In the 20th Issue of Legal & Kenyan, we featured an article titled “Advancing Green Governance: Standards, Finance and Sustainability in Africa’s Corporate Sector 2.0”, in which we discussed the manner that adoption of the International Financial Reporting Standards Disclosure of Sustainability-related Financial Information (IFRS S1) and Climate-related Disclosures Standards (IFRS S2) collectively (the Standards) that were issued by the International Sustainability Standards Board (ISSB) were being adopted by corporations in Africa in the absence of clear frameworks and/or guidelines. In the abovementioned article, we discussed green financing as an effective tool for uptake of the Standards reportable under IFRS S1 and made a case for streamlining of internal operational procedures in an environmental friendly manner as a good metric reportable under IFRS S2.

It is against this backdrop of the absence of clear frameworks and guidelines that Kenyan corporations (especially those in the banking sector) undertook to ensure compliance with the Standards in the best manner they could mirroring international best practice standards. However, from April 2025, with the issuance of Kenya’s Green Finance Taxonomy (KGFT) and the Climate Risk Disclosure Framework for the Banking Sector (the Framework)by the Central Bank of Kenya (CBK), our jurisdiction now has a clear way forward in respect of compliance with the Standards.

KGFT has been developed initially for the banking sector. However, it is intended to serve as an entry point to the larger financial sector in Kenya. KGFT a standardised classification system that identifies and categorises the investment options which are environmentally sustainable and, by extension, those that are not. KGFT defines a minimum set of assets, projects and activities that are eligible to be defined as “green” in line with international best practices and Kenya’s national priorities. The users of the KGFT may utilise it to track, monitor and demonstrate their credentials of their green activities (popularly termed as ESG) in a more confident and efficient manner.

The framework was issued in furtherance of the CBK’s Guidance on Climate–Related Risk Management, which it issued in 2021, and the issuance of IFRS S2 by the ISSB in 2023. Section 33(4) of the Banking Act, (Cap. 488)Laws of Kenya, empowers the CBK to guide institutions to maintain a stable and efficient banking and financial system. As such, CBK, in exercise of its statutory power, has formulated the framework to act as the guide through which the banking sector in Kenya shall identify, classify and disclose relevant, decision useful climate–related information consistently and comparably. The framework is fully aligned with the Institute of Certified Public Accountants of Kenya (ICPAK) recommendations on the IFRS S2, which it did designate as the official standard for climate risk reporting in November 2024.

Kenya’s Green Finance Taxonomy

KGFT has adopted the green European Union Taxonomy for Sustainable Activities as a reference framework, specifically in assessing the substantial contribution criteria for climate change mitigation and adaptation. KGFT seeks to align with Kenya’s National Policy on Climate Finance with regards to climate investment. KGFT is comprised of five (5) parts being: introductory breakdown about the KGFT, User Guidance, Catalogue of Sectors and Activities, Technical Screening and concludes with appendices. At the heart of its formulation is its alignment with international best practice in respect of green finance. This guarantees the users of the taxonomy of its adaptability and alignment with international standards.

Indeed, KGFT’s objective is to first serve as a reference for sustainable progress of the Kenyan economy without social or environmental trade-offs in a bid to increase the consistency of green finance flows and foreign investments. Second, KGFT users can be confident that taxonomically aligned economic activities meet a high threshold of commitment to climate change mitigation and the Kenyan trajectory towards a sustainable economy. Finally, the taxonomy establishes a uniform and transparent performance tracking and reporting mechanism.

There is process for determining taxonomy alignment under KGFT which offer guidance that will help users determine the alignment of their economic activity with KGFT. The expected result is a binary one either taxonomy–aligned or not. Once alignment is assessed based on the details of this screening criteria, taxonomy-aligned financial flows can be calculated and determined. Under KGFT, this determination of taxonomy alignment can be done at an economic activity level. However, taxonomy–aligned finance can only be disclosed at an asset/activity, project, entity, and/or portfolio level.

