of financial institutions extending funding to climate-conscious ventures, many start-ups still struggle to access green finance from formal sources.
This is partly because they do not know how to approach the financial services providers, which makes them receive poor risk evaluation scores.
Studies have shown that there are three critical areas in which start-ups tend to underperform: Explaining the nature of their business within the context of sustainability, describing their plans against robust forecasts and clearly communicating funding needs.
Maryanne Ochola, the managing director of Endeavor Kenya, says that having a clearly outlined strategy on how you as a start-up intend to incorporate sustainability into your business, is a good place to begin to access green finance.
The opportunity lies not necessarily in creating a purely climate-centred business, but rather in tailoring your business model to serve the interests of mitigating climate change.
“Investors will also evaluate whether the financing will be used to achieve positive environmental outcomes. That is why, start-ups need to make sure that the outcomes of their economic activities can be assessed, measured and quantified, for them to access sustainable finance,” says Ms Ochola.
Start-ups need to set clear environmental, social and governance goals that can be measured against international standards such as the UN Sustainable Development Goals (SDGs), to enhance attractiveness to investors.
They also need to develop feasible green projects and provide transparent and comprehensive sustainability reporting.
“Reporting on environmental performance, including greenhouse gas emissions, water usage and waste management, enhances credibility with green investors and lenders,” says Ms Ochola.
Seeking out and building relationships with banks, investment funds, and financial institutions specialising in green finance, can help startups understand the requirements and checklists of what makes a green project bankable and explore what products they can provide.
“We are seeing investors put up more specialised climate funds such as Novastar and E3 Capital that are raising significant rounds. These are good places to start,” says Ms Ochola.
Other organisations such as FSD Africa and the African Guarantee Fund (AGF), have also announced strategic collaborations aimed at propelling the growth of green start-ups.
The two organisations also provide technical assistance on green financing initiatives, which is critical in building the capacity of key stakeholders such as governments, financial institutions and green startups.
On her part, Ms Nasra Nanda, the CEO of the Kenya Green Building Society, says start-ups need to take advantage of government incentives such as subsidies, tax breaks and grants for green initiatives to reduce the cost of capital for environmentally friendly projects.
The National Treasury for instance is promoting green bonds as a new financial instrument for sustainable investments by offering 100 per cent tax exemption on interest income for bonds and securities used to raise funds for green building projects.
“Policymakers have a vital role to play in creating an enabling environment for green financing initiatives,” says Ms Nasra.
There are also local banks that are involved in climate financing, particularly through securitisation deals and firms such as Sun King and M-kopa are just examples of the startups operating in the cleantech space that have benefitted from these deals.
“These are sort of first in the market but what they do is that they start to create a playbook for what other companies that carry assets on their balance sheets can do, and which innovative financing mechanisms can be adopted,” notes Ms Ochola.
Africa’s startup ecosystem is still widely dominated by fintech firms, despite the growth in climate financing, with data from market intelligence firm Briter Bridges showing that only about 500 start-ups are operating across Africa in the climate-tech space.
These are in industries such as clean energy, sustainable materials, agriculture, e-mobility, transportation, and nature-based solutions. Between 2015 and 2022, 147 of these startups were able to raise a total of more than Sh200 billion from venture capital investors, highlighting the rise in climate-tech financing in Africa.
About 75 per cent of venture capital investments associated with the climate-tech sector went to start-ups that provided renewable energy solutions such as solar power. The rest went to agri-tech startups, followed by start-ups that provided low-carbon emission cooking alternatives as well as e-mobility startups.
“Many sectors and products have for a long time been overlooked in favour of fintech which has dominated the headlines but now, investors are searching for what’s next,” notes Ochola.
Since 2015, fintech has been the continent’s top sector in terms of the number of deals and volume of funding, accounting for nearly half of the funding raised in the startup ecosystem in Africa.
The share of funding to fintech from the total volume of startup funding has however been on a sharp decline within the past two years, dropping by almost 18 percent according to Briter Bridges data.
