The main challenge in Kenya is that there is little green financing available in the marketplace. The following barriers to inclusive green investments across the financial services sector include [1]:

A short-term investment horizon prevails across the value chain, which means that long-term considerations such as environmental and social sustainability are not factored into investment and strategic planning. Creating economic value over the longer term is rarely recognized and more importantly, not rewarded by any stakeholders.

Fragmentation of the institutional investor market prevents economies of scale. For example, the fragmented structure of the pension fund sector (1,500 plans, most of which have less than 5 billion Kenyan shillings under management) constrains the flow of capital toward alternative assets. Even if appropriate green investment vehicles were developed, most pension funds would not be able to invest because they do not have the scale and capacity to understand and evaluate such new investments.

There are relatively higher returns in traditional sectors and asset classes. The system rewards investments in safe and traditional assets (government bonds and listed equities).

Lack of experience and expertise in structuring new investment vehicles for the inclusive green pipeline. Kenya has a potential green infrastructure pipeline that presents opportunities for local banks and institutional investors to participate if investments are structured correctly upfront. This includes attaining an acceptable level of risk and developing an analytical framework that shows the real risk-adjusted return for these investments (long-term environmental and social risks).

Limited policy and regulatory incentives, including fiscal incentives, to drive investment towards a sustainable finance model. A number of high-level policy papers confirm the government’s commitment to green and inclusive growth but work to integrate such issues into sector-specific implementation plans is not mature. There is currently no public policy or regulation in the financial and capital markets that drives or incentivizes investments in the green economy.


Key policies and governance approach

With support from UNEP and the international community, Kenya has developed a Green Economy Strategy and Implementation Plan 2016–2030 (GESIP) which aims to enable Kenya to attain a higher economic growth rate, in line with Vision 2030. The strategy guides both the national and county governments, the private sector, civil society and other actors [2].

The strategy highlights that significant resources are required to transition to a green economy, in terms of finance, investment, technology and capacity building. Additionally, Objective 2.1 aims at promoting efficient management of public finances through (i) Building capacities for national and county institutions on effective public finance management in planning and implementation of resilient building projects; (ii) Mobilizing resources for building resilience; and (iii) Developing and implementing green fiscal policies [2].

The key channel of financing for green economy initiatives will remain the Medium-Term Expenditure Framework (MTEF) budget process both at national and county government level.


Successes and remaining challenges

Costing and development of the GESIP is hampered by various challenges, as the feasibility of the underlying macroeconomic framework is usually not considered. The GESIP only provides high-level information on costing.

The next step for GESIP will be sectoral costing of specific green economy initiatives considering already completed costing exercises. In addition, relevant institutions can develop thematic strategies, each with their own detailed costing exercises and financing analysis.


Initiatives and Development Plans

The Kenya Green Bond Programme was launched in 2017 to promote financial sector innovation by developing a domestic green bond market. The first green bond was issued in October 2019. The KSh 4.3 billion Climate Bonds Certified issuance will raise funds to provide 5,000 university students with environmentally friendly, affordable housing in Nairobi [3].

Kenya's Green Bond Programme focuses on the following work streams and outputs [4]:

  • Researching the potential of green bond issuance in Kenya;
  • Developing a pipeline of green investments and engaging with local and international investors;
  • Supporting demonstration green bond issuance from leading banks and corporates;
  • Promoting green Islamic finance;
  • Developing a pool of Kenya-based licensed verifiers;
  • Development of a cooperative fixed income fundraising facility that would allow smaller banks and corporates to also take advantage of wholesale debt capital markets; and
  • Leveraging the Kenya experience to catalyze similar programs across East Africa Community.
  • Thorough implementation of the GESIP.
  • In the near term, the financing windows that will be open to Kenya will most likely be climate change related funds.
  • Eventually, green financing will require significant private sector investments through appropriate tools and fiscal policy reforms.