Sustainable finance players are backing the new accounting standards and draft Central Bank of Kenya (CBK) rules to prevent unethical firms from making misleading claims on championing for environment-conscious business practices.
The stakeholders say the CKB-backed draft Kenya Green Finance Taxonomy (KGFT) and draft Climate Risk Disclosures Framework—both undergoing public participation—and the adoption of two International Financial Reporting Standards—S1 and S2— will stamp out green washing.
Green washing refers to tactics and means used to misguide the public into believing that an entity is doing more than it actually is in aligning its day-to-day practices with environmental sustainability.
Entities usually make such exaggerated or misleading sustainability-related claims to investors or consumers, usually to boost their reputation and bottom line.
Off-grid solar pay-as-you-go firm, Sun King, says green washing has been a major distortion in the sustainable finance market, crowding out well deserving companies from accessing capital.
“Green washing distorts the competitive landscape. It includes both misreporting and selective reporting. You for example have many companies that talk about usage of recycled paper yet they are the same ones polluting water bodies,” said Krishna Swaroop, chief finance officer at Sun King.
“When you have sustainable finance go into projects that are green washed, genuine projects which are actually creating an impact are crowded out.”
CBK published the draft green finance taxonomy in March 2024 to provide a reference point in guiding the country’s transition into a green economy as well as catalyse the inflow of green finance by aligning with internationally recognised standards.
A green finance taxonomy is a classification system that highlights which investments are environmentally sustainable and, by extension, those that are not.
CBK published the draft climate risk disclosures framework in August 2024. This is aimed at improving climate change-related risk management through enhanced disclosures made to potential investors and market watchers.
“We see mainly two forms of sustainable finance. There is that which right from the onset disbursement is pegged on the use of proceeds and that makes it easy to guard against green washing,” said James Agin, managing principal for corporate and investment banking at Absa Bank Kenya.
“It is the second one which is sustainability linked financing that tends to have a significant green washing challenge because it means an entity continues with its normal business only that it is providing assurances that this will be done in a sustainable manner. This is where the taxonomy will be instrumental in validation.”
Then there are also the two sustainability-related reporting standards— IFRS S1 and S2—that firms in Kenya have to start thinking about. IFRS S1 requires entities to disclose information regarding sustainability related risks that could materially affect cash flows while IFRS S2 places emphasis on disclosures on climate-related risks.
Whereas IFRS S1 and S2 compliance has not been made mandatory for companies in Kenya, gradual voluntary adoption is seen as a key stride in tightening safeguards against greenwashing in the country.
“We are moving towards more guidelines around reporting which will provide clarity around what projects are to be financed, what are the expected improvement targets, and that provides a mechanism to guard against green washing. This will also equip investors, especially fund managers to ask the right questions to their investees,” said Cecilia Bjeborn Murai, senior specialist in green finance at FSD Africa.
