CHAPTER ONE

INTRUDUCTION

1.1  Background to the Study

Sustainable investment is an investment approach that considers environmental, social and governance (ESG) factors in portfolio selection and management (Sultana et al. 2018). The term sustainable investment may be used interchangeably with responsible investment and socially responsible investment, among other terms, whilst recognising there are distinctions and regional variations in its meaning and use (Louche and Lydenberg. 2006). The Paris Agreement, the Sustainable Development Goals, the Task Force on Climate-related Financial Disclosures, and the United Nations Environment Program Finance Initiative (UNEP FI) Sustainable Financial Roadmap Initiative are four examples of global developments that have greatly impacted the sustainable investing industry and the financial services industry more broadly. (GSIA, 2020)

The Paris Agreement is a legally binding international treaty on climate change that entered into force in 2016 (Viñuales el al. 2016). The Paris Agreement was signed at the United Nations Climate Change Conference (COP21), and at the time of writing 195 parties have signed, and 189 parties have ratified the agreement. The goal of the agreement is to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels (Gernaat et al. 2022). The Paris Agreement has been the driving force of many state-based legislations to limit greenhouse gas emissions and set net zero emission targets. Although the Paris Agreement is a state-based agreement, investors, asset owners and asset managers are increasingly looking to align their portfolios to the goal of the Paris Agreement, and monitor and limit greenhouse gas emissions, or are required to in alignment with changes in state-based legislation. (GSIA, 2020)

The Sustainable Development Goals (SDGs) contain 17 globally set goals to achieve a better and more sustainable future for all by 2030 and were adopted by all United Nations Member States in 2015. There are a total of 231 indicators and 169 targets that recognise ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests. Although the SDGs are a state-based framework, businesses and investors have also been encouraged to adopt the SDG framework. The UN Global Compact and their regional associations have been leading the development of business-based guidance for SDG implementation. The Principles for Responsible Investment (PRI) has also provided guidance to investors on the SDGs Investment Case. (GSIA, 2020)

The Taskforce on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board. The launch of the Recommendations of the TCFD in 2017 has influenced policy and regulation globally, and greatly changed expectations on investors, asset managers and asset owners. The TCFD recommendations are designed to help companies to provide better information on how organisations provide information on climate-related risks and opportunities and disclosures structured around governance, strategy, risk management metrics and targets. In 2021, a new Taskforce on Nature-related Financial Disclosures (TNFD) was created to deliver a framework for organisations to report and act on evolving nature-related risks. (GSIA,2020)

The United Nations Environment Program Finance Initiative (UNEP FI) Sustainable Financial Roadmap Initiative proposes an integrated approach to accelerate the transformation towards a sustainable financial system (Klynovyi, 2023). Regionally, there have been localised Sustainable Finance Roadmaps created dedicated to accelerating sustainable financial systems locally in many markets around the world. (GSIA,2020)

At the start of 2020, global sustainable investment reached USD35.3 trillion in the five major markets covered in this report, a 15% increase in the past two years (2018-2020) and 55% increase in the past four years (2016-2020), (A Rizzello, 2022 and Singh, 2022). The largest increase over the past two years was in Canada, where sustainably managed assets grew over 48%. The United States closely followed Canada with a growth of 42%, followed by Japan at 34% from 2018 to 2020. Sustainable investment assets are continuing to climb globally, with the exception of Europe which appears to indicate a decline, however this is due to significant changes in the way sustainable investment is defined in this region under EU legislation, making comparisons with previous versions of this report very difficult. Europe reported a 13% decline in the growth of sustainable investment assets in 2018 to 2020 due to a changed measurement methodology from which European data is drawn for this year’s report. This reflects a period of transition associated with revised definitions of sustainable investment that have become embedded into legislation in the European Union as part of the European Sustainable Finance Action Plan. In Australasia, sustainable assets continued to rise, but at a slower pace than between 2016 and 2018 with a growth of 25% from 2018 to 2020 compared with 46% from 2016 to 2018. This slow down reflects an industry transition whereby industry standards on what constitutes sustainable investment, as defined and measured by Responsible Investment Association Australasia (RIAA), have tightened

