Aligning Kenya’s Financial System with Inclusive Green Investment Current Practice and Future Potential to Mobilize Investment in a Sustainable Economy OCTOBER 2015 AUTHORS About the Report Cecilia Bjerborn Murai and Wanjiru Kirima ACKNOWLEDGEMENTS IFC, the UNEP Inquiry, and the authors would like to thank the following individuals who have peer-reviewed this This report was developed through a partnership between report on behalf of their organizations: Berit Lindholdt Lauridsen (IFC), Christina Poser (GIZ), Fiona Stewart, (IFC), Matu Mugo (Central Bank of Kenya), Nzomo Mutuku (National Treasury), and Nuru Mugambi (Kenya Bankers the International Finance Corporation (IFC) and the UNEP Inquiry Association). The report has substantially benefited from comments by Aditi Maheshwari from IFC and Simon Zadek from the into the Design of a Sustainable Financial System (UNEP Inquiry). United Nations Environment Programme Inquiry. In addition, Mahenau Agha, Felicity Perry, Lani Sinclair, Clarity Editorial and Laura Chaves provided important strategic, production, and editorial support. IFC’s engagement in this initiative has been in partnership with Comments are welcome and should be sent to Aditi Maheshwari (amaheshwari@ifc.org). ABOUT IFC Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the on behalf of the German Ministry for Economic Cooperation and private sector. Working with private enterprises in about 100 countries, we use our capital, expertise, and influence to help eliminate extreme poverty and boost shared prosperity. In FY14, we provided more than $22 billion in financing Development (BMZ). to improve lives in developing countries and tackle the most urgent challenges of development. For more information, visit www.ifc.org. ABOUT UNEP INQUIRY The Inquiry into the Design of a Sustainable Financial System has been initiated by the United Nations Environment Programme to advance policy options to improve the financial system’s effectiveness in mobilizing capital towards a green and inclusive economy—in other words, sustainable development. Established in January 2014, it published its final report in October 2015. More information on the Inquiry is at: www.unepinquiry.org. DISCLAIMERS The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of, IFC or its Board of Directors or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use. The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the UNEP concerning the legal status of any country, territory, city, or area or of its authorities, or concerning delimitation of its frontiers or boundaries. Moreover, the views expressed do not necessarily represent the decision or the stated policy of UNEP, nor do citing of trade names or commercial processes constitute endorsement. Copyright © International Finance Corporation and United Nations Environment Programme, 2015 Contents EXECUTIVE SUMMARY 1 ANNEXURES 46 A. Glossary 47 CHAPTER 1: INTRODUCTION 5 B. Interviewees and Roundtable Participants 49 CHAPTER 2: OVERVIEW OF THE KENYAN ECONOMY C. Interview Questions 51 AND INCLUSIVE GREEN GROWTH 8 D. Inclusive Green Policies and Regulations in the Real Sector in Kenya 52 2.1 National Constitution and Strategy 9 E. Risk Guarantee Product and Technical Assistance for 2.2 Investment Need and Sources of Capital 13 Investment in Renewables 54 2.3 Green and Inclusive Investments in Kenya 16 F. Infrastructure Investment Projects 56 CHAPTER 3: THE KENYAN FINANCIAL SECTOR 20 G. Possible Inclusive Green Investment Themes across Key Sectors 62 3.1 Banking Sector 21 H. The Ten Largest Banks 64 3.2 Retirement Funds 25 I. The 20 Largest Pension Funds 65 3.3 Insurance Funds 31 J. The 10 Largest Fund Managers 66 3.4 Capital Markets 32 K. The 10 Largest General Insurance Firms and the 10 Largest Life Insurance Firms 66 3.5 Private Equity 36 L. Private Equity Funds with Investment Activities in Kenya 67 3.6 Savings and Credit Cooperatives 38 3.7 Other Sources of Capital: Foreign Direct Investment 38 ENDNOTES 68 3.8 Overview of Current Inclusive Green Investment Products in Kenya 40 ACRONYMS CHAPTER 4: BARRIERS AND POTENTIAL SOLUTIONS BMZ German Ministry for Economic Cooperation and Development FOR INCLUSIVE GREEN INVESTMENTS IN KENYA 41 ESG Environmental, social, and governance 4.1 Barriers 41 FDI Foreign direct investment 4.2 Potential Solutions 41 GDP Gross domestic product 4.3 Suggested Actions 43 G20 Group of 20 CHAPTER 5: CONCLUSIONS AND NEXT STEPS 44 GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit 5.1 High-Level Commitment in the Kenyan Financial Sector 44 IFC International Finance Corporation 5.2 Potential Next Steps 44 MTP2 Second Medium Term Plan MW Megawatt PPP Public-private partnership UN United Nations UNEP United Nations Environment Programme ABOUT THIS REPORT Executive Summary This report aims to promote inclusive green investment in Kenya. It focuses on policy, structural, and investment innovations across the economy and financial sector that would increase capital flows that support sustainable development. Inclusive green investment forms an important part of the broad environmental, social, and governance (ESG) considerations that underpin sustainable investment. “Green” investment supports economic growth in a clean, resilient, and sustainable manner – such as initiatives to encourage more efficient use of resources, reduce pollution, and mitigate environmental damage. “Inclusive” investment serves not only investors, but the broad interests of society, particularly low-income segments of the population. The report is a product of a global collaboration involving the International Finance Corporation (IFC) and the United Nations Environment Programme Inquiry into the Design of a Sustainable Financial System (UNEP Inquiry), with support from the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) on behalf of the German Ministry for Economic Cooperation and Development (BMZ). It is based on broad-based research, which included extensive interviews and dialogues with stakeholders across Kenya’s investment value chain. MAIN FINDINGS Kenya’s fast-growing economy is the largest in East Africa, and serves as a trade and investment hub for East and Central Africa. While the economy is diversifying, it remains largely dependent on natural resources. Agriculture and tourism account for nearly half of gross domestic product (GDP). Kenya is highly vulnerable to the effects of climate change, environmental shifts, and associated social effects. According to the Kenya National Climate Change Action Plan 2013-2017, extreme climatic events could cost the economy as much as $500 million a year, equivalent to about 2.6 percent of the country’s GDP in 2013.1 Aggregate models project that these economic costs will increase in the future, with some sources suggesting they could reach the equivalent of 7 percent of GDP by 2020. Such losses could result from lower crop and livestock yields, forest fires, damage to fisheries, reduced hydropower generation, lower industrial production, and reduced water supply. In addition to the effects of climate change, Kenya also faces costs from environmental pollution, which adversely affects human health and raises the risk of epidemics. Executive Summary 1 To counter these trends, Kenya requires increased investment in areas The total value of assets held by banks, pension funds, insurers, and such as sustainable agriculture, and green resilient infrastructure for credit cooperatives was equivalent to 108 percent of GDP in 2013, up transport, water, and waste management. Green resilience refers to from 96 percent of total assets (excluding capital markets) in 2012. the ability of a system to continue operating as external conditions The total value of equity market capitalization amounted to 51 percent change, and to adapt to changes in temperature, precipitation, and other of GDP in 2013.3 Within the financial sector, pockets of leadership variables. In the context of climate change, green resilient infrastructure are supporting inclusive green investment – and banks, insurance would be able to operate at its design capacity despite sharply changed companies, pension funds, and capital market participants have all climatic conditions. This means making a conscious shift away from a expressed strong interest in this approach. Existing levels of investment, business-as-usual approach, in which capital flows to non-sustainable however, are relatively small. polluting industries, practices, and technologies. In summary, the main barriers to inclusive green investment are as Kenya has a wealth of potential green investment follows: opportunities, particularly in infrastructure, agribusiness, A short-term outlook prevails across all levels of the investment •  tourism, and manufacturing. value chain. The main indicator is short-term financial success; long-term economic value creation is rarely recognized and goes The country is also home to some of Africa’s largest private sector- unrewarded by major stakeholders. funded renewable energy projects, such as the $870 million Lake Turkana wind power project and the $620 million OrPower 4 (Olkaria The institutional investor market is fragmented and does not allow •  III) geothermal power plants. To date, however, domestic financial for economies of scale, or the time and effort needed to invest in sector participation in these investments has been limited. strategic product development and innovation. The fragmented structure of the pension fund sector in particular constrains the flow The Kenyan government articulates a strong high-level policy of capital toward alternative assets. commitment to inclusive green economic growth and investment. This is High returns on government bonds tend to “crowd out” investments •  expressed clearly in the country’s Constitution, its Vision 2030, and the in other asset classes, while lending to established sectors is Second Medium Term Plan (MTP2). But the necessary links to sectoral supported by a better risk-return profile. strategies, including those of the domestic financial sector, are a work in progress. A lack of experience and expertise limits the structuring of new •  investment vehicles that can form a pipeline of inclusive green Kenya’s aspiration to become a middle-income country based on projects. sustainable development is premised on strong investment growth. The government targets investment growing from 24.7 percent of GDP in Policy, fiscal, and regulatory incentives to promote inclusive •  2013-2014 to 30.9 percent of GDP by 2017-2018.2 The current level green investment remain limited. Government’s high-level of public sector investment of between 8 percent and 10 percent is policy commitment has not yet been matched by sector-specific expected to be sustained throughout the period, with the bulk of the implementation plans, which remain a work in progress. increase in overall investment expected from the private sector. Policy Based on the research conducted and the recommendations of market commitments across a range of institutions envision a vibrant and participants, this report suggests that promoting inclusive green globally competitive Kenyan financial sector that serves as a regional investment in Kenya requires the following: hub, creating jobs and contributing to a higher domestic savings rate. Kenya’s financial system would have a fundamental role to play in Developing cohesive, market-wide policy and regulation. In •  allocating capital to a more inclusive, greener economy, and creating particular, this requires coordination across the financial services general awareness about this shift. sector to agree on high-level policies and principles for long-term sustainable investment. Fiscal incentives supporting inclusive green The financial sector in Kenya has grown significantly in recent years, investment could serve as an important catalyst in this process. with strong domestic, regional, and global integration supported by a broad market infrastructure that includes the Nairobi Securities Effective enforcement of the market-led Sustainable Finance •  Exchange. Principles in the banking sector, and a clear timetable to move from capacity building to direct regulation. 2 Executive Summary Executive Summary 3  onsolidating the pension and insurance sectors, and pooling of • C assets.  roviding structured market support to develop institutional • P investment vehicles.  aising awareness and increasing technical training across the • R financial services sector. • B  uilding on the broad interest in collaboration across the banking, Chapter 1: Introduction pension, and insurance sectors, which can support joint financing of short-, medium-, and long-term projects. MOBILIZING CAPITAL FOR AN familiar and perceived to be less risky than international INCLUSIVE GREEN ECONOMY investments, highlighting the importance of domestic  ddressing gaps in existing environmental and social regulation. • A policy frameworks in increasing climate finance flows.5 There is growing recognition that the global financial  aising public awareness of the need for inclusive green investment. • R system needs to actively contribute to sustainable Since 2012, the G20 Development Working Group has • A  ligning foreign direct investment (FDI) objectives with the green development. Poverty and inequality, alongside accelerated been focusing on inclusive green growth, and has asked growth agenda. climate change, loss of natural capital and biodiversity, IFC to support its efforts to mobilize private investment, depletion of non-renewable resources, water stress, and including from institutional investors. In Partnership with The risks for Kenya and its financial sector of not addressing soil erosion are serious concerns that “indicate structural GIZ on behalf of BMZ, IFC is working with the G20’s sustainability issues are potentially enormous. weaknesses and risks which remain unresolved.”4 Yet, GreenInvest Platform to create an enabling environment at the same time, new opportunities are emerging to and encourage domestic investors across a range of The government and the market have taken some important steps to mobilize the innovative capacity of the financial system to countries to support this agenda. UNEP recently initiated promote inclusive green growth through public-private investment in better meet the long-term needs of the real economy in a an “Inquiry into the Design of a Sustainable Financial renewable energy and sustainability initiatives led by the banks and sustainable manner, such as inclusive green investment. System” to advance design options that would deliver capital markets. But focused efforts are needed at all levels of the financial a step change in the financial system’s effectiveness in services sector to reach the scale and targets articulated in Vision 2030. The premise of this report is that Kenya’s financial system mobilizing capital for an inclusive green economy. Working can play a fundamental role in mobilizing capital to in partnership, IFC and UNEP are exploring this topic in Chief executive officers consulted during the development of this promote a greener economy, and in establishing general Kenya. report expressed the clear view that Kenya has both pools of money awareness about the importance of this shift and the for financing and viable inclusive green projects. The question is how opportunities it creates. Moving towards inclusive RISKS AND OPPORTUNITIES FOR to connect the two. Initial suggestions include identifying leaders and green investment means departing from business as KENYA’S FINANCIAL SECTOR champions to lead this process; forming a working group to focus on usual – in which capital at a global level is deployed to Kenya’s dynamic, fast-growing economy is the largest in increasing investments in the inclusive green economy; and establishing environmentally and socially unsustainable uses and East Africa, serving as a trade and investment hub for East a sector-wide implementation roadmap. practices – to sectors and projects in line with long-term and Central Africa. Although the economy is diversifying, sustainable development and economic growth. Such a it remains largely dependent on natural resources. shift potentially requires changes in macroeconomic policy, Agriculture and tourism account for nearly half of GDP. financial services regulation, private sector practices, and As a result, Kenya is highly vulnerable to the effects of consumer awareness. It can touch on a wide range of climate change, environmental shifts, and the associated issues, from international taxation, money laundering, social effects. and corruption to financial inclusion, health, education, employment, and environmental protection. For the financial sector, these risks also present potential investment opportunities. Government initiatives have The Climate Policy Institute’s Global Landscape of Climate identified various sectors that are likely to be most affected Finance indicates that nearly three-quarters of total global by climate change. These include water and forestry, climate finance flows were invested in their country of agriculture, livestock and fisheries, trade, extractive origin in 2014. Private actors had a strong domestic industries, energy, physical infrastructure, tourism, and focus, with 90 percent of their investments remaining in health. Kenya’s National Climate Change Action Plan6 the country of origin. In-country investments are more also identifies subsectors that can play a significant role 4 Executive Summary Chapter 1 5 in innovative adaptation and mitigation initiatives. These brokers; analysts; financial advisors; consultants; and Many of this report’s systemic-level recommendations areas potentially also represent investment opportunities industry associations. concern not only inclusive green investment, but also that can boost employment growth, crucially among youth: promote a broad sustainable development agenda. Kenya’s The outcome of the interviews laid the basis for two 75 percent of Kenya’s population is below the age of 30.7 green investment agenda lags behind other areas of ESG roundtable sessions with the Kenyan financial sector in investment considerations, such as financial inclusion. In Given its recent record of innovation, Kenya has a historic February 2015: A CEO roundtable and a technical experts’ the Kenyan context, the link between green investment and opportunity to develop competitive advantage based roundtable to discuss risks, opportunities, and potential to social issues such as food security, poverty reduction, on an inclusive green growth strategy. Taking financial initiatives to promote inclusive green investment. The two health, and unemployment needs to be clearly delineated. inclusion as an example, the country is home to some meetings resulted in proposed next steps that are outlined world-renowned innovations, such as M-Pesa (a mobile in Chapter 5. “Green resilience” refers to the ability of a system to money transfer system launched in 2007),8 M-Shwari continue operating as external conditions change, adapting A list of interviewees and roundtable participants is (a micro-savings and lending product launched in 2012),9 to changes in temperature, precipitation, and other contained in Annexure B. and M-Kopa (a renewable energy payment system focusing variables. In the context of climate change, green resilient on rural households, launched in 2012),10 which have REPORT STRUCTURE infrastructure would be able to operate at its design successfully demonstrated how the private sector, with capacity despite sharply changed climatic conditions. support from an engaged and pragmatic regulator, can The structure of the report is as follows: All exchange rates provided are taken from source profitably provide solutions to pressing societal needs. Chapter 2 provides an overview of the Kenyan •  documents. Although Kenya has reasonably sophisticated financial economy and discusses the relevance of the inclusive institutions and markets, to date there has been little green growth agenda. It outlines the high-level policy systematic research into the specific features and flows landscape and describes existing regulatory incentives, of inclusive green finance, especially from private capital analyses the country’s investment needs, and reviews markets and institutional investors. examples of inclusive green investments to date. This document aims to promote additional exploration of Chapter 3 provides an overview of the financial •  inclusive green investment in Kenya, within the context and capital markets sectors, and analyses industry of the broader economy and financial sector. It focuses on structures and incentives that either encourage or policy, structural, and investment innovations across the constrain inclusive green investment. economy and financial sector that would increase capital Chapter 4 highlights key barriers to inclusive green •  flows to encourage sustainable development. investment, and potential solutions. RESEARCH METHODOLOGY Chapter 5 sets out conclusions and proposed next •  This report reviews the current state of inclusive steps. green investment in Kenya, providing an overview of A NOTE ON DEFINITIONS AND APPROACH stakeholders, financial categories and volumes, and current and planned financial policies, regulations, and standards. A glossary of terms is provided in Annexure A. However, The report then identifies barriers to green investment and it is useful to define several terms at the outset. discusses how these might be overcome. “Green” investment supports economic growth in The research methodology combined extensive desktop a clean, resilient, and sustainable manner – such as research, a wide-ranging series of interviews, and initiatives to encourage more efficient use of resources, roundtable workshops. The authors interviewed 25 reduce pollution, and mitigate environmental damage. representatives covering all components of the investment “Inclusive” investment serves not only investors, but value chain, including representatives of the National the broad interests of society, particularly low-income Treasury; regulatory bodies (the Capital Markets Authority and underserved segments of the population. Inclusive and the Retirement Benefits Authority); the Nairobi green investment is an important part of the broader Securities Exchange; companies listed on the securities ESG considerations that underpin sustainable investment exchange; pension fund trustees and asset managers; at the global level. 