Why Kenya’s Financial System Must Start Pricing Nature Risk

For the past decade, sustainable finance in Kenya, as in much of the world, has been dominated by a single metric, carbon. Banks, insurers, and regulators have invested heavily in frameworks to measure emissions and price climate risk. This focus has been necessary. It is also no longer sufficient.

The next phase of financial risk will be shaped not only by greenhouse gases, but by the accelerating degradation of nature and biodiversity. The evidence is increasingly clear. Nature loss is no longer an environmental externality. It is a material financial risk.

Globally, the World Economic Forum estimates that more than half of global GDP, about USD 44 trillion, is moderately or highly dependent on nature and the services it provides, from water regulation and soil fertility to pollination and flood control. In Kenya, this dependence is even more pronounced. Agriculture, tourism, forestry, fisheries, and manufacturing together account for over 40 per cent of GDP and more than 60 per cent of employment, directly tying economic performance to ecosystem health.

Yet nature is deteriorating rapidly. According to the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, one million species face extinction, while nearly a quarter of the world’s land has already suffered productivity loss due to degradation. These trends are no longer confined to environmental reports. They are now shaping trade rules, regulation, and capital flows.

The financial sector has become more adept at modelling physical climate risks such as floods and droughts. What is now accelerating is nature-related transition risk, the financial loss that arises when firms fail to align with new regulatory and market expectations.

The European Union’s Deforestation-Free Products Regulation offers a clear signal of where global trade is heading. While Kenya’s direct exposure to EUDR-covered exports is currently estimated at around two per cent of total exports, the regulation is not an isolated measure. It reflects a broader shift in which market access is increasingly conditional on verifiable environmental performance. Exporters of commodities such as coffee, cocoa, timber, and livestock products must now provide farm-level geolocation data demonstrating that production is not linked to deforestation or ecosystem conversion.

Evidence compiled by the Taskforce on Nature-related Financial Disclosures, drawing on more than 600 studies, shows that nature-related risks can materially affect revenues, operating costs, asset values, cost of capital, and access to finance. For Kenyan exporters, particularly in tea, coffee, horticulture, and livestock, the implication is straightforward. Inability to demonstrate nature-positive production is no longer a reputational issue. It is a direct threat to competitiveness and market access.

This shift has immediate consequences for Kenya’s banking sector. If an agribusiness exporter loses access to European or premium global markets because it cannot meet traceability or biodiversity requirements, revenues fall quickly and debt-servicing capacity weakens. For lenders, this becomes credit risk.

This type of regulatory shock can be described as a Green Scorpion effect. It is sudden, externally imposed, and capable of paralyzing otherwise viable business models. Banks financing nature-dependent supply chains are therefore exposed not only to operational risks, but to the regulatory fragility of those business models. Sustainability risk, in this context, is indistinguishable from financial risk.

The pressure is not only external. Kenya is a signatory to the Kunming-Montreal Global Biodiversity Framework, which commits countries to protect 30 per cent of land and sea by 2030. Delivering on this commitment will require stricter land-use planning, expanded protected areas, and enhanced protection of water towers and biodiversity corridors.

This introduces a growing risk of stranded assets. Land remains the backbone of collateral in Kenya’s banking system. Yet international experience shows that environmental regulation can materially affect land values. When commercial use is restricted to protect ecosystems, land may remain legally owned but become economically impaired. The assumption that land values always appreciate is increasingly being challenged.

This moment calls for a recalibration of the role of finance. Banks cannot manage what they do not measure. Integrating nature-related risk into credit appraisal, portfolio management, and collateral valuation is becoming unavoidable. Frameworks such as the Taskforce on Nature-related Financial Disclosures offer a practical starting point. Equally important is a shift from transactional lending to advisory finance. Clients, particularly MSMEs and aggregators, will need support to build traceability systems, geospatial data capacity, and environmental performance metrics. These capabilities are fast becoming determinants of market access.

In this context, the Centre for Sustainable Finance and Enterprise Development, established by the Kenya Bankers Association building on the decade work by Sustainable Finance Initiative, represents an important institutional response. The Centre provides a platform to strengthen ESG and nature-related risk practices, provides technical assistance, offers advisory to the industry,build capacity across value chains, and support innovation in sustainability-linked financial products.

Estimates suggest that Kenya’s nature-positive investment potential could exceed USD 100 billion over the next decade across agriculture, water management, land restoration, and environmental services. Capturing this opportunity will require financial institutions that understand nature not only as a constraint, but as an economic asset.

The global economy is re-pricing environmental performance. For Kenya’s financial sector, the question is not whether this shift will occur, but how prepared it is when it does. The future of sustainable finance is not simply low carbon. It is nature literate, data driven, and risk aware. Nature risk is now financial risk, and the cost of ignoring it is rising.