Introduction

Climate finance lies at the intersection of two critical global challenges – climate change and sustainable development. While the urgency for climate action continues to grow, the financial systems meant to support this transition are evolving but remain far from adequate.

The Nationally Determined Contributions (NDCs) under the Paris Agreement, climate risk assessments and national development plans, have increasingly become a priority to States and entities. As such, they are now driving sustainable and green infrastructure finance to meet national climate objectives. That notwithstanding, this approach faces its fair share of challenges.

This gap highlights not only inadequate capital allocation to climate finance, but also the institutional and structural barriers such as regulatory shortcomings, limited project readiness, insufficient data and the general perception of high risk by investors. For private investors and lenders, recognising these constraints is imperative to mitigating risks and exploring innovative financing structures that can unlock value in green projects.

For instance, blended finance, which combines public, philanthropic, or concessional capital with private investment, has shown promise in reducing risk and attracting commercial investors. Instruments such as green bonds, sustainability-linked loans, and carbon credit mechanisms are increasingly being deployed to mobilise capital toward climate-related initiatives.

Evolving Landscape of Green Finance

Green finance has advanced significantly in recent years, moving from a fringe interest to a core element of global financial markets.

Institutional investors are increasingly integrating environmental, social, and governance (ESG) factors into their investment decisions, to meet the sustainability and regulatory quota.

Key instruments, including green bonds, which finance projects with clear environmental benefits; sustainability-linked loans, where interest rates are tied to achieving sustainability performance targets; blue finance, which targets marine conservation and sustainable use of ocean resources; and resilience bonds, designed to fund climate adaptation and disaster risk reduction, have introduced new facets to green finance.

Technological innovations such as blockchain and fintech platforms are also beginning to revolutionise the accessibility, traceability and transparency of green finance, especially for small-scale or community-led projects.

Additionally, taxonomies and verification frameworks have increasingly become standard practice, with frameworks such as the EU Green Taxonomy, the International Capital Market Association (ICMA) principles, and, closer home, the Kenya Green Finance Taxonomy are growing investor confidence and mainstreaming green finance.

Policy Frameworks and the Role of Climate Finance

Various factors impact the success of a climate finance project. However, one of the key hallmarks of an effective climate finance structure rests on the foundation of clear and comprehensive legal, regulatory and policy frameworks. Kenya has established fundamental regulatory frameworks and policies to support climate project finance. These include:

i) The Constitution of Kenya, 2010, which guarantees every citizen the right to a clean and healthy environment, the foundation for environmental sustainability and climate action. Furthermore, it enshrines key principles such as transparency, accountability, prudent use and equitable distribution of resources, which are essential for participatory resource management, financing of green projects and sustainable infrastructure;

ii) The Public Private Partnerships Act, CAP 430, Laws of Kenya, which provides the framework for the financing, construction, development, operation, and maintenance of infrastructure or development projects where projects require the structured collaboration of government and private investors. It also establishes a structured process for risk allocation and financing mechanisms, all of which are crucial for infrastructure and green projects;

iii) The Movable Property Security Rights Act, CAP 499A, Laws of Kenya (the MPSRA), which establishes the legal framework for securing financing through movable assets, offering an alternative to immovable property-backed financing. The MPSRA also prescribes a comprehensive mechanism for the enforcement of security rights in favour of a creditor, thereby strengthening access to finance; and

iv) The Insolvency Act, CAP 53, Laws of Kenya, which outlines processes for efficient and equitable administration of entities or natural persons in financial distress, aiming to secure better outcomes for lenders and investors. In the context of climate finance, investors and stakeholders in sustainable finance ventures, are more confident about their long-term commitments, noting that risks and losses can be mitigated through insolvency procedures.

Collectively, these statutes create a solid foundation for secure and transparent project financing in Kenya.

Regional and Continental Trends in Climate Finance

Regionally, the African Continental Free Trade Area (AfCFTA), together with Africa’s broader climate objectives, is promoting cross-border climate investment and facilitating new opportunities. However, this development has also introduced multi-jurisdictional regulatory complexities that require particular expertise to navigate disparate national policies effectively.