6 Chapter 1 Chapter 1 7 TABLE 1: BREAKDOWN OF LARGEST ECONOMIC SECTORS – SHARE OF GDP LARGEST ECONOMIC SECTORS PERCENTAGE CONTRIBUTION TO GDP BY ACTIVITY IN 2014 PERCENTAGE Agriculture, fishery, and forestry 27.3 Chapter 2: Overview of the Kenyan Economy Manufacturing 10 and Inclusive Green Growth Transport and storage 8.3 Wholesale and retail trade 8.2 Kenya plays a central role in East and Central Africa. Its Despite progress in diversification, Kenya’s economy Real estate 7.8 economy is diversifying and its financial sector is strong, remains highly dependent on its natural resource Financial and insurance activities 6.7 with deep and developed domestic debt markets. GDP base. The Kenya National Bureau of Statistics’ 2013 Percentage of GDP 68.3 growth was 5.7 percent in 2013, averaging 5.5 percent Economic Survey reported that more than 50 percent between 2003 and 2013,11 and the World Bank projects of the country’s GDP is derived from natural-resource- SOURCE: Kenya National Bureau of Statistics (2015), Economic Survey GDP growth of 7 percent by 2017.12 Inflation stood at based sectors (agriculture, mining, forestry, fishing, and 5.7 percent in 2013 and 6.9 percent in 2014, down from tourism).18 In aggregate, these sectors are estimated to a peak of 26 percent in 2008.13 account for 70 percent of total employment,19 with small- The success of Kenya’s economic sectors, including those Countering these trends requires more investment in scale agriculture and pastoralism alone accounting for Kenya also has a young population – 75 percent of its exploiting new sources of energy and minerals, depends sustainable agriculture and green resilient infrastructure, 42 percent of total employment.20 Agriculture is the largest 44 million people are below 30 years old.14 In 2009, the significantly on whether they are able to respond effectively which would enable the country to shift from a business- foreign exchange earner and accounts for 65 percent of overall unemployment rate was 8.7 percent, but the rate to environmental and social challenges and risks, as-usual approach to sustainable industries, practices, and total exports, followed by tourism, which has been worth of youth unemployment was 14.2 percent, according to including adapting to climate change, addressing youth technologies. about 95 billion Kenyan shillings ($1 billion) annually for the Kenya National Bureau of Statistics’ last published unemployment, and addressing conflict over land and the past three years.21 At the macroeconomic level, environmental and social data.15 Recent, non-bureau sources indicate higher overall water resources. considerations can have direct and indirect effects on unemployment rates of 40 percent,16 and data quoted in Economic growth in Kenya is broad-based (see Figure Although the country bears little responsibility for global growth. In a natural resource-integrated economy such the MTP2 suggests that 60 percent of the country’s youth 1). Over the past three years, industry and services have climate change, it is highly vulnerable to its effects. as Kenya’s, failing to deal with environmental and social are without work.17 experienced the most rapid growth. According to the Kenya National Climate Change Action challenges can put economic growth at risk. Plan 2013–2017, extreme climatic events could cost the This situation presents considerable investment economy as much as $500 million a year, equivalent to FIGURE 1: BROAD-BASED GDP GROWTH IN KENYA opportunities. Inclusive green investment can play an about 2.6 percent of the country’s GDP in 2013. Aggregate important role in mitigating the effects of climate change models project that these economic costs will increase, 7 6.7 and supporting sustainable development, while boosting reaching up to 7 percent of GDP by 2020.23 Such losses 6 5.8 economic growth. For example, a UNEP scenario modeling 5.5 would be due to declining crop and livestock yields, forest 5.3 5.3 exercise24 comparing economic growth in a green-growth Annual growth (percent) fires, damage to fisheries, reduced hydropower generation, 5 4.8 scenario and a business-as-usual scenario for selected lower industrial production, and reduced water supply. In 4.2 sectors showed that, in the long term (2010 to 2030), the 4 addition to the effects of climate change, Kenya also faces 3.4 4.2 costs from environmental pollution, which is adversely green-economy scenario would result in faster economic 3.0 3 affecting human health and raises the risk of epidemics. growth and more opportunities to create wealth. In the 2.0 green scenario, real GDP was projected to outstrip the 2 1.5 business-as-usual approach by 12 percent by 2030. 1 2.1 National Constitution and Strategy 0 2011 2012 2013 Governments play an important role in creating enabling report (137 in 2013 and 136 in 2014 out of 189 countries),25 conditions for sustainable private sector investment. Kenya but the government is working to improve the ease of Agriculture Manufacturing Other Industries Services is ranked relatively low in the World Bank’s Doing Business doing business and investing, aiming to feature in the top SOURCE: World Bank (2014),22 Economic Update Kenya. Based on data from the Kenya National Bureau of Statistics 8 Chapter 2 Chapter 2 9 50 rankings in the annual survey by 2017.26 In 2014, it 47 county governments, is also a potentially important step and transformation. As the maker of fiscal policy and that aim to increase the government’s budget and draw in established a Business Environment Delivery Unit to address for sustainable development. As power, representation, the overall policy holder for the financial services sector, more private investors will also affect the availability of challenges facing investors in the country. and resources are devolved to local level, various laws have Kenya’s National Treasury – along with financial sector funding for green and inclusive projects. been enacted to ensure better access to basic services such regulators – plays a critical role in incentivizing inclusive The Kenyan government has made strong, high-level Areas of financial policy where Kenya has made notable as healthcare and education, and more meaningful public green growth and investment. Other areas of fiscal policy policy commitments to green and inclusive investment and progress in recent years are outlined in Table3. consultation on new project development.27 growth through the Constitution of Kenya, Vision 2030, and the MTP2. The process of devolution from a centralized Table 2 summarizes national policy documents that touch TABLE 3: FINANCIAL POLICY AREAS THAT AIM TO RETAIN/INCREASE NATIONAL BUDGET REVENUE federal system to a two-tier decentralized system of on an inclusive green economy. government, consisting of a national government and FINANCIAL POLICY/ IMPLEMENTING AGENCY/ OBJECTIVE STRATEGY STATUS OF IMPLEMENTATION TABLE 2: NATIONAL DEVELOPMENT POLICY DOCUMENTS ON INCLUSIVE GREEN GROWTH Tax reforms Extensive efforts have been made to improve tax collection Kenya Revenue Authority and broaden the tax base, with government revenue at above NATIONAL POLICY/ MAIN IMPLEMENTATION 20 percent of GDP. PROVISIONS STRATEGY DOCUMENT AGENCY Government anti-corruption An estimated $50 billion leaves Africa every year in illicit National Treasury; Kenya The Constitution of Kenya The new Constitution brought the critical issues of sustainable Government of Kenya strategies and control of money outbound financial flows through tax evasion (domestic and Revenue Authority; Anti Money (2010)28 development to the core of the country’s legislature. It sets out a laundering and tax evasion: international) and corruption (roughly the same as official Laundering Agency; Cabinet commitment to an ecologically sustainable development and a clean, Anti-Money Laundering Act development assistance). These outbound flows reduce tax Committee on Anti-Corruption safe environment for all. (2012); Public Officer Ethics Act revenues and finance for development.32 (2006); Anti-Corruption and The government aims to use regulation and international Kenya’s development master Under its three pillars, economic, social, and political, Kenya sets out Ministry of Devolution Economic Crimes Act (2003) cooperation to combat illicit financial flows and ensure that plan: Vision 2030 (2006)29 its aspiration to become a middle-income country by 2030, aiming and Planning all payments to governments from large companies are fully to increase the annual GDP growth rate to 10 percent. Integral to transparent. this is the vision of developing a “just and cohesive society enjoying equitable social development in a clean and secure environment.”30 PPP Act (2013); Business Provides regulatory framework for private sector investment National Treasury Regulatory Reform Bill; in infrastructure development and other social services, and is MTP2 (2013–2017) The MTP2 of Vision 2030 lists six priority growth sectors to help Ministry of Devolution Special Economic Zones Bill expected to facilitate private sector investment in infrastruc- achieve the GDP growth target: tourism; agriculture, livestock, and and Planning is the lead ture and other areas of the economy. fisheries; trade; manufacturing; business process outsourcing and agency, with 20 sector- information technology-enabled services; and oil and other minerals. based working groups Income Tax Act and Finance Act Amendments include tax breaks for capital market instru- Kenya Revenue Authority. The It also commits to increasing public spending to expand and mod- developing the action (2014) ments covering infrastructure and other social services. tax breaks are implemented, ernize infrastructure (railways, roads, ports, airports, energy, water, plans31 but the market is still waiting and information and communication technology). Public-private for tested examples of their partnerships (PPPs) are seen as the key to successfully achieving this application to actual investment goal. MTP2 also commits to creating 1 million new jobs (including vehicles. “green jobs”) annually to address unemployment. Competition Commission Act The act aims to protect investor interests in terms of Ministry of East African Affairs, National Green Economy Based on Vision 2030 and the MTP2, the strategy gives policy options Government of Kenya (2012) intellectual property rights. Commerce, and Tourism Strategy and Implementation to enable integrated green growth strategies for the following Plan for Kenya (2015) priority sectors: Agriculture, forestry, and fisheries; water and Public Financial Management An overarching priority for Kenya’s Finance Ministry over the National Treasury sanitation: waste management; energy; trade manufacturing and Act (2012) and Integrated past five years has been the transfer to the devolution system, industry; land and ecosystems management; tourism and wildlife Financial Management in line with the new Constitution. As part of this process, the management; building and construction; transport; oil, gas, and Information System Integrated Financial Management Information System aims mining; information and communications technology; disaster risk to provide technical capacity, financing, and better tracking management; and education. of budgets and spending to support county governments.33 National Payment System Act This legislation allows agency banking, which has led to Central Bank of Kenya (2010) and National Payment Kenya’s success in mobile payment systems and high rates of System Regulation (2014) financial inclusion. M-Pesa is a globally renowned example Kenya took part in the UN Conference on Financing for FISCAL AND FINANCIAL SECTOR POLICY of how market innovation and pragmatic regulation can allow Development, held in Addis Ababa in July 2015, where AND REGULATION the private sector to profitably address a social need. heads of state approved an accord on financing sustainable The Kenyan diaspora is the largest in size from the African Financial and capital market regulation can promote development. The country also co-chairs the process to continent and remittances are a significant financial resource investment incentives that are fully aligned with long- for households. Remittances are integrated into Kenya’s facilitate consensus among the 193 UN member states on term performance and sustainability indicators, creating a national financial inclusion strategy and the cost of the new Sustainable Development Goals that will succeed remittances has been kept at competitive rates. strong impetus for increased awareness, focus, innovation, the Millennium Development Goals. 10 Chapter 2 Chapter 2 11 New policy and regulatory implementation traditionally finance, but it does not analyze risks such as climate and other measures will generate revenue that can be is needed. This could include increased application of works well in Kenya when the private sector initiates change in any depth. used to incentivize and promote inclusive green sectors. the polluter-pays principle set out in the Environmental an innovation, typically followed by, or in conjunction Natural capital accounting – the process of calculating Management and Coordination Act (1999).38 Lender Introducing a cohesive market-wide policy in Kenya  with, pragmatic and supportive policy and regulation. the total stocks and flows of natural resources such liability, suitably framed to provide a safe haven when could help ensure that all parts of the financial sector For example, financial inclusion rates improved from as air, water, land, and biodiversity – would improve adequate due diligence can be demonstrated, extends value chain are working towards the same green and 27 percent in 2006 to 67 percent in 201334 through private transparency and highlight the real long-term economic the liability for sustainability impacts, and introduces inclusive measures, which are kept at the top of the sector innovation (the piloting and subsequent launch of cost/benefits of environmental taxation. Lessons can be lender and investor liability. This can improve agenda. Such a cohesive, high-level policy could also the M-Pesa mobile payment system in 2007), supported drawn from the European Union, where environmental environmental outcomes, as demonstrated in the case increase the efficiency and scale of emerging individual by pragmatic policy and regulation (the passage of the taxation has been implemented in 30 member of US lender liability for land contamination. Brazil efforts. South Africa, for example, has successfully National Payment System Act in 2010 and its regulation in countries,36 and South Africa, where the government and China are also considering introducing liability implemented a financial sector charter, developed in 2014, following public consultation). has announced that a carbon tax will be implemented regimes.39 2003, which focuses on broad-based black economic in January 2016.37 These areas are also discussed in more detail in subsequent There is increased interest in the design of financial sector empowerment, financial inclusion, and directing policies and regulations that will further support cost- investment and commerce into targeted economic  ompliance with environmental and social regulation, • C chapters. However, further research and detailed effective and scalable innovation. Various policies and sectors. It relies partially on a point-based reward the polluter-pays principle, and lender liability: On consideration of suitability and adaptation to the Kenyan regulations supporting inclusive green growth in a number system to incentivize and enforce compliance with its paper, Kenya’s environmental and social regulation is context is needed. of sectors, including energy, agriculture and forestry, the objectives.35 comprehensive, but stronger enforcement of regulations environment and wildlife, transport, and climate-change Green credit policies for banks; ESG integration and/ •  mitigation, have already been implemented or are at an or developmental mandates for institutional investors: advanced stage. Recent examples include feed-in tariffs for Inclusive green investment could be promoted by 2.2 Investment Need and Sources of Capital renewable energy, the Energy Management Regulations, introducing mandates that require institutional the Wildlife Conservation and Management Act (2013) and investors to consider and integrate ESG risks and Kenya’s goal of becoming a middle-income country based percent is expected to be sustained throughout this period, the Integrated National Transport Policy (for an overview opportunities into investment decisions; enforcing on sustainable development is premised on investment with the private sector financing the bulk of the increase. of these policies and regulations in the real sector, see a minimum asset allocation to environmentally and growth. The government is targeting an increase in Annexure D). The MTP2 targets about $58 billion in private investment socially sustainable and inclusive sectors and projects; investment from 24.7 percent of GDP in 2013-2014 to between 2013 and 2017. Priority sectors are tourism, and introducing green credit policy guidelines in the 30.9 percent of GDP by 2017-2018.40 The current level Although there are financial products and regulatory agriculture, livestock and fisheries, trade, manufacturing, banking sector. Similar measures have been put in of public sector investment of between 8 percent and 10 frameworks for inclusive products and investment, place in South Africa and Namibia. The Government particularly in the banking sector, further development and Employees Pension Fund of South Africa and the FIGURE 2: INVESTMENT TARGETED BY MTP2 ($ BILLION) innovation are still needed in other parts of the financial Government Pension Fund of Namibia, both of which services sector to promote green investment. are significant investors in their markets and across the 30 Cohesive financial sector regulation can help incentivize continent, have both increased their inclusive green investments. 25 and support inclusive green innovation and investment. Below are suggestions put forward by participants in the (Percent of GDP) Sustainable listing/reporting requirements: ESG •  20 interviews and roundtable meetings, with examples and considerations can be made part of listing requirements discussion by the authors: or other means of highlighting sustainability 15 Cohesive market-wide policy on sustainable finance: •  performance (such as a sustainability index) and/or mandatory integrated reporting for listed companies. 10 The implementation of the MTP2’s inclusive green growth commitments into sectoral policies and The Johannesburg, Brazil, Hanoi, Shanghai, London, and New York stock exchanges have all implemented 5 strategies is a work in progress. For example, the Capital Market Master Plan, a Vision 2030 flagship similar measures. ESG reporting for companies listed 0 project, sets out a strategic direction for the Kenyan on the Nairobi Securities Exchange is voluntary. 2013 2014 2015 2016 2017 capital market over the next 10 years, but does not Environmental taxation and fiscal incentives for green •  cover environmental and social risks and opportunities. industries: A few interviewees, such as the National Private Investment Government Investment The Central Bank of Kenya’s Financial Stability Report Environment Management Agency and KenInvest, shows the country’s significant progress in inclusive suggested that a combination of taxation, regulation, SOURCE: Government of Kenya. Based on targets in MTP2 2013–2017 and World Development Indicators 12 Chapter 2 Chapter 2 13 MTP2 ENVIRONMENT, WATER, AND SANITATION FLAGSHIP PROJECTS (UNDER THE SOCIAL PILLAR) TABLE 4: ADAPTATION COSTS FOR A FIVE-YEAR PERIOD AS PROVIDED BY SECTOR AGENCIES • Strengthening environmental governance • Digitization of urban plans SECTOR ESTIMATED COST FOR FIVE YEARS (KSH BILLION) • Waste management and pollution control • Water resource management program Agriculture 44.9 • Rehabilitation of urban rivers • Trans-boundary waters Livestock 27.1 • Modernization of meteorological services • Water harvesting and storage program Water & sanitation 278.8 • Advertent weather modification program • Marine resources and fisheries Environment 115 • Rehabilitation and protection of the water towers • Urban and rural water supply sub-program Infrastructure related to roads in arid and semi-arid lands 107 • Forest conservation and management • Operationalization of water research and resource center program Sustainable livelihoods related to arid and semi-arid lands 59 • Forestry research and development • Provision of water to poor, unserved areas, including Energy infrastructure 5.3 • Wildlife conservation and management informal settlements Tourism 1.3 • Promoting and piloting of green energy • Irrigation and drainage infrastructure • Carbon credit trading Total KSh for next five years 638 • Land reclamation • Rehabilitation of storm water drainage systems Total US$ equivalent for five years 7.5 billion in selected towns SOURCE: Government of Kenya (2013), National Climate Change Action Plan business process outsourcing and information-technology- The plan also identifies flagship projects relating to the enabled services, and oil and other minerals. One focus of environment, water, and sanitation, with a combined TABLE 5: PROJECTED INVESTMENT COST FOR PRIORITY MITIGATION ACTIONS the plan is to expand and modernize Kenya’s infrastructure budget of 655 billion Kenyan shillings ($7.2 billion).45 (railways, roads, ports, airports, energy, water, and ACTION ESTIMATED COST TO 2030 (KSH BILLION) There are, however, gaps between policy commitments, information and communication technology). coordination, and implementation. The flagship Restoration of forests on degraded lands 186-290 Based on the projected investment budget in the MTP2, water, sanitation, and environmental projects are not Geothermal 877-1,115 the largest investment projects for the five-year period incorporated into the MTP2’s economic pillar and Reforestation of degraded forests 48-61 are in infrastructure (transport and energy), with a total priority sector programs. And while the government has (public and private sector) projected investment budget recently developed a National Green Economy Strategy Improved cookstoves and LPG cookstoves 20 of about 7.6 trillion Kenyan shillings ($83.2 billion); and Implementation Plan for Kenya to integrate green Agroforestry 70-117 information and communication technology, with an and inclusive growth strategies into priority sectors,46 Bus rapid transit and light rail corridors 170 investment budget of 51 billion Kenyan shillings ($0.6 the strategy does not include a focus on the role of the Development of greenhouse gas inventory and improvement of billion); and manufacturing, with a budget of 110 billion domestic financial services sector. 0.04 emissions data Kenyan shillings ($1.2 billion).41 The government has The National Climate Change Action Plan, also drafted Measuring, reporting on & monitoring forestry emmisions & sinks .62 allocated about 20 percent of its budget annually to energy in 2013, estimates that the total investment required and transport infrastructure,42 and identified a further Mainstreaming of low-carbon development options into planning 0.02 for climate-change mitigation up to 2030 is between infrastructure funding gap of between $2 billion and $3 Total cost Ksh 1372-1774 1.4 trillion and 1.8 trillion Kenyan shillings ($15 billion billion per year over the next 10 years.43 and $19 billion). It says another 638 billion Kenyan Total Ksh equivalent for next five years (US$4,596-5,815 million 391-495 As demonstrated in the above text box, the MTP2 shillings ($7.5 billion) is needed for adaptation measures equivalent) recognizes that climate change is one of its main in the five-year period of 2013–2017 alone.47 The Total US$ equivalent to 2030 16-22 billion implementation risks. It states that “environmental plan identifies priority mitigation actions and priority conservation and management of natural capital is pivotal adaptation sectors for this investment (see tables). SOURCE: Government of Kenya (2013), National Climate Change Action Plan to the socio-economic development of the economy.”44 14 Chapter 2 Chapter 2 15 megawatts (MW), half of which will come from renewable To address the infrastructure funding gap, all types of FIGURE 3: SOURCES OF INVESTMENT CAPITAL sources and about a quarter each from non-renewable investment need to be tapped to create appropriate vehicles sources and nuclear.52 Kenya was the first African country that can compete with the traditional sector in terms of risk 12 12 to tap geothermal power and the largest producer of profile and returns. Bringing together capital and know- geo-energy on the continent, initially spurred by the how from the public and private sectors will be important, 10 10 upfront investment of $1 billion by the state’s Geothermal particularly for large-scale infrastructure projects. The Development Company.53 PPP Act established a new legal framework to enable (Percent of GDP) 8 8 Foreign Direct Investment (% GDP) PPPs in infrastructure to be pursued. As of May 2015, Other incentives for renewable energy include feed-in 6 6 Domestic Savings (% GDP) the government’s PPP Unit had approved 71 priority PPP tariffs, the Energy Management Regulations, and Solar Official Development Assistance (% GNI) infrastructure projects (see Annexure F). 