The Landscape of Climate Finance in Kenya
In 2015, the Government of Kenya submitted its nationally determined contribution (NDC) to the Paris Agreement, a landmark agreement to combat climate change. Kenya pledged to reduce its greenhouse gas (GHG) emissions by 30% by 2030 relative to the business-asusual scenario. At the time, the Government of Kenya estimated that KES 4,040 billion (USD 40 billion) would be needed by 2030 to meet its NDC target. In 2018, these numbers were revised upwards in its National Climate Change Action plan (NCCAP) to KES 1,848 billion (USD 18.3 billion) for the 2018-2022 period only, equivalent to nearly KES 465 billion a year (USD 4.6 billion). In December 2020 the Government submitted an updated NDC further increasing the need. The current estimated cost of implementing Kenya’s mitigation and adaptation actions stands at KES 6,775 billion (USD 65 billion) in 2020-2030.
The Landscape of Climate Finance in Kenya is the first attempt to track the climate finance
flows in the country since the Paris Agreement. The report finds that KES 243.3 billion (USD 2.4 billion) flowed to climate-related investments in 2018, one third of the finance needed annually. Led by the National Treasury of Kenya, the analysis shows that the financing tracked is disproportionally targeting certain sectors and activities that will only partially address climate issues and significant efforts will be needed to align all sectors relevant to achieving Kenya’s NDCs. If finance continues to flow at this same rate, Kenya will fall short of what is needed to achieve its climate goals.
Kenya is highly vulnerable to climate change and is already feeling the effects with a notable increase in climate-related disasters, such as droughts and floods. These events are estimated to create an economic liability of 2-2.8% of its gross domestic product (GDP) every year. This is largely because the economy is dependent on many climate-sensitive sectors, such as agriculture, water, energy, tourism, wildlife, and health. This vulnerability is then worsened when the country is exposed to multiple crises, such as the locust invasion and COVID-19 pandemic in 2020.
Kenya’s ‘Vision 2030’ policy aims to transform it to an industrialized, middle-income country by 2030. However, given the vulnerability of its key sectors it is vital that this is ‘green growth’ to ensure Kenya builds a sustainable, resilient economy. To achieve this, both the public and private sector will need to scale-up and mainstream climate-related investments.
Through the research outlined in this report, there is an opportunity to examine the finance flowing in Kenya in 2018 and evaluate how aligned it is with the climate ambitions and needs. This study explores which sectors are receiving climate finance and whether this is enough to meet the ambitions of Kenya’s NDC. The research examines investments from the public and private sectors, as well as domestic and international investors.
KEY FINDINGS
In 2018, KES 243.3 billion (USD 2.4 billion) of public and private capital was invested in climate-related activities. This is approximately one third of the financing that Kenya needs annually to meet the targets set in its NDC. Overall, public investment (from domestic and international providers) totaled KES 144.3 billion (59.4%) while investment from the private sector totaled KES 98.9 billion (40.7%). In order to meet the climate ambitions outlined in the NDC, both public and private climate finance needs to be scaled-up significantly by 2030.
PUBLIC FINANCE
The Kenyan government disbursed KES 76 billion (USD 752.4 million) in climate-related development expenditures in the fiscal year 2017/18. This amount included KES 42 billion (55%) of external resources from international partners channeled into the national budget, while KES 34 billion (45%) was from domestic public resources.
Less than 60% of the tracked finance comes from international public and private sources. Implementing Kenya’s NDC requires that international partners will sustain at least 87% of
the costs by 2030, a level not met in 2018. Development partners in particular provided less than one third of all finance tracked.
Seventy-nine percent of international public climate finance was delivered through debt
and was mostly channeled towards mitigation activities (55%). There is an urgent need for international investors to scale-up their investments in adaptation sectors, which requires more innovative financing models.
PRIVATE FINANCE
Investment from the private sector totaled KES 98.9 billion (USD 979 million), 34.4% originating domestically from Kenyan companies through their own resources and 65.6% from overseas private companies investing into projects located in the country. Private finance represents almost 41% of total climate finance tracked in Kenya, and most of this was directed to renewable energy generation.
