- County governments have a crucial role to play in scaling green finance[1] in Kenya, particularly in providing channels through which projects can be identified, aggregated, and funded.
- A key challenge in scaling green finance in Kenya has been identifying green projects across the country, determining which ones should be funded and creating structures through which substantial funds can be channelled to local climate action.
- The county green finance assessment is the first of its kind in the country and has generated actionable insights on what the potential, opportunities and challenges exist at county level in terms of the financing of green projects and assets.
- The assessment will be turned into action through the FSD Kenya county green finance project preparation facility, through which green projects identified by county governments themselves will be prepared and can be funded at scale in a manner that speaks to county development priorities as well as those of the national government.
Financial Sector Deepening (FSD) Kenya published the results of the county green finance assessment on Thursday, 25th April 2024.
About the county green finance assessment
The county green finance assessment is related to FSD Kenya’s mission to support the development of an inclusive green finance ecosystem in Kenya.
The assessments and report are a result of the partnership, expertise, and work of specialists from FSD Kenya, Agusto & Co., The National Treasury and Economic Planning, The Capital Markets Authority, ADA Consortium, the Nairobi Securities Exchange, and the County Governments of Embu, Kirinyaga, Kisumu, Laikipia, Nairobi City, Makueni, Nandi, Taita-Taveta, Vihiga, and Wajir.
The Constitution of Kenya (2010) devolved important natural resource and environment-related sectors, meaning counties have an important role to play in Kenya’s sustainable development agenda, which can only be realised if counties have the requisite capacities and capabilities including financial resources.
Green finance instruments such as county green bonds, present an opportunity for counties to generate resources for their development in a green and climate-resilient manner.
The assessment, carried out between November 2022 and May 2023, evaluated four components in each of the 10 counties[2]:
- Economic and fiscal assessment to document county fiscal performance (historical and projected), strengths, challenges, and ability to take on (additional) debt including the consideration of potential revenue generation sources.
- Credit risk assessment to estimate the county government’s relative likelihood of defaulting on its obligations from capital raising initiatives – including a shadow credit rating.
- Green asset and activity assessment to document availability of green investment opportunities in the selected counties.
- Green finance capability assessment to gauge the skills and ability to manage green financial instruments and related projects available in the county.
Key findings
The economic and fiscal profile of counties assessed revealed strengths and challenges. Strengths documented in the assessment include stable political environments in the counties; youthful populations; high mobile banking penetration levels and a market with the presence of alternative financing options. Shared challenges include that most counties assessed represent a relatively low contribution to Kenya’s GDP as individual units and have fairly undiversified economies. They also all demonstrate a significant dependence on the exchequer, have low own source revenue and low compliance with the Public Finance Management Act.
In terms of the credit risk profiles of the counties assessed, they fall within the range of medium to high-risk profiles with limited financial flexibility and low fiscal autonomy including a high level of pending bills.
The assessment of the overall status of green finance capabilities demonstrated a presence of climate change laws in all counties assessed, and the presence of additional county laws to support implementation of green activities (such as acts related to water and sanitation, waste management etc). There is also a growing knowledge on climate finance and sustainable practices but this needs to be strengthened. Further, counties have expressed an openness to creative green financing structures and have the opportunity to deepen access to the FLLoCA county climate funds.
The top green finance sectors for the 10 counties assessed include:
- Agriculture and livestock
- Water and sanitation
- Public infrastructure
- Waste management
- Renewable energy
- Healthcare
- Eco-Tourism
- Green buildings and housing
- Forestry
- Natural resource management
- Urban development
- Green trade and industrialisation
The green finance potential also resides in county clusters as captured in the diagram below:
Following the county green finance assessment, FSD Kenya will provide further technical support to all the10 counties assessed through the county green project preparation facility.
PwC Kenya has been selected as the manager of the facility and will work with county governments to prepare priority green projects to access funding through the green finance market[3]. The facility will: shortlist viable green projects; prepare county green projects; and provide investor awareness and engagement.
[1] Green finance is defined as structured financial activity created to ensure a better environmental outcome. Green finance includes climate finance but is not limited to it as it encompasses a wider range of other environmental objectives, such as industrial pollution control, water sanitation, biodiversity protection and environmental benefits.
[2] The 10 counties were selected based on four criteria: On-going green and climate related initiatives and activities; existing relationships with strategic partners; implementation of the County Climate Change Fund (CCCF) mechanism; expressed interest in participating the green finance market; and regional representation.
[3] The green finance market is defined as the pool of funding constituting a range of green financial instruments that meet the objectives of green finance such as Government Grants; development grants; guarantee funds; subsidies; concessionary loans; commercial loans; results-based finance; blended finance; Green Bonds etc.