4 4 Portfolio Equity Inflows Water Heating Regulations. Some of the green energy developments already under way include the 300MW Lake Apart from the geothermal and large-scale wind power 2 2 Turkana Wind Power Project, the largest wind farm in sectors, green projects in other industries are limited, Africa and the single largest private investment in Kenya’s and existing investment opportunities are not sufficiently 0 0 history,54 and the Olkaria geothermal power plants (I, supported or promoted. For domestic inclusive green 2005 2006 2007 2008 2009 2010 2011 2012 II, III, and IV), with about 300MW in total capacity.55 industries to develop, and for existing industries to Project investors include government, development banks, become more environmentally sustainable, all sectors and foreign banks, and private equity funds. In many cases, companies, from start-ups to large corporations, need to SOURCE: World Bank (2013), World Development Indicators50 concessional funding has been used to reduce risks for innovate and invest. investors and allay concerns about development partners’ SOURCES OF CAPITAL The private sector and the Kenyan government, through lack of track record and high initial costs (see case study in various sources of international funding, are supporting Annexure E). A list of additional investment projects (green Vision 2030 seeks to mobilize additional and more effective Although the majority of capital is expected to come from business development centers such as the Climate and non-green) approved by the government’s PPP Unit investment using a higher domestic savings rate. As per external sources, domestic savings are important. Kenya’s Innovation Center at Strathmore University and the appears in Annexure F. the MTP2, the government will continue to borrow from domestic savings are low, standing at about 6 percent of Cleaner Production Center hosted by the Kenya Industrial domestic and external sources, with the latter being largely GDP in 2013.49 This suggests potential for savings growth. ADDRESSING THE FUNDING GAP Research and Development Institute. The Greening on concessional terms, targeting a 30:70 domestic:external Domestic investors have a stronger stake in the country’s Kenya Initiative (a flagship Vision 2030 program) and ratio.48 Kenya successfully issued domestic infrastructure Participation by both domestic banks and institutional development, and may have a longer-term outlook and the National Environment Management Agency, the state bonds, with significant uptake in 2008, 2009, and 2012 investors in the infrastructure sector, green or otherwise, deeper appreciation of local challenges and opportunities agency responsible for environmental management in at a total value of 90 billion Kenyan shillings ($1 billion). has been limited. Globally, investors have traditionally than their external counterparts. In addition, domestic Kenya, are promoting local green business innovation and In 2014, the government launched its first Eurobond, been exposed to infrastructure through government investment is not as vulnerable to short-term shifts in job creation. However, long-term funding at scale is needed successfully raising $2 billion for flagship projects in bonds, listed equities, company bonds (construction, global risk appetite. for such critical incubators to be sustainable (see Annexure transport, energy, and agriculture. utility, and telecommunications), or infrastructure private G for a list of potential inclusive green investment themes equity funds. However, it is increasingly suggested that across sectors). infrastructure projects need direct investment through participation in project finance, PPPs, and other Barriers to identifying/scaling up inclusive green sectors, 2.3 Green and Inclusive Investments in Kenya investment vehicles.56,57 as suggested by interviewees and roundtable participants, include the following:60 INCLUSIVE GREEN SECTORS by information and communications technology, and To date, international banks have been the most prominent manufacturing. Most of these sectors are also identified in providers of private capital in infrastructure investments Comparatively better returns in established sectors: •  Kenya does not have a central comprehensive source of the National Climate Action Plan as sensitive to the effects globally,58 but institutional investors and domestic banks Investors look for investments with good returns. information on inclusive green investments or a project of climate change, making them priorities for inclusive have the potential to become significant sources of capital Traditional sectors typically offer more attractive pipeline across all asset classes. Of the priority sectors green development. in this area, including for resilient green infrastructure. returns than green projects, which tend to be in new set out in the MTP2 (agriculture, livestock, and fisheries; This is particularly important in the wake of the global sectors that have no track record, are associated with trade; manufacturing; business process outsourcing To date, the Kenyan government has focused on financial and economic crisis, as investment flows from higher risk, and require longer investment horizons. and information-technology-enabled services; oil and incentivizing the development of renewable energy, with other sources have slowed, government finances have other minerals; and infrastructure), the largest planned a focus on geothermal, wind, and biomass.51 By 2030, become more stretched, and some multilateral development investment projects are in infrastructure, followed it aims to increase total installed capacity to 20,000 banks are reaching their capacity to intervene.59 16 Chapter 2 Chapter 2 17 Limited investment-ready green pipeline: Green •  According to banks surveyed in a recent research paper • Encourage financiers to help companies shift their focus inclusive projects typically need more work before they by the Kenya Bankers Association, the lack of consistent from tick-box compliance to developing a business are investment-ready because they are in new sectors enforcement of environmental and social laws is the second case for environmental and social management, where and often led by less-established entrepreneurs. Deals most important constraint to sustainable banking.62 gaps and potential improvements in their processes are are often not packaged and presented appropriately to identified. Banks could offer related products such as investors, and there is limited capacity and expertise to Kenya’s environmental and social legal and institutional energy-efficiency loans to support implementation. do so in the market. framework is robust on paper, but implementation and enforcement weaknesses mean that there is often a gap • Create support for public consultation and awareness No inclusive green pipeline database: The lack of •  between statutory requirements and operational practices. campaigns to increase awareness of environmental and comprehensive database makes it difficult to assess the This represents a risk for investors.63 The framework’s social issues. Kenya’s new Constitution emphasizes the size, type, and financing needs of potential projects in main elements include the Environmental Management importance of consulting with communities on new Kenya. and Coordination Act; subsidiary legislation in the areas of developments and raising awareness of environmental water quality, waste management, controlled substances, and social risks and opportunities. Interviewees and roundtable participants suggested a range biodiversity, wetlands, rivers, and seashores; environmental of possible solutions, including the following:61 • Coordinate with the National Environment impact assessment regulations; the Occupational, Safety, Management Authority and other relevant agencies and • Build on experience in the geothermal and wind sectors, and Health Act (2007); the Wildlife Management Act ministries on data. A number of emerging countries where incentives were offered to promote new projects, (2014); and the specialized Environment and Land Court. have adopted mechanisms to coordinate environmental and replicate these to encourage inclusive green Studies conducted64 suggest that reasons for weak and finance ministries, and banking regulators, to development in other sectors. enforcement of environmental and social obligations ensure information exchange, and to provide mutual • Ensure that the cost of environmental degradation include: support in the investigation and enforcement of and social impact is accounted for through taxation environmental regulations. and regulation, such as environmental taxation and • Light penalties that have not acted as deterrents. increased application of the polluter-pays principle in • Lack of enforcement capacity and funding in relevant the Environmental Management and Coordination Act. agencies, which in turn has hampered the effectiveness This funding can be used to incentivize and promote an of environmental impact assessments and annual audits. inclusive green economy. • Lack of public awareness/engagement, and a weak • Create additional fiscal incentives to channel capital civil society movement that does not help bring public to the inclusive green economy, such as guarantees interest cases to court. backed by the government (the Central Bank of Kenya) and international development banks, and regulatory The studies cited above discuss a range of potential support for a lower risk weighting/adjustment to capital solutions, including: adequacy requirements for such projects. • Strengthen enforcement of environmental and social • Continue to tap public and international funding to regulation, such as increased application of the polluter- commercialize inclusive green start-up companies and pays principle under the Environmental Management provide support for entrepreneurs (such as business and Coordination Act,65 which may increase investor plan writing and investor pitches) to make them focus on potential liabilities. Regulatory developments investor-ready. in emerging markets are making banks and investors liable for the environmental and social consequences COMPLIANCE WITH EXISTING of their investments, creating strong incentives to ENVIRONMENTAL AND SOCIAL REGULATION incorporate sustainability considerations into risk Given the volume and scale of proposed infrastructure assessments. development, and Kenya’s targets for economic growth • Extend liability for sustainability impacts such as across all sectors, basic compliance with existing pollution to lenders and investors. environmental and social laws and regulations is critical. 18 Chapter 2 Chapter 2 19 3.1 Banking Sector MARKET COMPOSITION record and a higher level of risk, potentially requiring a longer investment horizon. A compounding factor in the The Kenyan banking sector is sophisticated, competitive, Kenyan market is that the corporate debt market is still and diversified, making it fertile ground for innovation underdeveloped and long-dated corporate debt issuances and product development. The top commercial banks’ Chapter 3: The Kenyan Financial Sector services include traditional commercial banking, are less common (corporate debt market capitalization was only 2 percent of GDP in 2014).73 As a result, listed investment banking, insurance services, microfinance, companies, including banks, rely on short-term debt, custodial services, private equity ventures, and Kenya’s financial sector has grown significantly and is Although banking dominates the financial sector, which is relatively expensive and tends to create a short- engagement with capital markets to raise long-term integrated into the regional and international economy. accounting for 71 percent of total assets excluding term outlook. funding. Its subsectors include banking, capital markets, insurance, capital markets,67 pension and insurance funds have pensions, safety nets, and resolution institutions (such grown significantly and are emerging as potential Product innovation As of December 2014, the sector comprised the Central as the Kenya Deposit Insurance Corporation), financial important investors in the Kenyan economy. The Kenyan banking sector has led the way for mobile Bank of Kenya as the regulatory authority, 44 banking markets infrastructure (such as the Nairobi Securities money transfer systems, which has contributed to the institutions (43 commercial banks and one mortgage Kenya’s Vision 2030 envisions a vibrant and globally dramatic increase of financial inclusion rates in Kenya Exchange, stock brokers, and rating agencies), and savings finance company), eight representative offices of foreign competitive financial sector that creates jobs and promotes (67 percent of the adult population in 2013 used some and credit cooperatives. The financial sector is regulated banks, nine microfinance banks, two credit reference a higher savings rate. Establishing the country as a form of formal financial services, compared to 27 percent by the Retirement Benefits Authority, the Insurance bureaus, 13 money remittance providers, and 87 foreign regional financial hub is a key strategic objective for the in 2006).74 The industry has evolved since the successful Regulatory Authority, the Capital Markets Authority, the exchange bureaus. Of the 44 banking institutions, 30 government, as articulated in Vision 2030, the MTP2, mobile payment system M-Pesa was launched in 2007, Central Bank, and the Savings and Credit Cooperative banks are locally owned (three with public shareholding and the strategic plans of the Central Bank and the and today mobile money platforms are being used to Societies Regulatory Authority, and work is under way to and 27 privately owned), while 14 are foreign owned.68 Capital Markets Authority. Pushing for green and inclusive offer medical insurance and microloans; transfer money create a financial services “super regulator.” The total value financial and capital markets will help the country meet The sector is fairly stable and performance continues to a prepaid credit card; and pay parking, electricity, of assets held by banks, pensions, insurance, and credit these goals and sustain regional leadership over the long to improve, with the size of net assets increasing from and water bills. This demonstrates the Kenyan banking cooperatives accounted for 108 percent of the value of term. Kenya’s financial system has a fundamental role 2.7 trillion Kenyan shillings ($28 billion) in December sector’s innovative nature and the financial market’s GDP in 2013, up from 96 percent of total assets excluding capital markets in 2012. The total value of equity market to play in allocating capital to a more inclusive green 2013 to 3.2 trillion Kenyan shillings ($30 billion) in ability to make rapid policy changes. capitalization amounted to 51 percent of GDP in 2013.66 economy and creating awareness about this shift. December 2014.69 Although Central Bank interest Commercial green lending is limited but emerging, rates have been kept relatively stable and low at about with CFC Stanbic and Cooperative Bank providing 8 percent, this has not fully been passed on to the TABLE 6: THE FINANCIAL SECTOR’S SHARE OF GDP green credit lines worth 3.3 billion Kenyan shillings consumer, and lending interest rates remain relatively ($33 million) for energy and resource-efficiency projects75 high, with commercial bank prime rates of about 2012 2013 and Housing Finance’s green mortgage credit line of 18 percent over the past five years.70 Banking institutions’ GDP/SUB-SECTOR ASSETS 1.75 billion Kenyan shillings ($20 million).76 Green Million Ksh Share of GDP Million Ksh Share of GDP market shares continued to be dominated by the 10 lending also occurs as part of mainstream lending, but it largest commercial banks, which accounted for about Nominal GDP 3,403,547 N/A 3,797,988 N/A may not be specifically defined as such and is therefore 70 percent of net assets held by banking institutions as Banking assets 2,330,335 68.47% 2,703,394 71.18% not separately quantified at present. Other emerging of December 2013.71 A list of the 10 largest banks as of areas of product development include financing for Pension assets 548,700 16.12% 696,680 18.34% December 2014 is included in Annexure H. climate-change mitigation and adaptation projects, green Insurance assets 311,000 9.14% 366,252 9.64% INCLUSIVE GREEN FINANCE IN THE infrastructure projects, micro-lending, and lending to Savings and credit cooperative KENYAN BANKING SECTOR small-scale farmers and small businesses. 93,765 2.75% 335,437 8.83% organizations assets Kenya’s banking sector is affected by the global Although the largest banks have a long history of Total 3,283,800 96.48% 4,101,763 108.00% regulation of capital adequacy requirements providing financial contributions in areas critical to Equities market capitalization 1,272,002 37.37% 1,920,719 50.57% (Basel II, III), which drives a short-term lending focus.72 social and environmental sustainability in Kenya, This is an issue for long-term financing in general and this has typically not been part of their mainstream for green inclusive projects in particular. These projects financial products, but rather as charitable contributions SOURCE: Central Bank of Kenya (2013), Kenya Financial Stability Report 2013 are typically new types of investments with no track through the banks’ foundations or their corporate social 20 Chapter 3 Chapter 3 21 responsibility budgets. For example, Barclays Bank of inclusive green lending products, moving these efforts Banks use diverse frameworks and methodologies for IFC.80 In the interviews and roundtable meetings, both Kenya spent 26 million Kenyan shillings ($260,000) in that were previously part of banks’ corporate social their sustainability risk assessments. These frameworks the Central Bank and the Bankers Association stated 2014 on moving more than 100,000 rural establishments responsibility into their mainstream commercial business depend on the individual banks’ policies, unless they have that implementing and enforcing the principles would to solar energy. Equity Bank, National Bank, and activities. However, this is currently taking place in the development finance institution investors, in which case ideally be done through a step approach, starting with Kenya Commercial Bank have supported important form of isolated events and not at the scale required to adherence to standards such as the IFC environmental and overseeing the initial process of capacity building and environmental conservation in partnership with local help the Kenyan inclusive green economy grow. social performance standards would be in place. Kenya’s internalizing the principles, followed by implementation communities and Equity Bank has supported small-scale foreign-owned banks have signed the Equator Principles and direct regulation (on credit policy, risk assessment, Risk assessment farmers’ investments in biogas technology.77 (Barclays PLC Citigroup Inc., Standard Chartered and directed lending) over time. This will allow the The Kenyan economy is highly dependent on natural Bank PLC, and HSBC Holdings PLC), but no Kenyan banks to build the required capacity for effective Many Kenyan banks have also made strides in their resources, which increasingly exposes banks to financial incorporated bank has subscribed to the Equator Principles and meaningful implementation. It will also give the internal sustainability management systems and and economic risks associated with environmental and or signed other international initiatives such as the UNEP regulator time to build the internal capacity of its sustainability risk assessments.78 This indicates that with social effects across their portfolios. Apart from personal Finance Initiative. Adopting a market-wide cohesive risk supervision arm. the right supporting market and regulatory framework, loans, the largest proportion of banking industry loans assessment framework would create consistency and a level banks could also move quickly to develop new green and advances were channeled through the trade (which • In its role as an enabler of investment in green sectors playing field. Because sustainable finance is a new focus, investment products. Banks participating in the interviews is dominated by agricultural exports), manufacturing, such as renewables (and large-scale infrastructure banks will need to build their expertise and capacity in and roundtable discussion expressed that a potential and real estate sectors,79 all of which are sensitive to in general), the Central Bank of Kenya is open to this area. business opportunity is emerging to create commercial environmental and social effects. a discussion with the market on how to implement POLICY AND REGULATION suitable measures on a more systematic basis to allow for greater participation by Kenyan banks in Financial sector sustainability leaders see supportive policy such investments. In addition, the National Treasury TABLE 7: SECTORAL DISTRIBUTION OF GROSS LOANS, DECEMBER 2014 and regulation as critical for the success of sustainable Finance Bill has proposed increased capital levels/ inclusive green finance. To establish a cohesive approach consolidation to strengthen the banking sector SECTORS GROSS LOANS (MILLION KSH) % OF TOTAL to sustainability across the banking sector, the Kenya and allow for greater participation in large-scale Bankers Association and the commercial banks in Kenya infrastructure projects. Agriculture 80,195 4.1 have developed a set of universal principles that will guide Manufacturing 236,962 12.2 banks in balancing their immediate business goals with BARRIERS AND PROPOSED SOLUTIONS Building and construction 84,559 4.4 the economy’s future priorities and socio-environmental Innovation in Kenya is currently isolated and ad hoc. concerns (see box on Sustainable Finance Principles). These Mining and quarrying 18,783 1 Policies and regulations are needed to address market gaps principles are the first, industry-led sustainable finance Energy and water 88,692 4.6 and encourage systemic market innovation, consistent guidelines in Africa. They provide much-needed guidance assessment frameworks, and awareness building. Proposals Trade 375,525 19.3 on environmental and social credit policy, appraisal and from the interviews and roundtables include: Tourism, restaurants, and hotels 34,249 1.8 risk assessment, and product innovation. • Effective regulatory enforcement and monitoring Transport and communications 150,488 7.8 Kenya’s progress on financial inclusion has been the result of the market-led Sustainable Finance Principles, of private sector innovation, supported by pragmatic policy Real estate 282,396 14.6 including establishing risk assessment frameworks for and regulation. Similarly, private sector innovation is Financial services 72,612 3.7 real risk-adjusted returns. This will ensure that the emerging in the sustainable finance/risk assessment space, environmental and social risks of a project are taken Personal/household 516,320 26.6 but there is no specific regulation in place at present. The into account. Total in Ksh million 1,940,781 100 discussion around regulatory change is emerging in two main areas: • Ensuring that the process from capacity building to Total in $ million 21,564   the adoption of the principles is clear, time-bound, and • The Central Bank of Kenya and the Kenya Bankers enforceable. Effective enforcement is critical – very few Association are forming a partnership to promote the market-led principles globally have been successful in SOURCE: Central Bank of Kenya (2015) effective implementation of the market-led Sustainable terms of implementation and credibility, because they Finance Principles and have also recently joined the lack an effective enforcement mechanism. global Sustainable Banking Network supported by 22 Chapter 3 Chapter 3 23 • Shifting the current focus on environmental and social • Looking at the regulation and enforcement of Sustainable Finance Principles (as taken directly from the Kenya Bankers Association) sustainability as part of corporate social responsibility environmental laws and policies, at both national to commercial product development. and local government level, so that the government PRINCIPLE 1: FINANCIAL RETURNS VERSUS ECONOMIC VIABILITY is equipped to enforce county bylaws and business • Developing and using risk-guarantee products and and social policies that create an enabling environment Financial institutions should consider both the financial returns and economic viability of their activities. insurance to allow for investment in new sectors with for investment. Policy makers and regulators could Economic viability should be factored into the decision making process, particularly in the financing of higher perceived risk. commercial activities. The Guiding Principle is that financial viability is a necessary but not a sufficient also consider the advantages of extending liabilities condition for sustainable economic development that would increase commercial opportunities and hence • Coordinating across the financial services sector to for sustainability effects to financiers through promote long-term growth prospects. agree and establish high-level policies and principles lender liability regulation. This is discussed further for long-term sustainable investment. South Africa, for in section 2.3. PRINCIPLE 2: GROWTH THROUGH INCLUSIVITY AND INNOVATION example, has incorporated inclusive green sustainability Financial sector players seek to grow and enhance service delivery for the markets they currently serve, as well into its sector programs and established a sector-wide as reach out into diversified markets, thereby promoting financial deepening within untapped segments with Financial Sector Sustainability Charter, enforced by the economic potential. The Guiding Principle is that financial institutions in pursuit of growth should innovate National Treasury. and leverage on existing and emerging technology to reach potential markets while economically empowering communities. Sustainable Finance Priorities (as taken directly from the Kenya Bankers Association) PRINCIPLE 3: MANAGING AND MITIGATING ASSOCIATED RISKS Economic development is intertwined with social and ecological concerns; therefore, financiers are materially 1. COMPREHENSIVE RISK MANAGEMENT affected by these concerns despite the fact that these risks may be considered as indirect. The Guiding Principle is that firms should seek to mitigate social and environmental risks associated with their financing activities While utilizing capital responsibly to create economic value and deliver returns to shareholders, sector players through client engagement and effective policies and risk assessment procedures; and in addition, firms should should be effective at the management and mitigation of economic and associated risks in both the short run actively measure and report on the financial impact of these risks to their business performance. and long term period. Economic risk: As custodians of capital, anticipating and responding to the impact of macroeconomic PRINCIPLE 4: RESOURCE SCARCITY AND CHOICE conditions, including fiscal and monetary policy, government regulation, political stability, and circumstances across all economic sectors, is core to the viability of the institution, as well as the sector at large. In meeting present needs, financial institutions should ensure optimal management of resources, including financial resources and natural capital, to avoid compromising future generation needs. The Guiding Principle is Associated risk: Through policies and risk assessment procedures, firms should seek to mitigate social and envi- that optimal resource management is realized through productivity and efficient utilization of resources guided ronmental risks associated with their financing activities. by comprehensive opportunity cost assessment. 