Prolonged drought attributed to climate change is increasingly posing a challenge to the Kenyan economy, driving the State and various industries and sectors to look for remedies.
The finance sector has not been left behind, with banks being challenged to design products that target green energy enterprises.
The government, through the National Treasury, has said it has joined forces with various stakeholders to support and upscale climate-friendly investments.
This is aimed at accelerating uptake of green finance into the country.
“We have been affected by 12 serious droughts since 1990, with each reducing our Gross Domestic Product (GDP) by an average of 3.3 per cent,” said Dr Geoffrey Mwau, director general, budget fiscal and economic affairs, at the National Treasury.
Speaking during a green finance conference last week in Nairobi, Dr Mwau said the average annual cost of damages caused by climate change is estimated at $1.25 billion (Sh128.75 billion).
A report by the International Finance Corporation (IFC) and the United Nations Environment Programme (Unep) has estimated that drastic climatic incidents, such as environmental pollution and epidemics, could cost Kenya up to $500 million (Sh51.5 billion) a year and have a serious impact on the health of the population.
The insurance industry estimates the potential economic damage caused by climate change to be in hundreds of billions of dollars each year. This is expected to continue rising annually through to 2050 if global temperatures remain above two degrees Celsius.
Hence the need for financial institutions to act quickly to mitigate the adverse effects.
Dr Mwau said the Treasury has established the Kenya Green Bond Programme, which seeks to draw on significant private sector demand for investment in environmental projects.
The Public Finance Management (PFM) Act, 2014, empowers the Treasury to mobilise domestic and external resources for financing national and county budgets.
As a result, the Treasury in 2013 established the carbon credit/climate finance unit to coordinate and mobilise various types of climate finances, such as the Green Climate Fund and the Africa Climate Change Fund.
“We’ve developed our national climate change budget codes for tracking climate finance flows and expenditure in respect to mitigation measures and adaptation of financing in the country,” said Dr Mwau.
International Trade Centre (ITC) director Anders Aeroe said Kenya is ahead of many other countries in this field, as evidenced by the recent kick-off of the Kenya Green Bond Programme launched by Kenya Bankers Association (KBA), the Nairobi Securities Exchange (NSE) and IFC.
“This facility should help small and medium enterprises (SMEs) raise finance from both domestic and external sources for sustainability-driven investments,” said Mr Aeroe.
“By adjusting the way proposals are evaluated, the sector can back investment projects in sustainable energy, cleaner production, climate smart agriculture and food, environment-friendly resource management and green services,” added Mr Aeroe.
Central Bank of Kenya (CBK) Governor Patrick Njoroge said SMEs are dynamic and the problem with banks is that they are “lazy” in terms of pricing risks.
“A risk to a particular SME is completely different from the risk to another SME, and the issue is that banks have not been good at pricing risk, thus failing to charge the correct interest related to the risk the SME is carrying,” said Dr Njoroge.
“We hope that banks will start pricing risks at individual level and start lending to SMEs despite size. Innovation is key,” added the CBK governor.
Small enterprises account for more than 80 per cent of employment in Kenya, and they are critical engines for job creation and economic growth.
For most SMEs, lack of access to early stage financing and debt capital is a major barrier to growth.