A Sustainable Banking Network (SBN) Task Force Report June 2020 Country Addendum to the SBN Report Necessary Ambition: How Low-Income Countries Are Adopting Sustainable Finance Profile to Address Poverty, Climate Change, and Other Urgent Challenges Kenya © International Finance Corporation [2020], as the Secretariat of the Sustainable Banking Network (SBN). All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC and SBN encourage dissemination of their work and will normally grant permission to reproduce portions of the work promptly, and when the reproduction is for educational and non-commercial purposes, without a fee, subject to such attributions and notices as we may reasonably require. 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Additionally, “International Finance Corpo- ration” and “IFC” are registered trademarks of IFC and are protected under international law. Kenya SBN Member: Kenya Bankers Association (KBA) is $81 billion from 2016 to 2030. In Nairobi alone, (member since 2015) the estimated climate investment opportunity is $8.5 billion from 2018 to 2030.1 SBN Working Groups: Measurement Working Group, IDA* Task Force, and Green Bond Working Group About this Country Profile: Key policy documents: This Country Profile is an addendum to the SBN report: Necessary Ambition: How Low-Income Countries Are ◻◻ Kenya Sustainable Finance Principles and Adopting Sustainable Finance to Address Poverty, Guidelines (KBA, 2015) Climate Change, and Other Urgent Challenges. The ◻◻ National Policy on Climate Finance (National report and country profiles for the first time capture Treasury, 2016) in a systematic way how sustainable finance is being ◻◻ Kenya Green Bond Listing Rules (Nairobi Stock harnessed by low-income countries to address a Exchange - NSE, 2018) range of common environmental and social priorities and drive financial sector innovation despite market ◻◻ Kenya Green Bond Guidelines (NSE et al., constraints. 2019) ◻◻ Sustainable Finance Initiative Voluntary The report and profiles complement and build on Reporting Template (KBA, 2019) the data collection and analysis for the SBN 2019 SBN Progression Matrix Stage (2019): Advancing – Global Progress Report, which covered 39 emerging the country has adopted voluntary industry principles markets. They delve deeper into the experiences of 8 (which were subsequently made mandatory by low-income countries in the SBN network through an the central bank), has implementation tools and online survey, interviews, and desk research. initiatives in place, and requires reporting by financial institutions. This country profile has four sections: SBN and IFC role: IFC, through the Africa region ◻◻ The Drivers of Action – factors that spurred Environmental and Social Risk Management (ESRM) the country to develop sustainable finance Program for financial institutes, has provided capacity policies or voluntary principles. building to support KBA implement the Principles. ◻◻ The country’s Experiences in Developing Through IFC/SBN, KBA has shared its experience with Sustainable Finance Frameworks and what other SBN members and benefited from the collective was learned in the process. SBN experiences. IFC estimates that the country’s ◻◻ Future Priorities for the country as it climate-smart investment potential in selected sectors continues to develop its sustainable finance systems. * IDA stands for the International Development Association (ida.worldbank. ◻◻ How the country views linkages between org), an international financial institution under the World Bank Group that offers concessional loans and grants to the world’s poorest developing sustainable finance policies and Broader countries. Development of its Financial System. Country Profile - Kenya 1 1 Drivers of action and the activities of development finance institutions, which were concerned that their strategies and Which factors spurred sustainable finance investment portfolios should minimize E&S risks. in Kenya? Figure 1 compares the drivers of sustainable finance in Kenya to other SBN banking associations from The mobilization of the domestic financial sector IDA countries. In common with other SBN banking has been a key driver for Kenya’s progress toward association members, Kenya places less emphasis on sustainable finance. The Kenya Bankers Association policymaker engagement and greater emphasis on the (KBA) has driven sustainable finance, developing coordinated voluntary approach. ‘Peer experience’ has the Sustainable Finance Principles and Guidelines, been an important driver in Kenya and was integral and supporting the voluntary implementation of the in the process of drafting the Principles (discussed Principles by banks. Local finance institutions were below). In common with peers, sustainable finance mobilized out of awareness that sustainability concerns has been supported by Kenya’s policy environment, for were impacting market forces. This awareness was example the country’s commitment to green growth. prompted by the launch of national green strategies Figure 1 The mobilization of the domestic private sector and peer experience have driven sustainable finance in Kenya, facilitated by a supportive policy environment High Medium Low N/A Policy environment: NaƟonal commitments to the Sustainable Development Goals (SDGs), Paris Agreement on Climate Change, or a NaƟonal