African countries start business classification to shore up green investment

Kenya is set to become the third African country to put a green finance taxonomy in place, making the country more attractive for green investment and climate finance.   

Conrad Onyango, bird story agency

Kenya has joined South Africa and Rwanda in offering a “green investment” handbook as African countries race to close a huge climate financing gap.

The draft Kenya Green Finance Taxonomy (KGFT), published by the Central Bank of Kenya (CBK) in mid-April, is expected to help position the country for green funds and make the investment climate more attractive.

Targeting banks, the Taxonomy provides rules to guide financial sector players in properly classifying projects as either ‘green’ or ‘not green’ so as not to end up funding projects that harm the environment.

“The aim being to increase the consistency of green finance flows and align green products and financial allocations with internationally recognised standards,” said the country’s apex bank in the draft.

“Alignment to international best practice taxonomies such as that of the EU encourages green financial investment and lending both locally and from foreign financial institutions,” the CBK said.

Ultimately, the green financing guidelines will apply to financial players outside the banking sector.

“The intention is to expand the document to apply to additional areas of the financial sector, such as pension funds, asset managers and insurance,” the bank said.

Climate finance experts and development financiers have cited poor investment climate as a barrier to climate financial flows into Africa.

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The Africa Development Bank (AfDB) estimated in its African Economic Outlook 2023 that the continent requires as much as US$2.8 trillion through 2030 to implement its climate commitments set out in countries’ national targets under the 2015 Paris Agreement.

“However, Africa’s climate finance inflows remain very low, at 3% of global climate finance, and tend to focus on small-scale, fragmented and uncoordinated operations, primarily in middle-income countries,” the AfDB said.

The Climate Policy Initiative in its Climate Finance Needs of African Countries report 2022, shows that 87% of climate financing is from public actors.

It cites policy barriers such as uncertain permitting processes; investment environment barriers such as lack of liquid financial markets; and bankability barriers such as off-taker creditworthiness and high debt costs- as major challenges to mobilizing private climate finance in Africa.

“To mobilize private finance, public actors need to improve policy frameworks and investment environments and deploy concessional financing to target investment barriers,” the report said.

In December 2023, Rwanda officially launched the first phase of its Green Taxonomy, saying it would help catalyse private financing for green projects.

The Kigali International Financial Centre has spearheaded the taxonomy in collaboration with other institutions as the country moves to position itself as a sustainable finance hub of East Africa.

“Rwanda´s taxonomy is intended to be a sustainable finance taxonomy developed in several consecutive phases. In the first phase, only objectives of climate change mitigation and climate change adaptation are developed. Other objectives are expected to be developed in the future phases,” according to Rwanda’s Green Taxonomy White paper.

The capital city climbed 18 spots, the highest in Africa and third-highest globally, in the 35th edition of the Global Financial Centers Index (GFCI) rankings, placing the country third in Africa and 67th globally.

South Africa was the first African country to launch a Green Finance Taxonomy in April 2022, benchmarked on EU standards.

“It takes account of the model adopted by the EU, given its comprehensive technical foundation and to ensure interoperability in global reporting,” according to South Africa’s National Treasury.

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