The Paris Agreement allows countries to determine their contribution to control climate change. Every country can develop a nationally determined contribution (NDC) that indicates the detailed activities and targets it plans to execute for mitigating or adapting climate change effects. Most of these adaptation and mitigation activities need resources to be implemented, and most African countries lack the required resources. African countries need around USD 250 billion annually to support and meet their NDC. Africa needs more than USD 2.5 trillion to support its NDC and development goals in 2030. Africa needs an additional USD one trillion to recover from the impact of the Covid crisis. Africa must create jobs that provide opportunities to its people, which must be done sustainably. However, the financial burden of new technologies and the required human resources are significantly high and sometimes inhibiting. Public funds are limited, and most governments struggle to pay debts and cover the people’s basic needs. This clarifies that financing African green development is beyond available public funds, and engaging the private sector is indispensable. The private sector in Africa is not well developed, and it has a lot of limitations. Corporate governance in Africa has a long way to go to introduce accountability and transparency. Full transparency and reporting are yet to be developed. Africa is not benefiting as much as it should from the funds that private investors release as green finance. Sub–Saharan Africa is one of the minor beneficiaries of the green bond Markets. Limited availability of human resources that understand green bonds, lack of proper economic policies,

African Union has introduced the Green Recovery Action Plan (2021-2027) to support the sustainable recovery of Africa from COVID-19 and climate change (Asekomeh et al,2022). The action plan recognises that African countries are not on the right track and may not meet the objectives of SDG 2030, Agenda 2063 and the Paris Agreement (K Mahlatsi, 2021). The action plan has identified the following five areas of priority: Climate finance, including increasing flows, efficiency, and impact of funding; Supporting renewable energy, energy efficiency and National Just Transition Programmes (Colenbrander et al, 2018); Nature-based solutions and focus on biodiversity through work on sustainable land management, forestry, oceans and eco-tourism; Resilient agriculture by focusing on inclusive economic development and green jobs; and Green and resilient cities, focusing on water (flooding and water resources) and enhancing information, communication and technology.

The African economy and financial sector are generally yet to be harmonised. There is relatively low regional coordination regarding financial regulation. The African Union has a limited institutional and legal framework to introduce laws and regulations that help financial institutions reorient their investment to sustainable investment (Yusuf and Ouguergouz, 2012). However, some emerging continental as well as regional institutions can be used to leverage and coordinate efforts to make sustainable finance the mainstream in the financial industry. We will briefly discuss regional agreements and conventions that lay out the master plan for the future of African economic integration

The African economic community was established in 1991 in Abuja. A treaty commonly referred to as the Abuja treaty (Mukisa and B Thompson,1995). The treaty aspires to harmonise social and economic policy in Africa with a single market, a central bank, and a single currency. It is envisaged that an economic community will be created stage by stage by enhancing and perfecting the existing regional economic communities. The Abuja treaty has laid the foundation for subsequent actions that harmonies African policies and laws. Therefore, Africa aspires to have an integrated and harmonised financial market and development policy (Thompso et al, 1993). However, there are only a few rules that are, in reality, harmonised. Corporate governance and economic laws still need to be harmonised and coordinated. This has caused severe problems in promoting sustainable long-term development goals in the continent.

The African Continental Free Trade Agreement (AFCFTA) is another critical development in creating one economic community and integrating African policies. The African free trade agreement will be the most significant, bringing together 1.3 billion people and a GDP of 2.6 trillion. The deal is expected to boost the African economy and improve the lives of millions. Trade is one of the leading causes of environmental degradation and greenhouse gas emissions. Therefore, the appropriate measures must be taken to ensure AFCFTA enhances, not compromises, the Paris Agreement and other related international and regional agreements.

