Laying firm foundation for inclusive green investment

The value of retail sustainable investment holdings in Kenya is projected to climb to Sh2.3 trillion ($19 billion) by 2030. PHOTO | SHUTTERSTOCK

The banking sector in Kenya has been keen to adopt green initiatives that support climate and/or green related projects. Banks are already rolling out initiatives towards more climate-friendly policies and integrating Environmental, Social and Governance (ESG) best practices in their corporate cultures.

While the target of green financing is to enhance the amount of money flowing into sustainable investments through credit facilities, grants and other forms of ventures, the question that begs is, how then can banks and other financial institutions embed green financing practices into their strategies in a manner that will allow them to still realise returns on these investments?

Already there are key supporting infrastructures and investments put in place by the government to support the adoption and expansions of green financing.

The National Treasury recently unveiled the Kenya Vision 2030 Fourth Medium Term Plan (MTP) 2023 -2027 preparatory process meant to guide the development agenda for the country in promoting social and economic growth, including, laying the necessary infrastructure for the Financial Service Sector (FSS) that could streamline the growth of green financing ecosystem.

Notable progress has been made in the implementation of the three key Financial Service Sector (FSS) plans that have been infused in the Medium-Term Plans for the Vision 2030. These include modernisation and strengthening of the financial sector’s legal and regulatory frameworks and the development of requisite infrastructure to support the sector in its quest for inclusive viable and sustainable investments.

Kenya also launched the Green Bond Programme in 2017 which has seen several key developments in the green financial sector, including the issuance of Kenya's first green bond in 2019. To date, the country has continued to attract tangible international funding for green-related projects and Programmes in various sectors - supported by its broad market infrastructure that includes the Nairobi Securities Exchange.

Despite these significant steps, the green financing ecosystem is yet to seamlessly be designed and aligned to fully explore and expand the available funding windows for green projects that are commercially viable and sustainable to borrowers and lenders.

There are still hurdles for borrowers to flexibly access credits/loans, equities and other funding schemes available for green ventures. For instance, borrowers demonstrating to lenders how their businesses align with the green financing agenda requirements can sometimes imply re-structuring of their production processes in order to be compliant before they can qualify for the green financing.

In many cases, this has an effect on their costs of production and limits their competitive advantage over others. This then makes the funding less attractive to borrowers and in the end, hinders the financial sector’s abilities to spur and facilitate investment in strategic products and innovations that align with green financing policies.

Low returns on investments still characterise most of the green investments. A lack of integrated framework involving all the stakeholders remains a factor limiting the funding of most green investment schemes. Banks, investors and regulators are yet to fully build a mature pipeline of inclusive green investments.

Further, the financial sector is still experiencing inadequate research in green financing that can inform the development of high-level policies and principles for long-term sustainable investments.

To turn the dial, it takes more than merely encouraging investors to invest in green projects. The establishment of viable green initiatives in banks requires the right policies, knowledge, and a corporate culture that supports it.

More efforts should be put into strengthening the existing policies to make green investments more attractive, inclusive and commercially viable for banks and investors. This requires a great deal of collaboration between financial institutions, investors and regulators.

The sector needs comprehensive policies that can encourage the development of more investable green projects, whether for equity or debt, large or small, public or private.

The Central Bank of Kenya (CBK) is already in a strong position to assist financial institutions in developing green financial models that are viable and feasible. Already, there are policy guidelines providing regulatory oversight to green funding.

Nonetheless, there is still a need to build extensive collaboration across the financial sector with regulators and investors in a manner that will support the financing of short, medium, and long-term green projects. Incentives supporting green investment could serve as an important catalyst in this process.

Direct government intervention in the real economics of green ventures can stimulate green investment and attract investors. Subsidies, levies, incentives and governmental guarantees, for example, should be applied to enable access to green finance by borrowers and appropriate incentives should also be applied to enable lenders to put more money into this space.

Additionally, the financial sector itself should also address gaps in existing environmental and social regulation, align their Foreign Direct Investment (FDI) objectives with the green growth agenda and raise public awareness of the need for inclusive green investment in order to strengthen the green financial frameworks in the current financial sector.

These re-alignments could promote sustainable developments that do not harm or damage nature while addressing commercial banks’ needs to achieve their targeted investment return. This will eventually contribute to the creation of new jobs and business possibilities in the green investment sector, leading to overall growth in the sector.

As green financing continues to be an important subject of discussion, it’s also important to do a cost-benefit analysis, work collaboratively with all stakeholders to align all the risk factors in order to realize the return on investments in the sector.

The writer is the CEO of I&M Bank Kenya Ltd.

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