- The initiative seeks to help the financial sector with clarity and certainty in selecting green investments.
- It will also help reduce financial sector risks through enhanced management of environmental performance.
Image: PCS
Kenya is seeking to adopt a classification tool that will dictate whether particular economic activities are green, or environmentally sustainable to better position them for funding by investors.
This is through the proposed Kenyan Green Finance Taxonomy (KGFT), a draft now at the public consultation stage.
In a gazette notice dated April 12, the Central Bank of Kenya requested interested stakeholders to share their comments on the proposal and provide further inputs within the coming 60 days from the day of communication.
The apex bank says the classification model will play a key role in unlocking sustainable finance and stimulate the allocation of capital to support a climate-resilient economy.
The system defines a minimum set of activities that are eligible to be defined as "green" in line with international best practice and national priorities.
Akin to other best practice national taxonomies, the KGFT contains structural elements such as environmental objectives, sectors and economic activities with well-defined Technical Screening Criteria (TSC).
“It can be used by investors, issuers and other financial sector participants to track, monitor and demonstrate the credentials of their green activities transparently and efficiently,” CBK says.
In doing so, the lender says it will help the financial sector with clarity and certainty in selecting green investments.
It will also help reduce financial sector risks through enhanced management of environmental performance, it adds.
“Further, it will reduce the costs associated with labeling and issuing green financial instruments, unlock significant investment opportunities for Kenya in a broad range of green and climate-friendly assets.”
Nevertheless, the banking regulator is confident that the system will support regulatory and supervision oversight of the financial sector and provide a basis for regulators to align or reference green financial products.
Kenya is among the most vulnerable countries in the world to the impact of climate change.
The climate-sensitive nature of many of Kenya’s most important sectors, including agriculture, water, energy, and tourism, mean the economic costs of climate change are significant, with CBK warning that the country could lose up to 7.25 per cent of economic output by 2050 if it does not take strong action to adapt to climate change and mitigate its effects.
A recent policy paper presented during the inaugural African climate change global business summit in Nairobi, noted African countries have huge gaps in green funding, on the back of poor gree investment environment.
The paper shows annual climate finance flows in Africa stand at only $29.5 billion, whereas the continent needs $277 billion annually to implement its NDCs and meet the goals," the paper reads.
Country specific, Kenya attracted a total of $7 billion (Sh938 billion) in green financing in the past five years to 2023, with much of the funds directed towards the agricultural sector.
The segment got close to $2.25 billion (Sh301.5 billion), followed by urban development and water sectors which received $1.37 billion (Sh183.5 billion) and $1 billion (Sh134 billion), respectively.
The still limited funding is among the major reasons government is now considering strategic measures to unlock sustainable finance and stimulate the allocation of capital to support a climate-resilient economy.
The draft KGFT draws from Kenya’s Nationally Determined Contributions (NDCs) under the United Nations Framework Convention for Climate Change (UNFCC) and other national climate policy documents.