AU has introduced Agenda 2063 as part of its aspiration to harmonise and coordinate member states’ development policies. Agenda 2063 is intended to overhaul the African Union to achieve grand objectives, transforming Africa into the future powerhouse. Agenda 2063 has seven visions and 18 goals. It also includes 161 targets that African countries should meet. The Agenda has introduced 15 flagship projects that the union plans to launch in the coming years (which include African financial institutions)

Agenda 2063 outlines African ambitions. Agenda 2063 uses the motto ‘The Africa We Want’, indicating that Africa is not delivering what its inhabitants deserve due to multifaceted challenges. Agenda 2063 underlines that all nations and their people should aspire to build a “prosperous Africa based on inclusive growth and sustainable development”. For obvious reasons, the document has focused more on the social and security problems the continent is struggling with than climate change. Nhamo argued that Agenda 2063 appears as if what is worrying the continent (from discourse perspectives) is more social than environmental and economic issues.

A baseline survey conducted in 2021 has shown that many African countries are keen to introduce regulations and guidelines that require the financial sector to consider sustainability seriously. However, only a few countries have introduced such regulations and guidelines. Kenya, Nigeria, South Africa, Ghana, Egypt, Mauritius, Morocco, and Zimbabwe are leading in taking concert actions. Recently, some African countries have started to reform their laws or introduce new rules to introduce sustainable finance concepts in their financial industry. Central Banks or other regulatory authorities have taken vital initiatives. The influence of international development actors is an essential element that pushed African regulators to introduce new rules and guidelines. Banks are motivated to consider suitability-related risks, particularly climate change risks, in their credit risk, operational risk, market risk and liquidity risk considerations. International Financial Corporation (IFC) has also supported most regulators in the continent in introducing sustainable finance and bringing practical changes on the ground.

Many African banks and financial institutions have joined the United Nations Environmental Program Financial Initiative. Ten financial institutions from South Africa, ten from Nigeria, seven from Egypt, five from Kenya, two from Togo, one from Congo, and one from Morocco joined UNEP-FI. Four banks from South Africa, two from Nigeria, two from Nigeria, and one from Togo also joined the Equatorial Principles. Some African countries have also introduced mandatory laws and principles that require their banks and other financial market actors to embrace sustainable finance. The Banking and other professional associations have also introduced some voluntary principles and guidelines to ensure that African financial markets and banks incorporate principles and standards that enhance the industry’s sustainability.

Climate change directly affects over 70% of Cameroon’s population, mainly in the agricultural and forestry sectors. While the country has integrated climate change into its sectoral strategies, the financial needs remain immense if it is to achieve its climate objectives. These ambitions require the mobilization of substantial public and private capital. According to the Climate Policy Initiative, Cameroon needs 60, 293.1 million USD to tackle climate change, but has mobilized only 390.5 million USD in 2022, of which only 2.6% came from the private sector. The challenges of attracting private investment remain considerable. Inadequate infrastructure, the risk perceived by investors, and the lack of suitable financial mechanisms are holding back their commitment (BAD, 2023). However, initiatives are emerging, such as impact investment funds and public-private partnerships, which are enabling the development of projects focused on renewable energies, sustainable agriculture and industrial decarbonization. These initiatives, when well structured, can not only meet climate needs, but also generate social and economic benefits for local communities. This brief analyzes private sector participation in climate financing, current initiatives to bridge the gap, key sectors and private sector mobilization, followed by recommendations.

Climate financing in Cameroon is largely dominated by public flows and international funds, with the private sector lagging behind. The country needs to mobilize around $58 billion for adaptation and mitigation measures over the next ten years (BAD, 2023). Failure to do so could result in a significant economic loss of up to 10% of GDP by 2050. In 2022, only 2.6% of climate funds mobilized in Cameroon came from the private sector, out of a total of USD 390.5 million mobilized for climate (BAD, 2023). There are several reasons for this. Firstly, there is a lack of awareness among private players of the economic opportunities of green growth, such as renewable energies and clean technologies. Financial and tax incentives remain insufficient to encourage companies to invest in climate initiatives. For example, few companies benefit from tax credits for green projects. In addition, Cameroon’s private sector is largely made up of SMEs, which often lack the capital and technical support to commit to climate projects. Local banks, although developing in terms of climate finance, are reluctant to provide significant financing due to perceptions of the high risks associated with green projects. This situation highlights the urgency of getting private investors more involved in the national climate effort, despite the existence of promising initiatives.

