Navigating the Real Estate Sector Under the Kenya Green Finance Taxonomy Framework
In March of 2024, the Central Bank of Kenya in collaboration with the European Investment Bank launched the first edition of the Kenya Green Finance Taxonomy (KGFT), which provides a framework for classifying environmentally sustainable economic activities in various sectors. In Kenya’s Real Estate Sector, the KGFT introduces stringent criteria for climate change mitigation and adaptation, as well as compliance with environmental and social safeguards. This article explores the implications of the KGFT guidelines on real estate developers, investors, and financiers, focusing on two key practice areas: regulatory compliance and sustainable financing.
1. Regulatory Compliance: Meeting the KGFT’s Technical Screening Criteria
The KGFT establishes a classification system for sustainable economic activities, thus providing a framework for the evaluation and recognition of “green” projects. For real estate activities to qualify under the taxonomy, they must “Make a Significant Contribution” (MSC) and “Do No Significant Harm” (DNSH).
Appendix 7 of the KGFT framework outlines the specific requirements for building acquisition and ownership, which address both climate change mitigation and adaptation goals.
A. Climate Change Mitigation Criteria
To establish a positive contribution to climate change, real estate projects must meet the following criteria:
- Obtain an Energy Performance Certificate (EPC) Class A, for buildings constructed before December 31, 2020. Class A is the highest attainable energy efficiency rating.
- Implement energy performance monitoring to ensure efficient operation, for large non-residential buildings (over 1,000 m² or air-conditioning and ventilation systems exceeding 290 kW).
- Avoid the acquisition of properties to be used for fossil fuel extraction, storage, or transportation. This is strictly excluded from green classification.
- Use certified green standards. Alternative certifications may be accepted if verified by an accredited third party, such as the International Finance Corporation Excellence in Design for Greater Efficiencies (IFC EDGE) and the Leadership in Energy and Environmental Design (LEED) certifications.
B. Climate Change Adaptation Criteria
Projects must further demonstrate resilience to the adverse effects of climate change by:
- Ensuring structural resilience. Buildings and infrastructure should be designed or retrofitted to withstand extreme weather events (such as flooding, earthquakes or heatwaves).
- Utilising water efficiency tactics through the integration of water saving fixtures and systems to enhance responsible water consumption.
Strictly prohibiting the use of hazardous materials to promote material safety (for example, asbestos, toxic contaminants). - Ensuring sustainable and environmentally appropriate site selection for developments as they must not be located on protected natural areas (e.g., UNESCO World Heritage Sites, IUCN Category I-II zones), high-biodiversity land, Strict Nature Reserves, Wilderness Areas and National Parks.
C. Do No Significant Harm (DNSH) Assessment
To maintain compliance with the DNSH principle, developers and investors must ensure they do not adversely impact other environmental objectives. Legal compliance must be demonstrated in the following ways:
- Sustainable water use which entails strict compliance with Kenya’s Water Act (2012) and Environmental Management and Coordination (Water Quality) Regulations.
- Biodiversity and Ecosystem protection must be demonstrated as all developments are subject to strict adherence to Environmental Impact Assessment (EIA) requirements under Kenyan law.
- Pollution prevention tactics must be incorporated to ensure the use of low-emission materials and sustainable construction practices whilst minimalizing environmental harm.
Legal Implications can arise from failure to comply with KGFT criteria and may lead to regulatory sanctions and disqualification from green financing opportunities. It is therefore imperative that developers undertake comprehensive legal due diligence in relation to site selection, energy performance, building materials and certification pathways.
2. Sustainable Financing Opportunities for Real Estate
Beyond regulatory compliance, the KGFT opens doors for green financing, enabling developers and investors to access lower-cost capital, tax incentives, and international funding. Alignment with the taxonomy enhances eligibility for various incentives and financial opportunities such as:
A. Green Bonds and Sustainability – Linked Loans
Projects meeting KGFT criteria can issue green bonds or secure sustainability-linked loans. These instruments offer access to dedicated capital pools for sustainable infrastructure and development. The heightened disclosure obligations placed on financial institutions for green financing also enhances transparent reporting of financial figures, such as turnover, capital expenses and operating expenses.
B. Incentives for Retrofitting Existing Buildings
Owners and developers of existing properties may qualify for green financing by implementing energy efficient upgrades such as:
- Solar photovoltaic systems
- Enhanced insulation and ventilation systems
- High efficiency lighting and HVAC systems
Third-party certifications such as Building Research Establishment Environmental Assessment Method (BREEAM) and Green Star can further strengthen the project’s credibility and financing eligibility.
C. Risk Mitigation for Investors
Real estate projects that are designed to incorporate climate resilient measures are better positioned to withstand future environmental and regulatory risks, enhancing their attractiveness to ESG-focused investors. Additionally, conformance with international standards, such as the EU Taxonomy for Sustainable Activities, facilitates cross-border investment opportunities and access to international green finance markets.
3. Implications for Real Estate Stakeholders under the KGFT
The implementation of the KGFT marks a pivotal evolution in the governance of real estate development, offering a structured framework to align Kenya’s urban growth with international sustainability goals. By adhering to the taxonomy’s technical criteria, developers, investors, contractors and other industry stakeholders can access new financing opportunities, enhance regulatory compliance, and contribute meaningfully to Kenya’s transition to a low-carbon economy.
Developers and investors should prioritise energy-efficient design principles and integrate climate-resilient construction standards at the conceptual stage. This entails undertaking Environmental Impact Assessments (EIA) and Do No Significant Harm (DNSH) evaluations early in the project lifecycle to ensure regulatory alignment and financing eligibility.
Financial institutions are encouraged to embed KGFT-aligned screening criteria into loan underwriting practices and bond issuance protocols. They should establish internal mechanisms for verification and due diligence, ensuring that financed activities meet the taxonomy’s green eligibility requirements.
Given the complexity of regulatory and financial requirements, we strongly advise real estate firms to engage both legal and financial advisors at the project design and structuring stage to ensure compliance with the KGFT and maximise the benefits of green financing instruments. Legal Practitioners play a critical role in advising clients on regulatory compliance, green building certifications, negotiation of sustainability-linked financial arrangements and applicable environmental standards.
Conclusion
The effects of uncontrolled development in Nairobi and across the broader Kenyan landscape have become increasingly evident—manifesting in environmental degradation, urban inefficiencies, and infrastructure stress. The KGFT emerges as a strategic tool to address these challenges by promoting environmentally sound development while attracting sustainable investment.
Ultimately, the taxonomy is more than a regulatory instrument; it is a blueprint for responsible urban growth with the future in mind. Its successful adoption positions Kenya to not only to meet its domestic climate commitments but also align with the global effort to stabilise climate change and foster resilient, future-proof cities.
For further assistance or information, please contact Benson Ngugi, Hellen Waithira or Jessica Obimbo.