Understanding the Role of Kenya Green Finance Taxonomy (KGFT) in Kenya: A Bold Step towards a Sustainable Future

Introduction

The Central Bank of Kenya, on the 4th of April 2025, took a valiant step towards a sustainable future when it officially launched the Kenya Green Finance Taxonomy (KGFT). This crucial and landmark framework aims to guide financial institutions and businesses towards making environmentally sustainable investments and financial decisions. KGFT framework was developed by the Central Bank of Kenya in collaboration with the European Investment Bank and supported by the German Federal Ministry for Economic Affairs and Climate Action.

Kenya is one of the most climate-vulnerable nations in Africa, with projections suggesting a potential loss of 7.25% of GDP by 2050 if decisive action is not taken to ensure climate sustainability. The KGFT is designed to counter these risks by providing a clear classification system for green investments that align with both national and international climate priorities and goals. Therefore, the main purpose of KGFT is to facilitate the flow of green finance into projects and activities that would contribute to Kenya’s environmental objectives, particularly those aligned with climate change mitigation and adaptation. For banks and financial institutions, the understanding and application of KGFT will not only help them comply with regulatory requirements but also position them as key players in promoting sustainable economic development.

Overview of the Taxonomy Framework

The KGFT categorizes economic activities in a way that aligns with Kenya's climate and environmental goals. These activities are assessed based on whether they make a significant contribution to environmental objectives such as climate change mitigation, climate change adaptation and other sustainable development goals. The KGFT applies to various sectors, including banking, financial, energy, agriculture, transport, construction and waste management. However, KGFT is not static in nature as it is designed to evolve based on stakeholder feedback, economic conditions and emerging scientific insights. This living document is an essential tool for banks and other financial institutions to ensure their financing activities align with sustainability principles and contribute to Kenya’s green economy transition.

Key Financial Metrics for Disclosure-KGFT Framework

Under the new KGFT regime, banks and other financial institutions must adopt clear metrics to disclose the extent to which their investments and portfolios are promoting sustainable economic development. The aforementioned metrics which are essential in assessing whether an economic activity meets the KGFT criteria, include turnover, capital expenditure and operating expenditure. To begin with, turnover is the total revenue generated by a company or activity,

including the sale of goods and services. It is used to aggregate the financial impact of KGFT aligned activities. For banks, turnover helps determine whether a company or activity is aligned with the environmental objectives of the KGFT. This metric can be crucial for providing investors with comparative data for decision-making.

Secondly, capital expenditure refers to long-term investments in fixed assets such as machinery or buildings. The foregoing is an integral metric for financial institutions when determining if a loan or investment in an activity aligns with the green finance taxonomy. Capital expenditure is especially relevant when a project involves new technologies or investments aimed at reducing carbon emissions or improving environmental sustainability.

Thirdly, operating expenditure refers to the short-term costs associated with running a business. It can be used by financial institutions to assess the ongoing costs related to maintaining and improving the environmental performance of an activity. For example, the costs associated with maintaining carbon capture technology or retrofitting a factory to reduce emissions can be reported under operating expenditure.

The above listed and discussed financial metrics, while primarily quantitative, can also support qualitative disclosures, especially when it comes to projects or investments that do not yet meet full KGFT alignment. For instance, if a project has a high proportion of financing for activities that are not aligned with the taxonomy, it is essential for banks to communicate the reasons for this misalignment and outline strategies for achieving full alignment in the future.

Steps for Banks to Ensure Compliance

The KGFT framework is initially voluntary for the banking sector, with an 18-month transition period before its mandatory implementation. During this phase, banks are required to build capacity to integrate the taxonomy into risk management and disclosure practices that will help streamline climate finance flows and support Kenya’s Vision 2030 development blueprint. Therefore, banks and financial institutions should adopt the following steps in order to comply with the KGFT framework:

It is essential for banks to engage with their clients to ensure that they provide the necessary data to assess alignment. This may involve working closely with companies to understand the environmental impact of their activities and the sustainability of their business models. For projects or companies that have yet to achieve full alignment, banks should work with them to implement strategies to improve their environmental performance.
The successful implementation of KGFT will require capacity building within banks. Staff must be trained to understand the taxonomy and its application, or banks must invest in the necessary tools and technologies to assess and report on alignment, which may require hiring environmental sustainability experts or partnering with external law firms and organisation to support the alignment process.
Banks should start by categorizing their investments and understanding the environmental impact of each activity. This includes classifying loans, portfolios, funds and other financial instruments according to the criteria outlined in the KGFT framework. They should prioritize investments that clearly align with KGFT’s environmental objectives and gradually work towards aligning other areas of their portfolios.
Banks should invest in the development of robust systems to track and report on KGFT-aligned finance. This includes systems to calculate the proportion of investments that meet taxonomy criteria and to disclose this information transparently to regulators, investors and other stakeholders.
Banks should consider how they can support clients and projects that are not yet fully KGFT-aligned with the green finance taxonomy but are on a clear path to achieving sustainability goals. By providing financing for KGFT transition activities, banks can play a key role in supporting the broader green transition in Kenya.

To ensure full compliance with the KGFT, banks and financial institutions must not only adhere to the sector-specific criteria but also implement comprehensive climate risk and vulnerability assessments for every economic activity they finance. These assessments will enable banks to evaluate the potential physical climate risks that could impact the activity over its expected lifespan and to adopt appropriate adaptation measures. It is essential that the adaptation solutions do not create adverse effects on other activities or the environment, and they should align with national and regional adaptation strategies. By adopting these practices, banks will not only comply with the KGFT guidelines but also contribute to Kenya’s broader goals of sustainability and climate resilience, thus fostering a green economy that aligns with international standards for environmental responsibility and social welfare.

Challenges in Implementing the KGFT

The implementation of the KGFT presents several challenges for banks and financial institutions. One of the most significant challenges is the alignment of financial activities to specific economic activities. Banks often face difficulties in classifying investments accurately especially when they involve general-purpose loans or bonds with unspecified use of proceeds. It can be challenging to determine whether a specific loan or bond is aligned with the taxonomy particularly if the underlying borrower’s activities are diversified.

Another major challenge is the availability and quality of data needed to assess KGFT alignment. The KGFT requires granular data on a variety of environmental and financial performance indicators. However, much of this data is not readily available or may require specialized expertise to interpret correctly. Banks need to engage with their clients and invest in data collection systems to gather reliable information to support KGFT alignment assessments. In many cases, data may be incomplete or of low quality, thus requiring banks to adopt a precautionary approach and acknowledge the limitations in their reports.

Lastly, materiality assessments must be conducted to determine which activities are most significant to the bank’s sustainability objectives. This requires banks to prioritize investments based on their material impact on the environment and the long-term goals of the bank’s sustainability strategy. Materiality assessments help ensure that banks focus their efforts on the activities that contribute most to the green transition,n thereby maximizing the environmental impact of their financing.

Conclusion

The Kenya Green Finance Taxonomy is an integral tool for guiding the financial sector in supporting Kenya’s green transition. Banks and financial institutions can contribute to climate change mitigation and adaptation while ensuring compliance with regulatory requirements by aligning their investments and financing with the KGFT. Its full and mandatory implementation by all banks and financial institutions as of October 2026 will play a pivotal role in driving Kenya towards a more sustainable and resilient future.

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