2. BUSINESS PRACTICE, LEADERSHIP AND GOVERNANCE PRINCIPLE 5: BUSINESS ETHICS AND VALUES Ethical conduct reinforced by corporate values is the foundation of any financial service firm. Promoting enhanced oversight of business practices at both the Management and Board levels contributes toward effective, resilient organizations. The quest for ethical practice, efficiency, productivity, and waste • The leadership, mainly the Board and the Chief Executives, should set the tone and actively minimization should be fostered from the leadership and enabled by adequate governance structures. oversee business practices. The Guiding Principle is that the leadership of financial institutions should ensure the organization to deliver returns in the long term, and in a responsible manner that sees optimal utilization of resources toward • A robust framework should be in place to underpin the implementation of ethical conduct. achieving positive externalities. • Reporting is a key component. Firms should work to publicize the positive impact of sustainability initiatives that institutions are advocating and achieving in their day-to-day activities. Organizations that openly disclose and embed their core values and priorities tend to have better run 3.2 Retirement Funds institutions. MARKET COMPOSITION and $3 billion in assets under management respectively)81,82 3. GROWTH THROUGH INCLUSIVITY AND INNOVATION are both growing by about 20 percent per year and are As noted previously, the Kenyan financial sector is led by emerging as potential important long-term investors in Increasingly competition within the sector and from competing sectors is driving financial service players to banks, which are restricted in their ability to finance the continually innovate and leverage on existing and emerging technology to respond to and anticipate dynamic the Kenyan economy. inclusive green economy due to global regulation on capital market needs. adequacy requirements (Basel II, III). As a result, banks Kenya has the third largest pension fund market in are driven by a short-term lending focus and are unable to Sub-Saharan Africa after South Africa and Nigeria. The meet the financing needs of the inclusive green economy on market is relatively sophisticated and is regulated by their own. The pension and insurance industries ($9 billion the Retirement Benefits Authority under the Retirement 24 Chapter 3 Chapter 3 25 Benefits Act (1997). The top 20 pension funds represent INCLUSIVE GREEN FINANCE IN THE inclusive green space, because individual pension funds are incidental rather than strategic and systematic. One of about 50 percent of total pension fund assets (see Annexure RETIREMENT FUND SECTOR may not have the size and capacity to evaluate and make the few examples is the Local Authority Pension Trust’s I). The largest fund is the National Social Security Fund, such investments on their own, but would invest using investment in solar street lighting (see case study below) Kenya is among the emerging markets that are leading with $1.5 billion in assets under management. In addition funds and other investment instruments. and the significant investment by the Kenya Power and efforts to increase coverage of pension savings, including to the top 20 pension funds, the sector has more than Lighting Pension Fund and the Nation Media Group in a in the informal sector. This was initiated under the most There are some limited examples of green and low-income 1,500 registered retirement funds, the majority of which new East Africa-focused fund manager.88 recent regulatory reform of the Retirement Benefits Act, housing investments in pension fund portfolios, but they are small and have an asset base of less than 5 billion initiated in 2013.85 The Retirement Benefits Authority’s Kenyan shillings ($55 million).83 This means that each fund 2014–2019 Strategic Plan aims to increase the working has limited capacity to build expertise and invest in asset population’s pension coverage (including informal classes beyond the current focus on government securities. TABLE 9: REGULATORY INVESTMENT POLICY GUIDELINES sectors) from 15 percent to 20 percent by 2019.86 In The sector is moving towards consolidation – a current light of this, recently established pension funds offering proposal in the Finance Bill (2015) aims to consolidate ASSET CLASS MAX LIMITS “micro-pensions” in informal sectors include the Mbao the 47 existing pension schemes into one scheme for the Pension Fund launched by the Retirement Benefits Domestic fixed income 40% counties. In addition, some funds are already moving to Authority, as well as M-Pension launched by a subsidiary umbrella schemes. Domestic equities 30% of the Local Authority Pension Trust Retirement Fund. Compared to other markets, such as South Africa, Kenya Individual membership in retirement benefits plans has Offshore (global listed equities) 10% has a large number of fund managers and other service grown remarkably over the past few years, increasing by Alternatives (private equity, 10% providers, including asset consultants, custodians, and 250 percent from 25,289 members in June 2010 to 88,509 property, infrastructure, derivatives) administrators, relative to the size of the institutional members in December 2012,87 leading to a fast-growing asset base. This is an area of product development that is Cash 10% asset base. The sector is regulated by the Capital Markets Authority under the Capital Markets Act (1989) and the well under way and supported by regulatory reform. Total 100 Central Depositories Act (2000). The table below segments There has been limited participation by retirement funds in the market into the different players who service the inclusive green investments to date, even though there are country’s retirement funds84 and the insurance companies SOURCE: Retirement Benefits Authority (2014) no macro-regulatory barriers hindering their participation. in the market (see Annexure J for a list of the 10 largest The Retirement Benefits Authority’s investment policy fund managers). A challenge cited during several interviews guidelines allow for broad asset allocation/diversification, with fund managers and administrators was that the including investment in alternative asset classes such TABLE 10: AVERAGE PENSION FUND ASSET ALLOCATION HELD BY FUND MANAGERS AS AT DECEMBER 2013 fragmented and somewhat under-regulated service provider as private equity, asset-backed securities, real estate market, as well as the prevailing practice of “undercutting” investment trusts, collective investment schemes, and green ASSET CLASS MILLION KSH % OF TOTAL ASSETS and extremely low fees, does not foster innovation, bonds. These investments are already incentivized through sustainability, and long-term thinking among service Government security 217,166 38 capital market guidelines and tax breaks (see further detail providers. in Section 3.4). Quoted equity 150,299 27 Many inclusive green economy investments are likely to Guaranteed 71,475 13 TABLE 8: LIST OF REGISTERED SERVICE PROVIDERS AS OF DECEMBER 2013 fall under alternative asset classes, including private equity Immovable (property) 38,959 7 infrastructure funds, private equity cleantech funds, or Fixed deposits 33,139 6 STAKEHOLDER NUMBER securitization of inclusive green assets. But, in reality, the majority of assets are invested in government bonds Fixed income 29,785 5 Fund managers 16 (about 33 percent at the end of 2013), with almost none in Offshore 15,290 3 alternative asset classes such as private equity. Custodians 10 Cash, demand call 6,361 1 Administrators 32 Given Kenya’s rapidly growing asset base, the need for Unquoted equity 2,364 0 increased asset diversification will likely be one of the key Total 58 drivers for new green and inclusive product development. Total 564,838 100 Fund managers are expected to become critical enablers SOURCE: Retirement Benefits Authority (2014), Annual in the development and management of investments in the SOURCE: Retirement Benefits Authority (2013) Financial Statements 26 Chapter 3 Chapter 3 27 investment policy statement that includes a consideration of skill and capacity, because fund managers would be of ESG factors, and there are no signatories to relevant more autonomous and able to reach economies of scale. Lighting Kenya’s counties: Pension fund investment in green energy international initiatives such as UNEP finance Initiative’s Improve the efficiency of the training and •  Principles for Responsible Investment. The Local Authority Pension Trust is the second largest pension fund in Kenya, with assets of 28 billion Kenyan professionalization of trustees as fund operations reach shillings ($280 million). The Local Authority Pension Trust retirement fund and the Kenya county councils BARRIERS AND POTENTIAL SOLUTIONS economies of scale during the consolidation. At present, have formed a pioneering joint venture to finance and develop green street lighting across 19 counties. GIZ is trustees lack investment expertise. ESG could be an As stated above, fragmentation and short-term barriers providing technical support for this project. integral part of the training. in the retirement and fund management sectors lead to a short-term investment outlook, which hinders a Engage with policy makers on the interest rate policy •  As Kenya transfers administrative power from the federal government to local government, it is also working longer-term product development. Regulatory reform to adjustment to lower the high returns (returns of 12 to improve local infrastructure, schools, hospitals, and other sectors. Among other things, the counties are consolidate the pension industry will be a key driver for percent, compared to inflation of less than 6 percent) working to improve local security and accessibility by improving street lighting in cities. In many cases there is change. Market stakeholders have made the following on government bonds to encourage diversification and no street lighting at all. In doing so, the county governments are trying to move away from traditional energy suggestions: channel capital to the inclusive green economy. sources, and are exploring the feasibility of green technology, both in terms of environmental sustainability, reliability of supply, and long-term cost efficiency. Create a regulatory requirement for ESG integration •  Continue to consolidate the pension fund industry at •  into the investment process and set a minimum required two levels. Small funds (about 1,500 plans with less The counties, through their umbrella organization, identified the Local Authority Pension Trust as their partner allocation for developmental mandates to improve than $55 million in assets under management) should for this venture. To date, one county, Narok, has installed street lighting as a test case, with the Local Authority awareness and expertise in inclusive green investment. move from standalone funds to umbrella funds. The Pension Trust paying the upfront costs using its corporate social responsibility budget (about 250,000 Kenyan The largest 20 pension funds could act as champions top 20 largest funds should retain individual pension shillings per pole). The revenue model is based on selling commercial advertising space on the lamp poles and and lead the implementation using their internal funds, but move their segregated money into pooled the return on investment has been above market rate. Based on this successful test case, the Local Authority capacity. investment vehicles. At both levels, this will address the Pension Trust and the county councils are developing a joint financing model to scale up this investment prevailing short-term reporting requirements and lack across the counties. POLICY AND REGULATION and corporate debt). During the interview process it was TABLE 11: EXAMPLE OF INCLUSIVE GREEN INVESTMENT THEMES IN AN INSTITUTIONAL INVESTMENT PORTFOLIO suggested that the pension industry should engage with According to the Retirement Benefits Authority’s policy makers to lower the real interest rate on traditional 2014-2019 Strategic Plan, pension savings are expected ASSET CLASSES EXAMPLES OF POTENTIAL SUSTAINABLE/ debt assets to encourage proper diversification and channel GREEN INVESTMENT THEMES to increase from 17 percent to 30 percent of GDP by more capital into the inclusive green economy. 2019, playing an important role in raising institutional Cash N/A capital to increase Kenyans covered by pension savings, There is currently no provision in the pension policy or Fixed income Green bonds, development bonds, infrastructure bonds deepening the financial markets, and contributing to regulation on the relevance of ESG factors in investment Broad ESG integrated funds, clean energy funds, funding the country’s development needs.89 The 30 percent decision making. Environmental risk factors are briefly Equities sustainable agriculture funds projection is still below the average rate of developed covered in the Retirement Benefits Authority’s Strategic Alternative investments Private equity/venture capital funds targeting small market pension savings to GDP (the Organization for Plan 2014-2019, but the plan does not make the link to (private equity, infrastructure, businesses, cleantech entrepreneurs, women Economic Cooperation and Development country average investment management: “Environmental (ecological) property, hedge funds) entrepreneurs is 70 percent),90 but it continues on an upward trajectory factors: The effects of climate change affect food Commodities Fairtrade and is an important indicator of a country’s ability to production in Kenya as elsewhere. Coupled with risks invest in infrastructure and other developmental projects. Property (immovable and shares) Green buildings, low-income housing arising from pollution, life expectancies and consequently saving for retirement will be adversely affected. National Responds to investment opportunities arising from Policy and regulation can be used to drive consolidation Developmental mandate the developmental agenda, e.g., green infrastructure, Environmental Policy requires institutions to conserve the and enable fund managers and retirement funds to move small business and green job growth environment and address adverse effects of climate change. capital into the green and inclusive economy. Retirement In this regard, Retirement Benefits Authority will consider funds are achieving high real returns – between 4 percent environmental conservation initiatives, including but not SOURCE: Adapted from the Responsible Investment and Ownership Guide – A Guide for Pension Funds in South Africa (2013) and 6 percent above inflation – through investments in limited to tree planting and use of green technology.” In traditional debt instruments (treasury bills, treasury bonds, addition, there are currently no pension funds with an 28 Chapter 3 Chapter 3 29 3.3 Insurance Funds Pension fund ESG regulation in South Africa and Namibia MARKET COMPOSITION and Morocco).95 The industry has primarily focused on ESG integration and ESG mandates are two separate measures that can operate in conjunction with each other. the corporate and property market to date. Developing Kenya had about 5,000 licensed insurance fund providers insurance products for low-income earners (micro- ESG integration refers to the integration of environmental, social, and governance criteria into investment as of December 2013, including insurance companies, insurance), who make up the majority of the Kenyan insurance intermediaries, and other service providers.91 analysis based on the belief that ESG issues drive financial returns. population, is an emerging area for the industry. The industry’s asset base has grown significantly, doubling In response, the Insurance Regulatory Authority has South Africa has implemented policies and regulations that aim to achieve this for pension funds. The preamble in value from 150 billion Kenyan shillings in 2008 to drafted the Micro Insurance Policy Paper (2014) in of Regulation 28 of the Pension Funds Act (1956) states that “a fund has a fiduciary duty to act in the best 350 billion Kenyan shillings in 2013. A list of the largest preparation for the development of a legal and regulatory interest of its members whose benefits depend on the responsible management of fund assets. This duty insurance firms is included in Annexure K. framework to adequately govern and allow for easy to supports the adoption of a responsible investment approach to deploying capital into markets that will earn Similar to the pension fund asset base, the country’s understand, cost-effective products in this specialized adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. $3 billion insurance asset base has grown by about market segment. In addition to micro-insurance in Prudent investing should give appropriate consideration to any factor which may materially affect the mainstream areas such as health and accidents, a small 20 percent annually for the last five years92 and is emerging sustainable long-term performance of a fund’s assets, including factors of an ESG character. This concept applies as an important long-term investor in the Kenyan economy, number of insurance firms provide new products in areas across all assets and categories of assets and should promote the interest of a fund in a stable and transparent mainly supported by products with long-term capital such such as crop and livestock insurance for small-scale environment.” as life and retirement insurance. The sector has a large farmers (which helps farmers access bank credit), including number of small firms and service providers, but, to a insurance for nomad pastoralists for foliage availability, The regulation came into force in July 2011, with phased implementation over a number of years. Its effect on larger extent than in the pension sector, consolidation is weather, warehouse facilities, and so on. investment in the inclusive green economy is still a work in progress. already under way through a combination of company Developmental mandate refers to targeted financial investments into investments/projects that achieve Micro-insurance products tend to focus on inclusivity, mergers and buy-outs. Recently, Old Mutual merged addressing issues such as disaster coverage, financial specified developmental outcomes. Ideally, this should also be in line with the fund’s strategic asset allocation its insurance business with UAP’s financial services, security, poverty reduction, economic growth, and and asset/liability profile, and subject to due diligence and other normal prudent investment standards. health, and insurance business. Following all regulatory improved access to health care for low-income households, and competition approvals, Old Mutual will own up to In 2014, Namibia introduced a pension regulation that set out a minimum requirement for investment in which in many cases is intrinsically linked to green 60.7 percent of the UAP Group.93 Furthermore, a proposed unlisted equities, mandating all pension funds and long-term insurance organizations to place a minimum of growth. For example, uplifting the financial status of regulatory change for industry consolidation was put 1.75 percent of assets in local unlisted investments. small-scale farmers and pastoralists (it is estimated that forward in June 2015 as part of the Finance Bill. The small-scale farming generates 75 percent of Kenya’s In South Africa, the largest pension fund, the Government Employees Pension Fund ($120 billion in assets under consolidation of the industry is an important precursor to agricultural output and employs more than 50 percent of management) has a developmental strategy that aims to place 5 percent of assets in developmental asset enabling inclusive green investment. The average portfolio the rural population)96 will help improve lives and protect classes and an additional 5 percent in African unlisted investments. This has led to increased investment in allocation of Kenyan insurance companies is similar the environment as the ability to invest in sustainable to pension funds, with about 40 percent government these segments of the economy. methods of farming and land use increases, and families securities, 15 percent equities, 16 percent property, can, for example, upgrade their energy sources from At the 4th Annual Africa Conference on investment in infrastructure, Arthur Moloto, Chairperson of the South 15 percent deposits, and 12 percent other.94 No insurance firewood (which, along with charcoal production, is one African Government Employees’ Pension Fund, said that the diversification of its investment portfolio was funds in Kenya have an investment policy statement that of the leading causes of deforestation in Kenya). Apollo guided by its developmental investment policy, which rests on four pillars: considers ESG factors in asset management and investment Investment and Kilimo Salama are examples of East activities. 1. Investments in economic infrastructure. African insurance firms offering innovative insurance INCLUSIVE GREEN INSURANCE products for Kenyan farmers, including insurance of their 2. Investments in social infrastructure (including health care, education, and affordable housing). inputs against drought and excess rain. 3. Investments in sustainability projects. The insurance sector has an important role to play in developing insurance products that support the inclusive Insurance can also be a critical component in reducing risk 4. Investments in enterprise development and broad-based black economic empowerment. green agenda. Although insurance penetration stands in new areas of investment, such as green/infrastructure at just 3 percent of GDP, covering 7 percent of the investments. For example, a leading Kenyan insurance population, Kenya is East Africa‘s largest insurance market company provided insurance for the exploration and and among the top five insurance markets in Africa by drilling of geothermal wells in the Rift Valley. penetration (after South Africa, Mauritius, Namibia, 30 Chapter 3 Chapter 3 31 BARRIERS AND PROPOSED SOLUTIONS telecommunications companies (cell phone towers can FIGURE 4: STOCK MARKET CAPITALIZATION (PERCENTAGE OF GDP) OF SELECTED COUNTRIES host automated weather stations and transmit data). To support product development, market leaders have suggested the following focus areas: An appropriate policy framework is needed to ensure •  that the industry is regulated properly and that those 180  nsurance for small-scale farmers can unlock capital for • I selling financial products are not misleading customers 160 this large but dispersed group in the Kenyan economy. who may be new to insurance products. A certain volume of business is needed for sales in 140 this target market to be viable (for example, in the New product development in emerging areas will •  120 Indian market, at least 20,000 farmers are needed for require massive awareness-raising efforts in the target 100 it to be viable).97 Expanding this product offering will market. Better industry organization and collaboration 80 require collaboration with banks and other financial between the largest insurance firms in Kenya and 60 institutions such as savings and credit cooperatives, the Association of Kenyan Insurers is needed, with support from the Insurance Regulatory Authority in 40 microfinance institutions, and mobile money transfer creating guidelines for appropriate and cost-effective 20 providers to facilitate marketing, distribution, as well as premium collection and claims payment points. products. The level of organization and coordination in 0 a a na t ya il s the Kenyan banking sector, led by the Kenya Bankers na in isi yp sia az itiu in a nd di a re a ile ys ia or e ric a  eveloping feasible products in weather risk insurance • D ha en t n sw a Eg Ke n on e Br r Ch ila In Ko Ch a p Af Association, was highlighted as an example to follow. G g Tu t d au ha al ga th will require massive investment in collecting weather Ar Bo In M T M Si n u So data. The costs of this investment can be shared On the asset management side, continuing to •  through collaboration between insurance firms consolidate the industry to achieve economies of scale, Country and other potential users of such data (aviation, and introducing ESG and developmental investment mandates. 