Unlocking transition finance: Making a case for agri-enterprises in Kenya’s Agriculture sector.

In Kenya, climate related transition risks negatively affect a myriad of meso level enterprises, especially so, within the agriculture sector. Agro processors who often deal with runaway energy bills, face limitations in accessing applicable, affordable and tailored finance when they want to transition to clean and climate resilient technologies that offer reprieve. Consequently, on the demand side, high energy costs resulting in high(er) cost of production and lower revenues and increases in probability of default and loss given default of loan books, on the supply side. How then, do these enterprises mobilise capital to support a just transition? What role can finance play? Does transition[1]/green finance provide an avenue to enable this transition?

The Micro-Enterprise Support Programme Trust (MESPT) conducted energy audits across 15 agro-SMEs in Kenya, spread across the country’s counties. These audits aimed to provide these enterprises with the knowledge and guidance to transition to climate-resilient technologies. However, two years later, the level of implementation of audit recommendations was disappointing. Many of the agri-businesses had only made modest progress and struggled with the upfront costs of implementing these changes.

In 2024, MESPT, in partnership with FSD Kenya, sought to address these challenges by working on green finance solutions specifically designed for Kenya’s agricultural sector. These solutions would help create pathways for a just and equitable transition, in line with Kenya’s decarbonisation goals and the Paris Agreement.

Field visits in 2024 revealed that while the said enterprises understood the importance of adopting climate-resilient technologies, they were frustrated by the high initial costs of the transition. Majority of them expressed concerns over the lack of affordable, tailored financing options from financial institutions, or the absence of targeted government subsidies to support these efforts. Financial institutions, who finance these hard-to-abate sectors, also noted that they struggled to understand how to incentivise these agro-processors to adopt green solutions. They lacked the expertise and structures to develop, and scale tailored green finance solutions.

This misalignment between the needs of the agro-processors and the offerings of financial institutions presented a clear barrier. The solution, as MESPT and FSD Kenya recognized, lies in bridging this gap and creating green finance models that are adaptable, scalable, and accessible for Kenya’s agricultural sector.

To address these challenges, FSD Kenya and MESPT launched a green finance energy transmission pilot program aimed at designing and testing financial solutions that could help agro-processors adopt low-carbon technologies. The goal of this initiative is multifaceted:

1. Supporting the scaling of climate solutions within Kenya’s agricultural sector.
2. Building capabilities for both demand-side actors (agro-enterprises) and supply-side actors (financial institutions) to align with 1.5°C climate pathways.
3. Facilitating transition for value chains committed to aligning with a low-carbon future.
4. Contributing to broader national decarbonisation efforts by accelerating the phase-out of high-emitting, energy-intensive assets.

Currently, Kenya has managed to secure only $4.6 billion for climate finance, of which only 40% has gone to the energy sector, falling significantly short of its annual target of $3.2 billion. This funding gap highlights the challenge of securing enough capital for the transition. According to the Paris Agreement, achieving the global climate goals will require scaling up investments in green technologies, particularly in sectors like agriculture that are crucial to Kenya’s economy.

By unlocking green finance at scale, Kenya can not only help agro-processors transition to sustainable practices but also contribute to the global effort to mitigate climate change. Through the pilot program, MESPT and FSD Kenya hope to create a model that will encourage financial institutions to invest more heavily in the agricultural sector’s green transition.

This energy transition mechanism pilot presents a valuable opportunity to demonstrate that climate-conscious finance can be both accessible and profitable for agri-processors. The hope is that, once the model proves successful, financial institutions will adopt it and scale it further, creating a lasting impact on the agriculture sector and the environment.

Ultimately, finance will play a crucial role in this transition. By effectively allocating capital, financial institutions can help drive the adoption of sustainable practices and promote environmental responsibility. The success of this pilot could serve as a turning point in how the financial sector in Kenya and beyond responds to the needs of agri-businesses seeking to transition to a greener future.

In conclusion, through innovation and collaboration, Kenya can overcome the barriers to accessing green finance and take bold steps toward achieving its decarbonisation goals while fostering a more sustainable agricultural sector. This green finance pilot is just the beginning of what could be a larger movement towards a net-zero economy. What room is there, if at all, for failure.