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The Kenya Green Finance Taxonomy

10 June 2024
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Overview

  • Kenya has set itself ambitious goals to lead the way as a champion in climate change action in the region. The country made a commitment towards a nationally determined contribution (NDC) target of abating greenhouse gas emissions by 32% by 2030.

Kenya has set itself ambitious goals to lead the way as a champion in climate change action in the region. The country made a commitment towards a nationally determined contribution (NDC) target of abating greenhouse gas emissions by 32% by 2030. The total cost of implementing mitigation and adaptation actions in the NDC is estimated at USD 62 Billion. In order to meet the cost of the NDC target various economic sectors have a role to play, including the financial sector.

In October 2021, the Central Bank of Kenya (CBK) issued a Guidance on Climate-Related Risk Management to emphasise the financial sector’s role in addressing climate change. The aim was to help banks integrate climate-related risks into their governance, strategy, risk management, and disclosure frameworks. A recent review revealed that while progress has been made in governance and strategy, banks are still in the early stages regarding risk management and disclosure due to the absence of standardised frameworks for green finance. A shared understanding of green finance and standardised disclosure frameworks are crucial for the sector’s effective contribution to combating climate change.

To address this, the CBK collaborated with the European Investment Bank (EIB) in October 2023 to receive technical assistance, with a focus on developing a green finance taxonomy. A green finance taxonomy is a classification system that highlights which investments are environmentally sustainable and, by extension, those that are not. It defines a minimum set of assets, projects, activities, and sectors that are eligible to be defined as “green” in line with international best practices and national priorities.

The draft Kenya Green Finance Taxonomy (KGFT) has now been released for public consultation and is available on the CBK website. The KGFT aims to provide guidance for the banking sector and other market participants to make informed green investment or financing choices. This is intended to promote green finance flows and green products in Kenya that are aligned with internationally recognised standards. Kenya’s alignment with these international standards underscores its commitment to global climate goals.

The KGFT is meant to be used primarily by:

  • banking sector actors to identify and assess investment opportunities in the economy based on the KGFT, compile exposure disclosures and align supervisory and regulatory measures to facilitate system monitoring; and
  • companies and project developers to encourage investor and capital market involvement in obtaining and utilising green financing to combat climate change.

The KGFT will also establish a system for banks, issuers and other financial sector participants to track, monitor, and demonstrate the credentials of their green activities in a more credible way thus helping to stamp out greenwashing.

Currently, there is no regulation in Kenya requiring taxonomy alignment and therefore the use of the KGFT will be voluntary ahead of any mandatory regulation. Financial institutions will possibly be encouraged to start aligning their portfolios with the KGFT, even ahead of any mandatory regulation, to support the country’s climate goals.

The main highlights of the KGFT are:

  • The seven-step process for determining taxonomy alignment, the result of this is a binary classification – either ‘taxonomy aligned’ or ‘not’.
  • The catalogue of eligible sectors and activities spanning through manufacturing, agriculture, forestry and fishing, mining and quarrying, electricity, gas, steam, and air conditioning, water supply, sewerage, waste management, and remediation, transportation and storage, real estate, construction, information and communication and financial and insurance activities.
  • The following three principles that an activity must adhere to for it to be aligned with the KGFT:
    • Principle 1: Contributes substantially towards at least one environmental objective. The current draft of the KGFT only provides for an assessment of two objectives, climate change mitigation and/or climate change adaptation;
    • Principle 2: Does no significant harm to any of the other taxonomy objectives; and
    • Principle 3: Meets minimum social safeguards i.e. alignment with Kenyan labour laws and international standards.

It is anticipated that the application of the KGFT will face several challenges, including:

  • The availability and quality of data.
  • Aligning the types of investment finance to specific economic activities as identified by KGFT.
  • The absence of a reporting template, with users advised to follow international examples.

These challenges hinder one of its key objectives: establishing a common language and enabling transparent reporting for easier performance tracking and reporting.

Despite these challenges, the potential benefits of implementing the KGFT are substantial. Possible increased foreign investment, job creation in green sectors, and improved environmental outcomes are some of the anticipated advantages. These benefits will not only support Kenya’s economic growth but also its environmental sustainability goals.

Advancements in technology and innovation will play a critical role in supporting the implementation of the KGFT and helping achieve Kenya’s NDC targets. Technologies such as blockchain for transparent reporting, artificial intelligence for risk assessment, and renewable energy innovations are key to driving the green finance agenda forward.

The KGFT is intended to be a live document subject to periodic updates. The first edition applies to the banking sector and initially focuses on climate change mitigation and adaptation as its objectives. Further updates will apply to additional areas of the financial sector and cover other environmental objectives, such as biodiversity and related objectives. Interested stakeholders are requested to share their comments with the CBK on or before June 11 2024.  

Bowmans will continue to monitor the developments relating to the KGFT.