The future is sustainability.

And that’s especially true where finance is concerned. Sustainable finance is built on the bedrock of Environmental, Social and Governance (ESG), something we have already covered in our article Understanding ESG in Kenya.

ESG – as we have already reported – emerged as a focal point at the 2023 United Nations Climate Change Conference (COP28) recently held in Dubai. It refers to a framework or set of standards used by investors to assess a company’s performance and behaviour in relation to environmental sustainability, social responsibility and corporate governance practices.

It fits in perfectly with the Kenyan government’s stated commitment to sustainable development and its goal of transitioning to 100% clean energy by 2030.

The commitment to ensuring that future investments comply with environmental sustainability, social responsibility and corporate governance practices is not new. In fact, the Public Affairs Director and Sustainable Finance Initiative Lead at the Kenya Bankers Association recalls how she advocated for sustainable finance as far back as 2012. Fast forward a couple of years and SME development, environmental risk management and the green economy in the context of financial inclusion is all anyone can talk about. About time too.

But one thing is for sure – finance is all about sustainability and the future of it is green.

What is sustainable finance?

Sustainable finance – according to the European Union – refers to the process of taking ESG considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects. Environmental considerations might include climate change mitigation and adaptation, as well as the environment more broadly, for instance, the preservation of biodiversity, pollution prevention and the circular economy. Social considerations could refer to issues of inequality, inclusiveness, labour relations, investment in people and their skills and communities, as well as human rights issues. The governance of public and private institutions – including management structures, employee relations and executive remuneration – plays a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process.

Sustainable finance covers a broad range of financial instruments, products, and services in banking and financial markets. One thing they all have in common is the consideration and integration of ESG criteria in investment decisions.

Sustainable finance has continued to grow over the years. According to the Global Sustainable Investment Alliance, sustainable finance increased by 34% in 2019 to USD 30.7 trillion. That’s about one-quarter of the professionally managed assets globally.

Evidence suggests that sustainable finance drives business growth. Specifically, research by the Global Alliance for Banking on Values shows that sustainable banks have higher and more stable profits, as well as stronger growth than other banks. As such, there is an increased focus on sustainability.

Sustainable Finance Initiatives (SFIs)

SFIs refer to financial services and products that integrate ESG criteria into business or investment decisions. These initiatives aim to support sustainable economic growth by addressing global challenges such as climate change, social inequality and resource depletion. SFIs can take various forms, including:

• Green Bonds: Debt instruments specifically earmarked to fund projects with positive environmental outcomes, such as renewable energy projects, energy efficiency improvements and pollution prevention measures.

• Sustainability-linked Loans: Loans where the terms (such as interest rates) are linked to the borrower’s performance in achieving predefined sustainability targets, such as reducing carbon emissions or improving energy efficiency.

• Social Impact Investing: Investments made with the intention of generating positive, measurable social impact alongside a financial return. This could include investments in affordable housing, education, or healthcare.

• Climate Finance: Financing aimed at supporting mitigation and adaptation activities that address climate change. This could include funding for clean energy projects, climate-resilient infrastructure, or carbon capture technologies.

• ESG Integration: The inclusion of environmental, social, and governance factors into traditional financial analysis and investment decisions. Investors use ESG criteria to assess the sustainability and ethical impact of their investments.

• Sustainable Investment Funds: Funds that specifically target investments in companies or projects that meet certain sustainability criteria. These funds aim to deliver long-term returns while contributing to positive environmental or social outcomes.

• Carbon Markets: Systems where carbon credits are traded, allowing companies to offset their carbon emissions by purchasing credits from others who have reduced their emissions.

• Blended Finance: The strategic use of public or philanthropic funds to mobilize private sector investment in sustainable projects. This approach aims to reduce the risk for private investors and attract more capital into sustainable initiatives.

