The role of capital markets in supporting sustainable investments

The increase in the threat of climate change raises the urgency of commitment to climate transition, including the important role of global financial markets to align investment.

Financial markets and climate transitions focus on the critical contribution financial markets must play curb the increase of global warming and its effects. Investors have become increasingly aware of the importance of Environmental, Social and Governance (ESG) issues while making investment decisions.

Moreover, ESG has become a priority for leading securities regulators and stock exchanges. The regulatory focus in the finance sector has been on the environmental aspect. Environmental considerations include climate change mitigation and adaptation, as well as the environment more broadly, for instance the preservation of biodiversity, pollution prevention and the circular economy.

Recently, Egypt through the United Nations hosted a climate summit, COP 27, in which more than 200 governments came together to agree steps in which they could limit the global temperatures rising. The issues addressed included reducing emissions, helping countries to prepare for and deal with climate change, securing technical support and funding for developing countries among others.

President William Ruto delivered a statement on behalf of African Heads of State and Government on Climate Change, and Kenya at UN’s 27th Conference of the Parties on Climate Change. He emphasized on the adoption of sustainable green industries in Kenya.

The Capital Markets Authority (CMA) is alive to the fact that sustainability is key to the longevity of the capital market and its long-term financial sustainability. Transitioning to a green economy will be at the heart of sustainable growth and shared prosperity for our citizens.

In addition, (ESG) reporting has become an ever-larger consideration for investors in recent years, as well as the continued expansion of green finance across the globe. Investors are increasingly seeking out sustainable investments for a variety of reasons, such as to seize perceived opportunities for greater financial returns or to avoid risks around climate change or poor labour or governance practices.

The value of Kenya's sustainable retail investment stocks is expected to rise to 2.3 trillion shillings ($19 billion) by 2030, according to a new report from Standard Chartered Plc. The global financial institution's 2022 Sustainable Banking Report notes that (ESG) initiatives are becoming more important as investors demand that companies take action to address climate change concerns and more responsible business practices.

In addition, The Absa Financial Markets Index report indicates that Kenya has moved up two places due to improved (ESG) reporting in the financial sector. This has been made possible due to the Improved market transparency, taxation and regulatory environment in capital markets among others.

CMA encourages investors to consider and invest in sustainable finance products such as green bonds and NSE in providing support towards a supporting framework for the issuance of green bonds. Another emerging area of sustainable development is blue bonds. Blue bonds are used to finance marine and ocean-based projects that have positive environmental, economic and climate benefits whilst green bonds support specific climate-related or environmental projects such as ecosystem restoration or reducing pollution.

In 2020, Kenya capital market became the regional pacesetter in the adoption of environment-friendly financing options to ensure sustainable development. Acorn Holdings successfully issued Kenya’s first green bond. The Ksh4.3 billion Climate Bonds Certified issuance to finance green and environmentally accommodation for 5,000 University students in Nairobi.

According to Moody’s, a global ratings agency, Acorn’s medium-term note programme B1 is one notch higher than Kenya’s sovereign rating of B2 becoming the first non-governmental green bond rated by Moody’s in Africa. The bond became a significant step in the development of green finance for East Africa through multi-stakeholder collaboration.

Yet again, aligned to ESG, Acorn in December 2020 further quoted its two Income and Development Real Estate Investment Trust (Reit) products worth ASA D-REIT and ASA I-REIT respectively for a total minimum subscription of Ksh852 million and up to a maximum of Ksh8.5 billion, respectively to finance affordable student accommodation at the Nairobi Securities Exchange’s (NSE) unquoted securities platform.

In October 2021 the Acorn REITs achieved GRESB certification. GRESB is a global framework that assesses and benchmarks the ESG performance of real estate assets and infrastructure globally. Moreover, the NSE which works hand in hand with CMA has put in place a number of initiatives to promote the use of ESG principles among the listed firms.

The NSE went ahead and published the guidelines for listed companies in partnership with the Global Reporting Initiative, becoming the fourth exchange in Africa to launch such guidance.

The Kenyan Capital markets is cognizant of these emerging trends and the need to align existing products to retain their attractiveness to investors with changing investment interests. An example is the adoption of Kenya’s Finance Act Number 22 of 2022. The Act has introduced the tax incentive to encourage the use of market-based approaches to low-carbon development.

The Finance Act, which was assented to on 21 June 2022, introduces a corporate tax incentive for companies operating a carbon market exchange or emission trading system, in a first of its kind incentive for Kenya.

Carbon exchanges and emission trading systems are components of carbon emission reduction mechanisms that aim to reduce greenhouse gas emissions caused by environmentally harmful activities.

The new tax incentive is a welcome addition to Kenya's toolbox for low-carbon development, given its potential. It is likely to pique the interest of many businesses eager to capitalize on the opportunities it presents.

Education, Awareness and Certification Department staff

Capital Markets Authority