July 16, 2021 - 5 minutes read

Investing in Sustainable Financing

By The Vellum Team
By Amy Wahome- General Manager Oxygene Marketing Communication Ltd

In spite of all the havoc it has wreaked, the COVID-19 pandemic has inspired re-imagination of the role of business in society today. Increasingly, businesses around the world are mulling how to take a longer-term view of their investments, beyond profit. This has intensified commitment to sustainability principles. It heralds a new era, a paradigm shift from capitalism to a more resilient, sustainable and responsible business model.

The Finance Ecosystem

The global finance ecosystem today is striving for purpose. Without a healthy planet, the financial sector cannot thrive. This puts Environmental, Social and Governance (ESG) considerations at the forefront of financial decisions, supported by the Sustainable Development Goals (SDGs) and increased awareness of the climate emergency.

Additionally, faced with increasing environmental challenges in a changing climate regime and intensifying sustainability questions from powerful and critical stakeholders, sustainability is increasingly taking centre-stage in most boardroom discussions and decisions. Many economies in Sub-Saharan Africa, our home, are more susceptible to effects of climate change.

Innovating for Climate Smart Projects

Green bonds tend to be the most readily accessible and economical option to raise funds for climate smart projects. Kenya, plans to issue its first green bond by 2022 to advance the green economy development agenda.  The Kenya Green Bond Program is coordinated by Kenya Bankers Association (KBA), Nairobi Securities Exchange (NSE) and Climate Bonds Initiative (CBI) in conjunction with the Sustainable Finance Initiative.

The bond will then support Vision 2030 and allow domestic banks and corporates to better deliver green investments in Kenya – renewable energy, low carbon transport, water infrastructure, sustainable agriculture and more.

There is also a need for robust government and regulatory support. Whereas some governments have made some advancement in aligning with the green agenda, there is still room for regulatory improvement to favour increased uptake of sustainable projects. For instance, green fiscal policies geared towards driving down the cost of climate projects. This could be coupled with reallocation of the national budget to projects that advance the SDG’s.

Green funds are also vital financing mechanisms for the implementation of climate smart projects. One such fund is the Green Climate Fund (GCF). The Green Climate Fund is a global fund created to support efforts of developing countries to respond to the challenges of climate change and to help limit or reduce their greenhouse gas (GHG) emissions. It seeks to promote a paradigm shift to low-emission and climate-resilient development, considering the needs of nations that are particularly vulnerable to climate change impacts.

In Kenya, KCB Group is accredited for the Green Climate Fund paving way for the bank to receive funds for on-lending to beneficiary institutions involved in the development of green-climate resilient investment assets/projects in Kenya as well as in the region where the bank operates as the implementing entity.

The bank is the first locally established lender and private entity to be accredited as the direct access in the medium category to receive up to USD 250 M since 2016 and the second entity in the country to be accredited by the GCF. The other entity accredited is the National Environment Management Authority (NEMA) under the micro category to receive and manage up to USD 10 Million. 

The private sector also has a big part to play. Financial institutions should change their risk management frameworks to take environmental, social and governance factors into account. This helps with screening of loan books to make sure lending is compliant with ESG guidelines.

Acceleration of investment in renewable energy by implementing regulations that are fit for purpose permit rapid deployment of renewables. Private actors could also be allowed to participate meaningfully by supplying energy directly to the national grid.

However, due to the nature of green projects and the risk that comes from this type of financing there is a need for financial instruments meant to de-risk these projects, such as technical assistance, guarantee instruments, among others.

More to Come

We see a future in which adapting and integrating inclusive business models will help businesses take a major leap towards sustainable development.

By voluntarily opting into sustainability initiatives, the financial services industry will contribute towards building the foundations upon which regulation could be built upon, when needed. It also helps in developing robust measurement and setting standards as a basis for the regulations. As the industry takes up sustainability initiatives, it will provide insight on the mandate of regulators in addressing issues of alignment that have been evolving in some jurisdictions.

Sources:

Kenya Green Bonds programme

Covid-19 Macroeconomic Policy responses In Africa 02

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