Following the issuance of the draft Kenya Green Finance Taxonomy in March 2024 (draft KGFT), the Central Bank of Kenya (CBK) has published the first edition of the Kenya Green Finance Taxonomy (Taxonomy).

The adoption of the first edition Taxonomy aligns closely with the principles outlined in the draft KGFT, with no significant shifts in direction or underlying ideology.

The Taxonomy is a classification system that identifies environmentally sustainable investments. It can be used by investors, issuers and other financial sector participants to track, monitor, and demonstrate the credibility of their green activities.

Some salient features of the first edition Taxonomy are:

    Focus sector

The first edition of the Taxonomy focuses on the banking sector as a starting point, but its wide scope means it may be used by others, including policymakers, government agencies, companies, developers, investors and civil society groups. In subsequent editions, the CBK intends to expand its scope to cover the wider financial sector.

    Institutional oversight

The CBK, as the custodian of the Taxonomy, is responsible for overseeing its governance, implementation and continuous improvement. The CBK is tasked with regularly reviewing and updating the Taxonomy to ensure that the taxonomy remains up to date with the policy, legislative and technological landscape.

    Interoperability

The Taxonomy follows an 'adopt and adapt' approach – drawing on international frameworks like the EU and South African taxonomies, while tailoring its criteria to reflect Kenya's national goals and priorities.

    Assessment process for green classification

The Taxonomy outlines a detailed seven-step process for determining whether an economic activity aligns with the taxonomy's criteria. This process helps assess whether the activity meets the environmental and sustainability standards required for classification under the green finance framework.

    Catalogue of eligible sectors and activities
     

The Taxonomy provides a catalogue of sectors and activities it covers, aligned with the Kenya Standard Industrial Classification. These represent priority areas for Kenya's green transition and include manufacturing, agriculture, forestry, mining, energy, waste management, transport, construction, real estate, ICT and financial services. To identify priority sectors for Kenya's green transition, the development of the Taxonomy drew on international best practices. Sectors were prioritised based on their contribution to the gross domestic product, levels of foreign direct investment, private sector credit exposure, and greenhouse gas emissions.

    Technical Screening Criteria
    To determine whether an economic activity is aligned with the Taxonomy, the Taxonomy sets out the Technical Screening Criteria. This criterion serves as the guide for classifying activities as environmentally sustainable, ensuring that green finance is directed toward projects with genuine impact towards reducing the vulnerability of people, nature or assets to climate-related risks such as drought, floods and heatwaves.

While these core features provide a robust framework for assessing alignment with the six environmental objectives set out in the first edition Taxonomy i.e. (i) Climate change mitigation; (ii) Climate change adaptation; (iii) sustainable use of water and marine resources; (iv) Pollution prevention; (v) Ecosystem protection and restoration; and (vi) sustainable resource use and circularity; their effective implementation may face several practical challenges.

The Taxonomy may face the following issues:

    Limited applicability across different jurisdictions. Since the Taxonomy is tailored to Kenya's specific environmental, economic, and regulatory context, it may not align with green finance frameworks in other countries. This limited applicability can create challenges for multinational companies and global investors looking for consistent sustainability guidelines.
    The flexibility of the Taxonomy, allowing banks to adapt it to their own strategies, could lead to inconsistent applications across the sector. Different interpretations and materiality thresholds may result in varied assessments and reporting of green investments, making it harder to ensure transparency and comparability in the financial system.
    A major challenge with the Taxonomy is the lack of detailed and reliable data needed to assess whether investments align with the taxonomy. This data is often not publicly available and can be complex, requiring expert knowledge to evaluate. Applying the Taxonomy will also require ongoing cooperation between banks and their clients to gather the necessary information.

As a complement to the Taxonomy, the CBK has simultaneously introduced the Climate Risk Disclosure Framework for the banking sector. While closely related, the Taxonomy and the Climate Risk Disclosure Framework serve different purposes. The Taxonomy provides a classification system for identifying environmentally sustainable economic activities, while the Climate Risk Disclosure Framework guides financial institutions on how to report and manage climate-related risks. Used together, they support credible green finance and informed decision-making in Kenya's evolving regulatory landscape.

Looking ahead

The Taxonomy will be implemented in two phases. Initially, it will apply on a voluntary basis for eighteen (18) months beginning in April 2025, during which licenced banks and mortgage finance companies will have the opportunity to build internal capacity, align systems and make necessary adjustments in preparation towards mandatory application of the Taxonomy.

This transition period not only facilitates institutional readiness but also enables continued engagement between the CBK and the banking industry to refine the Taxonomy for smooth implementation. From October 2026, the application of the Taxonomy will become mandatory.

The Taxonomy is poised to catalyse wide-ranging benefits, from improving transparency in green finance to enhancing investor confidence and unlocking international climate capital. As implementation progresses, it could position Kenya as a regional pioneer in climate-aligned financial regulation.