Sustainable Development Policy Policymaker and/or regulator engagement: NaƟonal guidelines or regulatory requirements to beƩer manage environmental and social (E&S) risks in the financial sector, improving financial stability Coordinated voluntary approach: IniƟaƟve taken by local financial insƟtuƟons to adopt internaƟonal good pracƟce in sustainable finance and level the playing field Market incentives: Opportunity to increase compeƟƟveness and resilience of the financial sector through innovaƟon in green and socially inclusive finance Environmental and social challenges: E&S risk exposure that fosters parƟcipaƟon of financial insƟtuƟons to address the E&S risks at the country level Peer experience: DemonstraƟon effect of countries that have adopted a sustainable finance roadmap Notes: Large dots represent Kenya’s responses; small dots represent those from other IDA countries. Source: SBN IDA Diagnostic Survey responses 2. Developing a sustainable The process of developing a sustainable finance framework in Kenya, summarized in Figure 2 finance framework highlights the driving force of the KBA in initiating a sustainable finance program and drafting the What process did Kenya go through Principles. This process has been supported by the to develop a framework to promote financial sector and the broader policy context. In sustainable finance, and what was learned drafting the Principles, the KBA drew on international along the way? experience, such as the Equator Principles, the UN Global Compact, and UNEP-Finance Initiative. 2 Necessary Ambition – An SBN Task Force Report Figure 2 Stages and steps for developing and implementing the sustainable finance framework in Kenya 2013 – KBA convened a forum for all bank CEOs, who gave the KBA the mandate to start a Sustainable Finance IniƟaƟve and formed a working group of bank representaƟves. 1. Trigger The working group idenƟfied the key sustainability priority areas and defined sustainable finance for the Kenyan context. 2. Engage KBA draŌed the principles based on internaƟonal best pracƟce, which were reviewed and refined by the working group. 2015 – KBA launched the Sustainable Finance IniƟaƟve Guiding Principles to integrate sustainability 3. Launch into day-to-day banking principles. 2016 – Climate Change Acts includes the creaƟon of the Climate Change Fund to encourage green finance flows. 2017 – Green Economy Strategy and ImplementaƟon Plan launched. 4. Refine 2018 & 2019 – LisƟng Rules for Green Bonds & Green Bond Guidelines. 2019 – Issuance of its first green bond of 4.3 billion shillings ($42.5 million). Source: SBN IDA Diagnostic Survey responses In the process of developing and implementing the finance presented. For example, the KBA developed sustainable finance framework, the key challenge an e-learning platform to sensitize and build capacity was limited capacity in the banking sector. among banks. 80 percent of bank employees have since Local financial institutions were unconvinced that been trained on the platform. Furthermore, the KBA sustainable finance was a priority for their businesses reassured banks that sustainable finance would be and were concerned that the regulatory burden implemented voluntarily and gradually, enabling banks associated with sustainable finance would be costly to build internal capacity. Although the Principles were and punitive. For example, some banks believed it launched in 2015, voluntary progress reporting only would prevent them from doing business with certain began in 2019. The KBA has also incentivized green sectors, such as oil and gas. To establish consensus finance flows. For example, in 2017 it launched the for sustainable finance, the KBA engaged with banks Sustainable Finance Catalyst Awards. These solutions to persuade them of the opportunities sustainable are summarized in the figure below. Figure 3 The solutions Kenya found to address challenges in sustainable finance implementation Challenge Solution Capacity constraints within banks to Develop E-learning plaƞorm for sensiƟzaƟon and training implement sustainable finance Engagement with banks to persuade them of sustainable finance benefits Banks often prioritize profits over sustainability Create awards for banks to incenƟvize strong performance Banks are wary of additional regulatory Implement sustainable finance gradually to support internal capacity burden building Source: SBN IDA Diagnostic Survey responses Country Profile - Kenya 3 “ The main challenge raised was the view that Sustainable Finance was easier for international banks than local banks, and that it would cost local banks in time and compliance costs. Therefore, to get consensus, it was agreed that the Sustainable Finance Principles and Guidelines would not be mandatory until all members were given the opportunity to build internal capacity. ” “ There is a greater appreciation of how climate change poses a risk to the banking industry portfolio. Banks are also now more amenable to partnering with development finance institutions on green credit lines. ” - Kenya Bankers Association 3. Future priorities efforts will be supplemented by ongoing development of the e-learning platform. What are Kenya’s priorities as it continues Figure 4 compares Kenya’s ongoing challenges to develop a sustainable finance system? in developing a sustainable finance system with The key priority