March 3rd, 2021

Introduction

In January 2021, FSD Kenya launched work in green or climate finance – an area that is relatively new to the organisation, although we have always had intersections with it. Preparatory work before the launch included undertaking studies on financing green, greening finance and stakeholder engagements. These studies determined the specific interventions and opportunities that FSD Kenya would pursue in this green finance for the next four and a half years.

FSD Kenya’s green finance work seeks to respond to the pressing realities that environmental degradation in general, and climate change in particular, is presenting to Kenya’s economic growth and development and the socio-economic wellbeing of the 70 percent of its population that directly depend on natural resources.

Kenya’s economy is both heavily natural resource dependent – with 40 percent of the country’s gross domestic product (GDP) and 70 percent of overall employment being derived from natural resource-related sectors, including agriculture, mining, forestry, fishing, tourism, water supply and energy – and highly vulnerable to climate vagaries; this, according to the 2014 Green Economy Assessment Report by the United Nations Environment (UN Environment).

Responding to climate change and the environmental challenges posed by this heavy dependence on natural resources for economic growth and setting Kenya onto a green growth trajectory requires huge financial investments. As a developing country whose first and overriding priorities are economic and social development and poverty eradication, Kenya faces a significant challenge in financing its green growth agenda using its public resources. This situation is, however, not unique to Kenya. Article 4 of the United Nations Framework Convention on Climate Change (UNFCCC) recognises these exceptional circumstances of developing countries such as Kenya concerning the financing of their green agenda. It emphasizes the need for significant mobilisation of resources, including international climate finance, to finance a country’s green growth agenda.

For this reason, Kenya has committed to financing only 13 percent of its recently updated Nationally Determined Contribution (NDC) to the UNFCCC, amounting to some USD 8.06 billion of the USD 62 billion required annually to implement the NDC fully. It is obvious that the huge funding gap of 87 percent must be met from and by other sources. Meeting this requirement will support Kenya meet the twin NDC objective of decreasing the country’s greenhouse gas (GHG) emissions by 32 percent relative to the business as usual (BAU) scenario of 143 million tonnes of carbon dioxide equivalent (MtCO2e) by 2030 and mainstreaming as well as implementing adaptation actions.

Objective

Contributing to the bridging of this financial gap for green growth is the primary objective of this work area for FSD Kenya. Our approach involves stimulating both the interest of, and action by, the private sector in general, and the financial sector in particular, in financing green (investing in inclusive green initiatives) and greening finance (mainstreaming of climate and environment factors as a financial and strategic imperative in the financial sector).

FSD Kenya’s unique proposition in the green finance space is the enabling of meaningful engagement by the financial sector in the green agenda. This is an area we are well-suited for, given our experience with, and knowledge of, the sector – spanning some 15 years. Moreover, the financial sector’s role in green growth has been overlooked, yet it has massive potential. Consider, for instance, that the total value of assets held by Kenyan banks, pension funds, insurers, and credit cooperatives was equivalent to 108 percent of GDP in 2013. Purposefully channelled, this money can create the transformational change of the magnitude required to shift Kenya’s growth from a brown to the desired green trajectory. Enabling such a transformation is our ultimate aim in this new area of work.

Organisation of our green finance work

FSD Kenya recognises that any meaningful action by the financial sector in green growth will require certain public policy interventions. Hence, its work will straddle across both the private and public sectors. To deliver on the core objective of enabling the financial sector’s engagement in green, we have organised our work around the following four thematic areas:

1. Policy and regulation are essential for creating an enabling environment for green finance. The core aim of the work we will be doing under this thematic area is to link the existing green growth normative framework (in the form of the Climate Change Act, 2016, the National Climate Action Plan 2018-2022 and the various sectoral green growth strategies and plans such as the Kenya Climate Smart Agriculture Strategy 2017-2026) with the financial sector, and to truly create an enabling policy and regulatory environment for the financial sector to participate in green. This work could be summarised as contributing to what the first National Climate Change Action Plan (NCCAP 2013-2017) describes as “creating an investment climate for climate investment”

2. Market-driven engagement to incentivise and build demand-side and supply-side market activity in the ‘financing green’ and ‘greening finance’ segments is the second area of our green finance work. It is particularly meant to build the market’s capacity to absorb and adopt the green policy and regulatory changes brought about through both the policy and regulatory interventions of our green finance work and others intervening in the same space. The actual test of a conducive policy environment for the financial sector to participate in green is to support the sector to develop green financial products and services that take advantage of the created enabling environment for green growth. This is the principal aim of our work under this thematic area.

3. There is also the need to link a capacitated and informed market operating in an enabling environment for green growth with investment opportunities, particularly at the grassroots (in the counties). Data and information are a crucial link in this regard. This is what our work under this third thematic area will drive – the generation and testing of climate data that informs green investments.

4. Lastly, FSD Kenya will aim to enhance its green finance work through collaboration and mainstreaming. Developing and implementing collaborative projects, particularly through and with the FSD Network, mainstreaming climate or green into other FSD Kenya’s projects, and mainstreaming gender and COVID-19 are the three elements of our work under collaboration and mainstreaming.

Collaboration and partnerships 

FSD Kenya takes note of the importance of partnerships in delivering the project’s core objective. We are fully aware that while we have both the knowledge of and experience in the financial sector, it is essential to collaborate with other stakeholders and partners in the green growth space.

Limited resources mean that significant change may be brought about only when there is a pooling of resources to scaling up activities and initiatives. Since the green space is quite a rapidly evolving space with many stakeholders, duplicating efforts is real in the absence of meaningful collaborations and coordination.

Lastly, some, or indeed, many of the partners we will work with will be the consumers of our products. Partnering with them is, therefore, the only natural.

To this end, we have lined up a number of partners we intend to work with, some of whom we actually must work with. These include financial sector regulators, financial sector industry associations, financial service providers (FSPs), the National Treasury, the Climate Change Directorate (CCD) under the Ministry of Environment and Forestry, the Council of Governors (and select county governments), and the FSD Network. Therefore, we are reaching out to these potential partners and others to engage with us in this new and exciting work area.

 

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