The Kenya Green Finance Taxonomy (KGFT) Rules: A Legal Informative Overview

In recent years, the global financial system has increasingly emphasized on sustainability, underscoring the need for robust frameworks to guide green finance initiatives. Kenya, a frontrunner in sustainable development in Africa, has developed the Kenya Green Finance Taxonomy (“the KGFT”) through the (“the CBK”). The KGFT is a draft tool designed to classify economic activities as ‘green’ or environmentally sustainable, aiming to guide both the banking sector and other market participants in making informed investment or financing decisions. 

This article provides a legal informative overview of the KGFT rules, highlighting their objectives, the drafting process, and their implications for Kenya’s financial sector.

 

Objectives and Scope of the KGFT

The Kenya Green Finance Taxonomy was launched as part of the European Investment Bank (EIB) – Central Bank of Kenya (CBK) Greening Financial Systems Technical Assistance Programme, which began in October 2023. The KGFT is designed to be a live document, subject to periodic updates, to reflect evolving environmental objectives, including biodiversity and related goals.

The Kenya Green Finance Taxonomy serves the following functions:

1. Standardization: establishing a unified language and criteria for identifying green investments, thereby eliminating ambiguity. 
2. Transparency: enhancing the visibility and comparability of green financial products through stringent disclosure requirements. 
3. Incentivization: stimulating investment in sustainable projects by providing clear and consistent guidelines that bolster investor confidence.
4. Regulatory support: assisting regulators in promoting and monitoring green finance initiatives. 

The primary goal of the Kenya Green Finance Taxonomy is to support Kenya’s transition towards a low-carbon, resource-efficient, and sustainable economy. It achieves this by guiding capital flows towards environmentally beneficial projects, thus fostering sustainable development. 

 

The Drafting Process and Public Consultation

The Central Bank of Kenya released the draft Kenya Green Finance Taxonomy for public consultation. The CBK requests all interested stakeholders to share their comments and provide further inputs before 11th June 2024 through email at fin@centralbank.go.ke. 

This process is crucial for ensuring that the taxonomy is aligned with Kenya’s Nationally Determined Contributions (NDCs) under the United Nations Framework Convention for Climate Change (UNFCC) and other National Climate Policy Documents.

 

Structure of the KGFT

The KGFT is structured to provide a detailed framework for classifying green activities. It comprises the following key components:

1. Classification Criteria: This section delineates what constitutes a green activity, anchored on environmental objectives such as climate change mitigation, climate change adaptation, and biodiversity conservation.
2. Technical Screening Criteria: These criteria specify the performance thresholds and technical requirements that activities must meet to qualify as green. This includes quantitative benchmarks and qualitative assessments.
3. Do No Significant Harm (DNSH) Criteria: To ensure holistic sustainability, the DNSH criteria mandate that green activities must not adversely affect other environmental objectives. This holistic approach prevents activities from being green in one aspect while causing harm in another.
4. Minimum Safeguards: This component enforces compliance with social and governance standards, ensuring that green activities uphold ethical practices and human rights.

 

Key Sectors and Activities

The taxonomy spans a wide array of sectors, each with tailored criteria reflecting their unique environmental impacts. Key sectors include:

1. Energy: This sector covers renewable energy generation, energy efficiency improvements, and enhancements to grid infrastructure. The criteria emphasize reducing greenhouse gas emissions and promoting energy security.
2. Transport: This sector includes investments in low-carbon public transportation, electric vehicles, and supporting infrastructure. The focus is on reducing the carbon footprint of the transportation sector.
3. Agriculture: This sector promotes sustainable farming practices, soil health, water conservation, and climate-resilient agricultural techniques.
4. Manufacturing: This sector encourages eco-friendly production processes, the reduction of industrial emissions, and recycling initiatives.
5. Buildings and Construction: This sector covers energy-efficient buildings, green building certifications, and the use of sustainable construction materials.

Each sector-specific criterion is designed to align with broader environmental goals, ensuring that investments contribute positively to Kenya’s sustainability agenda.

 

Compliance and Reporting

Adherence to the KGFT requires financial institutions and companies to comply with stringent reporting and disclosure requirements. These include:

1. Sustainability Reporting: Entities must regularly disclose the environmental impact of financed projects, providing transparency to stakeholders.
2. Third-Party Verification: Independent assessments are required to ensure compliance with the taxonomy’s criteria, enhancing credibility.
3. Continuous Monitoring: Ongoing evaluation of projects is necessary to maintain their classification as green, ensuring sustained compliance over time.

These requirements are designed to foster accountability and ensure that green investments genuinely contribute to environmental sustainability.

 

Addressing Greenwashing and Promoting Transparency

One of the key objectives of the KGFT is to combat greenwashing by providing a collective understanding of green finance within the financial sector. This is particularly aimed at making it easier for investors to choose environmentally friendly options while cracking down on misleading claims from companies labelling themselves as eco-friendly. The KGFT is not just about following international trends but is tailored to Kenya’s specific environmental and development goals, promoting a smooth transition to a green economy while aligning with internationally recognized standards.

 

Classifying Green Activities and Encouraging Risk Reduction

The KGFT employs a “do no significant harm” approach to assess financial and insurance activities. This means that life and non-life insurers may need to evaluate how their products affect climate change. The draft encourages insurers to offer incentives for risk reduction, such as lower premiums for policyholders who invest in measures to adapt to climate change.

 

Kenya’s Climate Challenge and the Need for Sustainable Finance

Kenya faces significant challenges from climate change, despite its minimal contribution to greenhouse gas emissions. Sectors like agriculture, water, energy, and tourism are highly vulnerable, with a World Bank report estimating that Kenya could lose up to 7.25% of its economic output by 2050 without strong action. The KGFT is part of a broader effort to unlock sustainable finance, which is crucial for building a climate-resilient economy.

 

Conclusion

The Kenya Green Finance Taxonomy is a landmark initiative that sets a new standard for sustainable finance in Africa. By providing a clear and structured framework for classifying green activities, it promotes transparency, investor confidence, and alignment with national and global sustainability goals. As Kenya continues to implement and refine the KGFT, it stands to become a model for other countries seeking to develop their green finance frameworks. The KGFT not only supports Kenya’s environmental objectives but also enhances its position as a leader in sustainable finance.

B M Musau & Co., Advocates LLP is a top-tier legal services provider on emerging legal trends like Climate change in Kenya and beyond. While this is a general commentary aimed at providing information, if you require any specific assistance on this or any other emerging area of law, please reach out to us via email on info@bmmusau.co.ke.