2010 2011 2012 utilities, and mining sectors), in partnership with SOURCE: World Bank World Development Indicators (2015) 3.4 Capital Markets short-term debt in the form of Treasury Bills (26.8 percent) 2014 to 39 listings in 2023; and increasing assets under MARKET COMPOSITION Africa. It has market capitalization of $23 billion and 98 and long-term debt in the form of Treasury Bonds (73.2 management in fund managers’ collective investment plans clear targets under Vision 2030 and the capital markets percent). The return on government bonds has remained in Kenya from $0.36 billion in 2014 to $1.97 billion in As of January 2014, the Capital Markets Authority flagship program to become the gateway for businesses and relatively high at 12 percent. The corporate debt market is 2030. The share of infrastructure investment financed regulated the Nairobi Securities Exchange (where investors in East and Central Africa. comparatively shallow, particularly for long-term debt.99 through the private capital markets (through listed equity, the authority approves public offers and listings of private equity, or bond issues) should increase from 4 securities traded), the Central Depository and Settlement As of December 2014, 61 companies are listed on the main INCLUSIVE GREEN CAPITAL MARKETS percent (134 billion Kenyan shillings) as of January 2014 Corporation, six investment banks, 13 stockbrokers, exchange. The banking sector is the largest single sector, The Capital Markets Authority and the Nairobi Securities to 30 percent (2.4 trillion Kenyan shillings) by 2023). This 18 investment advisors, eight fund managers, one credit followed by large companies in general manufacturing and Exchange are progressive and sophisticated in their efforts will help ensure that Kenya continues to grow as a regional rating agency, one capital venture fund, two collective telecommunications. The exchange is fairly concentrated, to expand the capital markets as a percentage of GDP. The hub for local and international investors.101 investment plans, three authorized securities dealers, and with the top 10 listed companies representing about target, as articulated in the Capital Markets Authority’s four authorized depositories or custodians. The Nairobi 50 percent of market capitalization. Foreign investors POLICY AND REGULATION Master Plan,100 is for equity market capitalization to Securities Exchange was de-mutualized (self-listed) in have increased steadily over the past five years and now increase from 50 percent in 2014 to 70 percent of GDP in In light of these expansion targets, the Capital Markets September 2014, becoming the second African stock represent about 50 percent of shares owned as of December 2030. Other targets include increasing the ratio of equity Authority and the Nairobi Securities Exchange have exchange (after the Johannesburg Stock Exchange) to sell 2014. In terms of the debt market, the share of government market capitalization to GDP from 50 percent in 2014 introduced reforms to increase the confidence of local, shares to investors. securities held by various investors has remained relatively to 70 percent in 2030; increasing the ratio of corporate regional, and international investors, increase the diversity unchanged over the past five years, with banks holding Even though Kenya’s capitalization is small compared to bond market capitalization to GDP from 2 percent in 2014 of investment opportunities, and bring in best practice about 50 percent of the debt issued by government, many high-income developing markets (see figure below), to 40 percent in 2030; increasing listings in the growth governance and structures. Examples include: followed by the local corporate retirement funds sector at the Nairobi Securities Exchange is among the five largest enterprise market segment from one at inception in January 30 percent. In terms of stock composition, the domestic exchanges in Sub-Saharan Africa and the largest in East debt portfolio held in government securities included 32 Chapter 3 Chapter 3 33  armonized rules for debt issuance across the East • H uncertainty regarding the Kenyan Revenue Authority’s African region. application of these tax breaks, resulting in uncertainty about the actual return profile of these investments. This, Sustainable capital market initiatives  uidelines for the development of new investment • G combined with reluctance among institutional investors vehicles, including tax breaks for such vehicles The Nairobi Securities Exchange Diversity Series to venture into new forms of investment, is why there (asset-backed securities and, as recently proposed is limited experience and expertise in structuring and Barclays Bank Kenya championed the Nairobi Securities Exchange Diversity Series, which engaged the in the Finance Bill, tax breaks for green real estate approving such investment instruments. chairs and company secretaries of all listed companies on the stock exchange in a series of dialogues and investment). workshops. The initiative aimed to increase the diversity of company boards in terms of gender, age, disability, • T  he small business listing segment, which launched in BARRIERS AND PROPOSED SOLUTIONS and expertise. At present, most board members have a background in law or accounting. The initiative has January 2014 (the growth enterprise market segment). Given the fact that the green and inclusive growth agenda developed a Diversity Code of Conduct; a self-regulatory compact that is expected to be signed by all companies • T  he Nairobi Securities Exchange Leadership and offers opportunities to support capital market growth listed on the exchange in 2015. Diversity Dialogue Series (see box on sustainable targets, the following recommendations are made: The Capital Market Authority’s Corporate Governance Code and Stewardship Code for Institutional Investors capital market initiatives). • Provide structured market support to bring new • T  he Capital Markets Authority Corporate Governance investment vehicles to market (asset-based securities, The Corporate Governance Code, which will supersede the 2002 Corporate Governance Guidelines, was drafted Code (2014). Through an “apply or explain” infrastructure bonds, and real estate investment after extensive engagement and rigorous input from listed companies, licensed intermediaries, government framework, companies are recommended to report on trusts). While the Nairobi Securities Exchange and the officials, academia, multinational and foreign investors, and global corporate governance experts. The code their material environmental and social risks (see box Capital Markets Authority are ahead of the market, aims to address developments at national, regional, and international levels and strengthen the market against on sustainable capital market initiatives). market players lack the expertise and structural risks that threaten the financial system and stifle private sector dynamism, entrepreneurship, and ultimately, incentives/support to develop these vehicles. These economic growth. The code also moves away from simple compliance and “box-ticking” towards an “apply or  ork on the Stewardship Code for Institutional • W scalable products would allow domestic, regional, explain” approach. Investors (as a pillar of the Corporate Governance and international investors to channel capital to the Code) was initiated in January 2015. The code aims to The new code is organized into seven pillars: board operations and control; rights of shareholders; stakeholder inclusive green economy. encourage institutional investors to responsibly manage relations; ethics and social responsibility; accountability, risk management, and internal control; transparency and oversee assets by engaging with listed companies. • Increase the uptake of integrated reporting and create and disclosure; and supervision and enforcement. It proposes principles and makes recommendations under a level playing field.  he Nairobi Securities Exchange joined the UN-led • T each pillar. Sustainable Stock Exchange Initiative in 2015. • Ensure that the Stewardship Code for Institutional Under the “apply or explain” ethos, the Corporate Governance Code recommends that companies report on their Investors includes provisions for long-term risk Between 2005 and 2008, the government also put in place material environmental and social risks; it is not strictly a listing requirement. The number of sustainability assessment, investment horizons, and investment a number of fiscal incentives for issuers and investors in reports has been increasing, partly driven by the increased number of foreign investors on the Nairobi vehicles that actually move capital. Although the capital market instruments. These incentives focused on Securities Exchange. Of the 62 listed companies, about half produce some form of sustainability or Corporate regulator and the Nairobi Securities Exchange infrastructure and social services, with a maturity of three Social Responsibility reports, although varying in quality, completeness, uniformity and reliability104. Two are progressive in terms of market and product years or longer.102 New inclusive green infrastructure leading companies in the Kenyan market, Kenya Commercial Bank and Safaricom, are integrating ESG factors development, the risk from an inclusive green investment instruments would qualify for the same tax perspective is that environmental and social issues into their standard financial reports (integrated reporting). These companies are expected to be followed by breaks. For example, these fiscal measures include tax could become marginalized in new codes and others in the coming years. exemptions from investment income tax, withholding standards, which would be a missed opportunity. tax, and stamp duty, as well as infrastructure securities The Institute of Certified Public Accountants also plays a leading role in moving towards an integrated (asset-backed securities, infrastructure bonds, real estate • As the Corporate Governance Code and the reporting requirement for listed companies in Kenya. Its annual Corporate Reporting Awards (the FIRE Awards) investment trusts [including green trusts], and collective Stewardship Code have been developed as “apply or in 2013 had the headline “Using integrated reporting to elevate your brand.” In addition, the Global Reporting investment plans).103 explain” frameworks, an important factor for success Initiative has established an African Chapter, operating out of South Africa. will be effective monitoring mechanisms, including While these tax incentives are potentially critical in the provisions for integrated reporting, to assess progress One of the outcomes of the process of developing the Corporate Governance Code was to get the institutional effort to channel capital to these types of investment on their implementation. investors of listed companies to engage on sustainability. A committee of pension, insurance, asset vehicles, they have had limited impact to date, apart from management funds, and listed companies was established in early 2015 to develop the Stewardship Code for infrastructure bonds (which have been oversubscribed). Institutional Investors. The code was released for public comment in August 2015. According to interviewees, the limited uptake is due to 34 Chapter 3 Chapter 3 35 3.5 Private Equity billion for funds focused on Sub-Saharan Africa in 2014. hovers between 0 percent and 6 percent, according to This is the highest annual total since the association Prequin’s research in 2012.114 MARKET COMPOSITION investment of $70 million by Harith General Partners in started tracking fundraising data in 2006 and nearly 1.5 There is no commercial private equity fund manager with the Lake Turkana Wind Project.108 times higher than the last record of $2.6 billion raised in The Sub-Saharan African private equity market is an explicit green inclusive mandate in Kenya or the East 2006.109 Most of the capital was raised from governments dominated by South Africa, which has about $13 billion Kenyan institutional investors’ participation in private African region. But there are a number of commercial and development finance institutions in Europe and the in assets under management. Investment activity equity has been limited. The reasons for this, as stated in cleantech/renewable energy funds with a pan-African United States.110 But, according to the East Africa Venture contributed 0.13 percent to its GDP in 2013.105 Although interviews with the East African Private Equity Association mandate, including Inspired Evolution Investment Capital Association, interest from domestic institutional this is small in comparison to the United Kingdom and fund managers themselves, are mainly due to lack Management ($100 million in assets under management, investors is increasing. Kenya Power and the Nation Media and the United States, the South African private equity of understanding of the asset class, particularly issues of the recently closed Actis pan-emerging market energy fund Group recently made a significant investment in a new market is well established and significant in the region. liquidity, and preference for more familiar, low-risk/high- ($1.15 billion), and Lereko Metier’s Sustainable Capital East-Africa-focused fund manager.111 Private equity funds It is also proportionally larger as a share of the overall return government bonds and listed equities. There is also Fund (closed in 2013 at $67 million). Vantage Capital and their association, the East Africa Venture Capital economy than in China (0.07 percent of GDP) and Russia a perception that this asset class lacks transparency, and Group launched its renewable energy debt fund with a Association, are working to increase domestic investment. (0.01 percent of GDP). in some cases the share of financial benefits awarded to target of 2.2 billion South African rand ($183 million) to The association hosted its first conference in Nairobi in fund managers are out of proportion to overall returns. invest in debt in renewable energy projects, with a focus on Similarly, interest in private equity investment in Kenya June 2015. Increasing regional institutional investors’ uptake largely South Africa. is steadily growing. In 2013, the country’s private equity INCLUSIVE GREEN PRIVATE EQUITY depends on overcoming these barriers. Even though there assets under management totaled 700 billion Kenyan There are also a number of infrastructure-focused are regulatory hurdles for pension funds when investing INVESTMENTS shillings ($7 billion). In 2014, Kenya attracted more deals pan-African funds: Harith is a South African-based in private equity (for example, the Retirement Benefits Private equity is an interesting asset class for inclusive than any other country in sub-Saharan Africa.106 According infrastructure fund with a pan-African mandate that Authority must approve the investments), this was not green growth because it has a long-term investment to Deloitte’s Africa Private Equity Confidence Survey 2015, has invested in green infrastructure in Kenya with identified during the interviews as the main barrier horizon and a relatively high acceptance of risk. It invests about 80 percent of survey respondents expect the private African pension funds. Industry reports suggest that the preventing investment in the asset class. The Retirement in market segments with high inclusive green growth equity market in East Africa to grow further.107 greatest challenge for infrastructure funds is unreliable Benefits Authority is reviewing proposals to remove the potential, such as small business growth across all sectors; policy frameworks, which make it difficult to implement Kenya has about 57 private equity funds with investment steps of regulatory approval and establish private equity capital-intensive and large infrastructure projects meeting infrastructure projects in a timely and profitable way.115 activities (see list in Annexure L). The funds invest in as an asset class on its own under the Investment Policy national requirements (geothermal or wind projects all sectors of the Kenyan economy, but most of the Guidelines. supplying electricity into the national grid); and cleantech, Impact investment is gathering increasing interest among investments are in agribusiness, health care, and financial start-ups, and social entrepreneurs (typically under a investors across Africa according to a recent Ernst & According to the Emerging Market Private Equity services. The largest deal in 2013 was an infrastructure venture capital or impact investment mandate). Private Young report.116 Impact investing aims to have a positive Association, private equity fund managers raised $4 equity funds’ main areas of investment align with the social and/or environmental impact while generating a MTP2’s sector priorities. profit. ResponsAbility, Acumen, and LeapFrog Investments are examples of such funds with investments in Kenya. TABLE 12: PRIVATE EQUITY DEALS BY SUB-SAHARAN AFRICAN COUNTRIES (2013) Private equity fund managers are also closely involved in They have invested in micro-insurance companies, low- managing the business, contributing significant technical cost housing, manufacturers and distributors of cleantech expertise and strategic guidance. Fund managers who are equipment, and other social entrepreneurs. Kenya knowledgeable about green and inclusive measures can South Africa bring this expertise to the company’s management. In line For example, in 2015 ResponsAbility launched a new with this, each fund typically has stringent environment, investment fund (current commitments of $30 million) Nigeria social, and governance measures that are put in place at a dedicated to providing debt financing to companies Côte d’Ivoire that promote access to decentralized modern energy portfolio level during the life of the investment, particularly Rwanda if the fund is backed by development finance institutions. solutions, primarily in Africa and Asia.117 LeapFrog is Ghana one of the world’s largest private equity impact funds, The venture capital and private equity industry has with investments in financial services businesses, mostly Uganda been a significant investor in the green/cleantech sector insurance companies, in Africa and Asia. It successfully Tanzania globally,112,113 but cleantech has attracted relatively little closed its second fund in 2014 with $400 million in capital from fund managers in Africa to date. Europe, commitments. LeapFrog investments in East Africa include 0 2 4 6 8 10 12 14 North America and Asia receive the bulk of these Apollo Investment (one of the top three investment investments, while the rest of the world (including Africa) companies in East Africa) and Resolution Insurance.118 SOURCE: Deloitte (2014), East African Private Equity Confidence Survey 36 Chapter 3 Chapter 3 37 As a shareholder, LeapFrog, in addition to financing, has managers entering the industry will help the industry environmental standards of good corporate behavior. (2012), and a new draft National Investment Policy to brought expertise in micro-insurance product development develop and grow. The East Africa Venture Capital Kenya’s domestic investment authority, KenInvest, has an update and ensure effective and coherent frameworks and and supported the development and launch of micro- Association is developing a strong awareness-building important role to play in supporting the alignment of such incentives for investors. insurance products in East Africa.119 agenda and training program for private equity investors, investments with sustainable development. regulators, policy makers, and industry players. INCLUSIVE GREEN FDI BARRIERS AND PROPOSED SOLUTIONS FDI has the potential to play an important role in All projects and companies in Kenya, whether foreign or Barriers for the private equity funds themselves in sustainable development, but it is not without its Investment in private equity by institutional investors in national, have to comply with environmental and labor identifying inclusive green investments include: challenges. The Kenya Revenue Authority’s 2013 audit Kenya is nascent. The sector’s challenges are largely related standards. Investors wanting to benefit from the available of 40 multinationals uncovered widespread transfer to lack of understanding of the asset class and structure, • Relatively higher returns in traditional sectors. investment incentives have to go through an investment pricing abuse (the practice of declaring losses that and preference for more familiar and low-risk/high-return registration process that includes a health, safety, and • Entrepreneurs lack the experience needed to effectively disqualify them from paying income tax). Ten government bonds and equities. environmental impact screening and an environmental package and present themselves to investors. multinational companies were forced to rewrite their impact assessment. The National Environment The establishment of the East Africa Venture Capital financial statements, turning losses of 8 billion Kenyan • Policy uncertainty hinders investments in Management Authority is the principal environmental Association in 2013 and the significant number of new shillings ($78 million) into profits that have yielded infrastructure funds. regulatory agency in charge of granting licenses and 4 billion Kenyan shillings ($39 million) in tax revenues.121 monitoring compliance. KenInvest and the Ministry of FDI into Kenya has been low since the 1980s (below East Africa Affairs and Tourism are drafting a national 3.6 Savings and Credit Cooperatives 1 percent of GDP) and is relatively small compared to other investment policy document and a green investment guide, African countries, but it has been on an upward trajectory which will collate all the various regulations relating to MARKET COMPOSITION In the past, these institutions were difficult to govern, but in the past five years, nearly doubling from $258 million in the environment, water, air, climate adaptation/mitigation, the Savings and Credit Cooperative Societies Regulatory 2012 to $514 million in 2013.122 Increased FDI is also one wildlife, and other issues to make environmental and social Savings and credit cooperatives are emerging as important Authority, established in 2010, has improved the sector’s of the government’s targets in Vision 2030. According to a requirements clearer for investors. non-banking, micro-savings institutions in Kenya. The governance and supervision. The Savings and Credit 2015 report by PricewaterhouseCoopers, Nairobi is likely industry’s total assets grew by 14 percent from 294 billion Many foreign-owned companies in Kenya go beyond Cooperative Societies Act (2008) and regulations stipulated to become Africa’s top investment destination. FDI inflows Kenyan shillings in 2012 to 335 billion Kenyan shillings in regulatory compliance by applying international standards prudential norms and operation requirements to enhance to Kenya are projected to average $1.3 billion annually 2013. There were 1,955 active cooperatives in Kenya by relating to business ethics, environmental policies, the financial stability of the deposit-taking cooperatives. between 2013 and 2018, placing Kenya on par with the close of 2013. community development, and corporate governance. Requirements include capital adequacy, asset quality, and Tanzania and Uganda.123 For example, in the financial sector, a recent report Savings and credit cooperatives are different from banks liquidity. Profitability, while not a regulatory requirement, The main sectors that attract foreign investment into by the Kenya Bankers Association mentions foreign- in that they are nonprofit financial cooperatives (typically is implied to ensure the savings and credit cooperative’s Kenya are financial services, agriculture, real estate, owned Standard Chartered Bank as one of the leaders in offering lower fees and interest rates than banks) owned financial and operational sustainability.120 manufacturing, retail, technology, and construction. This is sustainable finance in Kenya.125 In cases where foreign by their members and governed by a board of directors Savings and credit cooperatives are a rapidly increasing market-seeking FDI, which capitalizes on the fast-growing companies do not comply with Kenya’s national standards, elected by, and from among, those members. Usually market segment that has proven critically important for domestic and regional market. However, resource-seeking KenInvest, the National Environment Management there is a common bond among the members of a savings inclusivity. Further engagement with this market segment foreign investment has also increased in recent years due Authority, and other relevant agencies work together. and credit cooperative, such as belonging to the same is needed to determine ways to increase its effect on green to the discovery of commercially viable oil and gas. The organization or living in the same area. They are easy to KenInvest aims to increase the number of investable green development through collaboration with relevant agencies government is working to put prudent legal frameworks establish and can provide a critical source of funding for and inclusive investment projects for foreign investors. As and organizations. (such as the Mining Bill of 2013) and a sovereign wealth families, farmers, and other entrepreneurs that would not of March 2015, it has between 60 and 70 investment-ready fund in place to ensure the sector is governed properly, be able to access traditional bank loans. Membership in projects. Other than the geothermal and wind projects, local content clauses are included, and funds are preserved Kenya’s cooperatives grew from 2.97 million in 2012 to very few are categorized as green and inclusive. Incentives for future generations. 