A GAME CHANGER IN GREENWASHING? Kenya develops the Kenya Green Finance Taxonomy, 2024

The Central Bank of Kenya (CBK) on 12th April 2024 released the draft Kenya Green Finance Taxonomy (the “KGFT”) and is inviting comments from the public until June 2024. The KGFT has been drafted to help stamp out greenwashing. At a time when there is an increasing demand for environment friendly products, many companies are capitalizing on healthier, more natural, recyclable, chemical-free products, and less wastage of natural resources. In a bid to increase their sales therefore, some companies may convey misleading and deceitful information on how environmentally safe their products are. This is called greenwashing.
In the past, the issue of climate change was seen only as a problem of science. As such, financing institutions did not involve themselves in the debates and actions on climate change. However, the growing concern on the impacts of climate change have brought on board all sectors including the financing institutions. Being the regulator of banking and other financial institutions, CBK has made several steps to protect the environment, reduce climate change and mitigate the impact of climate change. Among such attempts is the drafting of the KGFT.
The intended users of the KGFT are banks, corporate bond issuers and project developers such as manufacturers and mining companies. It is also projected that future editions of the KGFT will increase the intended users of the taxonomy to include asset managers, insurance agencies and pension funds, policy makers and government agencies, among others.
The KGFT mirrors international best practice to enhance interoperability with international taxonomic structures. Further, the framework is underpinned by Kenya’s own specific strategic environmental and development objectives and policies.

Key highlights of the Draft Kenya Green Finance Taxonomy

The KGFT introduces the concept of green finance taxonomy which it defines as a classification system of catalogue that defines a minimum set of activities that are eligible to be defined as “green” based on international best practice and national priorities. It is intended that the taxonomy will be used by financial sector participants to track, monitor and demonstrate the credentials of their green activities transparently and efficiently. A green taxonomy will help the banking sector to identify “green” assets in their jurisdictions and make informed decisions on environmentally friendly investments that can promote sustainable economic development and environmental goals.

The KGFT intends to provide a common language and criteria that will support coordination and cohesion among the banking sector and its beneficiaries to identify investment opportunities that are environmentally sustainable, through managing environmental risks and knowing the activities that will enable Kenya to acquire an equitable, resilient, low-carbon green economy.

The 7-step procedure for determining taxonomy alignment

1. First to demonstrate that an activity aligns with the taxonomy, it must be assessed against and meet all the principles. The principles of the taxonomy are that the economic activity contributes towards at least one environmental objective, does no significant harm to any of the other taxonomy objectives, and meets minimum social safeguards.
2. Identify the environmental objective the economic activity intends to contribute to. The KGFT proposes six environmental objectives which are climate change mitigation, climate change adaptation, sustainable use of water and marine resources, pollution prevention, ecosystem protection and restoration, and sustainable resource use and circularity.
3. Assess if the economic activity is included in the taxonomy. Part C of the KGFT provides a list of economic activities and the environmental objectives they contribute to. An economic activity means activities carried out by a person in which labour, capital, and goods and services are input to produce goods and services. The KGFT has adopted the classification of economic activities under the Kenya Standard Industrial Classification (KESIC). This classification is in tandem with the UN International Standard Industrial Classification, which makes it compatible with other international frameworks and provides a high level of granularity. Ten economic activities are listed under the KGFT and comprise:
   • Manufacturing,
   • Agriculture,
   • Forestry and fishing,
   • Mining and quarrying,
   • Electricity, gas, steam and air conditioning supply,
   • Water supply, sewerage, waste management and remediation,
   • Transport and storage,
   • Real Estate, Construction,
   • Information and Communication, and
   • Financial and Insurance activities.
4. Evaluate the performance of the economic activity against technical screening criteria related to the environmental objective the economic activity intends to contribute to. Once a match is made under stage 3 of the process, an assessment is made to determine whether the economic activity provides a substantial contribution to adaptation. This includes the underlying rationale for how the activity will result in a substantial contribution and/or avoidance of significant harm to the environmental objective in question, and the method(s) by which the environmental performance of the economic activity will be measured, including defining the boundary for this measurement and the qualitative or quantitative conditions which must be met to enable the performance of the activity in a way that is considered environmentally sustainable. For instance, in a cement manufacturing industry, the assessment will examine how the process can contribute to adaptation. Further, assessment defines how environmental performance can be measured and could include metrics such as carbon emissions for cement produced. The qualitative and quantitative condition could involve a commitment of the company to use renewable energy sources and specifying targets to reduce carbon emissions by a certain percentage over a specific period.
5. Evaluate the performance of the economic activity against the Do No Significant Harm (DNSH) criteria as provided under Part D of the draft KGFT. The economic activity must be in such a manner that it does not impact any adaptation measures of other assets or activities negatively. The investment undergoes an assessment to identify any potential risks to climate change such as extreme weather conditions and changes in precipitation patterns, with the aim to evaluate the vulnerability of the economic activity over time. The operators of the economic activity will then come up with solutions to address the identified potential risks. Such solutions will be required to be implemented within a specific timeline and not negatively impact other environmental adaptation measures.
6. Evaluate the performance of the economic activity against the Minimum Social Safeguards (MSS) by ensuring implementation of policies, procedures and governance mechanisms that put into effect alignment with Kenyan labour law and the standards in the International Labour Organisation (ILO) core labour conventions, the Organisation for Economic Co-operation and Development (OECD) KGFT on Multinational Enterprises (MNEs); and the UN Guiding Principles on Business and Human Rights.

Conclusion

The CBK’s draft KGFT is certainly a step in the right direction as it places Kenya on a similar ranking with countries such as South Africa and countries in the European Union that have made progress in this regard. It represents a significant step in promoting sustainable development and responsible practices within the banking sector. The KGFT has a potential to steer financial institutions towards investing in projects that in fact prioritize environmental conservation and climate resilience. It is therefore important for stakeholders to engage in constructive dialogues and feedback to ensure that the final KGFT will balance not only the interests of the economy, but also those of the environment as well.