Kenya Green Finance Taxonomy: Unlocking Sustainable Capital and Climate Resilience
- Muhoro & Gitonga Associates
- Apr 16, 2024
- 6 min read
Updated: 2 days ago
Table of Contents
Understanding the Kenya Green Finance Taxonomy
Recent Developments and Launch Timeline
Structure and Key Pillars of the Taxonomy
Integration with the Climate Risk Disclosure Framework
Scope and Application of the Taxonomy
Regulatory and Legal Implications for Financial Institutions
Impact on Borrowers, Investors, and Project Sponsors
Legal Documentation and Due Diligence for Counsel
Opportunities in Green Finance Products
Enforcement, Dispute Resolution, and Compliance Risks
Practical Steps for Law Firms, Corporates, and Financiers
1. Executive Summary
The Kenya Green Finance Taxonomy (KGFT), formally launched by the Central Bank of Kenya (CBK) in April 2025, introduces a unified system for classifying environmentally sustainable activities. It provides a common language for financial market participants, banks, insurers, investors, and regulators to identify, assess, and report on green investments.
This initiative aligns with Kenya’s Vision 2030, National Climate Change Action Plan (NCCAP), and commitments under the Paris Agreement. By defining what qualifies as “green,” the KGFT seeks to curb greenwashing, enhance investor confidence, and facilitate access to sustainable capital both locally and internationally.
2. Understanding the Kenya Green Finance Taxonomy
The KGFT is a classification tool that establishes criteria for determining whether an economic activity contributes substantially to environmental objectives. It aims to standardize definitions of green finance, ensuring consistency in sustainable investment decisions.
Its objectives include:
Promoting transparency and credibility in green finance markets.
Guiding the design and labelling of green financial products.
Facilitating the alignment of financial flows with Kenya’s sustainability goals.
Encouraging private investment in climate-friendly sectors such as renewable energy, water management, waste reduction, and sustainable agriculture.
The Taxonomy defines six environmental objectives:
Climate change mitigation
Climate change adaptation
Sustainable use of water and marine resources
Transition to a circular economy
Pollution prevention and control
Protection and restoration of biodiversity and ecosystems
An activity must make a substantial contribution to one of these objectives while avoiding significant harm to others; a principle derived from international best practice, notably the EU and ASEAN taxonomies.
3. Recent Developments and Launch Timeline
Kenya’s journey toward the KGFT began in 2023, when the Central Bank, in collaboration with the National Treasury and development partners such as FSD Kenya and the International Finance Corporation (IFC), initiated consultations on a national green finance framework.
A draft taxonomy was published for stakeholder review in April 2024. Following feedback from banks, capital market participants, and government agencies, the final version was released in April 2025. This first edition is aligned with the Climate Risk Disclosure Framework, also issued by the CBK in 2025, ensuring consistency between classification and disclosure.
The KGFT now forms part of Kenya’s broader Sustainable Finance Initiative (SFI), which aims to integrate environmental and social governance (ESG) principles into the financial system.
4. Structure and Key Pillars of the Taxonomy
The KGFT is structured around three main pillars:
Classification of Activities: Economic activities are categorised as green, transition, or excluded based on technical screening criteria.
Technical Screening Criteria: Each eligible sector—energy, agriculture, transport, manufacturing, buildings, and financial services has specific performance thresholds and qualifying technologies.
Do-No-Significant-Harm Principle: An activity must not significantly undermine other environmental objectives.
The taxonomy also includes transition activities, which are not yet fully green but are on a credible pathway toward sustainability. This flexibility allows Kenya’s industrial and energy sectors to modernize gradually while still attracting finance.
5. Integration with the Climate Risk Disclosure Framework
The Climate Risk Disclosure Framework (CRDF), also issued by the CBK in 2025, complements the KGFT by requiring banks to disclose climate related financial risks and exposures.
This integration ensures that institutions not only classify their portfolios accurately but also communicate their exposure to transition and physical climate risks transparently.
6. Scope and Application of the Taxonomy
The KGFT applies primarily to financial institutions regulated by the Central Bank of Kenya, the Capital Markets Authority (CMA), and the Insurance Regulatory Authority (IRA). It also guides:
Fund managers and institutional investors developing green portfolios.
Corporates seeking green bonds or sustainability-linked loans.
Public sector entities implementing climate-aligned projects.
While the taxonomy is not yet a legally binding instrument, regulators are expected to progressively integrate it into prudential guidelines, product approval processes, and sustainability reporting standards.
7. Regulatory and Legal Implications for Financial Institutions
The adoption of the KGFT introduces new compliance and disclosure obligations for banks and financial service providers. Institutions must:
Integrate taxonomy-aligned definitions into lending and investment policies.