3.31 million in 2013. are needed to ensure that inclusive green projects offer The Kenyan government is working to attract FDI competitive returns. by improving regulatory frameworks and addressing BARRIERS AND PROPOSED SOLUTIONS 3.7 Other Sources of Capital: Foreign Direct Investment challenges in the following areas: ease of doing business, reliable and affordable power supply, transportation The barriers and solutions for aligning FDI with MARKET COMPOSITION often emanating from multinational organizations. infrastructure, and streamlined tax administration, as well sustainable development and inclusive green growth are Such investment can make an important contribution to as issues relating to corruption.124 The government has similar to those for promoting the growth of inclusive Unlike other financial flows, FDI operates largely sustainable development if investors follow social and introduced the PPP Act, the Competition Commission Act green sectors in general, as well as compliance with independently of domestic financial and capital markets, 38 Chapter 3 Chapter 3 39 existing environmental and social regulations (see Section Practices Act governing the international operations of 2.3). Trade agreements and specific FDI tax incentives can U.S.-based corporations; Singapore’s new legislation be used to further support this alignment. Also helpful governing trans-boundary haze; and financial regulators are the rules governing originating financial and capital with international footprints, such as the China Banking markets; U.S. regulations such as the Foreign Corrupt Regulatory Commission’s Green Credit. Chapter 4: Barriers and Potential Solutions for 3.8 Overview of Current Inclusive Green Investment Products Inclusive Green Investments in Kenya in Kenya 4.1 Barriers Inclusive green financing and investment is in its infancy investments in this area. Kenya’s green inclusive investment in Kenya, but strong leadership and interest across the instruments are summarized in the table below. During the interviews and roundtable discussions, listed equities). The high returns on government bonds financial sector can increase the number of products and participants identified the following barriers to inclusive could “crowd out” investments in other asset classes. green investments across the financial services sector: • Lack of experience and expertise in structuring new • A short-term investment horizon prevails across the investment vehicles for the inclusive green pipeline. value chain, which means that long-term considerations Kenya has a potential green infrastructure pipeline that TABLE 13: KENYA’S GREEN INCLUSIVE INVESTMENT INSTRUMENTS such as environmental and social sustainability are presents opportunities for local banks and institutional AVAILABILITY IN THE not factored into investment and strategic planning. investors to participate if investments are structured FINANCIAL PRODUCT COMMENT KENYAN MARKET correctly upfront. This includes attaining an acceptable Creating economic value over the longer term is rarely Commercial green lending Limited. About $50 million in total Even though there are many examples of grant funding from recognized and, more importantly, not rewarded by any level of risk, and developing an analytical framework from CFC Stanbic, Cooperative Kenyan banks for green inclusive projects, the availability of stakeholders. that shows the real risk-adjusted return for these Bank and Housing Finance. Can be commercial green credit lines is still limited. It is also difficult compared to the total gross loan to quantify because funding may be in mainstream lending investments (long-term environmental and social risks). • Fragmentation of the institutional investor market portfolio of Kenyan banks of portfolios and not specifically defined as green financing. prevents economies of scale, with little time and • Limited policy and regulatory incentives, including $17 billion There is also limited participation by Kenyan banks in green infrastructure project financing. The only example identified effort invested in product development and thought fiscal incentives, to drive investment towards a as part of this research was CFC Stanbic acting as the lead leadership. The fragmented structure of the pension sustainable finance model. A number of high-level advisor in a wind project fund sector (1,500 plans, most of which have less policy papers confirm the government’s commitment Green mutual funds No green funds currently exist Products have not been developed due to limited demand than 5 billion Kenyan shillings under management) to green and inclusive growth, but work to integrate from the institutional and retail market constrains the flow of capital toward alternative assets. such issues into sector-specific implementation plans Green private equity funds No commercial-level return green There are a number of inclusive green “impact funds” in the is still under way. The Medium Term Plan’s flagship private equity fund focused specifically Kenyan market, which may or Even if appropriate green investment vehicles were on the Kenyan market may not be feasible investments for Kenyan developed, most pension funds would not be able to programs are not integrated into the sector strategies, institutional investors invest because they do not have the scale and capacity arguably resulting in less effective implementation. to understand and evaluate such new investments. There is currently no public policy or regulation in the A number of pan-African general in- financial and capital markets that drives or incentivizes frastructure and cleantech funds are • There are relatively higher returns in traditional sectors investments in the green economy. available and asset classes. The system rewards investments in Green bonds No green bonds have been issued to The government has issued infrastructure bonds. Underlying safe and traditional assets (government bonds and date investments include, for example, both geothermal and fos- sil-fuel-based power developments Risk guarantees for new green sectors such as Available on an ad hoc basis Central Bank of Kenya, IFC, and the African Development Bank provided such risk guarantees. Local insurance firms have 4.2 Potential Solutions geothermal and wind provided insurance for geothermal well drilling Direct green investment Limited Only one example identified as part of this research: The following proposals on ways to unlock capital to • Develop market-wide cohesive policy and regulation. by pension and insurance Local Authority Pension Trust green street lighting the green inclusive economy in Kenya are based on Coordination across the financial services sector funds participants’ recommendations during interviews and is needed to agree and establish high-level policies roundtable discussions, as well as suggestions developed and principles for long-term sustainable investment. during the research process: Effective monitoring and evaluation mechanisms 40 Chapter 3 Chapter 4 41 will be critical for successful implementation. As • Raise awareness and provide technical training across of extending liabilities for sustainability impacts to funds in Kenya. National sensitization campaigns will discussed in Section 3, South Africa and Namibia have the financial services sector. To achieve the market financiers, using lender liability regulation as a tool for also help give legitimacy to green growth businesses. successfully applied regulations in the institutional shift, banks, fund managers, analysts, insurance, increased focus in this area. Further collaboration with Kenya Commercial Bank, for example, already investor sector that require ESG integration and pensions, and companies need to upskill in areas of the National Environment Management Authority supports journalist training in the area of sustainability. developmental mandates. Such regulation creates a environmental and social/inclusive green investment may also be an advantage. • Align FDI with the Kenyan inclusive green growth level playing field and reduces the pressure on these strategies and techniques. The suggestion from the • Conduct awareness-raising campaigns for the public agenda: As FDI flows into Kenya continue to grow, asset classes to demonstrate short-term returns to market was to identify how to pool resources in terms and media. For many of the suggested step changes it will be important to ensure good sustainability compete with more traditional investments. Similar of expertise and capacity building to reduce this cost. to be effective, increased public awareness on the practices and alignment with Kenya’s inclusive green successful regulation in the banking sector can be seen • Seek opportunities to collaborate across the sector. relevance of ESG issues and support for civil society growth agenda for this source of capital. KenInvest is in China and Brazil. The Kenya Bankers Association There are opportunities in the Kenyan financial market groups is needed to galvanize interest. This could, already playing an important role in this regard. and the Central Bank of Kenya have already started for the banking, pension, and insurance industries to for example, include pension plan members, who are discussing such measures. collaborate and jointly finance projects in the short, already actively querying the investments of pension • Engage with policy makers on fiscal policy adjustments. medium, and long term. Sectors could work together Ensuring that existing tax incentives (asset-backed to identify and review the inclusive green investment securities, infrastructure bonds, and so on) are also pipeline, and consider the best funding options for the 4.3 Suggested Actions applied to relevant green and inclusive investment short, medium, and long term. Potential participants vehicles. Fiscal incentives can further channel capital in such a task force could include the government, The framework presented here prioritizes the out in the previous section has been evaluated and the to the green inclusive economy, such as government investors (short and long term), project developers, recommendations put forward, assessing each suggestion’s recommendations below require the least effort and are (Central Bank) guarantees and regulatory support and business incubators. The sectors could collaborate relative level of effort, expected impact, and estimated likely to have the most impact on increasing inclusive for lowering the risk weighting or adjusting capital to develop new capital market and other investment timeline for implementation. Each recommendation set green investment in the domestic financial sector in Kenya. adequacy requirements for such projects. vehicles; banks and insurance companies could work together to expand the micro-insurance market, as well • Implement an effective and stepped approach to as insurance for investment in renewable energy; and COMPARATIVE EXPECTED TIMELINE FOR regulatory enforcement of the market-led Sustainable RECOMMENDATION STAKEHOLDER the government and relevant sectors could collaborate LEVEL OF EFFORT IMPACT IMPLEMENTATION Finance Principles in the banking sector. This includes a in the regulatory space to create cohesive market-wide 1. Structure market support to Low High Short term Cross-sectoral clear timetable to move from capacity building to direct policies that further enable such investments. develop investment vehicles regulation. As the Kenyan financial sector is bank-led, successful implementation, including monitoring and 2. Collaborate across the financial Low High Short term Cross-sectoral CHANGES NEEDED IN OTHER PARTS sector for project financing (short, enforcement systems, will have a significant knock- OF THE VALUE CHAIN medium, and long term), starting on effect, both in the banking sector and the broader with the largest actors financial sector. Addressing existing market gaps, not all of which are 3. Consolidate the pension and Medium High Medium term Retirement Benefits within the direct control of the financial sector, will also insurance industry Authority and pension • Consolidate the pension and insurance sectors and pool help develop the green inclusive economy. The following industry assets. The smaller funds could move from standalone recommendations aim to address these gaps: 4. Enforce market-led Sustainable High High Medium to long term Central Bank of Kenya, funds to umbrella funds, while the largest funds move Finance Principles in the form of Kenya Bankers Associa- their segregated money into pooled investment vehicles • Address challenges with existing environmental and direct regulation tion and banks to create economies of scale. social regulation. Weak environmental and social 5. Develop a cohesive market-wide High High Medium to long term National Treasury in regulatory enforcement exposes investors and financiers policy, such as a financial sector consultation with • Provide structured market support to develop sustainability charter regulators and market to potential risks that may become future critical institutional investment vehicles. In South Africa, the stakeholders liabilities. As regulation in the financial sector becomes relevant industry associations used joint, cross-sectoral 6. Engage with policy makers High High Medium to long term Financial sector and more advanced, financiers will emerge as increasingly working groups to help banks and fund managers on fiscal policy adjustments, National Treasury important enforcement stakeholders. Increasing the including incentives for green develop the investment instruments. Individual firms focus on the business case for good environmental inclusive investment vehicles then finalized the competing products and put them on and social management for companies, as opposed the market. to a box-ticking exercise, will be important. Policy makers and regulators should consider the advantages 42 Chapter 4 Chapter 4 43 • Form a working group: Establish a working group to focus on a collective “integrated” approach across the Kenyan financial sector to increase investments in the inclusive green economy. Coordinated action will ensure that the financial sector demonstrates success as a whole. Cross-collaboration would help identify the size and type of inclusive green pipeline needed Chapter 5: Conclusions and Next Steps and the funding required over the short, medium, and long term. This will pool capacity for more effective 5.1 High-Level Commitment in the Kenyan Financial Sector and efficient engagement with the financial sector policy maker. Coordination needs to happen with the The Kenyan financial sector is rich with opportunities meeting, leaders in the sector voiced their interest in and right mix of people present, including regulators to for inclusive green growth. During the CEO roundtable commitment to promoting this type of growth: ensure an appropriate enabling environment for such investments. The county governments will also need to be consulted Key messages from the CEO meeting to determine how they can help promote and implement inclusive green investment strategies at a • Sustainable finance cannot be achieved without financial inclusion: Efforts to increase sustainability local level, and integrate these strategies into the local have to be framed within the local context. Financial inclusion, innovation, and sustainability should governments’ budgets and procurement processes. align with Vision 2030’s development paradigm. • Establish a sector-wide implementation roadmap: Align • Collaboration is needed across the entire financial sector investment value chain: Banks, pension, the Kenyan financial sector with long-term inclusive insurance, capital markets, advisors, regulators, and the government have an opportunity to work green growth. together to unlock capital for short-, medium-, and long-term financing of green and inclusive economic growth, while sustaining their core business. The abundant supply of capital and innovation in the Areas where further research may be beneficial include: Kenyan domestic financial sector needs to be matched with viable, existing sustainable investments. • Lessons learnt from other markets in relation to • A short-term outlook is no longer viable: The financial sector and regulators collectively need to certain sustainable investment measures that may be address systemic issues – structural, institutional, and financial instruments and incentives – that create considered for Kenya and their suitability and tailoring a short-term investment focus. to the local context. • Raising awareness and building capacity are essential: The financial sector needs to raise awareness • Baseline data on Kenyan banks’ green lending. on the relevance of financing long-term inclusive green investments and available products, both internally • ESG training needs assessment for different actors in and with potential clients across all segments of the value chain. the financial sector. • Partnerships, action plans, and outcomes are necessary: A forum for financial industry-wide • Targeted research on the inclusive green investment engagement, involving all relevant stakeholders, including regulators, will build cross-sectoral linkages pipeline in terms of size, sectors, and financing needs. and facilitate catalytic action. Broadening the discussion to include legislators and the wider political landscape will be an important next step. 5.2 Potential Next Steps Participants in the CEO and technical group meetings industry associations and other participating proposed the following next steps: organizations could nominate individuals for the steering committee and work streams. Where possible, • Identify leaders and champions: Identify individuals capacity should be leveraged from existing financial and institutions to lead this process at a policy, sector initiatives, such as the Institutional Investor regulatory, and private sector level. In addition, Stewardship Code. 44 Chapter 5 Chapter 5 45 A. Glossary Annexures Cleantech: Products, services, and processes that either directly reduce or eliminate ecological impact, or provide performance at least matching that of traditional alternatives while requiring less, or a different mix of, resource inputs. Cleantech is an investment theme rather than an industrial sector. It may include investments in agriculture, energy, manufacturing, materials, technology, transportation, and water. In 2005, cleantech was North America’s fifth largest venture capital investment category, attracting more than $1.6 billion. Climate change: Defined by the United Nations Framework Convention on Climate Change as “a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods.” Climate risks: Risks stemming from climate change that may affect companies, industries, communities, and whole economies. The five key areas of business risk associated with climate change are regulatory, physical, litigation, competitiveness, and reputational. Corporate governance: The procedures and processes according to which an organization is directed and controlled. Corporate governance structures specify the distribution of rights and responsibilities, including the board, managers, shareholders, and other stakeholders. They also lay down the rules and procedures for decision making. Best-practice corporate governance may be determined by both national and international standards. Corporate social responsibility: A business approach that takes into account economic, social, and ethical effects to mitigate risk, decrease costs, and improve brand image and competitiveness. This approach may be implemented using a comprehensive set of policies and procedures relating to all levels of business activity, including corporate governance, employee relations, supply-chain relationships, customer relationships, environmental management, philanthropy, and community investment. Investors, including institutional investors like pension funds, can use their leverage (through responsible investments) to encourage companies to adopt corporate social responsibility practices. Such practices have been linked to improved financial performance. Developmental investment: Targeted financial investment that prioritizes the allocation of capital to investments and projects that achieve specified developmental outcomes. Developmental mandate: Discretionary investment of a proportion of assets in specialized strategies as part of a diversified portfolio consistent with the fund’s strategic asset allocation and asset/liability profile, subject to due diligence and other prudent investment standards. Economically targeted investment: An investment that aims to achieve a market return while improving economic conditions by, for example, providing private housing or employment opportunities. Environmental, social, and governance (ESG): The environmental, social, and governance issues that investors consider in the context of corporate behavior, alongside traditional financial criteria in managing and selecting investments. No definitive list of ESG issues exists, but they typically: • Are often considered non-financial or not material. • Are medium- to long-term investments. • Have qualitative objectives that are not readily quantifiable in monetary terms. Annexures 47 • Have externalities (costs borne by other firms or by society at large) that are not well captured by market B. Interviewees and Roundtable Participants mechanisms. • Have a changing regulatory or policy framework. NAME ORGANIZATION POSITION A.M Kariuki KenInvest Chief Compliance and Enforcement Officer • Are susceptible to unknown risk as patterns arise throughout a company’s supply chain. Abdalla Abdulkhalik Gulf African Bank Chief Executive Officer • Are a public concern. Achim Steiner UNEP Executive Director Aditi Maheshwari IFC Policy Officer ESG integration: The active investment management process that includes an analysis of environmental, social, and Alex Busisa National Bank of Kenya Country Credit Head governance risks and opportunities. Andia Chakava Alpha Africa Asset Managers Managing Director Green bonds: The Green Bond Principles recognize four types of green bonds: green use of proceed bonds, green use Arun Mathur I&M Bank Limited Chief Executive Officer of proceed revenue bonds, green project bonds, and green securitized bonds. Bond issues can be tailored to the needs Ashok Shah Apollo Insurance Company Ltd Group Chief Executive Officer of diverse financial market players and support a range of public and private sector projects. Bonds can be issued by Basilio Joshua CPF Financial Services Head of Branch Network (Local Authority Pension Trust) municipal or federal government, as well as by private sector entities. Catherine Gachenge KenInvest Chief Analyst Green resilience: The ability of a system to continue operating as external conditions change. It is able to adapt to Cecilia Bjerborn Murai UNEP Consultant changes in