for sustainable finance those faced by SBN member associations in other development in Kenya is the continuous IDA countries. As with peer countries, there is development of its green bond market. A significant focus on a supportive enabling environment, framework for green bond issuance was launched capacity building and developing specific tools to and the first green bond issued in 2019. In addition, support sustainable finance implementation. The in 2019 the KBA reviewed the 2015 Guidelines and KBA expressed concern that there has been limited initiated voluntary reporting toward sustainable regulator intervention to incentivize or motivate the finance implementation, ensuring that reporting banks to implement sustainable finance. The high requirements were not overly onerous for local banks. level of staff turnover in banks also poses a challenge, Furthermore, the 2019 Kenya Finance Act introduces as it makes it difficult for sustainable finance to gain a withholding tax exemption for green bonds, making traction across the industry. Kenya one of the first countries in Africa to do so. These 4 Necessary Ambition – An SBN Task Force Report Figure 4 Ongoing challenges to be met in developing and implementing sustainable finance for Kenya High Medium Low N/A Build the capacity of regulators and financial insƟtuƟons Enhance cooperaƟon among financial Enabling environment and capacity building insƟtuƟons Provide clear incenƟves for sustainable finance Develop and launch a sustainable finance roadmap Expand sustainable finance to other financial sectors Develop a taxonomy of green/socially Specific regulations inclusive projects or tools Promote publicly available environmental data Create green asset guidelines, incenƟves, and awareness Note: Large dots represent Kenya’s responses; small dots represent those from other countries. Source: SBN IDA Diagnostic Survey responses 4. Broader financial sector emerging technologies to reach current and potential markets while economically empowering communities. development Furthermore, sustainable finance development How does sustainable finance in Kenya is expected to contribute to poverty reduction connect with broader ambitions? in Kenya. For example, the KBA prioritizes green finance in the agriculture sector in both climate change In Kenya, stakeholders are concerned about mitigation and adaptation, and has estimated that the financial sector development more broadly, both agriculture sector has a green finance need of over with regard to cross-cutting issues and within $180 million over the next ten years. This investment specific sectors. Figure 5 compares Kenya’s concerns is expected to contribute to poverty reduction, as related to financial sector development to the concerns it increases the resilience of the agriculture sector faced by other SBN member associations from IDA (which is particularly vulnerable to climate change) countries. In Kenya, concerns about E&S management and encourages investment in a sector characterized and climate and green finance are ranked lower than by informal employment. Despite being a key driver other finance sector priorities, such as agriculture of the economy, banks have historically struggled to finance, SME finance, financial inclusion, long-term engage with the agriculture sector, as they were unsure financing, and fintech/digital finance. This highlights how best to manage risk. The KBA also prioritizes the importance of defining sustainable finance broadly green finance in the manufacturing sector, which has and integrating these wider considerations fully an estimated green finance need of $480 million over into the sustainable finance framework. In Kenya the next ten years, which should also contribute to the Sustainable Finance Priorities and Principles employment creation. incorporate financial inclusion and encourage financial institutions to innovate and leverage existing and Country Profile - Kenya 5 Figure 5 Key areas of concern related to financial sector development for Kenya High Medium Low N/A Financial inclusion Cross-cutting issues FinTech/digital finance Long-term financing Environmental and social risk management Agricultural finance Sectoral financial areas SME finance Climate and green finance Disaster risk finance, disaster/weather insurance Notes: Large dots represent Kenya’s responses; small dots represent those of other countries. Source: SBN IDA Diagnostic Survey responses “ The agriculture sector, which is most affected by climate change, is a key area for sustainable finance intervention, including investments in both climate change mitigation and adaptation. The majority of Kenya’s agriculture sector is informal, and there is a need of over $180 million worth of green finance over the next 10 years for the agriculture sector in Kenya. The second sector that requires green finance and contributes to employment creation is the manufacturing sector, which needs $480 million worth of green ” finance over the next 10 years. - Kenya Bankers Association 1 IFC. 2016. Climate Investment Opportunity Report. 2018. Climate Investment Opportunities in Cities - An IFC Analysis. 6 Necessary Ambition – An SBN Task Force Report Access SBN knowledge resources at: www.ifc.org/sbn Access the SBN Necessary Assessment Report and associated Country Profiles at: www.ifc.org/sbnnecessaryambition