Within sub-Saharan Africa, and particularly in Kenya, climate finance is evolving in response to localised needs and emerging regional frameworks. Kenya has made significant strides, with strong legal and political commitment embodied in legislation such as the Climate Change Act, CAP 387A, Laws of Kenya, which has provided an overarching statutory framework for the development, regulation and implementation of mechanisms geared towards enhancing the country’s climate resilience and carbon market development.

To complement this, Kenya also developed the Kenya National Adaptation Plan (2015-2030) and the broader strategic frameworks aligned with the Vision 2030 blueprint. Collectively, these frameworks have embedded climate change mitigation and adaptation within the national development agenda, fostering an enabling environment to mobilise climate finance resources targeting Kenya’s unique vulnerabilities and enhancing climate resilience for sustainable economic growth.

Further, the launch of the Kenya Green Finance Taxonomy (KGFT) and climate risk disclosure frameworks marks a major milestone in Kenya’s green finance architecture. The KGFT has provided a com- prehensive classification system designed to standardise and define the financial activities in alignment with Kenya’s environmental and development objectives. It classifies environmentally sustainable economic activities to guide investment decisions, combat greenwashing by ensuring transparency and accountability, and align the financial flows with Kenya’s NDCs. In doing so, it boosts investor confidence and attracts both domestic and international capital towards the achievement of a climate-resilient economy.

In many developing countries, including Kenya, challenges such as underdeveloped capital markets and limited institutional capacity can hinder the flow of private capital. However, through the ongoing alignment of legislation and policy, Kenya is creating an environment that supports both conventional and green project finance, which will unlock funding streams that advance sustainable priorities.

The KGFT has exemplified the efforts to standardise definitions and reporting, thereby enhancing transparency and boosting investor confidence; trends we believe, shall influence risk profiles and structuring considerations in future green deals.

Strategic Imperatives to Navigate Climate Finance

Stakeholders engaged in climate finance transactions must adopt a holistic approach to mitigate the risks commonly associated with such investments. First, rigorous due diligence must be undertaken at the outset to identify potential regulatory, environmental and technical risks. These may include issues such as uncertain land tenure, weak institutional governance, or technological feasibility.

Contracts and supporting documentation must be precisely structured to account for the allocation of risk and liability among stakeholders, especially in cases of project failure, cost overruns, or force majeure events. Moreover, the covenants, obligations of the respective parties, and remedies available in the event of default should be clearly highlighted. The incorporation of binding ESG performance covenants relating to the project should also be carefully considered and critically outlined.

Parties seeking to engage local or international actors in financing and implementation of green projects should effectively negotiate and evaluate co-investment strategies, including guarantees, to mitigate risk perception and enhance project bankability.

Overall, embedding integrated strategic measures and regulatory parameters into green project financing will safeguard investor confidence, unlock climate capital, and create long-term value for communities and stakeholders.

Conclusion

The challenge of climate finance is multidimensional, involving regulatory gaps, capital markets, policy design, institutional capacity, and social equity concerns. Yet, in the midst of these challenges lies a profound opportunity to reimagine development in a way that is sustainable, inclusive, and resilient.

In many developing countries, including Kenya, challenges such as underdeveloped capital markets and limited institutional capacity can hinder the flow of private capital. However, through the ongoing alignment of legislation and policy, Kenya is creating an environment that supports both conventional and green project finance, which will unlock funding streams that advance sustainable priorities.

Addressing these challenges requires coherence across institutions, innovation in financial structures, and trust among stakeholders. A robust ecosystem – comprising national governments, development finance institutions (DFIs), financial institutions, public benefit organisations, and academia – is essential to designing, funding, and implementing impactful climate projects.

With the right strategies, tools, and partnerships in place, climate finance can become a powerful engine for transformation – driving the world not only toward net-zero emissions but also toward a future that is just, prosperous, and resilient for all.