Sustainable Financing in Infrastructure Projects in Kenya

Sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable projects. To guide the transformation towards a sustainable and inclusive economy, the United Nations in 2015 developed the 2030 Agenda for Sustainable Development. However, measuring the impact that sustainable investments have on their environmental targets remains challenging. There is a risk that investors may become reluctant to invest at the scale necessary to mitigate climate change, especially if policy action to address climate change is lagging. Only with accurate and adequately standardized reporting of climate risks in financial statements can investors discern projects’ actual exposures to climate- related financial risks. It is against this backdrop that the study fathomed to assess the state of sustainable finance in projects, to assess the role of financial institutions in sustainable finance and to assess policy issues in sustainable finance in projects. The study adopted desk review also known as Meta-analysis method to extract information concerning sustainable finance in infrastructure projects with subsets on the state of sustainable finance in projects, the role of financial institutions in sustainable finance and policy issues in sustainable finance in projects. The study observed that new financial products and services with ESG have been incorporated into general lending, insurance and investment strategies. A number of new regulatory and legislative regulations have been invented by government or other auditing financial bodies (the European Union and the Capital Market Commission) and have been compulsorily or voluntarily adopted in order to classify and evaluate the weight of the environmental, social and sustainable information in the capital market. Banks are adjusting their lending policies by giving incentives on loan pricing for sustainable projects by adopting less carbon-intensive technologies. On policy issues in sustainable finance, IMF conducts the analysis of risks and vulnerabilities and advising its members on macro-financial policies regarding sustainable finance which has stimulated the private sector capital investment on sustainable projects. Equally, UNEP through its resource efficiency programme offer countries the service of reviewing their policy and regulatory environment for the financing system and developing sustainable finance roadmaps, and assisting central banks, regulators on how to best improve the regulatory framework of domestic financial markets to shape the way and supporting multi-country policy initiatives at sub-regional, regional and global level. In conclusion, sustainable finance is well developed in the international capital markets of Europe, USA, Japan and Australia while in Africa the idea is still nascent and requires the guidance of international monetary and non-monetary institutions to stimulate the financial markets to adjust to sustainable finance initiatives. Further, there is a significant lack of official, regulatory or binding legal standards, for the taxonomy, the evaluation and the notification of environmental, social and corporate governance information in the capital market. The study recommends that: Financial stakeholders should design a holistic taxonomy for the long-term evaluation and notification of the sustainable financial risk models; Sufficient regulatory safeguards should be enacted in every financial product that will satisfy the demand for a clearer sustainable evaluation; Financial instruments and credit rating should be indexed against ESG factors; In parallel with the global initiatives inspired by the United Nations, lending institutions should undertake actions with regard to increasing the level of social responsibility; Lenders insist on information disclosure on how institutional investors and asset managers integrate ESG factors in their risk processes; The capital stock markets should trade Green financial instruments such as green bonds, green loans, green venture capital, green credit guarantee and green insurance on the counter; Entrench PPP Models for resource mobilization and risk sharing and enhance awareness creation and publicity on sustainable finance benefits and operations should be enhanced.