International Monetary Fund: The $184 million Resilience and Sustainability Facility (RSF) aims to help Cameroon adapt to and mitigate the impacts of climate change, improve governance and integrate climate policies into public finance management. The RSF can encourage private sector participation by providing risk mitigation tools and guarantees, enabling the private sector to participate in climate finance projects. This is already the case at the Inter-American Development Bank, and other authorities are working to set up a project preparation facility that could mobilize up to $1.2 billion in private sector resources. The Cameroonian government can work with local banks to finance climate adaptation projects on a gender-balanced basis, while using the fund to provide guarantees. At the same time, the Green Fund for Climate Projects (CFAN) is expanding in Cameroon to help develop climate change adaptation projects. The Key Sectors for Investment include:

The agricultural sector employs over 60% of the working population in Cameroon. It provides 1/3 of the country’s foreign currency and 15% of its budget revenues (INS, 2019). These data reflect the importance of agriculture to the Cameroonian economy. However, this sector is hard hit by the effects of climate change; it is the sector most exposed to and most affected by the consequences of climate change. To make it more resilient in the face of this risk, targeted investments need to be initiated and implemented. These should focus first and foremost on training farmers in the use of sustainable farming methods. Investments should also focus on scientific research, in particular on the development of seeds capable of coping with climatic hazards (World Bank, 2020). The private sector should support farmers in their transition to a more sustainable agricultural model, such as vertical farming, drought- and flood-resistant agriculture.

Cities and Infrastructure: Current forecasts suggest that, by 2050, Cameroon’s population will be close to 50 million. In addition to this, and following the same logic, its urban population will increase from 11 million to around 21 million, or 65% of the country’s population at that time (UN-HABITAT, 2016). The increase in the urban population means that these areas are vulnerable to the effects of climate change. This vulnerability presents itself through greater exposure to cataclysmic phenomena (World Bank, 2017). This calls for investment in infrastructure, particularly in the energy sector, to support climate resilience. This calls for investments in the production and use of green, non-polluting energies. Investments should also be directed towards building an adequate and reliable road system capable of withstanding the vagaries of climate change, and incorporating the aspect of long-term sustainability.

Forests and land us, according to data from the World Bank, around 43% of the country’s surface area is covered by forests (Logo, 2022). Forests are therefore an important resource, both for the population as a source of food and sustenance, and for the country’s economic growth, on which a significant proportion of exports depend. These forests are subject to the somewhat harmful actions of man. In view of the fact that forests represent an important resource in the fight against climate change, it is important that action be taken in this direction (PNACC, 2015). This means funding training in the use of sustainable farming methods, in particular reforestation, as well as the use of fallow land to revitalize the soil. We also need to fund projects to strengthen the skills of forestry administrations in monitoring forest management

Towards greater mobilization of the private sector, mobilizing the private sector in climate financing in Cameroon is an urgent necessity to meet the challenges posed by climate change. Indeed, the financing gap to reach national climate targets, as defined in the Nationally Determined Contributions (NDCs), remains considerable (NDC Revised 2021). The private sector, as a driver of innovation and investment, can play a key role in supplementing limited public funding. However, a number of challenges stand in the way of this mobilization. The regulatory and institutional environment hinders private sector development and is not robust enough to attract a substantial level of private investment. In addition, SMEs, which make up a significant part of the economic fabric, often lack technical capacity and access to financing (BAD, 2023). Opportunities related to green technologies, renewable energies and sustainable agriculture remain under-exploited (Thang et al., 2022).

