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How to integrate sustainable financing in building a better economy

The Kenyan budget for the fiscal year 2021/22 is themed “Building Back Better: Strategy for Resilient and Sustainable Economic Recovery and Inclusive Growth”. A sustainable economy cannot ignore the effects of climate change especially for Kenya which is heavily reliant on the agricultural sector as a key Gross Domestic Product (GDP) contributor. By allocating funds to climate mitigation and adaptation activities, the government can reduce the negative impact of climate related challenges such as drought and flooding which directly affect the population and enterprises in Kenya.

In March 2021, the National Treasury and Planning of Kenya, KCIC Consulting Ltd (a subsidiary of KCIC Group) and the Climate Policy Initiative jointly published The Landscape of Climate Finance in Kenya, which was the first attempt to track the climate finance flows in the country since the Paris Agreement. The report estimates that Kenya needs Kshs 6.8 tn between 2020 – 2030 in climate finance which translates to Kshs 677.5 bn per year. The report found that only Kshs 243.3 bn of private and public funds flowed to climate-related investments in 2018.

In Kenya, the economic impacts of climate change – and its effect on development and growth are already significant. According to the report the climate-related disasters, such as droughts and floods, are estimated to create an economic liability of 2-2.8% of its GDP every year, due to dependence on climate-sensitive sectors such as agriculture, water, energy, tourism, wildlife, and health. Both tourism and rainfed agriculture sectors are susceptible to climate change and extreme weather events. Increasing heat, recurrent droughts and floods contribute to severe crop and livestock losses. The recurrent droughts and floods also affect wildlife which is the major tourist attraction in Kenya.

Hon. (Amb.) Ukur Yatani, Cabinet Secretary for The National Treasury and Planning, in his opening statement of the report, said: “Kenya’s economy is highly dependent on its natural resource base,” thus making it highly vulnerable to climate change and threatening the Vision 2030 goal to create a globally competitive and prosperous nation with a high quality of life. Addressing climate change requires economic transformation by integrating climate change into development policies and actions across multiple sectors. The government in the budget 2021-22 allocated Kshs 94.4 bn to Environment Protection, Water, and Natural Resources as shown in table 1.

Table 1: Environment Protection, Water and Natural Resources Budget Allocation

Initiative Amount (Kshs, Billions)
Forests and Water Towers Conservation                                      9.5
Water Resources Management                                    16.4
Water and Sewage Infrastructure Development                                    39.1
Water Storage and Flood Control                                    10.8
Irrigation and Land Reclamation                                    10.4
Wildlife Conservation and Management                                      8.2
TOTAL                                    94.4

Source: FY 2021-22 The Mwananchi Guide Budget Highlights

An addition allocation of Kshs 6.9 bn was allocated for improving environment protection, water, and sanitation, under the Post Covid -19 Economic Stimulus Programme putting the total budget allocated for Environment Protection, Water and Natural Resources at Kshs 101.3 bn. The Agricultural sector will benefit the most from this as it will tap into these resources and reduce reliance on rainfall. The allocation will also be a boost to the tourism sector as wildlife conservation and management allocation will go a long way in protecting this tourist attraction.

The Government under the Big 4 Agenda of Enhancing Food and Nutrition Security to all Kenya’s also allocated Kshs 1.5 bn to Small Scale Irrigation and Value Addition Projects and Kshs 10.7 bn to increasing agricultural productivity and enhance resilience to climate change risks in targeted smallholder farming and pastoral communities.

Exempting solar and wind energy generating equipment promotes the  uptake of clean solar and wind energy by both small scale and large-scale consumers. This supports the manufacturing sector which may benefit from reduced production costs through reduced power bills and consistent energy supply. The latter actions wholesomely benefit the society through cleaner air from reduced carbon emission.

For Kenya to reach the scale of finance needed to achieve its Nationally Determined Contributions (NDC), the private sector will need to play a larger role in the key sectors beyond renewable energy. To attract more private finance into other sectors, there is a need for a more conducive enabling environment. The use of public sector instruments and well-crafted supportive policies and regulations can encourage additional private sector investments, reducing the perceived risk of investing in Kenya’s clean projects. For example, targeted incentives for investments in ‘high risk’ sectors using incentives such as government guarantees and tax exemptions, which will help minimize the risks associated with low-carbon and climate-resilient investment.

The Kenyan private sector can profit from the opportunities available in low-carbon infrastructure, such as solar grids, which would reduce business risk. Capacity building can also increase the ability of Kenyan companies to identify opportunities arising from climate change and implement solutions to preserve their business operations through adverse climate conditions. Capacity building would also benefit financial institutions in Kenya, increasing their capacity to review climate-related lending opportunities, and access concessional capital from development finance institutions for green lending to their customers. Corporates and MSME’s face difficulties in accessing finance from domestic commercial banks whose risk aversion and limited understanding of low-carbon opportunities result in high interest rates as well as high collateral requirements. Public-private partnerships (PPPs) are another effective solution to encourage private sector participation in climate projects. Private sector associations also have a role to play as they are an effective vehicle for creating awareness and providing information on climate change to their members.

Through sustainable finance and collaboration between government, international organizations, and the private sector, Kenya can be transformed to a sustainable economy where we protect the environment and our resources so that they can benefit us and future generations to come. We all have a part to play in transforming Kenya to a sustainable economy be it through raising awareness of sustainability issues, efficient and effective use of natural resources or facilitating sustainable finance to the sectors and people most affected by climate change.

KCIC Consulting plays a role in promoting sustainable financing through projects such as the Blended Finance Project which is a collaboration with Kenya Banker Association and FSD Kenya which seeks to promote the flow of sustainable finance from Development Finance Institutions through the vast network and infrastructure of Kenyan commercial banks to Micro, Small and Medium enterprises (MSME’s) who need this financing to mitigate and adopt to climate change. Other initiatives by KCIC Consulting in sustainable financing include collaboration with the National Treasury and the Climate Policy Initiative to track climate finance in Kenya and develop The Landscape of Climate Finance in Kenya. KCIC Consulting also provides MSME’s with investor readiness training and linkages to sustainable finance.

The writers are Private Sector Development Experts at KCIC Consulting Ltd.