Kenyan investors have lately shown an unusual appetite for a new class of debt instruments that promise both financial returns and measurable social or environmental impact.
The Kenya Mortgage Refinance Company (KMRC) in May raised Sh3 billion through a sustainability bond that attracted bids worth Sh9.38 billion, more than three times the amount on offer. Months earlier, Safaricom raised Sh20 billion through a green bond that drew bids worth Sh41.4 billion against an initial target of Sh15 billion.
The success of the two issuances has thrust sustainable finance into the spotlight and raised important questions among investors: What is a sustainability bond? How does it differ from a green bond? And why are investors rushing to buy them?
Part of the answer lies in tax incentives. Under Kenya’s sustainable finance framework, qualifying green bonds and sustainability bonds enjoy tax exemptions, including relief from the 15 percent withholding tax normally charged on bond interest.
This means investors receive the full interest payment declared by the issuer, unlike conventional bonds where 15 percent is deducted before payment.
What is a sustainability bond?
A sustainability bond is a debt security through which an issuer borrows money from investors and commits to using the proceeds exclusively for projects that generate both environmental and social benefits.
Unlike a conventional corporate bond, whose proceeds can be used for general business purposes, a sustainability bond requires the issuer to clearly disclose where the money will go, how it will be managed and how the impact will be measured and reported.
Under the International Capital Market Association (ICMA) Sustainability Bond Guidelines, proceeds must finance or refinance a combination of eligible green and social projects.
Examples include affordable housing, energy-efficient buildings, climate resilience initiatives, water projects and programmes that improve access to essential services for underserved populations.
How is it different from a green bond?
The distinction lies in how the money raised is used.
A green bond finances only projects that deliver environmental benefits. These include renewable energy plants, energy-efficient buildings, clean transport systems, climate adaptation projects and other investments aimed at reducing environmental impact.
Safaricom’s Sh20 billion bond falls into this category because the proceeds are earmarked for environmental and climate-related projects.
A social bond, on the other hand, finances projects designed to generate positive social outcomes such as affordable housing, healthcare, education and support for vulnerable communities.
A sustainability bond combines both objectives within a single issuance.
KMRC’s Sh3 billion bond falls into this category because the proceeds are intended to support a combination of eligible green and social housing loans, expanding access to affordable homeownership while encouraging the development of energy-efficient and climate-resilient homes.
A fourth category, known as a sustainability-linked bond, works differently. The proceeds can be used for general corporate purposes, but the issuer commits to achieving specific sustainability targets. Failure to meet those targets may trigger penalties such as a higher interest rate.
In simple terms, green, social and sustainability bonds are defined by how the proceeds are spent, while sustainability-linked bonds are defined by whether the issuer achieves agreed sustainability goals.
Why are investors increasingly buying them?
The appeal lies in their ability to combine financial returns with measurable impact.
Investors receive regular interest payments while knowing their money is financing projects that address challenges such as affordable housing shortages, climate change, energy access or social inclusion.
They also offer a level of transparency not typically associated with conventional debt instruments. Issuers must disclose how proceeds are allocated and publish reports showing the outcomes achieved.
This reporting requirement gives investors greater visibility over how their money is being used and helps build confidence that the promised impact is being delivered.
The tax incentives attached to qualifying green and sustainability bonds have added another layer of attraction.
For example, an investor in a conventional bond receives only 85 percent of the declared interest after the deduction of 15 percent withholding tax. Investors in qualifying green and sustainability bonds, however, receive the entire interest payment, boosting their net return.
Why did KMRC’s bond attract more than three times the amount it wanted?
The oversubscription reflected several factors beyond the sustainability label itself.
Investors were attracted by KMRC’s track record, governance standards, institutional credibility and clearly defined housing mandate. The issuance offered exposure to a sector with significant economic and social importance while also providing a competitive fixed-income return.
The proceeds are ring-fenced and tracked under a Sustainable Finance Framework to ensure they are directed exclusively to eligible green and social home loans.
For homebuyers, the impact is expected to be practical. Additional long-term funding can help lenders offer longer mortgage repayment periods, lower monthly instalments and broader access to homeownership.
The framework also aims to support homes that are more energy-efficient, water-efficient and resilient to climate-related risks.
For investors, regular reporting on allocation and impact provides transparency over both financial performance and sustainability outcomes.
What qualifies a company to issue a sustainability bond?
Any company can issue a sustainability bond provided it has eligible green and social projects that meet recognised standards.
An issuer must establish a Sustainable Finance Framework aligned with international guidelines, particularly the ICMA Sustainability Bond Guidelines. The framework must clearly define which projects qualify for funding, how projects will be selected, how proceeds will be managed and how results will be reported.
Independent external review is also considered a key requirement. Most issuers obtain a Second Party Opinion from a recognised reviewer to assess whether the framework aligns with accepted market principles.
Who ensures the money is used as promised?
One of the biggest concerns in sustainable finance globally is greenwashing—the practice of portraying investments as environmentally or socially beneficial without delivering meaningful results.
To reduce this risk, sustainability bonds operate under strict use-of-proceeds rules.
Issuers must identify eligible projects, explain how funds are allocated and provide regular reports showing where the money has been spent and what outcomes have been achieved.
Independent reviewers assess the credibility of the framework before issuance, while external audits and annual reporting may be used to verify that proceeds have been deployed as promised.
The Capital Markets Authority also plays a regulatory role by approving public offers, recognising independent verifiers and requiring ongoing disclosures to investors.
Can sustainability bonds lower borrowing costs?
Globally, some issuers have secured cheaper financing because strong demand allows them to borrow at lower rates.
Kenya’s market, however, is still developing.
Market participants say investors remain primarily focused on returns and credit quality, even as interest in sustainability grows.
What sustainability bonds currently offer is access to a wider pool of investors, including pension funds, insurers, development finance institutions, banks, SACCOs and impact-focused investors seeking measurable environmental and social outcomes.
Over time, as the market matures and more issuers enter the space, the sustainability label could begin to influence pricing more significantly.
What does this mean for Kenya’s capital markets?
The success of recent issuances suggests sustainable finance is moving from concept to reality in Kenya.
The strong investor response demonstrates that local capital markets can mobilise substantial domestic savings for development priorities when projects are clearly defined, governance standards are robust and reporting requirements are transparent.
This is particularly important for sectors that require large amounts of long-term capital, including housing, energy, transport, healthcare, water infrastructure and climate adaptation.
Traditional bank lending is often too short-term to finance such investments efficiently. Sustainable finance instruments provide an alternative channel through which long-term savings can be matched with long-term development needs.
Could sustainability bonds become a major source of development financing?
Many analysts believe they could.
Kenya faces significant financing gaps across housing, energy, transport, healthcare and other infrastructure sectors. Sustainability bonds provide a mechanism for directing capital toward projects with measurable environmental and social outcomes while maintaining accountability through reporting and verification.
If governance standards remain strong and issuers continue demonstrating credibility, sustainable finance instruments could become an increasingly important source of funding for national development priorities.
The recent success of KMRC’s sustainability bond and Safaricom’s green bond suggests investors are no longer viewing such instruments as niche products. Instead, they are beginning to see them as a mainstream asset class capable of delivering both competitive returns and tangible economic impact.