temperature, precipitation, and other variables. In the context of climate change, green resilient infrastructure Charles Ogalo Genesis Kenya Investment Managing Director would be able to operate at its design capacity despite sharply changed climatic conditions. Management Ltd Daniel Warutere Capital Markets Authority Assistant Manager, Regulatory Framework, Impact investing: Investing strategies that provide capital to companies working to generate a financial return along with Regulatory Policy & Strategy Directorate significant social and environmental benefits. Donald Ouma Nairobi Securities Exchange Head of Market and Product Development Edgar Mokua Bank of Africa Head of Enterprise Banking Inclusive green investment: Green investment supports economic growth in a clean, resilient, and sustainable manner – Edward Njoroge Nairobi Securities Exchange Chairperson such as initiatives to encourage more efficient use of resources, reduce pollution, and mitigate environmental damage. Edward Odundo Retirement Benefits Authority Chief Executive Officer Inclusive investment serves not only investors, but the broad interests of society, particularly low-income and underserved Edwin Induli NIC Bank Head of Risk Management and Compliance segments of the population. Inclusive green investment is an important part of the broader ESG considerations that Emma Caddy Consultant Kenya Bankers Association underpin sustainable investment at the global level. Erastus Wahome National Treasury Chief Economist Prescribed assets: Assets/capital that are required by regulation or policy to be directed into government-selected assets, Esther Muiruri Equity Bank General Manager sectors, or projects. Fahima Zein Genesis Kenya Investment Chief Investment Officer Management Ltd Short-termism: The bias of some investors towards short-term performance and share price appreciation rather than Felicity Perry UNEP Inquiry Coordinator long-term investment performance. This may put pressure on fund managers, companies, and other service providers to Fred Mburu Apollo Asset Management Chief Executive Officer make decisions that boost short-term accounting measures of profitability, rather than long-term sustainable economic Gabriel Negatu African Development Bank Regional Director profitability. Geraldine Kyalo National Treasury Policy Analyst Gideon Chokah Standard Chartered Bank Kenya Ltd Director, Investors and Intermediaries, Socially responsible investments: Investments that seek to achieve social, environmental, and financial objectives. Transaction Banking Stakeholders: Individuals or organizations with an interest in the actions and effects of an organization. These may be Gideon Kyengo National Social Security Fund Acting General Manager (F&I) customers, service providers, special interest groups, nongovernment organizations, regulators, policy makers, asset Grace Kibuthu Ogola IFC Securities Market Specialist owners, financial institutions, members of the public, institutional investors, or labor. Habil Olaka Kenya Bankers Association Chief Executive Officer Henry Ndede UNEP Coordinator, UNEP Kenya Country Program Sustainable and responsible finance and investment: Investment processes and ownership practices that take Hosea Kili Local Authority Pension Trust Chief Executive Officer environmental, social, and governance considerations into account in the belief that these can impact long-term financial Imran Khan Britam Senior Portfolio Manager performance. Jairus Muaka Capital Markets Authority Assistant Manager, Policy Analysis and Planning James Ndwiga Insurance Regulatory Authority Assistant Manager, Actuarial Services John Nzau Commercial Bank of Africa Assistant General Manager SOURCE: IFC and POA (2013), Responsible Investment and Ownership: A Guide for Pension Funds in South Africa Joshua Oigara Kenya Commercial Bank Group Chief Executive Officer Judith Sidi Odhiambo Kenya Commercial Bank Director of Corporate Affairs 48 Annexures Annexures 49 NAME ORGANIZATION POSITION C. Interview Questions Kariuki Thande IFC Senior Investment Officer NAME: Lydia Mwithiga Jamii Bora Bank Head of Investment Banking Mahenau Agha UNEP Inquiry Head of Outreach POSITION / DEPARTMENT: Manuel Moses IFC Regional Head CONTACT EMAIL / PHONE NUMBER: Margaret Osure East and Central African Secretary General Social Security Association DATE OF INTERVIEW: Martin Gitu Central Bank of Kenya Policy Analyst, Bank Supervision Matu Mugo Central Bank of Kenya Assistant Director, Bank Supervision General Questions Maurice Otieno National Environmental Chief Environmental Planner 1 Please give us a brief overview: What is your role and the role of your department? Management Authority Morefu Barasa EED Advisory Principal Definition Moses Ikaria KenInvest Managing Director 2 What does the term “green finance” mean to you? Nahashon Wamugi Cooperative Bank Head, Corporate Credit Analysis 3 Do you think Kenya’s exposure to polluting and environmentally damaging investments could pose a systemic risk to the financial Nicholas Malaki Pinebridge Chief Investment Officer system and long-term growth? Njuguna Ndung’u Central Bank of Kenya Governor Nonnie Wanjihia East Africa Venture Capital Association Executive Director Evaluation of current state/processes Nuru Mugambi Kenya Bankers Association Director, Sustainable Finance Initiative 4 Does your organization have a policy concerning the integration of ESG, green, or climate change factors into the Patricia Kiwanuka Association of Retirement Benefit Schemes Chairperson investment decision-making process? If not, why not? If yes, how and to what extent? Are there any standards / regulations that enforce or hinder such policy? Patrick Huber ResponsAbility Africa Ltd. Regional Manager Africa Patrick Mwangi Habib Bank Limited Chief Risk Officer 5 Are there risk assessment methodologies or disclosure requirements that address long-term systemic risk factors? For example: Are financial market actors required to assess long-term, climate-related risks? Patrick Obath East African Business Council Vice Chairperson 6 Do you practice environmental stress testing, e.g., for carbon prices? Paul Sigsworth ICEA Lion Asset Management Managing Director Peter Ngeno UAP Group General Manager Regulatory Barriers Peter Odhengo Greening Kenya Initiative National Coordinator 7 In your opinion, what are the critical financial policies, regulations, guidelines, or practices that hinder the channeling of capital by Rajal Upadhyaya Catalyst Principal Partners Managing Director financial institutions into the green economy? Robert Kuloba Insurance Regulatory Authority Manager, Policy Research and Development 8 What challenges do you face with respect to investing in green investments, e.g., climate resilient infrastructure? Rose Kinuthia Kenya Commercial Bank Chief Risk Officer 9 There is concern that prudential regulation (e.g., Basel III capital and liquidity coverage ratio rules, rules on the matching of assets Rose Lumumba IFC Consultant and liabilities of pension funds) might be inadvertently pushing institutional investors away from longer-term investments in infrastructure, particularly low-carbon and climate resilient infrastructure. Do you think this happens in Kenya? What could be Ruth Barry Cornerstones International Portfolio Manager done to prevent this? Sammy Makove Insurance Regulatory Authority Chief Executive Officer Shameer Patel I&M Bank Limited Chief Manager, Corporate and Strategic Planning Regulatory Solutions Shem Ouma Retirements Benefit Authority Head of Research 10 If you could change and/or introduce any piece of financial regulation and/ or financial policy to make it easier to fund projects Simon Nyakundi Association of Retirement Benefit Schemes Council Member that support an inclusive green economy, what would the reform be? Steven Wamathai Genesis Kenya Investment Management Investment Manager 11 How do you think financial regulators, policymakers, and private standard setters (such as investor-led initiatives) could potentially Sundeep Raichura Alexander Forbes Financial Services, Group Chief Executive Officer influence investment flows toward green finance opportunities? East Africa 12 What do you think it would take to fully integrate the sustainability dimension into the long-term financial agenda? Tony Olang’ Local Authority Pension Trust Project Manager Optional Questions Wanjiru Kirima IFC Consultant What types of “green financial innovation” do you see emerging, e.g., green bonds? Are there domestic industry accords, investor-led solutions, or “stewardship codes” that seek to promote low-carbon, climate resilient, or other sustainable development objectives? If so, how effective are these? How can the practice of disclosure by corporations, financial institutions, and regulators evolve to strengthen market discipline for a sustainable financial system? How much of a problem do you perceive short-termism to be? What actions can be taken to overcome it? Some are concerned that fair-value or market-based accounting principles may have brought a greater focus on short-term market fluctuations. Do you think this has been the case? 50 Annexures Annexures 51 D. Inclusive Green Policies and Regulations in the Real Sector Energy Act (2006) Amends and consolidates laws relating to energy Ministry of Energy and Petroleum in Kenya Energy Management Regulations Requires designated facilities, including large commercial Ministry of Energy and (2012) and government buildings, to undertake energy audits Petroleum every three years; energy efficiency and conservation STATE PROGRAM/STRATEGY/ PROVISIONS MAIN IMPLEMENTATION measures be put in place; and audits to be undertaken by ACTION PLAN AGENCY licensed energy auditors OVERALL NATIONAL PLANNING Solar Water Heating Regulations Requires that “all premises within the jurisdiction of a Ministry of Energy and (2012) local authority with hot water requirements of a capacity Petroleum Population Policy for National Recognizing the effect of rapid population growth on Ministry of Devolution and exceeding one hundred liters per day shall install and use Development Kenya’s development goals, the policy proposes a Planning solar heating systems – within five years from the date of multi-sectoral approach with a focus on voluntary coming into force.” family planning Africa Carbon Exchange The first carbon exchange platform in Africa. Opened in National Treasury Physical Planning Act Reserves land for open spaces, parks, urban forests, and Ministry of Lands, Housing, and 2011, but activity has been limited since the collapse of green belts Urban Development carbon prices. Local Government Act (revised) Maintains sewage systems, including removal and Ministry of Devolution and MANUFACTURING destruction of refuse and effluents Planning Occupational, Safety and Health Act Ensures health, safety, and welfare of employees in Ministry of Labour, Social Arid and Semi-Arid Lands National Sets out overarching principles and broad actions required Ministry of Devolution and (2007) factories Security, and Services Vision and Strategy: Natural to transform Kenya’s arid and semi-arid lands into nation- Planning Resource Management, 2005–2015 al wealth and employment creators TRANSPORT HEALTH Integrated National Transport Policy Aims to develop, operate, and maintain an efficient, Ministry of Transport and cost-effective, safe, secure, and integrated transport Infrastructure Public Health Act Sanitation and health Ministry of Health system to achieve national and international AGRICULTURE development objectives in a socially, economically, and environmentally sustainable way Agricultural Sector Development Seeks to progressively reduce unemployment and poverty Ministry of Agriculture, Strategy 2010–2020 through agriculture and to spur growth in the sector Livestock, and Fisheries Motor Vehicle Emissions Control Provides for the measurement of vehicular exhaust Ministry of Environment, in Kenya emissions in Kenya Water, and Natural Resources Agriculture Act (1967) Promotes and maintains stable agriculture and provides Ministry of Agriculture, for conservation of soil and soil fertility; aims to stimulate Livestock, and Fisheries ENVIRONMENTAL PROTECTION the development of agricultural land in accordance with National Climate Change Outlines adaptation and mitigation measures to enhance Ministry of Environment, accepted practices of good land management and Response Strategy climate resilience Water, and Natural Resources husbandry National Climate Change Action Plan Sets out how the National Climate Change Response Ministry of Environment, Agriculture (Farm Forestry) Promotes and maintains farm forest cover of at least 10 Ministry of Agriculture, Strategy will be implemented Water, and Natural Resources Rules 2009 percent of every agricultural land holding; preserves and Livestock, and Fisheries sustains environment in combating climate change and global warming Forests Act Reserves, protects, and ensures sustainable use of forests Ministry of Environment, Water, and Natural Resources ENERGY Kenya Forestry Master Plan Reserves, protects, and ensures sustainable use of forests Ministry of Environment, Draft National Energy Policy Aims to facilitate provision of clean, sustainable, Ministry of Energy and Water, and Natural Resources (third draft) affordable, reliable, and secure energy services at least Petroleum cost, while protecting the environment Water Act Manages water resources, including prohibiting water Ministry of Environment, pollution, such as discharge of rubbish, refuse, effluent, Water, and Natural Resources Feed-in Tariffs for Renewable Accelerates development of green energy, including wind, Ministry of Energy and and trade waste into water Energy Resource Generated solar, and renewable biomass; promotes generation of Petroleum Electricity – Guide for Investors electricity from renewable energy sources Fisheries Act Manages the exploitation and conservation of fisheries Ministry of Environment, Water, and Natural Resources Least Cost Power Development Plan Identifies affordable, low-cost energy sources Ministry of Energy and Petroleum Environmental Management and Outlines framework for environmental management and Ministry of Environment, Coordination Act related matters – currently under review Water, and Natural Resources Scaling up Renewable Energy Provides resources to various actors in Kenyan society, Ministry of Energy and Programme – Investment Plan for including government, to assist low-income countries Petroleum Wildlife Conservation and Seeks to balance needs of Kenyan people with Ministry of Environment, Kenya in achieving their energy goals in ways that improve Management Act (2013) sustainable wildlife conservation and management Water, and Natural Resources environmental, economic, social, and productive development Sessional Paper on Energy Identifies need to integrate energy planning with Ministry of Energy and (No. 4 of 2004) national economic, social, and environmental policies Petroleum 52 Annexures Annexures 53 Development Bank, Nedbank Capital, the Standard Bank of South Africa, Eksport Kredit Fonden, Deg – Deutsche Draft Climate Change Bill (2014) Aims to establish, among others, a climate change fund To be confirmed to access international climate-related funding. Through Investitions – Und Entwicklungsgesellschaft Mbh, East African Development Bank, and Triodos. various financing mechanisms, it will “crowd in” private sector financing of climate-change adaptation and Aldwych is the largest single investor in the project, alongside KP&P Africa B.V. as co-developers and investors. mitigation, and ensure ongoing implementation of a Aldwych is majority owned by the Pan African Infrastructure Development Fund, which is managed by Harith. budget-coding system for transparent accounting of climate finance Other investors include the Finnish Fund for Industrial Cooperation Ltd., the Industrial Fund for Developing UN SUBMISSIONS Countries, the Norwegian Investment Fund for Developing Countries, OPIC, Vestas Eastern Africa, and Sandpiper. Aldwych Turkana Ltd. will oversee the project’s construction and operations. The project has Kenya’s Climate Change Technology Provides first step towards including development and Ministry of Environment, Needs and Needs Assessment Report diffusion of environmentally sound technology in Kenya’s Water, and Natural Resources already started construction and is expected to produce power in 2017.  under the United Nations Framework investment strategies Convention on Climate Change In addition to its role as the mandated lead arranger for the power plant, the African Development Bank is Millennium Development Goals Kenya is committed to the goals and is implementing Ministry of Devolution and providing a €20 million African Development Fund partial risk guarantee for the transmission line component. various programmes relevant to the MDGs especially Planning This will protect the power plant against the risk of a delay in constructing the 400km Suswa-Loyangalani related to energy and environment transmission line and substations. The governments of Spain and Kenya are financing the transmission line and First National Communication to Demonstrates Kenya’s willingness to meet its obligations Ministry of Environment, related substations. The partial risk guarantee was a key condition for access to long-term debt from private the United Nations Framework under the convention. Kenya ratified the United Nations Water, and Natural Resources Convention on Climate Change (2002) Framework Convention on Climate Change in 1994, sector institutions and ‎for the financial close for the power plant. signifying its determination to join the international community in combating climate change The Lake Turkana Wind Power Project is a Vision 2030 flagship project and a key deliverable under the Kenyan Sustainable Development Goals Kenya co-chairs the process to facilitate consensus among Permanent Mission of Kenya government’s commitment to increasing electricity generation to 5,000MW and providing cost-effective the 193 UN member states on the new Sustainable to the United Nations renewable power to the public. This project alone will produce about 20 percent of Kenya’s currently installed Development Goals that will succeed the Millennium capacity at 9 Kenyan shillings per kilowatt hour. It will have a transformative development impact in the Development Goals. northern, arid areas of Kenya, Kenya’s electricity sector, and the country as a whole. It is also expected to generate up to $150 million annually in foreign currency savings due to savings on fuel displacement costs. SOURCE: UNEP (2014), Green Economy Assessment Report Kenya, pages 14–16 World Bank Group providing long-term financing and risk guarantees for OrPower 4 (Olkaria III) geothermal facility E. Risk Guarantee Product and Technical Assistance In response to private sector investors’ concerns about the security of a return on their investments in Kenya’s for Investment in Renewables energy infrastructure and the government’s struggle to finance the large-scale investments needed, the World Bank Group has encouraged the private sector to offer a unique package based on $166 million in partial risk CASE STUDIES guarantees. IFC provided the project’s long-term debt and the Multilateral Investment Guarantee Agency provided a African Development Bank providing financing and risk guarantee of the Lake $166 million series of partial risk guarantees to reassure commercial financiers concerned about the state- Turkana Wind Power Project owned electricity utility and its obligations to the financiers. This combination of instruments unlocked a total The Lake Turkana Wind Power Project is one of the largest wind power projects in the world (300MW), the financing package of $623 million, including $357 million in private sector investments and commercial lending. largest to be constructed in Africa and, to date, the largest private investment in Kenya’s history. The project The structure provided the necessary comfort to investors and commercial lenders. IFC provided long-term has won several awards and has been nominated as the “African Renewable Deal of the Year 2014” by Thomson financing for two of the four independent power producers; this type of funding is generally unavailable for Reuters Project Finance International. It is a good example of development finance institutions working with long-term infrastructure projects. IFC’s engagement also reassured and supported South-South investors with commercial banks on developmental projects, using a range of financing instruments to structure the deal to an appetite for investments in Africa but relatively limited structuring and project implementation ability. suit the different types of investors. The $870 million financing agreement was signed in March 2014. Its financing is made up of a mixture of equity, mezzanine debt, and senior debt. Lenders include the African Development Bank as the lead syndicate bank, European Investment Bank, Nederlandse Financierings Maatschappij Voor Ontwikkelingslanden N.V., Société De Promotion Et De Participation Pour La Coopération Economique, Eastern and Southern African Trade and 54 Annexures Annexures 55 F. Infrastructure Investment Projects 5 Dualling of Nairob - Contracting authority: Kenya National On February 25, 2015 Intercontinental Nakuru Road Highways Authority Consultants & Technocrats Pvt. Ltd. and its   consortium were appointed transaction The complete list of infrastructure investment projects coordinated by the PPP Unit is available at:   Development and operation of the 157km advisor http://www.pppunit.go.ke/news/view/ppp-pipeline-status-report-may-2015. Nairobi-Nakuru Road (A104), which forms part of the Trans-African Highway (Northern The transaction advisor is undertaking a Corridor) feasibility study consistent with the PPP Act A selection of the projects included in the list is showcased below. to enable the contracting authority to establish the project’s technical configuration, KENYA PPP PIPELINE – MAY 2015: TRANSPORT AND INFRASTRUCTURE commercial attractiveness, and bankability 6 Roads Annuity Contracting authority: Ministry of Transport Approval of project and risk assessment NO. PROJECT DESCRIPTION STATUS Program (Phase 1) and Infrastructure and its road agencies, report for Lots 1, 3, 17, 32, and 33   Kenya National Highways Authority, Kenya 1 2nd Nyali Bridge Contracting authority: Kenya Urban Roads On November 25, 2014, Deloitte Consulting Ltd.   