The Central Bank of Kenya (CBK) has given banks 18 months to start compulsory disclosure of climate-related exposure resulting from the individuals, businesses and projects they finance.
The timeline comes after the regulator on Friday issued Kenya Green Finance Taxonomy (KGFT), which will serve as a guide on the minimum set of assets, projects and sectors that are eligible to be defined as "green" in line with international best practice and national priorities.
A green finance taxonomy is a classification system that highlights which investments are environmentally sustainable and, by extension, those that are not.
CBK on April 12, 2024, issued a draft KGFT--which has since been refined to a final document--which will also help curb greenwashing—a practice where organisations exaggerate their environmental credentials using the so-called eco-friendly investment products.
The regulator said given that this is the first iteration of KGFT, banks and mortgage finance companies will be allowed to apply it on a voluntary basis for a period of 18 months from the date of issuance before it becomes mandatory.
“The CBK is issuing this framework to commercial banks and mortgage finance companies licensed under the Banking Act (Cap 488) for application on a voluntary basis, for a period of 18 months from the date of issuance. Thereafter, implementation will be mandatory,” said CBK.
“During the 18-month transition, institutions will build their capacity and make the necessary adjustments in preparation towards mandatory application of the taxonomy. The transition period will also facilitate further engagement between CBK and the banking industry on any changes deemed necessary to facilitate smooth implementation of KGFT.”
Banks will rely on the KGFT to track, monitor and demonstrate the credentials of their green activities in a more credible way, while also making public their levels of exposure to climate-change-related activities.
Publishing banks to start making such disclosures is aimed at encouraging the financial sector to dial down on activities that fan climate change while at the same time supporting those that promote a climate-resilient economy.
CBK said the European Investment Bank offered technical assistance to the development of KGFT which has been benchmarked on experiences in jurisdictions that have made progress in this respect, in particular the European Union and South Africa.
Countries around the world are turning to the green finance taxonomy to unlock sustainable finance and stimulate the allocation of capital to support climate-resilient economic activities.
CBK said KGFT will help banks distinguish between real and financial assets with high and low greenhouse gas emissions to drive capital allocation, evaluate investment strategies, and manage climate-related risks.
The regulator also sees the taxonomy as a tool that will provide banks clarity and certainty in selecting green investments and help them manage climate-related risks by tracking their exposure to green and non-green companies, projects, and assets.
“As a result, the taxonomy may support the reduction in financial sector risks through enhanced management of environmental performance,” said CBK.
Kenya is among the most vulnerable countries in the world to the impact of climate change, according to the World Bank 2021 Climate Risk Country Profile.
The sensitive nature of many of the country’s most important sectors, including agriculture, water, energy, and tourism, means the economic costs of climate change are significant.
