Thursday, June 20, 2024

Why Denmark Is Financing Green Enterprises in Kenya


Investing in projects that generate a positive social and environmental impact, as well as a financial return is only but gaining root in Kenya – also known as impact investing.

In light of climate change and rapid urbanisation that put a squeeze on resources and infrastructure, green investing could not only lead to black ink for businesses, but could also climate-proof their operations while strengthening the society’s adaptive capacity and resilience.

Danish International Development Agency (Danida) – the development arm of the Ministry of Foreign Affairs of Denmark – has been leading the charge in channeling resources towards impactful projects like food, energy and water through enterprises in developing countries like Kenya.

Danida is a funding partner of Kenya Climate Ventures (KCV) – an impact investment company providing financial and technical support to SMEs that operate in climate-related sectors and promote sustainability. This includes renewable energy, agribusiness, water management, commercial forestry and waste management.

Africa Sustainability Matters reached out to the Embassy of Denmark in Nairobi to shed more light on its impact investing in Kenya.

Here are the excerpts:

Why did Danida get into the climate financing space?

Climate change space is a relatively new field, but one that is developing pretty fast, driven by innovations.

However, across the world, new innovations come with uncertainties with stakeholders unsure how the market will respond. And this means financial risks.

As far as climate-related innovations are concerned, there are quite a number of hurdles, the biggest being financial constraints. This means enterprises operating in clean technology space need support – not just financial but also technical know-how on the nuts and bolts of running a business.

Briefly explain how you support Kenyan enterprises through KCV

A little bit of background will help put things in context. To better understand KCV, we have to go back to its parent company Kenya Climate Innovation Centre (KCIC).

KCIC was founded to provide incubation and acceleration support to climate-related innovations. It looks at a number of areas – one of it being access to finance. Note that Danida participated in setting up KCIC, and we envisaged three levels of access to finance.

The first level is proof of concept grants (up to $50,000). The next is early-stage financing and finally scale-up financing.

Briefly expound on each one of them

To begin with, proof of concept fund is purely a grant that KCIC offers to hand-hold individuals with climate-related ideas that, at this point, are still experimental.

Unfortunately, a few innovations don’t turn out as expected and we close that chapter and document lessons learnt to guide us in future in conducting due diligence.

Good thing is that most ideas prove viable, and we graduate them to the next level – early stage financing mechanism. Since the concept has been proven, this level involves guiding startups into the commercial world. At this level of financing, we introduce the loaning aspect, which comes with other distinct packages like market linkages and patient money.

Now, once the entrepreneur is introduced to the commercial world, they’re now deemed ready to scale up. And that’s where Kenya Climate Ventures (KCV) comes in. KCV is an instrument designed to help startups begin scaling up. It targets enterprises that want to scale up.

At the scale-up financing phase, startups have only started moving into the commercial world and are keen to expand – but they’re still not mature enough to attract hardcore commercial funding at prevailing market rates.

This space is very dynamic and besides financial sustainability, our primary goal is transformative impact.

At what stage is Kenya in impact investing?

Kenya is largely at the early stage.

What needs to be done to boost impact investing?

The first step is to have a complete mindset change, especially among local financial institutions. Most commercial banks offer regular financial products, with less focus on climate financing.

For instance, when you give grant money or development money support to a commercial bank, the lender will struggle to strike a balance between financial returns and envisaged impact value. Most often the profit goal tends to override the latter in a typical commercial set-up.

To be clear, profit is important. But our goal and that of KCV goes beyond margins. For us, profit is a means to sustainability; it’s not an end in itself as viewed in a typical commercial set-up.

Profit has to be a means to creating impact in the society, a vessel through which purpose is channeled.

To trigger a shift in mindset, there’s also need to socialise investors into impact thinking and investing, so that when they give resources into a cause, they shouldn’t only expect financial returns. There are other measurable impact returns that they should also care about, like climate change mitigation, strengthening the society’s adaptive capacity and job creation.

Thus, mindset shifts involving financial institutions and investors may trigger bigger financial flows into the climate space, especially around innovation.

What policies are needed to draw in more impact investors?

Notice that most innovations are two steps ahead of policymaking. Therefore, there is need for more flexible policy frameworks that are anticipative of new projects.

The public sector actually has big role to play in determining the success of impact investing given that all socioeconomic projects have to be conducted within laid down policy and legal frameworks.

To give an example, Danida has been working with Keekonyokie slaughterhouse in Kiserian, Kajiado County to package biogas into refillable cooking gas cylinders, the way it is with LPG. This innovation has proved viable and affordable.

However, the challenge is that Kenya is yet to develop standards for this innovation (packaged biogas) – meaning Kenya Bureau of Standards (Kebs) cannot certify it in the absence of the set standards. Therefore, the packaged biogas cannot be put on the market, denying households cheaper and cleaner cooking fuel alternative.

This demonstrates a case where innovation has gone ahead of policy.

Does Danida, therefore, offer any policy support to the Kenyan government?

Indeed. Our support towards Kenya Climate Innovation Centre (KCIC) has an enabling environment item, which advocates for forward-looking policies that are more accommodative of upcoming innovations through the entrepreneurs that we support.

We also support Kenya Business Advocacy Fund – an institution that advocates for policy changes to make it easy to do business. We also developed a document called Gesip (Kenya green economy strategy and implementation plan) together with the Ministry of Environment that provides a framework to spur a green revolution in Kenya.

Equally, we work closely with Nema (National Environment Management Authority) around climate policy issues.

How much has Danida funded KCV since initiation?

Around $7 million (Sh700 million).

What’s your performance scorecard for the funded projects?

We’re actually happy with the impact our investing is having on the society. Definitely, there are challenges we have encountered but all in all we’ve had a good run. For instance, KCV funding has put 300 people in permanent jobs through its investees.  

Also, some 3,000 farming households have had access to cleaning cooking solutions courtesy of KCV investee – (biogas provider). Lastly, some 5,000 smallholder farmers have been granted access to markets through other investees in the agribusiness space.

What lessons have you picked along the way?

There are a number of lessons that we have drawn. 

First is post-investment support. In the beginning, we thought that once an enterprise has reached the third level of financing (scale-up financing), it’s good to go. We came to realise that there are other soft issues that these enterprises still needed to be supported with. This realisation led us to design post-investment support. We even hired an investment manager to walk with the enterprises every step of the way.

Second is the realisation of the oversized influence an entrepreneur has on a business. At first, we were just looking at the strength of the concept, forgetting the entrepreneur behind that concept as a person – their character and values. To this end, we always conduct background checks on the entrepreneur, since their personality and attitudes would determine whether a startup ends up succeeding or not.

Third is focusing on concepts with great impact potential rather than just the financial strength.

Why should investors park their money in impact related innovations?

Just look at global trends. Consumers are becoming increasingly sensitive to information behind the products they are consuming. This has taken shape strongly in Europe and it’s now spreading over to African countries. The more impactful your business is, the more clients you’re likely to get.

In the near future, investment is going to be impact investing. So the front runners in this space are poised to reap big, given the first-mover advantage.

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