The Central Bank of Kenya (CBK) has taken a significant step towards promoting sustainability in the country's banking sector by introducing new rules that require commercial banks to disclose the environmental impact of the businesses and projects they finance. The move is aimed at curbing greenwashing, a growing concern as more banks and companies rush to brand themselves as environmentally responsible.

The CBK has issued the Kenya Green Finance Taxonomy (KGFT), a classification system that identifies what qualifies as "green" under local and international climate standards. The new rules will require lenders to publicly disclose their exposure to climate-related risks, including investments in sectors with high greenhouse gas emissions. The idea is to move capital away from businesses that worsen the climate crisis and towards those that support low-carbon, climate-resilient investments.

The 18-month transition period will serve as a grace window and a testing ground for all commercial banks to build internal capacity, train risk teams, and integrate climate screening into their credit assessment models. During this period, the CBK will engage with banks to facilitate smooth implementation of the KGFT, which will be a live document subject to periodic updates.

The introduction of the KGFT marks a significant shift in the way climate risk is perceived in the banking sector. Climate risk will now be treated as a material financial risk, not just a reputational issue. The regulator said the taxonomy is meant to give banks a clear, standard language for identifying climate-friendly investments and flagging the ones that are not.

The new rules are likely to have a significant impact on the banking sector, particularly in terms of the types of projects and businesses that receive financing. Sectors like oil and gas, mining, and large-scale agribusiness may see a reduction in financing, while climate-conscious investors may be more likely to invest in banks that prioritize environmental sustainability.

The move by the CBK is part of a broader trend towards greater transparency and accountability in the banking sector. Globally, investors and regulators have grown wary of the rise in ESG-labelled products without evidence to back their bold environmental claims. The introduction of the KGFT is a step towards ensuring that banks in Kenya are held to a higher standard of environmental responsibility.

In conclusion, the CBK's new rules on environmental disclosure are a significant step towards promoting sustainability in Kenya's banking sector. As the country continues to grapple with the challenges of climate change, the move towards greater transparency and accountability in the banking sector is a welcome development. It remains to be seen how banks will respond to the new rules, but one thing is clear: the days of greenwashing in Kenya's banking sector are numbered.