The Kenya Bankers Association (KBA) has been promoting sustainable finance principles and practices in Kenya’s banking industry since 2012.  Part of this included lobbying and championing industry development and innovation by coordinating members and partnering with stakeholders on key strategic initiatives. KBA’s Sustainable Financing Initiative (SFI) falls into this category.

The SFI Guiding Principles inform financiers on how to optimise the balancing of their business goals with the economy’s future priorities and socio-environmental concerns.

The Guiding Principles are in line with international best practices and are consistent with the financial sector’s environmental and social risk management aspirations. They are meant to guide banks on the implementation and adoption of sustainability practices and their incorporation into their day-to-day operations.

They are based on five principles –

1. Principle 1: Financial Returns versus Economic Viability – The guiding Principle is that financial viability is necessary from an investment perspective; but is not a sufficient condition for sustainable economic development. Financial institutions should consider both financial returns and the economic viability (ability to realise sustained long-term growth/ returns) of their financing activities.
2. Principle 2: Growth through Inclusivity & Innovation – The guiding Principle is that financial institutions in pursuit of growth should innovate and leverage existing and emerging technology to reach current and potential markets while economically empowering communities.
3. Principle 3: Managing & Mitigating Associated Risks – The guiding Principle is that firms should seek to mitigate social and environmental risks associated with their financing activities through client engagement and effective policies and risk assessment procedures. In addition, firms should actively measure and report on the financial impact of these risks on their business performance.
4. Principle 4: Resource Scarcity and Choice – The guiding Principle is that optimal resource management is realised through productivity and efficient utilisation of resources and is guided by comprehensive opportunity cost assessment.
5. Principle 5: Business Ethics & Values – The guiding Principle is that the leadership of financial institutions should ensure that the organisation delivers returns in the long term, and in a responsible manner that sees optimal utilisation of resources towards achieving positive externalities.

The adoption of sustainable banking practices has led to increased awareness of ESG risks and opportunities among Kenyan banks. This has resulted in more responsible lending practices, with banks now considering the environmental and social impacts of the projects they finance. The SFI has also helped banks identify new business opportunities in green finance, contributing to the growth of the green economy in Kenya.

Sustainable Financial Investments Thus Far

The African Development Bank has been at the forefront of issuing green bonds since 2013. Through its green bond issuance, the Bank has allocated USD 3.7 billion to 48 projects across 18 African countries (as of 2019). These projects include solar and hydropower, energy efficiency, clean transport, biogas, forestry conservation, water and wastewater management. Corporate green bonds are also receiving attention. The Green Bond Programme Kenya, launched in 2017, is a collaborative effort between the KBA, the Nairobi Securities Exchange (NSE), the Climate Bonds Initiative and the Dutch Development Bank. The program aims to promote the issuance of green bonds by providing technical assistance, capacity building, and certification services to potential issuers.

In 2020, Acorn Holdings dual-listed its USD 42.7 million green bonds on the London Stock Exchange. The bond meant to finance green buildings and affordable accommodation for 5,000 students in Nairobi, Kenya, was first issued in 2019 in Nairobi. The Acorn Holdings’ Green Bond was evidence that Kenya’s operational and regulatory environment was ready for the actualisation of sustainable finance instruments and transactions. The issuer of the bond cites technical support from the GBP-K and regulatory support from the CMA and the National Treasury, as some of the factors that led to the issue’s landmark success

On the 4^th of September 2023, Safaricom (NSE: SCOM)  announced the closure of a multi-billion Sustainability Linked Loan (SLL) to strengthen its ESG agenda.

The KES 15 billion deal, which can be increased to KES 20 billion by accordion, is the largest ESG-linked loan facility ever undertaken in East Africa and the first of its kind for Safaricom as well as the first Kenya Shilling-denominated SLL in the market.  The funding was provided by a consortium of four banks consisting of Standard Chartered Bank, Stanbic Bank, ABSA Bank and KCB Bank Kenya Limited and will enable Safari.com to access funding based on its progressive achievement of set milestones across key ESG areas.