Foreign private sector actors invested KES 64.9 billion (USD 643 million) in climate-related capital in Kenya, predominantly in renewable energy projects (99.7% of the total). Beyond renewable energy, philanthropic foundations are the only international private actors that have invested in other climate sectors, in particular supporting adaptation, health, and water projects in Kenya.
For Kenya to reach the scale of finance needed to achieve its NDC, the private sector will need to play a larger role in the key sectors beyond renewable energy.
USES AND SECTORS
Slightly more than 79% of climate finance in Kenya was directed to the implementation of climate mitigation measures which is in stark contrast to the need given that Kenya has an adaptation focused NDC. This presents an economic risk due to the cost of climate events such as drought and flooding. Within the mitigation sector, climate finance is disproportionally targeting the renewable energy sector, while other key sectors, like agriculture, forestry and land use, transport, and water management, are dramatically underfunded.
Only 11.7% of climate finance in Kenya was directed to adaptation. The largest financing gap in meeting Kenya’s NDC is in the water and blue economy sector. Improved water security and management is vital for Kenya to achieve its NDC and adequately adapt to climate change, however this requires investment. There is also an urgent need to increase finance for the forestry and disaster-risk management sectors, as both will build Kenya’s resilience against drought and flooding. The COVID-19 pandemic has also shown the increased importance of health, sanitation, and human settlement, as those without access to healthcare or permanent housing are most at risk during crises. The figures outlined above represent the needs estimated in the NDC, but it is likely that this need could now be much higher for Kenya to increase its resilience to pandemics.
GREEN RECOVERY
This report is written during the onset of the COVID-19 pandemic, which is likely to have a significant impact on flows of finance in Kenya. The pandemic has had a devastating financial impact globally, the extent of which is still unknown. The World Bank has projected that in Kenya GDP growth will decelerate from an annual average of 5.7% (2015-2019) to 1.5% in 2020 (World Bank, 2020b). This reduced economic growth, and its cost to Government combined with the human toll from the pandemic, is a risk for the state of climate finance in Kenya. However, it also presents an opportunity to accelerate the transformation. It is now more important than ever that stimulus packages and new investments are aligned with climate ambitions to create a ‘green recovery’ and to build a more resilient economy.
RECOMMENDATIONS
This report provides key recommendations for how climate-related investments can be
scaled in Kenya:
- Adaptation. There is an urgent need to increase finance for adaptation in Kenya, particularly in the water, disaster risk management, and forestry sectors. This should be the priority of the public sector given the unique challenges in financing adaptation, and the focus of both domestic and international public finance.
- Mitigation. While the renewable energy sector has been a success story in Kenya, there is a need to scale-up investment in most of the key mitigation sectors, namely transport and forestry (which is cross-cutting with adaptation).
- Subsidies and incentives for private sector. The private sector has a key role closing Kenya’s investment gap. Implementation of incentives and subsidies to create a more attractive enabling environment for private investment in the transport, forestry, water, land use, and waste sectors are therefore of critical importance. For example, implementation of the proposed incentive schemes in the national strategy for achieving and maintaining over 10% tree cover by 2022.
- International public finance. There is a need for international public finance to focus on more challenging sectors which are not receiving private finance at scale. For example, using innovative financing to mobilize investment into key underfunded sectors, such as forestry, transport, and water.
- Coordination among actors. Climate finance should be used more effectively to increase its impact. This will require improved coordination and reporting between Kenyan actors at all levels: Ministries, agencies, county-level government entities, international donor partners, and private sector stakeholders.
- Climate finance tracking and reporting. To better understand whether finance is meeting Kenya’s climate needs and how to scale-up investment, there is a need for regular reporting from Ministries to the National Treasury on climate-related expenditure. This can be implemented through the new segment 8 component of the Integrated Financial Management and Information System (IFMIS). Once in place, the National Treasury should annually monitor the climate finance flows relative to the need to monitor progress and respond to short falls.
