Walking the talk on climate action: Kenya’s Green Finance Taxonomy

On 4 April 2025, the Central Bank of Kenya (CBK) issued the first edition of the Kenya Green Finance Taxonomy (the KGFT) and Climate Risk Disclosure Framework for the banking sector. A draft of the KGFT was published for public commentary on 12 April 2024. Please see our previous report on the publication of the draft KGFT here. 

The first edition of the KGFT was initially developed for the banking sector as an entry point to the broader financial sector. It applies to commercial banks and mortgage finance companies licensed under the Banking Act (chapter 488 of the Laws of Kenya) for application on a voluntary basis for a period of 18 months from the date of issuance. Thereafter, implementation will be mandatory. It is eventually expected to expand to the wider financial sector in subsequent editions. 

A green taxonomy is a classification system that provides clarity on which investments are environmentally sustainable and, by extension, those that are not. It defines a minimum set of assets, projects, activities, and sectors that are eligible to be defined as “green” or “climate-aligned” in line with international best practices and Kenya’s national priorities. 

In Kenya’s case, the National Policy on Climate Finance provides the blueprint for Kenya’s approach to climate finance. The KGFT forms a part of this broader ecosystem. It is based on the following principles: Significant Contribution, Do No Significant Harm, and Minimum Social Safeguards. An activity will only be considered “taxonomy-aligned” if it abides by the three principles. The activity must make a Significant Contribution towards one of the objectives, Do No Significant Harm to any of the other objectives and comply with Minimum Social Safeguards. 

To determine taxonomy alignment, the following steps are to be followed: 

1. Alignment with the principles. The activity, effort, asset or project must initially meet all the above-mentioned principles.

2. Identification of the environmental objective. The activity should be aimed towards achieving one of the following objectives: climate mitigation, climate adaptation, sustainable use of water and marine resources, pollution prevention, ecosystem protection and restoration, and sustainable resource use and circularity.

3. Assessing whether the activity is covered by the KGFT. The KGFT currently covers the following eligible sectors and activities: manufacturing; agriculture, forestry and fishing; mining and quarrying; electricity gas, steam, and air conditioning supply; water supply, sewerage, waste management and remediation; transportation and storage; real estate; construction; information and communications; financial and insurance activities; and trade.

4. Evaluating the performance of the activity against the Technical Screening Criteria (TSC). The KGFT prescribes objective-specific TSC. At this step, an assessment is conducted to evaluate how the activity performs against the TSC for the objective that the activity intends to achieve.

5. Evaluating the activity’s alignment with the Do No Significant Harm criteria. The activity is assessed on whether it has a significant negative impact on any of the objectives. The KGFT provides both generic criteria and objective-specific criteria for climate mitigation and climate adaptation.

6. Evaluating the activity’s alignment with the Minimum Social Safeguard compliance. This step requires an analysis of compliance with both local and international labour laws and standards.

7. At this stage, the activity is declared as either taxonomy-aligned or not. The KGFT provides that banks may report taxonomy-aligned finance at a portfolio, fund, or debt instrument level.

Notably, the KGFT concedes that currently, there is no regulatory agency to verify taxonomy-related claims as the KGFT (this first edition specifically) is a voluntary tool. However, on the basis that the implementation of the KGFT will be mandatory in 18 months, we expect that the CBK will establish mechanisms of monitoring and regulation or task a different authority with this role. 

While the KGFT has adopted the principles and objectives of the EU Taxonomy as well as the work done on the South African Green Finance Taxonomy, it has adapted to account for national goals and the commitments of Kenya. This ensures the KGFT is applicable within the Kenyan context but interoperable with other taxonomies, thus easing the integration of emerging markets like Kenya into the international financial markets. 

Finally, the KGFT acknowledges that there will be challenges in its application, such as: 

• banks having difficulty aligning the various forms of investment or finance to a specific economic activity within the KGFT;

• availability of quality granular data to evidence alignment with the KGFT can be difficult to obtain; and

• the banking sector will require sustainability expertise to adequately assess alignment to the KGFT and this can be expensive.

Despite the challenges, the issue of the KGFT is a great triumph for the CBK, and it sets Kenya on the same footing with international markets. We anticipate that the KGFT will benefit the banking sector as follows: 

• it will promote greater capital expenditure on activities that are sustainable, thus promoting Kenya’s goals towards managing the risks posed by climate change;

• it highlights the activities in various sectors that are “climate-aligned”, thus promoting clarity and bringing awareness to banks; and

• it will promote transparency and therefore curb greenwashing practices.

This article was first published by ENS (www.ENSafrica.com) on 15 April 2025. 

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Any values, such as currency (and their indicators), and/or dates provided herein are indicative and for information purposes only, and ENS does not warrant the correctness, completeness or accuracy of the information provided herein in any way. 

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