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Sustainable finance, the integration of environmental, social and governance (ESG) factors, risks, and preferences in lending, has become a mainstream concern.
Sustainable finance products such as sustainability-linked loans and bonds continue to gain traction, influencing global lending practices.
International lenders and other investors are increasingly subject to sustainable finance compliance requirements in their jurisdictions, in turn shaping how they engage with borrowers.
For borrowers, understanding and adapting to this shift is no longer optional; it is imperative to access finance.
Key policy initiatives in Kenya
Kenya has made significant strides in embedding sustainability within its financial sector. Key policy initiatives borrowers should be aware of include:
- Central Bank of Kenya (CBK): The CBK Guidance on Climate-Related Risk Management, 2021 sensitises the banking sector on mitigating climate-related risks. The CBK’s draft Climate Risk Disclosure Framework, currently undergoing public consultation, aims to standardise climate-related disclosures among commercial banks.
- Capital Markets Authority (CMA): The CMA Code of Corporate Governance Requirements for Issuers of Securities to the Public, 2015 requires listed companies to integrate ESG considerations into their governance structures and disclose their sustainability performance.
- Nairobi Securities Exchange (NSE): The NSE Listing Rules, the ESG Disclosures Guidance Manual, 2021 and the Policy Guidance Note on Green Bonds, 2019 promote ESG integration among listed companies and provide a framework for green bond issuance.
- Kenya Bankers Association (KBA): The KBA’s updated Sustainable Finance Guiding Principles and the Landscape of Sustainable Finance in Kenya’s Banking Industry Report aim to deepen financial inclusion and sustainability within Kenya’s financial services sector.
- Institute of Certified Public Accountants of Kenya (ICPAK): The ICPAK’s Roadmap for Adoption of IFRS Sustainability Disclosure Standards in Kenya sets the stage for the adoption of the International Financial Reporting Standards (IFRS) S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and the IFRS S2 (Climate-related Disclosures), which will make ESG reporting mandatory for public companies, including financial institutions.
- National Treasury:Â The Draft National Green Fiscal Incentives Policy Framework, published in December 2022, aims to identify and prioritise green fiscal actions to facilitate Kenya’s transition to a low-emissions development pathway while enhancing climate resilience and environmental sustainability.
- Kenya Green Finance Taxonomy: The CBK has now published the first edition of the Kenya Green Finance Taxonomy (the Taxonomy), following the issuance of the draft Taxonomy in March 2024. The Taxonomy identifies environmentally sustainable economic activities, enabling lenders and investors to assess sustainability-linked projects more effectively. Read more about the Taxonomy here.
- Climate Change Act:Â The regulations issued under the Climate Change Act include the Climate Change (Carbon Markets) Regulations, 2024, which provide a framework for the implementation of carbon projects and create incentives to support greenhouse gas emissions reduction and removal targets.
Meeting lender expectations
As international lenders adopt stringent ESG-related requirements, borrowers must anticipate similar requirements by:
- Aligning business practices with sustainable finance frameworks:Â Borrowers should assess their operations against green taxonomies and sustainable finance guidelines to improve their eligibility for financing.
- Developing ESG reporting capabilities:Â Establishing strong ESG reporting structures is crucial for meeting lender expectations and maintaining access to finance.
- Engaging lenders early on ESG criteria:Â Engage with potential lenders early in the financing process to understand their specific sustainability expectations.
In an increasingly sink-or-swim market, borrowers who fail to develop and implement sustainability strategies may face higher borrowing costs and limited financing opportunities.
The Author, Dominic Indokhomi, Partner, and Nairuko Kantai, Ginger Grace Ouma and Wambui Kelemba are Associates at Bowmans Kenya
