Contracts to capital: Building the legal foundations for Africa’s climate finance

Proper legal frameworks, particularly when it comes to contracts, is essential for the success of climate finance tools, writes Christopher Burke of WMC Africa.

African countries face an urgent financing gap for climate action. Meeting adaptation and mitigation needs requires trillions of dollars by 2030, yet official development assistance (ODA) is stagnating and domestic fiscal space is tightening. The UN warns that Africa could be USD 2.5 trillion short of climate finance by 2030. Private capital is indispensable to close this gap. Unlocking this depends on both financial innovation and law. Contracts, regulation and enforceable rights are the foundations that can attract and sustain investment.

Why legal certainty matters for climate finance

Current flows are far below needs. The Landscape of Climate Finance in Africa 2024 reported that tracked flows rose from USD 29.5 billion in 2019/20 to USD 43.7 billion in 2021/22 surpassing USD 50 billion in 2022. This covers only a quarter of Africa’s nationally determined contribution (NDC) requirements under the Paris Agreement.

The obstacle is not only capital scarcity, but the perception of unmanageable risk. Investors face uncertainty over contracts, land rights, dispute resolution and regulatory stability. Without legal and institutional clarity, even well-designed finance mechanisms will fail to scale. As the Organisation for Economic Co-operation and Development (OECD) suggests, guarantees and blended finance structures are most effective when anchored in predictable regulatory environments.

Blended finance: Legal scaffolding for bankability

Blended finance combining concessional and commercial capital remains a central de-risking tool. Between 2021 and 2023, 41% per cent of blended climate finance transactions targeted Sub-Saharan Africa. The USD 750 million Distributed Access through Renewable Energy Scale-up (DARES) programme in Nigeria is designed to expand distributed renewable energy to 17.5 million people by structuring public funds to attract private providers.

Finance alone does not make projects bankable. These models rely on enforceable power purchase agreements (PPAs), concession contracts and regulatory frameworks to reduce the cost of negotiation and improve certainty. The OECD’s 2025 Blended Finance Guidance emphasized the need for local-currency lending frameworks and FX backstops to mitigate devaluation risks. Blended structures cannot deliver at scale without clear contractual standards and central bank support.

Guarantees and first-loss: Shifting liability through law

Guarantees redistribute risk, but their credibility rests on enforceable obligations. The World Bank Multilateral Investment Guarantee Agency (MIGA) is deploying a USD 61.5 million first-loss tranche under the IDA Private Sector Window to support more than 100 renewable energy projects across 20 African countries.  It issued USD 8.2 billion in guarantees in fiscal year 24.

Guarantee structures are evolving in sophistication. A Shell Foundation study highlights a layered model combining USD 400 million in first-loss insurance with USD 1.6 billion in public second-loss backstops, spreading liability across multiple actors. These mechanisms rely on legal frameworks that clearly define risk allocation, creditor priority and dispute resolution. Yet guarantees remain underutilised, accounting for only about 4% of multilateral development bank (MDB) commitments, even though evidence shows they can mobilise up to five times more private capital than loans when carefully structured and backed by enforceable rules.

Insurance: Governing non-diversifiable risks

Insurance tools cover shocks that cannot be diversified away including extreme weather, political upheaval and currency crises. At the sovereign level, Ghana purchased its first African Risk Capacity (ARC) drought policy in 2024 with support from the Global Shield against Climate Risks and received two pay-outs in 2024–25. This demonstrates how rules-based liquidity can protect national budgets and households.

At the meso-level, Agriculture and Climate Risk Enterprise (ACRE) Africa has expanded index-based insurance products to de-risk lending for climate-smart agriculture. Studies in Kenya show improved farmer resilience and greater willingness of banks to extend credit. Political risk and credit insurance from African Trade and Investment Development Insurance (ATIDI) and MIGA remain vital in higher-volatility environments. The OECD notes that guarantees and credit insurance account for 21% of private finance mobilized by MDBs, and that MIGA guarantees against political and credit risks have a strong record of mobilizing private finance.

Policy priorities: Law as the enabler of finance

To move from episodic projects to systematic capital flows, African governments and their partners must consider ways to prioritise standardisation in contractual arrangements. Well-drafted PPAs, concession templates and arbitration mechanisms provide clarity and predictability that reduce due diligence costs and shorten negotiation timelines. Standardisation builds investor confidence by reducing the likelihood of disputes and ensuring that risk allocation is consistent across projects, rather than negotiated on a case-by-case basis.

Enabling local-currency finance is important. Foreign exchange volatility remains a significant deterrent to long-term investment in African markets. Establishing FX liquidity facilities and hedging instruments backed by central or regional development banks helps shield investors from sudden devaluations. Such measures lower the cost of capital and encourage local lenders and institutional investors to participate, broadening the pool of available finance.

Clarity in liability frameworks is essential. Legislation that defines how risk is shared among parties, establishes creditor priority in the event of default and enforces insurance claims ensures that guarantees and blended finance tools function as intended. Without this clarity, even well-structured instruments may fail to mobilise private capital with investors wary of enforcement challenges. Strong liability frameworks effectively translate risk-sharing promises into enforceable commitments, bridging the gap between financial engineering and real-world investment outcomes.

Public capital could be deployed more strategically. Governments are best placed to absorb risks that the private sector cannot take on, especially in early-stage project development and climate adaptation infrastructure where returns are uncertain. When public funds assume these roles, private capital is freed to finance commercially viable components of projects, improving leverage ratios. MDBs have recognised this principle, with commitments to mobilise USD 65 billion annually by 2030, demonstrating the scale of public-private alignment required.

Transparent and credible project pipelines are critical to attracting sustained investment. Investors do not only need clarity on specific projects, but confidence in the broader portfolio of opportunities within a country or region. Building dedicated project preparation facilities, backed by robust monitoring, reporting and verification (MRV) systems helps ensure that pipelines are bankable, verifiable and ready for due diligence. Greater transparency reduces information asymmetry, shortens underwriting timelines and lowers transaction costs. This shifts investment from scattered, one-off projects to cohesive, scalable portfolios that can anchor long-term capital flows.

Conclusion: Contracts as capital multipliers

Africa’s climate finance needs are counted in trillions, not billions. MDBs mobilized USD 134 billion in private investment in 2024 demonstrating the right mechanisms can unlock significant capital. The challenge is to scale these approaches systematically. This requires enforceable contracts, predictable regulation and clear liability rules; otherwise even well-designed financial instruments will remain underutilised. The task for governments, regulators and development partners is not to chase one-off deals, but to embed these foundations so that capital flows become consistent and long-term. Only then will Africa’s climate ambitions be matched by the finance needed to deliver them.

Christopher Burke is a senior advisor at WMC Africa, a communications and advisory agency located in Kampala, Uganda. With over 30 years of experience, he has worked extensively on social, political and economic development issues focused on governance, land, agriculture, extractives, the environment, communications, advocacy, peace-building and international relations in Asia and Africa.