By Jerameel Kevins Owuor Odhiambo
Worth Noting:
- The Climate Change Act of 2016 forms the cornerstone of Kenya’s legal framework for climate action, including provisions for climate finance. Section 25 of the Act mandates the National Treasury to develop financial mechanisms for climate change response, including incentives for investment in low-carbon development strategies.
- However, the implementation of these provisions has been slow, necessitating further regulatory action to operationalize the Act’s climate finance objectives. This could include the development of specific regulations on green bonds, carbon trading, and climate risk disclosure for financial institutions.
- Green banking, a subset of climate finance, refers to banking practices that promote environmentally friendly practices and reduce the carbon footprint from banking activities.
Kenya, like many developing nations, stands at a critical juncture in its economic development, facing the dual challenges of fostering economic growth and addressing the pressing issue of climate change. Recent data from the Kenya National Bureau of Statistics reveals that climate-related disasters cost the country an estimated 3-5% of its GDP annually. This stark reality underscores the urgent need for innovative financial mechanisms to support sustainable development and climate resilience. The concepts of climate finance and green banking have emerged as potential solutions, necessitating a robust legal framework to guide their implementation in Kenya’s financial sector.
Climate finance, as defined by the United Nations Framework Convention on Climate Change (UNFCCC), refers to local, national, or transnational financing drawn from public, private, and alternative sources of financing to support mitigation and adaptation actions addressing climate change. In the Kenyan context, this encompasses a range of financial instruments and mechanisms designed to channel funds towards climate-friendly projects and initiatives. The legal framework governing climate finance in Kenya is multifaceted, involving international commitments, national legislation, and sector-specific regulations.
At the international level, Kenya is a signatory to the Paris Agreement, which obliges developed countries to provide financial assistance to developing nations for climate change mitigation and adaptation. This commitment is reflected in Kenya’s Nationally Determined Contribution (NDC) under the Paris Agreement, which outlines the country’s climate action plans. The legal imperative here lies in creating domestic mechanisms to access and effectively utilize international climate finance. For instance, the establishment of the National Climate Change Fund, as provided for in the Climate Change Act of 2016, serves as a legal vehicle for receiving and managing climate finance from various sources.
The Climate Change Act of 2016 forms the cornerstone of Kenya’s legal framework for climate action, including provisions for climate finance. Section 25 of the Act mandates the National Treasury to develop financial mechanisms for climate change response, including incentives for investment in low-carbon development strategies. However, the implementation of these provisions has been slow, necessitating further regulatory action to operationalize the Act’s climate finance objectives. This could include the development of specific regulations on green bonds, carbon trading, and climate risk disclosure for financial institutions.
Green banking, a subset of climate finance, refers to banking practices that promote environmentally friendly practices and reduce the carbon footprint from banking activities. The Central Bank of Kenya (CBK), as the primary regulator of the banking sector, plays a crucial role in promoting green banking. In 2015, the CBK issued guidelines on sustainable finance, encouraging banks to integrate environmental and social considerations into their lending decisions. However, these guidelines are voluntary, raising questions about their effectiveness in driving substantial change in banking practices.
To strengthen the legal framework for green banking, Kenya could consider emulating countries like Bangladesh, which has made green banking mandatory through central bank directives. The CBK, under its mandate provided by the Central Bank of Kenya Act (Cap 491), could issue binding regulations requiring banks to allocate a certain percentage of their loan portfolios to green projects, implement environmental risk management systems, and report on their green banking activities. Such regulations would provide a clear legal basis for the transition towards a more sustainable banking sector.
The Capital Markets Authority (CMA) of Kenya has also taken steps to promote green finance through the issuance of the Policy Guidance Note on Green Bonds in 2019. This guidance provides a framework for the issuance of green bonds in Kenya, outlining the requirements for labeling, verification, and reporting on green bonds. While this is a positive step, there is a need for more comprehensive legislation to cover other aspects of green finance, such as green loans, sustainability-linked bonds, and climate risk disclosure.
One area where legal reform is particularly crucial is in the realm of fiduciary duty. Currently, Kenyan law does not explicitly require institutional investors to consider climate-related risks in their investment decisions. Amending the Retirement Benefits Act and the Insurance Act to include climate risk as a material financial consideration would align Kenya’s financial sector with global best practices and promote the integration of climate considerations into investment decisions.
The legal framework for climate finance and green banking in Kenya must also address the issue of transparency and accountability. The Access to Information Act of 2016 provides a general framework for public access to information, but specific regulations are needed to ensure transparency in climate finance flows and the use of green financial instruments. This could include mandatory climate-related financial disclosures for both public and private sector entities, in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Another critical aspect of the legal framework is the need for capacity building within the judiciary and legal profession. The Environmental and Land Court Act of 2011 established specialized courts to deal with environmental matters, but there is a need for further training and specialization in climate finance and green banking law. This could be achieved through amendments to the Legal Education Act to include climate finance as a mandatory subject in legal education curricula.
The role of public-private partnerships (PPPs) in advancing climate finance cannot be overstated. The Public Private Partnerships Act of 2013 provides a general framework for PPPs in Kenya, but there is a need for specific regulations to facilitate climate-focused PPPs. This could include streamlined approval processes for green projects, risk-sharing mechanisms, and financial incentives for private sector participation in climate finance initiatives.
As Kenya seeks to position itself as a regional hub for green finance, there is a need to harmonize its legal framework with international standards and best practices. This includes aligning with the Principles for Responsible Banking, the Equator Principles, and the UN Sustainable Development Goals. Legislative amendments to the Banking Act and the Microfinance Act could incorporate these principles, making them binding on financial institutions operating in Kenya.