Reclassify existing portfolios according to taxonomy categories.
Report taxonomy alignment percentages to regulators and investors.
Legal counsel must therefore ensure that financial products marketed as “green” or “sustainable” meet the taxonomy criteria. Mislabeling could lead to regulatory sanctions, reputational damage, and potential investor litigation for misrepresentation.
8. Impact on Borrowers, Investors, and Project Sponsors
For borrowers and project sponsors, taxonomy alignment is increasingly a prerequisite for accessing concessional finance or blended capital. Development banks and green funds are now requiring evidence that projects meet KGFT criteria before disbursement.
Investors gain confidence from taxonomy-aligned instruments because they can verify that proceeds are used for environmentally sound purposes. Over time, the Taxonomy is expected to lower the cost of capital for green projects while discouraging investment in high-carbon sectors.
9. Legal Documentation and Due Diligence for Counsel
Lawyers advising on project finance, capital markets, or corporate transactions must adapt their due diligence checklists to incorporate KGFT criteria. Key documentation considerations include:
Ensuring that environmental impact assessments (EIAs) align with taxonomy definitions.
Including representations and warranties confirming taxonomy compliance.
Structuring green bond frameworks and sustainability-linked loans around taxonomy-approved activities.
Reviewing disclosure statements to mitigate greenwashing risks.
The taxonomy also influences how law firms draft sustainability clauses, ESG covenants, and reporting undertakings in financing agreements.
10. Opportunities in Green Finance Products
The KGFT opens new avenues for innovation in Kenya’s financial markets, including:
Green bonds and sukuk: Taxonomy alignment will enhance credibility and investor confidence.
Sustainability-linked loans: Performance indicators can be benchmarked against taxonomy metrics.
Green insurance products: Underwriters can develop risk transfer mechanisms that support renewable energy and climate-resilient agriculture.
Carbon credit financing: Banks can structure credit lines around verified emission-reduction activities classified as green.
By providing a trusted framework, the KGFT is expected to accelerate capital inflows into renewable energy, clean transport, sustainable agriculture, and water management.
11. Enforcement, Dispute Resolution, and Compliance Risks
Although the taxonomy itself is a guidance tool, its gradual integration into regulatory frameworks will introduce compliance and enforcement dimensions. Institutions that misrepresent the green nature of their products could face:
Regulatory action by the CBK, CMA, or IRA.
Civil liability under the Capital Markets Act and Consumer Protection Act.
Reputational damage arising from public scrutiny and investor claims.
Disputes may emerge around taxonomy interpretation, especially in loan documentation or investment prospectuses. Counsel must therefore draft clear provisions on classification methodologies and verification processes.
12. Practical Steps for Law Firms, Corporates, and Financiers
To align with the KGFT, stakeholders should consider the following steps:
Capacity building: Train compliance and legal teams on taxonomy interpretation.
Policy updates: Integrate taxonomy criteria into lending, investment, and procurement policies.
Portfolio mapping: Assess existing exposures and classify them according to taxonomy categories.
Disclosure alignment: Ensure climate-related reporting follows both the KGFT and CRDF guidelines.
Contractual safeguards: Include taxonomy-based representations in financing agreements.
Law firms can play a central role by advising clients on compliance frameworks, conducting taxonomy audits, and structuring innovative green financial instruments.
13. Frequently Asked Questions (FAQs)
1. What is the Kenya Green Finance Taxonomy?
It is a classification system developed by the Central Bank of Kenya that defines which economic activities qualify as environmentally sustainable.
2. Who is required to use the taxonomy?
Banks, insurers, fund managers, and corporates seeking to raise or invest in green finance instruments are encouraged to apply it.
3. Is compliance mandatory?
Currently, the taxonomy is a voluntary guidance tool, but regulators are expected to embed it into financial sector regulations progressively.
4. How does the taxonomy relate to the Climate Risk Disclosure Framework?
The taxonomy defines what qualifies as green, while the disclosure framework prescribes how financial institutions must report climate-related risks and opportunities.
5. What are the penalties for greenwashing?
If a financial product is mislabelled as green contrary to taxonomy criteria, institutions may face regulatory sanctions, investor lawsuits, or reputational loss.
6. How can corporates benefit from taxonomy alignment?
Taxonomy-aligned projects enjoy easier access to concessional financing, green bonds, and international climate funds.
7. Will there be future updates to the taxonomy?
Yes. The CBK intends to periodically review and expand sector coverage as technologies evolve and Kenya’s climate policies advance.
To learn more see the Kenya Green Finance Taxonomy and the Central Bank of Kenya Website.