Urban Roads Authority, and Kenya Rural   Authority and its consortium were appointed transaction   advisor Roads Authority Development of a second Nyali Bridge   connecting Mombasa Island with the North The transaction advisor is undertaking a The government plans to develop and mainland to ease congestion on the existing feasibility study consistent with the PPP Act rehabilitate 10,000km of the road network Nyali Bridge and make traffic less dependent to enable the contracting authority to establish within the next five years. Phase 1 of the on a single channel crossing the project’s technical configuration, program (3,000km) adopts a “finance- commercial attractiveness, and bankability design-build-maintain-transfer” PPP scheme. In return, the government uses public funds to 2 Dualling of Mombasa- Contracting authority: Kenya National On January 28, 2015, Pricewaterhouse- compensate the private developer via fixed and Nairobi Highway Highways Authority Coopers Ltd. and its consortium were performance-related periodical payments   appointed transaction advisor (annuity)   Upgrading, capacity expansion, and subsequent operation and maintenance of the heavily The transaction advisor is undertaking a 7 Mombasa 2nd Contracting authority: Kenya Ports Authority Tender for prequalification for the terminal op- trafficked 485km Mombasa-Nairobi highway feasibility study consistent with the PPP Act container terminal erator for phase 1 was put out in December 2014 to enable the contracting authority to establish   (phase 2 & 3) Construction of a new container terminal with and 19 firms applied. Of these, 12 firms were This highway forms part of the longer Trans- the project’s technical configuration, a total area of 100 hectares and capacity to shortlisted, and requests for proposals were African Highway (Northern Corridor) and is the commercial attractiveness, and bankability   handle 1.2 million twenty-foot equivalent units issued in April 2015. The bid submission main transport route serving East and Central per annum. The project is funded by the Japan is scheduled to close on June 26, 2015 African countries from the Indian Ocean seaport Bank for International Development. Phase 1 of Mombasa involves construction of berths 20 and 21, which   will each be 350 meters long and 15 meters deep, 3 Operation and Contracting Authority: Kenya National On January 28, 2015 Intercontinental providing additional capacity of 550,000 twen- maintenance of Highways Authority Consultants & Technocrats Pvt. Ltd and its ty-foot equivalent units per berth. Construction   Nairobi – Thika Road consortium were appointed transaction is expected to be completed by March 2016 and Operation and maintenance of the eight-lane, advisor is currently about 85 percent complete. Phase 2   50km superhighway from Nairobi to the out- will involve construction of berth 22, which will skirts of Thika, which was completed in The transaction advisor is undertaking a be 250 meters long and 15 meters deep, and will November 2012. The project has been proposed feasibility study consistent with the PPP Act provide additional capacity of 400,000 twen- under an operation and maintenance PPP to enable the contracting authority to establish ty-foot equivalent units. Phase 3 will involve de- scheme, whereby the private party is awarded the project’s technical configuration, velopment of berth 23, which will be 300 meters through a competitive bidding commercial attractiveness, and bankability long, 15 meters deep, and include a side berth process of 4.5 meters deep and 80 meters long. There 4 Operation and Contracting authority: Kenya National On February 25, 2015, CPCS Transcom will also be construction of additional stacking maintenance of Highways Authority International Ltd. and its consortium were yards, procurement of equipment, and dredging   Nairobi Southern appointed transaction advisor works. Completing this phase will give Bypass Operation and maintenance upon completion of additional capacity of 450,000 twenty-foot the 28.6km dual carriageway, which is currently The transaction advisor is undertaking a equivalent units   being constructed by the China Road and Bridge feasibility study consistent with the PPP Act Corporation. The project has been proposed to enable the contracting authority to establish 8 Kisumu Sea Port Contracting authority: Kenya Ports Authority On February 27, 2015, Maritime & Transport under the operation and maintenance PPP the project’s technical configuration, Business Solutions and its consortium were     Development of Kisumu Port into a modern appointed transaction advisor scheme, whereby the private party is awarded commercial attractiveness, and bankability commercial lake port to serve growing trade in through a competitive bidding process the East African Community The transaction advisor is undertaking a feasibility study consistent with the PPP Act to enable the contracting authority to establish the project’s technical configuration, commercial attractiveness, and bankability 56 Annexures Annexures 57 9 Shimoni Port Contracting Authority: Kenya Ports Authority Terms of reference for transaction advisory 12 Multi-storey terminal Contracting authority: Kenya Ferry Services Feasibility study stage service are being developed at Likoni Limited     Development of the Shimoni Port, which is sit-     uated off Wasini, an island off the South Coast.     Development of a multi-storey terminal Shimoni Port is one of the Southern ports of on 1.6 hectares in Mombasa to provide a Kenya, with a population of about 215,000 in- modern ferry terminal, parking, bus terminal, habitants on an area of 3,267km2. The port is as well as a variety of commercial services to small and has limited connectivity to the hin- maximize the site’s revenue potential terland. Shimoni is considered to be ideally po- sitioned because it has good nautical access for 13 Integrated Marine Contracting authority: Mombasa County Feasibility study stage tourism development and continuation of exist- Transport System Government ing trade on a PPP basis. The private sector will     inject additional funds to support infrastructure   Development and operation of an integrated development (of port facilities and supporting marine transport system on the Indian Ocean infrastructure), while playing a key role in the involving regular ferry services landing on operation of the port Mombasa Island and Mainland North, South, and West. Includes water bus and leisure 10 Conversion of Berth 11–14 Contracting authority: Kenya Ports Authority Project proposal stage ferry services around Mombasa, floating into container terminals hotels, cruise vessels, water taxis, and coastal   Infrastructural modification to berths 11–14 ferry services linking all coastal towns between   to support loadings from modern container- Mombasa, Lamu, and associated islands handling equipment and procurement of handling equipment. Berths 11–14 were con- 14 Nairobi Commuter Rail Contracting authority: Kenya Railways Feasibility study stage structed between 1956 and 1959 to serve as Services Corporation conventional berths. The berths’ original     fendering systems and scope were renewed   Rehabilitation of existing 100km railway in 1990 and they have a total length of 736 line and doubling of sections and support meters and width of 22.6 meters. The berths infrastructure. Design and provision of are increasingly used for container handling rolling stock and operation of the commuter even though they do not have requisite rail link between Nairobi CBD and airport equipment such as ship-to-shore gantry cranes. As a result, only vessels with their own gear use 15 Operations and Contracting authority: Kenya Airports Project proposal stage these berths. The project is estimated to cost maintenance of Authority $120 million. Constructing and equipping the   Jomo Kenyatta   berths will take about two years International Airport With a capacity of 20 million people per year Terminal 2 11 Lamu Port development Contracting authority: Kenya Ports Authority Project proposal stage (Greenfield Terminal)     Transformation of Lamu from a small port on     the East Coast of Kenya into an international port handling more than 24 million tonnes of 16 Development and Contracting authority: Kenya Airports Project proposal stage cargo and serving a new major transport Management of Authority corridor in Eastern Africa   in-flight catering   kitchen at Jomo Introduce a second in-flight kitchen operator Lamu Port is the key pull factor for all the at Jomo Kenyatta International Airport to Kenyatta International corridor project components of a flagship increase competition, leading to improved Airport infrastructure project (known as the Lamu Port service delivery and quality of service Southern Sudan-Ethiopia Transport project)   identified by Vision 2030 17 Development and Contracting authority: Kenya Airports Project proposal stage Manda Bay at Lamu Port can accommodate management of food Authority any post-panamax vessel. The project will also     courts at Jomo include the construction of port-associated in- Construction of food court area to include a Kenyatta International frastructure such as a causeway, a port access restaurant, a coffee shop, 12 individual food Airport road, a railway yard, water and electricity sup- courts, multipurpose shops, an ATM lobby, a ply, a port building, and other port-related ser-   banking facility, and a customer care desk vices. Lamu Port is expected to have a total of facility 32 berths, each with an estimated quay length of 400 meters and a draft of between 17.5 me- ters and 18 meters. The port has an estimated total investment of $5 billion, with an internal economic rate of return of 23.4 percent 58 Annexures Annexures 59 18 Government Flying Contracting authority: Kenya Civil Aviation Terms of reference for transaction advisory 26 800MW Menengai Contracting authority: Geothermal Development Project proposal stage School Authority service are being developed (phase 2) Company         Establishment of a government flight-training     A greenfield electricity generation project whose school at the East African School of Aviation, objective is to increase the installed national the training directorate of Kenya Civil Aviation capacity by 800MW Authority in partnership with the private sector 27 300MW geothermal Contracting authority: Geothermal Development Project proposal stage plant at Suswa Company KENYA PPP PIPELINE – MAY 2015: ENERGY AND PETROLEUM       A greenfield electricity generation project that 19 980MW coal plant in Contracting authority: Ministry of Energy and Selection of an independent power producer – aims to contribute up to 300MW toward the Lamu Petroleum negotiations with preferred bidder ongoing Least Cost Power Development Plan. Indepen-   dent power producers will be invited to buy the   Construction of a 980MW Coal Power   steam from Geothermal Development Company Plant in Lamu on a build, own, operate, under a steam purchase agreement and sell the and transfer basis for 20–25 years electricity it generates to Kenya Power under a 20 800MW liquefied natural Contracting authority: Ministry of Energy and Tender cancelled power purchase agreement, thereby recouping gas power plant at Petroleum its investment costs   Dongo Kundu   800MW liquefied natural gas power plant to be 28 960MW Kitui Coal Plant Contracting authority: Ministry of Energy and Feasibility study stage   constructed at Dongo Kundu in Mombasa on a Petroleum       design, finance, construct, own, operate, and Development of a 960MW coal power plant on maintain basis for 20 years the eastern side of Mui Basin, in Kitui County, 21 40MW solar power plant Contracting authority: Ministry of Energy and Project proposal stage using independent power producers at Muhoroni, Kisumu Petroleum     29 Offshore Jetty Contracting authority: National Oil Corporation Transaction advisor contract award stage County Procurement of an independent power of Kenya         producer to generate 40MW of solar energy Development, operation, and maintenance of in the Muhoroni area of Kisumu County the Mombasa offshore loading and offloading 22 560MW geothermal Contracting authority: Kenya Electricity Phase 1, first 140MW section: Provision of trans- jetty and tank-farm project under a PPP Olkaria VI Generating Company action advisory services – terms of reference arrangement   for transaction advisory service are being   Construction of 560MW geothermal pipeline developed Project proposal stage refers to the stage where the PPP project proposal has been approved by the PPP Committee and (divided into four equal projects of 140MW each) on a build, own, operate, and transfer basis for   the contracting authority has been granted authority to undertake a feasibility study in line with Section 33 of the PPP 15 years Act (2013). 23 400MW wind plant Contracting authority: Kenya Electricity Project proposal stage at Meru/Isiolo Generating Company       Development of a 400MW wind farm power plant at Meru through private sector participa- tion as independent power producers, occupying an area of about 18,000 acres 24 400MW Menengai Contracting authority: Geothermal Development Contracts signed and implementation under (phase I) Company way for the first 90MW     Development of a greenfield electricity gener- Second 60MW is under tender preparation. ation project to increase the installed national Geothermal Development Company is capacity by 400MW undertaking exploratory drilling for the remaining 250MW 25 800MW Bogoria-Silali Contracting authority: Geothermal Project proposal stage (phase 1) Development Company       A greenfield electricity generation project that aims to increase installed national capacity by 800MW. The Bogoria-Silali block comprises Bogoria, Baringo, Arus, Korosoi, Chepchuk, Paka, and Silali prospects 60 Annexures Annexures 61 G. Possible Inclusive Green Investment Themes across Key Sectors Transport Destruction of trans- • More fuel-efficient vehicles; hybrid • Rift Valley Railways (Kenya, Uganda) port infrastructure due vehicles; cleaner diesel vehicles; biofuels; • Africa Sustainable Transport Forum to extreme weather bioethanol blending and biodiesel • Green transport infrastructure EXAMPLES OF INCLUSIVE GREEN (rail networks, a mass transit CLIMATE CHANGE INVESTMENTS IN KENYA (A NUMBER system for Greater Nairobi) AND OTHER GREEN GROWTH INNOVATION/ SECTOR OF WHICH ARE REGISTERED ENVIRONMENTAL INVESTMENT OPPORTUNITIES • Urban transport management skills, PROJECTS UNDER THE CLEAN AND SOCIAL RISKS modal shifts from road transport to DEVELOPMENT MECHANISM)126 public transport systems; non-motorized Agriculture, High dependence on • Climate-smart agriculture and • The Vegepro Group, establishing transport (cycling, walking); land-use forestry, fisheries rain-fed subsistence agroforestry technology (includes the largest biofuel plant in and transport planning agriculture; declining drought-tolerant crops, water Eastern Africa • Technological innovations to make production due to harvesting, efficient irrigation • Mumias Sugar Company, extraction infrastructure “climate proof” (such as erratic rainfall, soil systems, and integrated soil fertility of ethanol from by-product bagasse a rail network that can withstand high erosion, and increased management) (reg. CDM project) temperatures) evapotranspiration • Industrial-scale cogeneration using biogas produced from agricultural Waste Pollution of air, • Modern waste management facilities • Licensed private sector recycling residues management water, soil; hazard including: landfill methane recovery; companies include Taka Kenya and to population waste incineration with energy recovery; EcoPost Kenya • Afforestation; reforestation; forest living on landfills composting of organic waste; controlled management; reduced deforestation; waste-water treatment; recycling and harvested wood product management; waste minimization use of forestry products for bioenergy to replace fossil fuels Water and Increased water • Water-efficient technologies • Excloosive Ltd. sanitation scarcity Trade and Reliance on • Cleaner technologies and more • Kenafric Ltd., winners of KAM • Improved water resource management industry infrastructure and resource-efficient processes Energy Efficiency Award 2015 (better sewage systems, irrigation, (includes services (water, and drainage) • Pollution control equipment and • Karan Biofuel Ltd., produces and cement) energy, and transport); • Flood mitigation plans installation supplies biomass briquettes vulnerability to disrup- (reg. CDM project) • Use of water filters (reduces demand tion from droughts and heavy rains for firewood to boil water, slowing deforestation) Tourism Dependence on • Eco-tourism • Porini Eco Camps, award-winning environmental eco-tourism camps Telecoms/ICT Destruction • Climate-proof telecoms infrastructure • Safaricom is one of the leading com- • Low-carbon tourism infrastructure of telecoms panies globally in using resources (such as • Renewable energy-powered base stations wildlife) infrastructure renewable energy at its base- • Automated weather stations hosted in stations Energy Reliance on increasing- • Renewables (geothermal, wind, solar, • Lake Turkana Wind Project; Marsabit cell phone towers to transmit data ly unreliable, large-scale and biogas) Wind; Lambwe Valley Wind; General supporting weather insurance products hydroelectricity Electric Wind in Kajiado County (reg. • Expansion of mobile payment services • Off-grid clean energy solutions CDM projects) • Strategic multipurpose dams Financial sector Reduced returns of • New product development (weather risk • M-Pesa, M-Kopa, and M-Shwari all • Geothermal developments; • Solar water heater distribution investment portfolios insurance, micro-insurance, energy- offer micro-insurance to small-scale Olkaria, Menengai, OrPower4 (reg. and maintenance over the long term efficiency lending, and green mortgage farmers CDM projects) products) • D’Light, BareFoot Ltd., off grid solar system manufacturers/distributors Property Destruction of and • Upgrading of building codes to include • Garden City damage to property climate resilience and green building concepts • Green building design; efficient lighting and day lighting; more efficient electrical appliances and heating and cooling systems; alternative refrigeration fluids; recovery and recycling of fluorinated gases; rain water harvesting. • Low-income housing 62 Annexures Annexures 63 Extractive Reliance on water • Climate-proof, resource-efficient • No examples found I. The 20 Largest Pension Funds industries and energy; pollution; extraction technologies exposure of sensitive infrastructure (such as As of January 2015 pipelines) to extreme weather RATIO TO TOTAL  FUND NAME FUND VALUE (KSH) FUND VALUE Engineering and Lack of relevant • Expertise in installation, operation, • A number of Kenya-based consulting consulting expertise and maintenance of new, cleaner firms are developing these areas of 1 National Social Security Fund 134,932,875,000 19.78 technologies across all sectors expertise 2 Kenya Ports Authority Pension Scheme 23,026,644,000 3.38 • Sustainable urban planning • Reforestation and regeneration of 3 The Local Authorities Pensions Trust 22,651,603,000 3.32 degraded land 4 Central Bank of Kenya Pension Fund Registered Trustees 21,115,993,000 3.1 • Sustainability impact assessments and 5 Kenya Railway Staff Retirement Benefits Scheme 20,164,919,000 2.96 management systems 6 Kenya Power 15,954,560,000 2.34 SOURCE: Table based on information in the National Climate Change Action Plan (2013), the Climate Change Framework Policy (2014), 7 Telposta Pension Scheme 12,468,674,000 1.83 and the Scaling up Renewable Energy Program Investment Plan for Kenya (2011). Kenya Commercial Bank Staff Retirement (Defined Contribution) 8 11,806,017,947 1.73 Scheme 2006 H. The Ten Largest Banks 9 Kenya Revenue Authority Staff Pension Scheme 11,475,732,000 1.68 10 University of Nairobi Pensions Scheme 2007 9,586,908,000 1.41 As of December 2014 11 Standard Chartered Kenya Staff Retirement Benefits Scheme 2006 9,396,950,000 1.38  BANK NET ASSETS (MILLION KSH) PERCENT OF MARKET SHARE (%) 12 Barclays Bank of Kenya Ltd DC Scheme 9,351,226,000 1.37 13 National Security Intelligence Service Staff Superannuation Scheme 8,731,934,453 1.28 1 Kenya Commercial Bank Ltd 376,969 11.8% 14 Kenya Commercial Bank Staff Pension Fund 8,447,714,626 1.24 2 Co - operative Bank of Kenya Ltd 282,689 8.8% 15 Alexander Forbes Staff Provident Fund 8,194,184,000 1.2 3 Equity Bank Ltd 277,116 8.7% 16 Alexander Forbes Synergy Retirement Fund 8,194,184,000 1.2 4 Barclays Bank of Kenya Ltd 226,043 7.1% 17 The Kenya Airways Ltd Staff Provident Fund 8,140,381,000 1.19 5 Standard Chartered Bank (K) Ltd 222,636 7.0% 18 National Social Security Fund Staff Retirement Benefits Scheme 6,968,290,048 1.02 6 Commercial Bank of Africa Ltd 175,809 5.5% The Kenya Power and Lighting Company Ltd Staff Retirement Benefits 7 CfC Stanbic Bank (K) Ltd 171,347 5.4% 19 6,726,536,000 0.99 Scheme 2006 8 Diamond Trust Bank (K) Ltd 141,176 4.4% 20 Kengen Staff Retirement Benefits Scheme 6,626,155,000 0.97 9 NIC Bank Ltd 137,087 4.3%   Ratio to total fund value represented by the top 20 largest pension funds 53.37% 10 I&M Bank Ltd 137,299 4.3% SOURCE: Retirement Benefits Authority (2015)   Total in Ksh million 2,148,171 67.3%   Total in $ million 23,869   SOURCE: Central Bank of Kenya (2015) 64 Annexures Annexures 65 J. The 10 Largest Fund Managers LIFE INSURANCE TOP 10 ASSETS (MILLION KSH) As of June 30, 2014 ICEA Lion Life Assurance Company 39,297 British American Insurance 31,868 NUMBER OF ASSETS UNDER MANAGEMENT FUND MANAGER Jubilee Insurance Company 30,873 PARTICIPATING PLANS (MILLION KSH) Africa Alliance Securities (Kenya) 9 6,665 CFC Life Assurance Company 20,282 Co-op Trust Investment Services 64 46,554 Pan Africa Insurance Company 18,623 Genesis Kenya Investment Management Kenindia Assurance Company 16,421 97 106,286 Limited Old Mutual Assurance Company 12,038 ICEA Lion Asset Management Limited 28 29,747 UAP Life Assurance Company 6,458 Old Mutual Investment Group Limited 92 79,236 CIC Life Assurance Company 5,327 Pinebridge Investments East Africa Limited 57 158,906 Madison Insurance Company 5,196 Stanlib Investments 34 73,343 Total in million Ksh 186,384 Total 381 500,737 Total in $ million 2,040 SOURCE: Alexander Forbes (2014) SOURCE: Insurance Regulatory Authority (2015) L. Private Equity Funds with Investment Activities in Kenya K. The 10 Largest General Insurance Firms and the 10 Largest Life Insurance Firms 8 Miles Emerging Capital Partners Pearl Capital Partners 88mph eVentures Africa Fund Phatisa Abraaj Fusion Capital Progression East Africa GENERAL INSURANCE TOP 10 ASSETS (MILLION KSH) Accion Ventures Grassroots Business Fund Proparco Jubilee Insurance Company 15,019 Actis Grofin ResponsAbility Acumen Harith Satya Capital UAP Insurance Company 12,569 AfricInvest Helios Partners Shulze Investments APA Insurance Company 10,493 AgriVie IFC Silk Invest CIC General Insurance Company 10,429 Alpha Africa Asset Managers Invested Development Surya Capital ICEA Lion General Insurance Company 7,786 Amethis Finance Kaizen Ventures Swedfund GA General Insurance Company 5,631 Ascent Capital Kibo Capital TBL Mirror Fund Kenindia Assurance Company 5,586 Bamboo Finance KKR TIA Capital British American Insurance Company 4,571 Blue Haven Initiative Kuramo Capital TLcom First Assurance Company 4,427 Carlyle Group LeapFrog Investments TLG Capital CDC LGT TransCentury Directline Assurance Company 3,900 Centum Lundin Foundations Vantage Capital Total in million Ksh 80,410 Citadel Capital/Al Qalaa Holdings Maris Capital Voxtra Total in $ million 883 Development Partners International Mkoba Fund Zoscales DOB Equity Novastar Ventures East Africa Capital Partners Pan African Investment Company SOURCE: East Africa Venture Capital Association (2015) 66 Annexures Annexures 67 1. Government of Kenya. 2013. National Climate Change Action Plan, 2013–2017. Endnotes 2. Government of Kenya, Ministry of Devolution and Planning. 2013. Second Medium Term Plan, 2013–2017. 3. Central Bank of Kenya. 2013. Kenya Financial Sector Stability Report, 2013 (December 2013, Issue No. 5). 4. UNEP. 2011. Towards a Green Economy. 5. Climate Policy Initiative. 2014. The Global Landscape of Climate Finance. 6. Government of Kenya. 2013. National Climate Change Action Plan, 2013–2017. 7. Kenya National Bureau of Statistics. 2013. Economic Survey 2013 Highlights. Accessed April 2, 2015, http://www.knbs.or.ke/index.php?option=com_phocadownload&view=category&id=16&Itemid=508. 8. Safaricom, M-Pesa. Accessed May 5, 2015, http://www.safaricom.co.ke/personal/m-pesa. 9. Safaricom, M-Shwari. Accessed May 5, 2015, http://www.safaricom.co.ke/personal/m-pesa/m-pesa-services/m-shwari. 10. M-Kopa. M-Kopa and Safaricom Announce National Partnership. 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Government of Kenya, Ministry of Devolution and Planning. 2013. Second Medium Term Plan, 2013–2017. 73. Capital Markets Authority. 2013. CMA Master Plan 2013. 49. World Bank, World Development Indicators. Gross Domestic Savings % of GDP. Accessed March 4, 2015, 74. Central Bank of Kenya. 2013. Bank Supervision Annual Report 2013. http://data.worldbank.org/indicator/NY.GDS.TOTL.ZS. 75. Energy Regulatory Commission. 2013. Renewable Energy Portal news article: Financing Renewable Energy. 50. World Bank, World Development Indicators. Accessed April 3, 2015, http://data.worldbank.org/topic/ Accessed April 4, 2015, http://www.renewableenergy.go.ke/index.php/content/38. economy-and-growth. 76. Business Daily Africa. Housing Finance secures Sh1.7bn IFC green loan. Accessed August 6, 2015, 51. Energy Regulatory Commission. Renewable Energy Portal. 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Kenya Financial Sector Stability Report 2013 (December 2013, Issue No. 5). 126. NEMA. 2015. Status of CDM Projects in Kenya. Accessed August 6, 2015, http://www.nema.go.ke/ index.php?option=com_content&view=article&id=241:status-of-cdm-projects-in-kenya&catid=100&Itemid=598. 100. Capital Markets Authority. 2013. CMA Master Plan 2013. 101. Ibid. 102. Capital Markets Authority. 2014. Internal document: Tax and Policy Incentives Chronology (October 2014). Chapter 1 photographs by Frank Van Der Vleuten, Olkaria 2 and Production well. http://bit.ly/2074cgz and 103. First Schedule of the Income Tax Act Cap 470, Section 13 & 14. Part I (50) of the Finance Act 2006. http://bit.ly/1kHuXHW. 104. Standard Media. 2014. Interview with Safaricom CEO Bob Collymore, accessed on September 10, 2015 from http://www.standardmedia.co.ke/ktn/mobile/video/watch/2000085225/-job-centre-sustainability-reporting- bob-collymore-ceo-safaricom-ltd 72 Endnotes Endnotes 73 Aligning Kenya’s Financial System with Inclusive Green Investment International Environment House 2121 Pennsylvania Avenue, NW Chemin des Anémones 11-13 Washington, DC Geneva, 20433 USA Switzerland Tel: (202) 473-3800 Tel.: +41 (0) 229178995 Fax: (202) 974-4384 Email: inquiry@unep.org - Twitter: @FinInquiry Website: http://www.ifc.org/ Website: www.unepinquiry.org