The environmental awareness began on the 70’s with the United Nations Conference on the Human Environment claiming that adequate measures should be implemented to face these problems (United Nations, 1972). Still, only in the 80’s sustainability has emerged as a clearer concept, when the World Commission on Environment and Development brought it into mainstream and defined sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their needs” (Harlem, 1987, p.41). Since then, the term sustainability has been defined in numerous ways. According to Charter and colleagues (2002, p.10), sustainability means “to maintain or prolong both environmental and human health and simply good management”. Van de Kerk and Manuel (2008) suggest that it comprises the depletion of resources, the conservation of nature and other ecological aspects, and the human well-being and quality of life. In fact, sustainability has been given approximately three hundred alternative definitions (Santillo, 2007; Hult, 2011; Borowy, 2013). According to (Farsi, Hosseinian- Far, Daneshkhah, & Sedighi, 2017), understanding the sustainability concept is a major matter as it is the basis for sustainability assessment

Environmental issues such as climate change, loss of biodiversity and land deterioration are attracting worldwide attention (Bhattacharyya, 2022). Being aware of the criticalness of the issues, international organizations, government authorities, industries and academia have spent much effort on developing and implementing sustainable business practices (Zhang et al., 2019; Bhatnagar et al., 2022). Social and environmental problems have resulted from the pursuit of economic expansion and industrial development (Ekins, 1993). The climate and environment face growing challenges as a result of the depletion of natural resources and the release of harmful emissions from industrial operations (Singh & Singh, 2017). Extreme weather events and the disappearance of biodiversity are some of the key changes brought about by rising temperatures in environmental systems and human life. Climate change is a significant global challenge that has far-reaching impacts on ecosystems, weather patterns, and human livelihoods. Recent reports from reputable sources such as the Guardian (2023) and the NOAA (2021) highlight the alarming consequences of escalating greenhouse gas emissions, deforestation, and rapid industrialization. These factors have led to a notable increase in average global temperatures.

This necessitates addressing negative externalities associated with energy use and fostering energy sustainability (Handmer et al., 2012). The progress toward these goals has been slower than anticipated. To achieve the SDGs, substantial investments, estimated at $5 to 7 trillion annually, are required from all sectors of society (Kharas & McArthur, 2019). The Paris Agreement emphasizes the need for persistent financing and significant global investments. Government action required to protect environment by investing in green finance projects. In this context, green finance, championed by China, has gained widespread attention as a potent tool to address environmental concerns while promoting sustainable development (Wang et al., 2022). Green finance has emerged as a critical tool in the global effort to promote sustainable economic development and combat climate change (Eyo-Udo et al., 2024). The concept of green finance refers to the use of financial instruments and investments to support environmentally sustainable activities, such as renewable energy projects and sustainable infrastructure development (Taghizadeh & Yoshino, 2020). The impact of green finance on sustainability is significant, as it enables the allocation of capital towards activities that contribute to mitigating climate change and reducing other environmental impacts (Dikau & Volz, 2018). The growth of green finance is essential to achieving the goals of the Paris Agreement on climate change and the United Nations Sustainable Development Goals, as it helps to accelerate the transition towards a low-carbon economy and promote responsible and long-term investment strategies (Debrah, 2022). The investment needed to fix today’s sustainability challenges is twofold: it should both “finance the green”, that is, invest in environmentally friendly solutions, and “green the finance” by reorienting the financial system (Clapp & Dauvergne, 2011). An example of financing the green is the estimated USD 53 trillion that the International Energy Agency says should be invested in the world energy sector by 2035 to prevent life-threatening climate change. Conversely, greening the finance can be exemplified by the New Climate Economy’s analysis which shows that this systemic change will require funding to the tune of USD 90 trillion. In short, green and sustainable finance is needed on a massive scale. The Significance of Green finance has gained global recognition for several key reasons (Ye & Dela, 2023): Firstly, it aligns with the imperative of sustainable development, becoming a central focus in international financial circles. Eco-financed products adoption on “One Planet Summit” in Paris in 2017, supported by global central banks and financial industry leaders, exemplifies its growing prominence (Swaty, 2023). The Green Climate Fund’s commitment to supporting green projects that can reduce global greenhouse gas emissions by 1.4 billion tones underscores its pivotal role in financing sustainability initiatives (Chen et al., 2024). Secondly, green finance prioritizes the societal benefits derived from a healthier environment. It places a strong emphasis on how economic activity and ecological wellbeing can coexist peacefully, ultimately promoting long-term development in society (Hariram et al., 2023). The “green” component of green finance is demonstrated by the distribution of social capital to a variety of industries, including corporate governance, renewable energy, green building, climate resilience, and environmental preservation (Debrah et al., 2022). Thirdly, there are now a variety of green financial products. They encompass green bonds, green investments, green insurance, carbon finance, and anticipate the emergence of new products. Green bonds, well-known for their risk reduction features and attractiveness to socially conscious investors, have become increasingly important in the realm of climate change and strategies for financing sustainable development. Fourthly, Green finance has gained global attention and support (Ozili, 2022). For instance, global central banks and financial institutions endorsed eco-financed products at the “One Planet Summit” in Paris, emphasizing its significance in combating climate change (Gribincea, 2024). Global central banks and key players in the financial industry worldwide have wholeheartedly embraced the adoption of eco-financed products (Swaty, 2023). They are championing the cause of green projects aimed at reducing global greenhouse gas emissions by an impressive 1.5 billion tones. Playing a pivotal role in financing these vital green initiatives is the Green Climate Fund. In a significant commitment, the Spanish government pledged in November 2021 to increase its contribution to the Green Climate Fund by 60% (Dormido et al., 2022). This boost in funding is intended to provide essential support to underdeveloped nations in their efforts to combat the challenges posed by climate change (Smit & Pilifosova, 2003). Green finance lays a lot of emphasis on enhancing society’s quality of life. A vast array of financial instruments is included in the category of “green finance,” such as carbon finance, green bonds, green investments, and green insurance (Tavares et al., 2024) The efficient distribution of funds to initiatives aimed at mitigating and adapting to climate change is made possible by this diversity.