Elsewhere, Access Bank, a Nigerian bank also issued a USD 41.1 million green bond in 2019 to fund projects such as flood defence, solar power and finance agriculture to enhance food security. The bond was also dual-listed on the Luxembourg Stock Exchange, the largest listing global platform for green bonds. In South Africa, Nedbank issued USD 100 million of renewable energy bonds. Proceeds from the issuance are also being used to finance three solar energy projects and one wind energy project.

The Future is Undoubtedly Green

The Constitution of Kenya recognises housing as a basic human right and outlines the right to adequate and accessible housing in Article 43. However, 93.6% of housing in Kenya is inadequate. This coupled with the fact that there is a housing deficit of over 65.6% in urban areas (KNBS, 2019), it’s clear that there’s a need to improve the quality of housing, whilst also addressing the shortage created by rapid urbanisation.

The problem is – the building sector contributes to 40% of global emissions. This is higher than other sectors (UN-Habitat, 2022). Furthermore, the share of energy used during the construction and operation of these buildings is above 60%. But by adopting green housing – also known as sustainable or eco-friendly housing, which refers to the residential buildings that are designed, built and managed with an emphasis on sustainability while minimizing their negative environmental effects – Kenya could create eco-friendly, energy-efficient and liveable communities that align with global Sustainable Development Goals and contribute to the Kenya Vision 2030 for a prosperous future.

Kenya has slightly over 100 projects registered or certified as green buildings, most of which are in Nairobi. They include Mlolongo Green Ville in Nairobi, Tatu City in Kiambu County, Two Rivers Development in Nairobi and UN-Habitat’s Sustainable Urban Energy and Ecosystems Project.

The Acorn Holdings’ Green Bond which raised KES 4.3 billion to construct affordable, environmentally friendly student hostels has been a source of financial support in the world of green housing. The Qwetu Hostels were built using climate-resilient designs, and are green resource efficient, adhering to the International Finance Cooperation (IFC) EDGE requirements.

Additional finance was also established by IFC in collaboration with International Housing Solutions (IHS) which established the IHS Green Housing Fund. The objective of the fund is to provide financial support to investors in the housing sector towards building affordable houses.

Lastly, it’s the intention of the KCB Bank Kenya Limited to partner with government entities, development banks and financial institutions to finance renewable energy and energy efficiency projects in emerging markets; grow the green bonds market and increase green bonds; allocate pension funds to low-carbon and energy-efficiency assets; develop smart agriculture through the implementation of Mifugo ni Mali (Livestock is Wealth) projects and hydroponic farming and implement projects involving electronic motorcycles, waste management and green and intelligent buildings.

Kenya’s dedication to sustainable finance is clearly reflected in the variety of initiatives and frameworks introduced in recent years. Whether through green bonds, sustainable banking, regulatory backing, or public-private partnerships, Kenya is at the forefront of embedding sustainability into its financial practices. These efforts not only bolster the nation’s economic growth but also align with global initiatives to address climate change and advance sustainable development. With the rising demand for sustainable finance, Kenya is strategically positioned to capitalize on these opportunities to create a resilient, inclusive and environmentally friendly economy.

As we have said in numerous places throughout this article – the future is green. Sustainable finance is no longer the future, it is our present. It’s something that is being championed in boardrooms and now banking institutions worldwide. And the focus on ESG principles is no longer a nice to have, it is a priority and the only way to do business going forward – whether in Kenya or elsewhere. The focus is very much on our planet and how we can do better. This extends to every facet of how we do business – including how we finance our builds and what builds we are financing.

It’s an exciting time to be alive, a time when corporates really can make a difference.

If you have any questions about the information we have set out above or need assistance with a legal matter that we have the experience and expertise to assist with, please don’t hesitate to contact us at TripleOKLaw LLP.

(Sources used and to whom we give thanks – KCB Bank Kenya Limited; 2020 Report on the State of Sustainable Finance; Safaricom; Kippra and European Commission).