Kenya’s financial sector is at a tipping point. Climate change is no longer a looming threat. It is an immediate crisis. Once considered peripheral, climate change is now a central risk to economic stability. The Central Bank of Kenya (CBK) estimates that unchecked climate change could erode 2.6% of our GDP annually by 2050, equivalent to KShs 300 billion in losses each year.

Sustainability in Kenya’s financial sector emphasises the integration of social and environmental considerations into financial decision-making, fostering long-term value for all stakeholders, and promoting responsible investment practices. This involves aligning with global sustainability trends, improving transparency, addressing greenwashing, and facilitating the mobilisation of sustainable capital.

Against this backdrop, the CBK introduced the Green Finance Taxonomy and the Climate Risk Disclosure Framework as part of its ongoing second-generation reforms aimed at greening the banking sector. These frameworks compel banks to align their operations with Kenya’s survival, demanding transparency, accountability and innovation. It is essential to recognise the urgent need to unlock sustainable finance and stimulate the allocation of capital to support a climate-resilient economy. The initiative behind the framework is part of the Greening Financial Systems Technical Assistance Programme to the CBK, which was initiated by the European Investment Bank (EIB) and commenced in October 2023. The framework is aligned with global best practices and standards such as the International Financial Reporting Standards (IFRS) S2 on climate-related disclosures and the Basel Committee on Banking Supervision (BCBS) principles on climate-related financial risks.

The Kenya Green Finance Taxonomy (KGFT) eliminates ambiguity by defining what qualifies as a “green” investment, from solar energy projects to drought-resistant agriculture. This clarity is critical. For years, terms like “sustainable” have been misapplied globally, enabling greenwashing, where institutions overstate their environmental commitments. In Kenya, vague claims risk undermining public trust and diverting capital from genuine solutions.  

Similarly, the Climate Risk Disclosure Framework compels banks to confront a blind spot: environmental risks are, in fact, financial risks. This framework aims explicitly to enable commercial banks to gather and disclose climate-related information consistently and comparably. It also provides investors with insights to assess financial impacts and identify investments positioned for a low-carbon transition.

Benefits of the Framework

The adoption of a climate risk management framework offers a range of significant benefits for banks and the broader financial sector. One of the most critical advantages is improved risk management. By proactively identifying and addressing climate-related risks, banks can better safeguard their assets and ensure long-term financial stability. This forward-looking approach also helps institutions build resilience, enabling them to withstand climate-related shocks and stresses more effectively.

Additionally, it allows financial institutions to position themselves as leaders in sustainability, which can boost their brand value and public perception. Additionally, the increased transparency and accountability that come with implementing the framework foster greater trust among stakeholders, including investors, customers, and regulators.

The framework also contributes to broader economic growth. By encouraging green investments, it channels capital into environmentally sustainable projects, supporting national and global development goals. Furthermore, the need to manage emerging climate risks drives innovation within the banking sector. Banks that embrace these innovative practices can improve their competitiveness, staying ahead in a rapidly evolving market.

Conclusion

Climate change is expected to impact agriculture, water, energy, and tourism in Kenya, potentially denting economic output by more than 7% by 2050 if the country does not take action. In light of this, it is essential for the financial sector to effectively contribute to implementing the climate change agenda. There is a need for a common understanding of what constitutes green finance as well as a standardised disclosure and reporting framework.