A company’s sustainability contribution is commonly measured by its Environmental, Social, and Governance performance (ESG). Public and private investors now use such ESG scores for screening investment opportunities. Although the ESG score is a good tool for portfolio selection, another widely used approach is to consider the industry in which the company operates. Company stocks from more harmful or unethical industries such as alcohol, tobacco, weapons, gambling or fossil fuel production are considered sin stocks, as they negatively affect a sustainable society and are therefore often excluded from an investor’s portfolio. Sin stocks are often associated with strong financial performance over time, which can make it challenging to exclude them from a portfolio entirely. Blitz and Fabozzi (2017) argue that investors can selectively exclude certain segments of sin industries without significantly impacting the financial performance of the portfolio

1.2 Statement of the Problem

Sustainable investment face growing challenges as a result of climate change caused by the depletion of natural resources and the release of harmful emissions from industrial operations (Singh & Singh, 2017). Climate change directly affects over 70% Cameroonians population, mainly in the agricultural and forest sectors. Environmental problems are significant obstacles to investment and economic growth. Initiatives are emerging such as impact investment funds, public-private partnership which are focused on renewable energy, sustainable agriculture but the challenges of attracting investment remain considerable. According to the climate policy initiative, Cameroon needs 60,293.1million USD to tackle climate change but has mobilized only 390.5 million USD in 2022, of which only 2.6% comes from private sector. This research is motivated by the fact that green finance can adequately solve environmental problems and ensure sustainability of investments in Cameroon. Green finance has gained global recognition due to its crucial role in achieving sustainable development and addressing climate change. It’s a key tool for balancing economic growth with environmental protection, fostering a transition to a low-carbon economy, and meeting international sustainability goals. This recognition is driven by the growing understanding of the interconnectedness of environmental and economic systems, and the urgent need for sustainable.

1.3 Research Questions

1.3.1 The Main Research Question

What is the influence of green finance on sustainable investment in Cameroon?

I.3.2 Specific research questions

1. To what extent does green loan influence sustainable investment in Cameroon?
2. To what extent does green fund affect sustainable investment in Cameroon?
3. What is the role of Environmental, Social, Governance (ESG) on sustainable investment in Cameroon?

1.4 Objectives of the Study

1.4.1 Main Objective

The main objective of this study is to examine the influence of green finance on sustainable investment in Cameroon

1.4.2 Specific objectives

 The specific objectives of the study are to;

1. Analyze the influence of green loans on sustainable investment in Cameroon
2. Evaluate the extent to which green funds affect sustainable investment in Cameroon
3. Examine the role of Environmental, Social, Governance (ESG) on sustainable investment in Cameroon