Advocate for Grant-Based Financing- A Strategic Policy Recommendation for European Commision and European Investment Bank

April 16, 2025 majsteve 10 Views

Executive Summary

The European Investment Bank’s (EIB) concessional loan-based climate financing model under the Green Climate Fund is inefficient in addressing African Union’s(AU) climate change goals and exacerbates Africa’s debt crisis. Loan-based financing undermines the solvency and social stability of African nations, reduces the effectiveness of aid to achieve climate goals, and fails to uphold the principles of climate justice. If African nations continue to face rising debt, complicated application processes, and limited access to appropriate financing for climate priorities, the EU has failed to address the fundamental issues with its $100 billion commitment. This memo analyses two alternative approaches that the EU currently uses for financing the AU’s climate action strategy: grant-based financing and green bonds and outlines the limitations of the current system. It then claims that grant-based financing will better advance AU’s climate objectives while creating mutual economic and strategic advantages for both the AU and EU, and strengthening global climate leadership. This recommendation is specifically directed at the European Commission and the European Investment Bank, the primary institutions responsible for implementing the EU- AU climate financing strategy. This shift would not only uphold climate justice principles but also serve the EU’s strategic interests in securing critical minerals and clean energy partnerships essential for its own green transition.

Background: Loan Based Financing is failing African Nations– The EU has already established various climate financing mechanisms, including the European Green Deal and the Global Gateway initiative. However, these efforts still rely heavily on loan-based financing that can exacerbate debt problems.

Twenty-two African countries are at high risk of debt distress: African governments are struggling to pay the debts that they incurred on behalf of their states with Sub-Saharan Africa’s debt-to-GDP ratio averaging 58%.
This high debt ratio limits fiscal flexibility, making it increasingly difficult for African governments to finance essential public services such as healthcare, education, and infrastructure, causing social and economic instability in regions already impacted by adverse effects of climate change.
Concessional loans, even at relatively low interest rates, increase debt ratios and contribute to economic insolvency. The share of concessional loans in the EIB climate finance portfolio has fallen sharply, from 19% in 2017 to just 2% in 2021, indicating increasingly unfavorable lending terms for low-income African countries.3
Over half (52%) of all EU climate finance to African nations was extended as non-grant instruments, with 51% as loans in 2022, further deepening debt and undermining Africa’s ability to fund climate adaptation projects.
Additionally, weak project development capacities, bureaucratic hurdles, and cumbersome accreditation processes prevent many African countries from accessing available loans, as reflected in the Green Climate Fund’s low approval rate (39%) for African proposals up to 2017.
Africa’s economic sectors, such as agriculture and hydropower, are highly climate-sensitive, making adaptation financing crucial. Yet, the loan-based model often prioritizes mitigation projects with clearer financial returns, leaving adaptation projects—critical for Africa’s resilience—underfunded.
As global warming intensifies, adaptation costs are projected to rise sharply, yet financial flows through loans remain insufficient, leaving Africa increasingly vulnerable to climate shocks.
EIB’s loan-based financing model also undermines EU’s credibility as a global climate leader and climate justice principles, which hold that the biggest emitters should provide debt-free support to low-emitting, vulnerable regions like Africa.
Africa with 30% of the world’s critical minerals required for electric vehicles, renewable energy generators and other green technologies is emerging as a crucial supplier of clean hydrogen and critical minerals to the EU, especially in the aftermath of the Russia-Ukraine conflict.6
The Russian-Ukraine war and the Covid-19 pandemic have further amplified the urgency for the African Union to act, as escalating climate change impacts and rising adaptation costs underscore the need for an alternative climate finance strategy to address these pressing challenges.

Options and Analysis

Given the shortcomings of EIB’s loan-based climate financing model, the AU should advocate for models that build the adaptive capacities of AU nations and also support the EU in its clean energy transition. Green bonds and grant-based financing are two potential solutions. I analyze each option according to its ability to address the shortcomings of loan-based financing and appeal to the EU and EIB.

