Kenya ties Sh64.8 billion bond to forest protection and power access

Kenya is preparing to raise Sh64.8 billion through its first sovereign sustainability-linked bond, a novel debt aimed at lowering borrowing costs, connecting more households to electricity and slowing the loss of natural forests.

Last week, the National Treasury unveiled the country's Sustainability-Linked Financing Framework, paving the way for an inaugural $500 million (Sh64.8 billion) bond that will be supported by the World Bank.

The framework allows Kenya to tap international capital markets while linking the cost of borrowing to measurable environmental and social outcomes rather than restricting how the funds are spent.

The bond will be among the first sovereign sustainability-linked bonds in Africa and differs from conventional green bonds, whose proceeds must be used exclusively for environmentally friendly projects.

Under the new structure, the government will have flexibility in how it uses the money, but investors' returns will depend on whether Kenya meets agreed sustainability targets by 2030.

The framework identifies two key performance indicators: reducing deforestation and expanding electricity access in rural areas.

On electricity, Kenya aims to increase rural access from 67.9 per cent in 2023 to 81.8 per cent by 2030.

According to the latest official data, about 78 per cent of households nationwide are currently connected to the national electricity grid, although access remains significantly lower in remote rural areas.

If rural electricity access reaches 94.4 per cent by 2030, Kenya will be deemed to have exceeded its target, triggering a reduction in the bond's coupon rate and lowering the government's financing costs.

However, if access only reaches the minimum target of 81.8 per cent, the coupon will remain unchanged.

Current projections suggest that, without additional interventions, rural electrification would rise to only about 76.7 per cent by 2030, underscoring the scale of investment needed to connect thousands of households still beyond the reach of the national grid.

The second performance target focuses on protecting Kenya's shrinking natural forests.

The government has committed to limiting cumulative forest loss from a 2024 baseline to below 44,000 hectares by 2030.

Reducing losses to below 38,000 hectares would qualify as overperformance.

Without stronger conservation measures, cumulative forest loss is projected to approach 50,000 hectares by the end of the decade.

The framework relies on independently verifiable data.

Forest cover will be monitored using satellite imagery and official land records. At the same time, access to electricity will be measured using data from the Kenya National Bureau of Statistics and the Ministry of Energy.

According to the framework, both indicators were selected because they address national development priorities while contributing directly to Kenya's climate commitments under the Paris Agreement and its long-term economic transformation agenda.

The bond's pricing mechanism introduces financial incentives for meeting those targets.

Missing the minimum performance thresholds would result in a higher interest rate payable to investors.

Achieving the baseline targets would leave the coupon unchanged, while surpassing the higher performance thresholds would reduce Kenya's borrowing costs.

The proposed issuance will also benefit from support by the World Bank, which is expected to provide a Performance-Based Guarantee.

The guarantee is intended to strengthen investor confidence, improve the bond's credit profile and help Kenya secure financing on more favourable terms than would otherwise be available in international markets.

The Sustainability-Linked Financing Framework also establishes governance and reporting standards for the transaction.

The Treasury has committed to publishing regular reports on progress towards the two sustainability targets, with independent verification of the results before any adjustment is made to the bond's coupon.

The planned issuance builds on Kenya's growing use of innovative climate finance instruments. It follows the country's successful sovereign green bond, which raised $1.2 billion (Sh155.4 billion) through a 10-year issue carrying a 6.875 per cent coupon.

The bond attracted orders worth more than $5 billion, reflecting strong international appetite for Kenya's environmental, social and governance-linked investments.