The Central Bank of Kenya (CBK) has introduced the Kenya Green Finance Taxonomy (KGFT) and a Climate Risk Disclosure Framework to cultivate a sustainable and climate-resilient banking sector.
These new measures build upon the CBK’s 2021 guidance on managing climate-related risks and are integral to its broader strategy for greening the financial system.
Developed with technical assistance from the European Investment Bank (EIB) through the Greening Financial Systems Programme, these tools aim to enable financial institutions to align their operations with climate objectives.
According to a CBK statement, the KGFT is “expected to guide target institutions on the evaluation and classification of their economic activities based on their contribution to supporting or hindering climate objectives.”
The KGFT is rooted in Kenya’s Nationally Determined Contributions (NDCs) under the UN Framework Convention on Climate Change (UNFCCC) and other national climate policies. Its initial focus will be on climate change mitigation and adaptation, with future updates planned to incorporate additional environmental goals, such as biodiversity.
The Climate Risk Disclosure Framework is designed to assist banks in presenting climate-related information in a “relevant, useful, consistent, and comparable manner.”
It aligns with global standards, including the International Financial Reporting Standards (IFRS) S2 and the Basel Committee’s principles on climate-related financial risks.
The CBK anticipates that increased transparency and accountability through these frameworks will “encourage businesses to adopt more sustainable practices” and aid investors in identifying companies best positioned for a low-carbon future.
This initiative is considered a significant advancement towards greening Kenya’s financial sector and aligning it with international climate finance norms.
18-month transition period
The CBK has provided all commercial banks with an 18-month transition period to commence disclosing the environmental impact of their financed businesses and projects. This move addresses growing concerns about greenwashing within the banking sector, where institutions may make unsubstantiated environmental claims.
The KGFT is a classification system defining what qualifies as “green” under local and international climate standards. The new regulations will mandate lenders to publicly disclose their exposure to climate-related risks, including investments in high greenhouse gas emission sectors. The objective is to redirect capital from businesses exacerbating the climate crisis towards those supporting low-carbon and climate-resilient investments.
The 18-month transition period will allow commercial banks to develop internal capacity, train risk teams, and integrate climate screening into their credit assessment models.
The CBK emphasized that “the KGFT, which will be a live document subject to periodic updates, initially focuses on climate change mitigation and adaptation as its objectives,” with future updates considering “other environmental objectives, such as biodiversity and related objectives.”
This announcement signifies a crucial shift, treating climate risk as a material financial risk. The CBK stated that the taxonomy aims to provide banks with a clear, standardized language for identifying climate-friendly and non-climate-friendly investments.
The transition period will also facilitate further engagement between the CBK and the banking industry to address any necessary changes for the smooth implementation of the KGFT, with a mandatory rollout expected in late 2026.
These new rules will impact the future financing of sectors such as oil and gas, mining, and large-scale agribusiness. However, they could enable banks to attract climate-conscious investors and access the expanding market for green bonds and climate-aligned lending.