Option 1: Enhanced Grant-Based Financing

Grant-based financing provides funds that do not require repayment, usually for a specific purpose or project. Because grants don’t increase African Nations debt burdens, are accessible with less cumbersome prerequisites, and support adaptation interventions, grants are ideal funding mechanisms for the AU’s climate action plan, and loss and damage.8

Benefits

Grant-based financing can jumpstart growth by enabling African countries to invest in critical infrastructure, boost local economies, and create jobs in climate-resilient sectors. This can help prevent insolvency, and finance high-risk, low-return adaptation projects like early warning systems, sustainable agricultural methods, and infrastructure upgrades.9
Grants have a simplified application process with established mechanisms, fewer prerequisites in terms of investments and accreditations, and can be directly allocated to specific project initiatives without elaborate financial arrangements, making them more accessible.
Grant-based financing provides a tool to the EU to build credibility for the EU as the true global leader in climate justice.
Because Africa is home to rapidly growing populations and economies that are heavily reliant on fossil fuels, grants for Africa’s energy transition would contribute to limiting temperature rise to 1.5 degrees Celsius and would reduce global climate risk. Supporting Africa’s shift to renewable energy would help reduce emissions from one of the fastest-growing energy markets, while also providing a model for low-carbon development in other emerging economies in the Global South.10
Grants can drive the necessary investments to rapidly and sustainably scale up clean hydrogen and critical minerals production, and support the EU in its green transition.

Drawbacks

Grants require substantial public funding. Because the EU is in its own clean energy transition while struggling to fulfill its energy needs due to the Russia- Ukraine war, allocating a significant portion of taxpayers’ money for attaining AU’s climate goals would face serious political resistance.
EU member states’ donations to the developing world often count towards meeting both climate change obligations and development commitments, such as providing 0.7% of gross income for overseas aid. Grants-based financing will increase avenues for more overlaps between EU’s aid for

development and climate mitigation and adaptation, ultimately limiting aid to the African nations. 11,12,13

African nations lack an appropriate measurement, reporting, and verification mechanism to monitor the use of climate aid expenditures. Grant based financing without conditionality has the potential of increasing institutional corruption and misuse of resources.
Grant-based funding, if poorly designed, may increase Africa’s reliance on outside assistance to build climate resilience, which could jeopardize sustainability in the long run. Grants offer short-term respite, but in order to guarantee long-term climate resilience, they must be a component of a larger plan that also involves bolstering local finance institutions and increasing governance capacity.

Option 2– Blended Financing using Green Bonds through Green and Resilience Debt Platform

Building upon the EIB’s green bond program, which has been in operation since 2007, this option combines public and private resources to finance sustainable projects, especially climate adaptation and mitigation and improve access for African nations. In order to coordinate and maximize finance, it makes use of Green Bonds, which are fixed-income financial instruments designated especially for environmental initiatives, and platforms such as the Green and Resilience Debt Platform. As evidence of its expanding significance in funding sustainability programs, worldwide green bond issuance hit a record $517.4 billion in 2021.14

Benefits

By leveraging private capital, this model will help the EU increase its funding capability by mobilizing private sector investments alongside public funds through the use of green bonds.15,16 2. African countries can also raise money on global financial markets through green bonds, which are scalable and sustainable models that offer lower interest rates than conventional finance. Additionally, this model can be extended and replicated over time, resulting in an ongoing cycle of funding for climate-related projects that is more self-sustaining.
Because they are a market-driven approach, green bonds encourage innovation in clean energy technologies and other climate solutions. Furthermore, green bonds are financial instruments that raise capital specifically for environmental initiatives and can finance both mitigation and adaptation projects, providing a broader range of support for Africa’s climate action plan.
The new Green and Resilience Debt Platform will focus on climate resilience and blue bonds in Africa. It will provide technical assistance to partner countries, promote a climate-sensitive investment environment, create a pipeline of bankable green investments, and strengthen domestic and regional green debt ecosystems and financial institutions. It will also provide access to anchor investments in green bond issuances, facilitating easy access to financing for vital adaptation projects.17
In order to maintain transparency and meet investor expectations, issuers must reveal the environmental effect of projects they have sponsored, creating accountability for effective use of aid.
Use of green bonds aligns with the EU’s European Green Deal, a renewed sustainable finance strategy. European Commission President, Ursula von der Leyen, announced that the Commission would set a target whereby 30 % of the €750 billion Next Generation EU would be raised through green bonds. Investment in Africa through this model provides a unique opportunity to the EU to test waters around the efficiency of their Taxonomy Regulation in facilitating sustainable investments through green bonds.18,19,20

