The Central Bank of Kenya (CBK) has taken a significant step towards combating greenwashing in the financial sector by publishing draft rules for a Kenya Green Finance Taxonomy (KGFT).

This move aligns Kenya with the global effort to promote transparency and environmental responsibility in financial activities.

Greenwashing refers to the misleading portrayal of a company's products or services as being more environmentally friendly than they actually are.

This deceptive practice often seeks to capitalize on the growing consumer demand for sustainable options.

The proposed KGFT aims to establish a clear classification system to differentiate between environmentally sustainable, or "green," projects and those with a detrimental impact on the environment.

The taxonomy will define a baseline for what qualifies as "green" based on international best practices and Kenya's specific national priorities.

"A common understanding of what constitutes green finance is crucial for the financial sector to effectively contribute to addressing climate change," stated the CBK in the draft document.

The KGFT is envisioned to function as a benchmark for Kenya's transition to a green economy, ensuring consistency in green finance flows and alignment with international standards.

This initiative comes amidst growing green finance disclosures by Kenyan banks, with institutions like Kenya Commercial Bank, Co-operative Bank of Kenya, Absa Bank Kenya, and Standard Chartered Bank-Kenya reporting billions of shillings allocated to green projects.

The urgency for action on climate change in Kenya and other African nations is particularly pressing.

Despite contributing minimally to global greenhouse gas emissions, these countries are disproportionately burdened by the consequences of climate change.

In a previous effort to address environmental risks, the CBK issued climate-related risk management guidance in October 2021.

This guidance aimed to assist banks in integrating climate change considerations into their governance, strategic planning, risk management, and disclosure frameworks.

While a review found progress in integrating climate risks into governance and strategy, the CBK noted that most Kenyan lenders are still in the early stages of developing risk management and disclosure frameworks.

The KGFT is expected to bridge this gap by providing a standardized approach to green finance classification and reporting.

What it greenwashing?

Greenwashing refers to a marketing strategy where companies make deceptive or exaggerated assertions regarding the environmental advantages of their products or actions.

For instance, a company might assert that it is effectively reducing its emissions to net zero without having a substantiated plan in place.

This tactic allows companies to perpetuate or escalate their environmentally harmful practices while simultaneously capitalizing on consumers with sustainability concerns.