Kenya Central Bank Advocates for Green Finance Reforms Amid Climate Risks

The Central Bank of Kenya (CBK), led by Governor Dr. Kamau Thugge, is implementing reforms to position Kenya as a hub for green finance. This initiative follows the 2021 Guidance on Climate-Related Risk Management and is part of an ongoing effort to strengthen these guidelines. The CBK’s goal is to help commercial banks incorporate climate risks into their governance and risk management practices.

The announcement came during the inaugural Africa Climate Business Forum, which was held after the Africa Climate Summit. As part of this initiative, the CBK is creating a green finance taxonomy to categorize sustainable initiatives, investments, and projects. This taxonomy will include a disclosure framework for banks that aligns with international standards.

In his address at the forum, Dr. Thugge stressed the importance of increasing resources for development and climate action among financial institutions and stakeholders. He noted the significant capital shortfall in addressing climate-related challenges in Kenya and the broader African continent. According to estimates from the World Bank, Kenya faces an annual climate financing gap of $5.13 billion, exceeding its development budget.

Dr. Thugge referenced the COP27 decision, which indicated that transitioning to a low-carbon economy will necessitate annual investments ranging from $4 to $6 trillion globally. He called for a transformation in financial systems that involves collaboration among governments, central banks, commercial banks, institutional investors, and other financial institutions.

The governor also urged for collective global efforts to mobilize capital dedicated to both development and climate action, in line with international agreements aimed at balancing development needs with climate responsibilities. He emphasized that no nation should have to choose between pursuing development and taking climate action.

Despite the challenges posed by climate change, the shift towards a sustainable economy presents significant opportunities for corporations, micro, small, and medium enterprises (MSMEs), as well as households. A report on the State of the Climate in Africa 2020 identified various risks, including the impact of extreme weather on loans, the risk of asset obsolescence due to a green economy shift, and potential liabilities from financing harmful activities.

Transitioning to sustainability also opens up avenues for growth, such as the adoption of low-emission energy sources and the creation of innovative products. Notably, three years ago, the Acorn Group made headlines by issuing the first green bond in East and Central Africa, valued at KSh 4.3 billion and listed on both the Nairobi Securities Exchange and the London Stock Exchange.

However, funding for climate adaptation in Africa and other developing nations remains inadequate. The United Nations Environment Programme estimates that African countries will require at least $3 trillion by 2030 to fulfill their Nationally Determined Contributions (NDCs) as stipulated by the Paris Agreement, which outlines commitments to limit global temperature increases to 1.5°C.