Ultimately, at the heart of KGFT is its role in contributing to multifaceted sustainable development within the financial sector in Kenya. It is anticipated to provide useful information for measuring, monitoring and reporting on ESG performance and impact of taxonomy– aligned activities.

Kenya’s Climate Risk Disclosure Framework for the Banking

Sector

The Framework issued by CBK was issued against the backdrop of its earlier issued Guidance on Climate–Related Risk Management, and it is complementary to the Green Finance Taxonomy. With this issuance, banks can improve risk management, leading to more informed lending decisions and increased resilience. Transparent disclosures also attract investors seeking sustainable investments, while strategic planning that considers climate risks fosters long-term sustainability.

For investors, the Framework provides the information needed to assess the financial implications of climate change on potential investments. Through the issuance of the Framework, the banking sector in Kenya is well poised to play a pivotal role in fostering a more resilient and sustainable future. The Framework has adopted sophisticated methodologies for risk assessment and management, and has broader reporting requirements such as those set out in the Taskforce on Climate Disclosures (TCFD).

The Framework highlights the exposures of the banking sector’s credit portfolios to “inherent” climate–related risks. These risks can materialize in the short–term, medium–term and/or in the long–term and are largely classified into either physical or transitional risks. With respect to climate governance, CBK has adopted an expectation that is “fit for purpose”. That is ensuring that proper governance structures are in place to properly assess climate–related risks and opportunities, take appropriate strategic decisions to manage them, and determine relevant goals and targets along with progress monitoring mechanisms.

Under the Framework, banks are required to have in place robust governance arrangements that enable them to effectively identify, manage, monitor, and report the risks they are, or might be, exposed to both on an individual and consolidated basis. Whereas this can take several forms depending on the relevant institution’s business model and other factors, there is a requirement on them to demonstrate how their governance body, which can be materialised in the form of a board, committee within the board structure or equivalent body charged with the responsibility of governance and oversight of climate–related risks and opportunities. In doing so, the nexus between the board involvement and management involvement set out in the Framework is achieved.

In formulating their business strategies, institutions are expected to understand the impact of climate–related risks on the business environment in which they operate. The rationale behind climate–related financial disclosures on strategy is to provide a comprehensive understanding of how an entity manages climate–related risks and opportunities.

Ultimately, the Framework presents various opportunities which may be beneficial to Kenya’s financial sector. It presents an opportunity for market discipline and the sustainable strengthening of financial stability of the markets; the broader reporting requirements help in proactive identification and management of risks which impacts decision- making, and the integration of sustainability–related considerations in operational structures.

Upshot

In our previous article on this topic, published in the 20th Issue of this publication, we made a case for the formation of an African sustainable investment alliance in a bid to chart an African way forward as regards the formulation of a harmonised standard on corporate reporting of sustainability within corporate institutions, green finance and climate–related disclosures. This was against the backdrop of the absence of a framework.

Now that KGFT and the Framework have been issued, their integration is important considering that it shall ensure the inflow of finances in the form of investments, and it shall strengthen the alignment with Kenya’s sustainable agenda, all in a bid to ensure Kenya’s financial system is more resilient.

Kenya now has leaped forward within Africa, joining ranks with South Africa and Nigeria; and has taken the bold step to formulate its own standards and frameworks which it shall rely on to guide its financial sector regarding this issue. The implementation of these Frameworks issued by CBK follow a phased approach which ensures institutions have adequate time to transition and adopt robust internal processes. It additionally aligns with ICPAK’s Roadmap for Adoption of Sustainability Disclosure Standards.

Beginning with a voluntary reporting period, which is currently done by the majority of the Tier–1 banking institutions in Kenya, the ultimate goal is to have mandatory reporting and disclosure beginning on or after January 2028. The successful implementation will require collaborative efforts from various stakeholders such as government, regulators, financial institutions and investors.

This is a major development in the sustainable corporate reporting space in Kenya. This now places Kenya on the forefront and trailblazer against fellow African countries in respect of corporate sustainability.