In 2008, then Kenyan president Mwai Kibaki launched Vision 2030, a long-term development blueprint for the country. The vision was to create a “newly industrializing, middle-income country providing a high quality of life to all its citizens by 2030 in a clean and secure environment”.
It would go on to be the bedrock for Kenya’s developing sustainable finance efforts, according to Huib-Jan De Ruijter, Director, Financial Institutions at FMO, the Dutch development bank, which has helped put sustainable finance on the map in Kenya. “They were really about bringing Kenya to a globally competitive and prosperous country with a high quality of life by 2030.”
Sustainable Finance Initiative
Against this backdrop the Sustainable Finance Initiative (SFI) took root. Headed by the Kenya Bankers’ Association (KBA), the banking sector-led initiative came together in 2013 to put together the SFI Principles: a Kenya-specific set of harmonised guidelines for sustainable development to be adopted across the industry in pursuit of meeting Vision 2030.
Twelve of Kenya’s biggest banks were on the working group behind the principles, which De Ruijter says was important: “Through the financial sector, you can really drive change and sustainable development, but it works best if it's a collective approach,” he says. “Our clients are typically very concerned about a level playing field for incorporating sustainability into their business, and we’ve found that those sectoral initiatives have worked very well in helping create that.”
In 2015, the banking sector adopted the principles, which have since been translated into an e-learning platform that has been used to train 25,000 bankers. KBA is now supporting other bankers’ associations on their SFI journeys, for example Ghana will be officially launching its Sustainable Banking Principles later this month.
Nuru Mugambi, a director of the KBA who formerly acted as CEO, says Kenya’s ambitions are reflected in the principles. “We recognised the need to adopt these international best practices while responding to our local priorities, which have been to advance financial inclusion and enterprise development,” she says.
Green Bond Program
But, Mugambi says, as much as Vision 2030 and the SFI built sustainable finance capacity, that was just the beginning: “It wasn’t until the establishment of the Green Bond Program in 2016 that the market took concerted efforts to create the policy framework and build potential issuers’ technical capacity in green bond structures,” she says.
Again, the program was launched with broad backing, set up by the Kenya Bankers Association, Nairobi Securities Exchange, Climate Bonds Initiative and Financial Sector Deepening Africa (FSD Africa) in conjunction with the FMO and the International Finance Corporation. And in 2017, the instruments got official governmental support with the launch of a new national blueprint – the Green Economy Strategy and Implementation Plan (GESIP) – which identified green bonds as a mechanism for financing low-carbon, resource efficient, equitable and inclusive socio-economic transformation.
But the program has hit hurdles. The first bonds were planned from 2016, but, Mugambi says, the macroeconomic and policy environment has been a challenge. In 2015 and early 2016, two listed bond issuers defaulted, causing concerns within the bond market. In 2017, Kenya held a record two presidential elections. The government has also been active in the domestic market, crowding out private sector activity.
A controlled lending rate regime in place since 2016 has been particularly problematic. The interest rate caps meant, for example, that a planned pooled green bond facility – developed by KBA with financial backing from FMO – did not meet the pricing models. Now that the interest rate cap has been repealed, KBA is planning to reengage with the banks on the topic.
In October this year, Kenya’s first green bond closed; a KES4.3bn (€35m) issuance from property developer Acorn Holdings, with the proceeds used to finance green and environmentally friendly accommodation for 5,000 university students in Nairobi. Investors in the transaction were mainly local banks, development finance institutions and local pension funds.
Olumide Lala, Africa Programme Manager at the Climate Bonds Initiative, says the outlook looks good for more issuances: "Now that the first corporate issuance has taken place, and it was well and truly subscribed, I guess that's the proof in the pudding. It shouldn't take too long for the next one to come along." Significantly, the Finance Act of 2019 said that interest income from certified green bonds will not be taxed, making the economic environment more favourable. And the Kenyan government has long been known to be working up to a sovereign issuance. Also on the horizon are social and developmental bonds, with regulatory frameworks currently being developed by FSD Africa and the Treasury.
