Kenya’s public debt as of September 2025 stood at KSh 12.1 trillion, with debt servicing putting a significant strain on government revenues. However, the challenge for the country is not only the size of the debt, but how it is managed and utilized. In this blog, IPF argues for a shift away from conventional borrowing and toward one that leverages investor interest in environmental and social outcomes to generate more restrictive “ESG” (environmental, social and governance) debt that is also more transparent, better aligned to long-term priorities and cheaper than issuing general purpose bonds.
In the last decade, Kenya’s borrowing has often failed to translate into sustainable development. This is partly due to weak tracking of funds, limited integration with national priorities, and inadequate return on investment. For instance, the audit of the 2014 Euro Bond noted that the utilization of the proceeds could not be traced to specific development projects. Since general revenue is fungible, it means that borrowed resources can be absorbed into general spending, with no evidence that they achieved their intended purpose of capital investment. This weak traceability opens the door to misallocation, leakage, and opacity. Additionally, in the 2021/22 fiscal year, more than KSh 70 billion in debt proceeds were unaccounted for, reinforcing the persistent debt governance challenge which points to dysfunction in how debt is managed, allocated, and monitored.
Kenya needs to shift to borrowing that is more transparent, purpose-driven, and linked to long-term social, environmental, and economic value. ESG debt instruments, which are bonds and loans specifically designed to finance projects with measurable environmental, social, and governance benefits, offer a compelling alternative.[i] ESG instruments require clear project selection, earmarked funding, public reporting, and external verification, making it harder for funds to be diverted or misused. Because ESG debt is tied to specific investments, it ensures that borrowed money supports productive, long-term projects rather than short-term budget relief. It also attracts a wider pool of investors, potentially at better terms and longer maturities, while improving Kenya’s debt transparency, accountability, and credibility.
ESG debt instruments include green bonds, which fund environmentally sustainable projects, social bonds aimed at addressing social challenges, and sustainability bonds, which combine both environmental and social objectives. A growing segment of investors, especially from pension funds, insurance companies, and impact funds, actively allocate capital to sustainability-linked instruments to meet regulatory, fiduciary, or voluntary ESG mandates. This prioritizes projects that help countries close SDG and climate gaps, through renewable energy, resilient infrastructure, healthcare, and social inclusion. [ii] Globally, the ESG debt market has grown into a USD 4–5 trillion industry from less than USD 100 billion in 2015. However, this still represents only about 5-6% of the total sovereign debt market. [iii] Sovereign issuances are now common among both developed and developing economies reflecting an evolution of ESG from a corporate funding strategy to a mainstream financing tool for public debt. Kenya is well-positioned to tap into this growing market as it reforms its debt strategy and strengthens fiscal credibility. While ESG debt cannot fully substitute for conventional debt, Kenya can expand its limited ESG portfolio currently consisting of green and infrastructure bonds which make up only a small fraction of the total public debt.
ESG-aligned financing sends a strong signal that the government is shifting toward more responsible, transparent, and development-oriented borrowing. Kenya’s rising debt levels and frequent sovereign credit rating downgrades have raised concerns over debt sustainability and governance. However, ESG financing requires stricter reporting, ring-fencing and performance commitments and this constraint is precisely what helps rebuild trust in a market where credibility has deteriorated. By demonstrating discipline and transparent use of proceeds, Kenya can counter negative perceptions, diversify its investor base, and access financing that would otherwise not be available through general-purpose bonds.
By adopting ESG financing, Kenya can fund productive development and climate commitments while putting less pressure on the budget than conventional debt. Unlike Eurobonds which have limited traceability, ESG instruments ring-fence funds for specific sustainable projects, aligned with national development goals. For example, Kenya’s first green bond, issued by Acorn Holdings in partnership with Helios, successfully raised KSh 4.3 billion, more than twice the initial KSh 2 billion target to finance sustainable student housing in Nairobi. This project proved both financially viable and impactful, generating KSh 544 million in net profit in 2024. [iv] This suggests that projects with predictable cash flows or clear financial advantages can attract ESG funding, support repayment and reduce concerns about financial sustainability. Additionally, even where ESG projects do not generate direct revenue, they can still improve the government’s fiscal position by reducing future government expenditures. For example, investment in geothermal energy has greatly increased domestic generation capacity to roughly 45% of the nation’s electricity needs, cutting down reliance on costly diesel-based thermal plants thus saving on fuel costs.[v].
ESG debt instruments would help Kenya borrow at better terms than the common commercial bonds. ESG bonds attract slightly lower interest rates in emerging markets as investors are willing to accept lower financial returns in exchange for measurable environmental or social impact, stronger reporting standards, and enhanced transparency.[vi] In emerging markets, ESG bonds typically attract 5–15 basis points lower yields and also offer longer maturities, with OECD data showing an average of 12.3 years for sustainable bonds versus 9.4 years for regular corporate bonds, reducing rollover and refinancing risks.[vii] As global ESG-focused assets are projected to exceed USD 30 trillion by 2026, demand for credible, impact-linked bonds is rapidly rising.[viii] This expanded investor base driven by regulatory and fiduciary ESG mandates means higher demand, lower yields and longer tenors for issuers. However, rising political pushback, regulatory uncertainty and reassessments of ESG value in some markets have created a backlash that makes demand more selective.[ix] Well-structured projects with clear, verifiable impacts or environmental benefits can still attract committed investors, lower yields, and longer tenors while those lacking transparency may face reduced demand or higher financing costs.
ESG financing does not come without challenges. Kenya lacks strong institutional frameworks to identify eligible projects, monitor impact and report transparently.[x] There is also the risk of greenwashing, where projects are labelled “green” or “social” without delivering actual impact.[xi] To ensure the success of ESG debt issuance, the National Treasury needs to establish and publicly share a well-defined pipeline for ESG projects that align with sustainable development goals while ensuring that legal and regulatory frameworks facilitate their issuance. Additionally, the Central Bank and Public Debt Management Office should strengthen the debt management and risk assessment processes to ensure that ESG linked borrowing is integrated into the broader debt portfolio without creating new vulnerabilities. This includes evaluating how ESG issuances interact with key risks such as currency mix, refinancing, interest-rate exposure, and contingent liabilities and ensuring they align with Kenya’s medium-term debt management strategy. Line ministries and agencies should establish reliable reporting systems and enhance ongoing PFM reforms. These enhancements focus on improving current processes rather than establishing new institutions, making alignment with ESG standards feasible within a realistic timeframe. ESG debt presents Kenya with a unique chance to transition from borrowing for survival to borrowing for sustainable transformation.
References:
[i] ESG Debt Instruments. Link
[ii] Emerging market sovereign issuers address demand for transparency and rigor in capital market transactions.
[iii] Climate bonds sustainable debt 2024. Link
[iv] ASA-I-REIT-2024-Annual-Report. Link
[vi] Shifting the balance. Link
[viii] ESG focussed investment. link
[ix] The ESG Backlash unpacked. link
[xi] A greenwashing perspective exploration. Link
This blog has been authored by Pauline Wambui, Project Assistant at the Institute of Public Finance
