What Does the GESIP 2016–2030 Mean for Financial Institutions?
The Implications of the Green Economy Strategy and Implementation Plan for Financial Institutions in Kenya
What’s the Plan?
About 42 percent of Kenya’s GDP and 70 percent of Kenya’s overall employment is derived from natural resource-related sectors: tourism, agriculture, mining, forestry and fishing. This makes the Kenyan economy quite susceptible to variability in climate conditions. Hence, the Green Economy Strategy and Implementation Plan-Kenya 2016–2030 (hereafter GESIP) was developed to provide a more concrete pathway of implementing the Vision 2030 in a sustainable manner.
The GESIP is part of the broader national plan as it was identifed as one of the priorities in the second Medium Term Plan(MTP II, 2013–2017) under Kenya’s Vision 2030. This is also in alignment with Kenya’s global committment to the Paris Climate Deal and attainment of the Sustainable Development Goals.
The Ministry of Environment and Natural Resources through an inter-agency secretariat identified 5 thematics areas and supporting strategies aimed at making Kenya globally competitive whilst curbing national carbon levels. These key areas include sustainable infrastructure, building resilience, social inclusion and sustainable livelihood, resource efficiency and sustainable national resource management.
So, What’s in It?
This macropolicy framework outlines nine main enabling conditions that underpin the six guiding principles and thematic areas which will ease Kenya’s transition into a green economy as illustrated in the figure below.
Maintaining local and foreign investor confidence will only be possible in the presence of macroeconomic stability for green growth. The government’s key role will be providing fiscal and monetary policies that will ensure financial markets’ stability and resilience to external shocks. The provision of basic services such as health,education and security will create a more conducive enviroment for human development and capacity building.
The green economy (GE) is also require the shift towards more socially-just occupations that provide economic opportunities while reducing adverse environmental impacts namely green jobs. Seeing that the some career fields will require additional tasks or speciality areas such as construction managers, farmers or public relations specialists due to the increased demand for alternative goods and services. In other fields, some occupations are already existing but are expanding due to higher demand such as carpenters will be required to retrofit projects. In addition, the sustainability trend will create a new job segments such as sustainability officers, wind farm managers and energy auditors.
The discovery of natural resources such as oil and coal will require frameworks for extractive industries to ensure that the local communities benefit from the resources while respecting the environment. This will also mean the establishment of sustainable trade regimes that will ensure that importation and exportation of environmentally and socially safe products through standards such as eco-labelling or certifications. Financial institutions will have to work closely with local and national governments to support economic activities and financial inclusion to provide sustainable finance through the diversification of policy and financial instruments.
Good governance and structural transformation will be important in ensuring equitable resource distribution and easing the cost of doing business. Devolution is a key factor in Kenya’s context as it will be important to factor in more localised knowledge and solutions. Realising the GE in Kenya will require significant financial support from the financial services industry whether it will be investment, technology and human development.
Why This Matters for the Financial Services Industry
As earlier alluded, maintaining macroeconomic stability is part of the targets of financial regulators such as the Central Bank should be able to translate how green growth is linked to monetary policy. The convening role and soft power of central banks can be catalytic in championing green finance. For instance Banco Central do Brasil was the first regulator in the world to request banks to monitor environmental risks as part of the implementation of Basel III’s Internal Review for Capital Adequacy¹.
Apart from disclosure requirements as well as guidelines and frameworks, central banks can have designated green differentiated reserve requirements and directed green credit policy instruments for priority sectors². The national government should also consider credit guarantees and expenditure tools e.g green public procurements. This will also require the development and implementation of green fiscal policies such as ecotaxes as economic (dis)incentives to complement or avert the need for regulatory approaches.
Foreign Direct Investments(FDI) is governed by a combination of domestic policy and regulations, source country policies and investments provisions in preferential trade agreements. Disputes have arisen concerning natural resources that are perceived to have negatively affected an investor’s bottom line³. Investment promotion agencies such as KenInvest will have to create a pipeline of green bankable projects which can be presented to potential investors⁴. Relatedly,GESIP will promote entrepreneurship around natural resources and promote livelihood diversification for vulnerable communities which in turn will open a new pool of clientele for financial service providers.
Consumer protection as an integral but least highlighted part of financial inclusion. Financial services providers need to educate their (prospective) clients about their offerings especially with innovative products. The emergence of alternative finance such as crowdfunding particularly remittances in the green space will not only require the appropriate legal and regulatory frameworks in case of the need for redress.
The green economy will see the evolution of the labour market even in the financial services industry with the creation of job segments such as sustainability officers and enegy auditors who will assist the financial institutions in their own sustainability reporting or when they need to evaluate various projects to reduce ESG risks before extending lines of credit.
What’s Happening in the Financial Services Industry
It is quite clear that public finance will not be enough to set economies onto low carbon and climate resilient pathways. The Green Economy Assessment Report estimates that the total investment costs identify are approximately Kshs. 70 billion annually (approx USD 674M) while the implementation of the GESIP is estimated to require Kshs. 2.4 Trillion. Kenya’s projected fiscal deficit for FY 2017/18 will be Ksh 524.6 billion equivalent to 6.0 percent of GDP. With this financing gap in the country, it is most likely that available funding will more likely be directed to low-hanging fruit. The Climate Change Act 2016 has provided for the creation of a national fund but it is yet to be formally established.
The financial services sector are now embracing green principles as they see the benefits of the overall triple bottom line (people, profit and planet) and are now working on greening their products and operations. For instance, Kenya Bankers Association is collaborating with other key financial sector stakeholders to issue the country’s first green bond. Apart from the environmental and social benefits, some studies have shown that such bonds with green labels offer ‘greeniums’ (green premiums). Moreover, the funds are more or less ring-fenced as capital is directed to sustainable projects so that there is more accountability.
The use of decentralised channels such as the adaptation fund in the country has assisted in channelling funds to community organisations and small businesses. The fund was designed to ensure that funds are split between wards and counties with the bulk being directed to the communities while a specific percentage is directed towards administration costs. It also recognised county-level committees that provide oversight and technical support.
Creating an environment that will enable local government and local banks to develop innovative blended finance tools that will capital access to SMEs and provide business model options for investors. This could also encourage business to reach the “right” scale to attract investment opportunities through either programmatic (bundling small projects into a larger set to reduce transaction costs) or working through intermediaries who reach the local level such as banks.
Conclusion
Financiers are willing to support the green economy but will have to overcome weak enforcement laws and regulations across sectors, inadequate knowledge about green technologies, integrating natural capital into economic growth and gaps in human capabilities. Prima facie, the GESIP seems to be a wonderful document but it will require a lot more than good intentions for the various strategies to be operationalised for Kenya to successfully transition to a low carbon economy.
References
- Halle, M. Forstater M and Zadek, S.(2016) Green Finance for Developing Countries: Needs, Concerns and Innovations UNEP Inquiry [Available here]
- Volz, U. (2017) On the Role of Central Banks in Enhancing Green Finance. UNEP Inquiry Working Paper No 17/01[Available here]
- Halle, M. Forstater M and Zadek, S.(2016) Green Finance for Developing Countries: Needs
- UNCTAD (2016) Promoting Green FDI: Practices and Lessons from the Field. The IPA Observer №5 [Available here]