The Global Steering Group for Impact Investment (GSG), the successor to the Social Impact Investment Taskforce established under the UK´s presidency of the G8, has talked of the possibility of an “impact investment revolution” in Kenya, advocating the creation of a National Advisory Board (NAB) and investor-friendly policies to unlock $6bn to finance progress on the Sustainable Development Goals.
It kicked off a string of meetings with the Kenya Impact Dialogue in December 2018, which saw broad participation from national and county government, impact investors social entrepreneurs and development finance specialists. A NAB is expected to be established by the end of the year, charged with mainstreaming impact investment, fostering collaboration between key players, supporting favourable policy development, and engaging with government and policy influencers. A dedicated taskforce and the UN-Kenyan government collaboration Kenya SDG Partnership Platform are currently leading on its creation and working to develop its charter, strategy and action plan, with support from the GSG and national players.
Arif Neky, Senior Advisor, UN Strategic Partnerships who also coordinates the SDG Partnership Platform, says a range of work is being done to make the regulatory environment more investor friendly, for example through the recently launched Kenya Investment Policy (KIP) and the County Investment Handbook.
“The handbook provides an opportunity to review and harmonize legislation to make Kenya a more attractive investment environment, and provides a coherent investment strategy that avoids duplication across agencies involved, including county governments,” he says. “The KIP, meanwhile, proposes the establishment of the National Investment Council, a presidential body with all the key high level personalities responsible for decision making on the most critical investment issues.” A social enterprise policy for Kenya is being drafted by the Social Enterprise Society of Kenya (SESOK), and the government is attempting to simplify tax processes for small businesses and social enterprise.
Neky says one of the biggest challenges cited by investors is the lack of enough investment-ready enterprises in the country: “This results in investors competing for a smaller pool of investment-ready enterprises, distorting the market, leading to higher valuations and investing in the same companies’ ‘usual suspects’.” In 2017, for example, over 70% of the impact investment capital deployed in the country went to just five companies.
But Neky says investors are responding to the problem: “Lots are now focusing to develop solutions such as sharing of deal-flow, sharing due-diligence costs, and providing pre-investment support to increase the number of investment-ready enterprises.”
Nairobi Securities Exchange
Since joining the Sustainable Stock Exchanges initiative in 2015, the Nairobi Securities Exchange (NSE) has made noise around ESG and sustainability. Under CEO Geoffrey Odundo, in 2016 it announced plans to launch Kenya’s first sustainability index to encourage listed firms to adopt higher ESG practices, and former chairman Eddy Njoroge has encouraged company-investor dialogue around financial, social and environmental practices. But it appears progress is slow going, with ESG reporting not yet required as a listing rule, no written guidance on ESG reporting and no sustainability-related index having surfaced so far.
Regulators and regulation
Kenya’s Capital Markets Authority has raced ahead of its regional peers with its Stewardship and Corporate Governance Codes, in what the World Bank said could guide the development of a regional code in East Africa. Accompanied by the 2015 Companies Act – which introduced a new company law framework – the code promotes investor-corporate engagement, and suggests that investors should encourage companies to operate with a positive social impact. Investors should also incorporate social, environmental and ethical concerns into their investment processes, the Stewardship Code suggests.
Central Bank of Kenya
Under Governor Patrick Njoroge and his predecessor Njuguna Ndung’u, the Central Bank has made moves to bolster sustainable finance efforts in the country.
In July 2019 it organised the Afro-Asia FinTech Festival in Nairobi, in partnership with the Monetary Authority of Singapore, under the theme “Sustainable Finance: Inclusive and Green”.
The bank has facilitated reforms and initiatives in financial inclusion driven by the mobile-banking revolution, authorising Vodafone and other providers to offer cash transfer system M-Pesa. Mark Halle, Africa lead for the International Network of Financial Centres for Sustainability (FC4S) says the move came out of frustration at the lack of interest of the commercial banks in providing services in rural areas and remote areas.
It was mainly thanks to tech-driven change like this access to financial services has surged in recent years. “Once this platform is in place it means you can go to any registered agent – and that includes the shack in the slum that sells cigarettes and soap – you pay, say, 100 shillings (€89) and you're given a code and you send that code to your grandmother in the village in northern Kenya. She goes down to the kiosk and with the code collects 100 shillings,” Halle says. “It's quite extraordinary.”