Drawbacks

The EU Green Bond Principles do not outline what use of proceeds will be considered green. This analysis is left to the issuer, its advisers, and the second opinion reviewer. This lack of robust contractual protections, coupled with inconsistent reporting metrics and limited transparency, poses significant risks to the credibility of the green bond market, potentially undermining investor confidence and the broader objectives of sustainable finance.
Even though green bonds usually have lower interest rates than conventional loans, this strategy requires African nations to incur debt. Repayment of these bonds could put a strain on the finances of countries who are already struggling with high debt levels. If not managed correctly, the issuing of green bonds could exacerbate the region’s debt problems.
Strong institutional frameworks, such as robust capital markets and trustworthy financial supervision, are necessary for the issuance of green bonds. Significant capacity deficits of African nations in these sectors may make it more difficult for them to issue and administer green bonds efficiently. Furthermore, smaller nations may find it difficult to afford the up-front costs of green bonds, such as legal fees and debt ratings.
While green bonds are effective at attracting private capital, they tend to focus on projects with higher returns on investments, such as renewable energy, rather than adaptation. This focus could limit the effectiveness of the financing in addressing the immediate and growing need for climate adaptation across Africa while deprioritizing areas with lower financial returns but significant social and environmental benefits.
Another significant risk associated with green bonds is the potential for greenwashing, where issuers exaggerate or misrepresent the environmental benefits of their projects.21

Recommendation

I recommend that the European Commission, in coordination with the EIB, jointly revise their financial approach to incorporate a Targeted Grant-Based Climate Finance Initiative for Africa. This initiative should commit to providing at least 50% of climate finance to African nations as grants rather than loans, with particular focus on the 22 countries already at high risk of debt distress. Unlike green bonds, such grant-based funding would not exacerbate Africa’s debt crisis while addressing both the continent’s urgent adaptation needs and the EU’s climate commitments.

The initiative should earmark 60% of grant financing specifically for adaptation projects in climate-vulnerable sectors, creating a fast-track application process that reduces administrative burdens while maintaining accountability. By strategically framing these grants as investments that secure EU access to critical minerals and clean energy partnerships essential for the European Green Deal, and pairing them with technical assistance to strengthen African institutions, the EU can overcome domestic political resistance.

This approach would enable grants to be deployed quickly and efficiently, overcoming the barriers that have hindered access to existing climate finance mechanisms. By financing the AU through grants, the EU will not only fulfill its obligations under the $100 billion commitment, but also strategically secure vital resources for its own green energy transition, such as critical minerals and clean hydrogen. This positions the EU as a true global leader in climate justice while creating a powerful tool for both AU’s climate strategy and EU’s green transition goals.

Biography of Author

Saima Rashid is a driven policy advocate and change-maker, dedicated to making a meaningful impact on society. Her work with an isolated Indigenous forest community in India, where she co-created an inclusive and interactive learning space for the tribe’s children, developed her ability to collaborate on context-based solutions that center local expertise. In her subsequent roles with the State Department of Education and the Central Ministry of Social Justice, Saima drew on her grassroots experience while engaging with experts from diverse fields—including the World Bank—to design large-scale projects aimed at enhancing the accessibility and inclusivity of public schools. Through this work, she developed a keen ability to diagnose government capacity failures in delivering promised goods and services, while analyzing the intersectionality of policies to maximize their benefits. Her involvement in mixed-methods studies to improve public school teacher training further strengthened her communication skills with diverse stakeholders and helped her build robust qualitative and data-analysis research expertise.

Edited by: Sergio Lozano, MPP ’26 // Alina DeVoogd, MPP & MS ’27 // Dani Levy, MPP & MS ’26 // Jose Peleaz, MPP ’26