Legal Alert | The Draft ESG Disclosure Manual and ESG Reporting in Kenya

Introduction

Background of ESG in Kenya

As we move towards a holistic approach to evaluating companies’ performance, the environmental, social and governance (ESG) indicator has now been universally accepted as a valuable metric at gauging the non-financial performance of a company. There has been a global shift towards incorporating sustainability practices in business activities. This shift has been motivated by the collective understanding that corporations have a larger responsibility in reducing the negative social and environmental effects of their businesses. Additionally, there has been a growing body of evidence that good ESG performance is positively correlated with higher returns and financial performance.[1] In essence then institutions have a fiduciary role in promoting the long-term benefits of social and environmental sustainability.

Kenya has made important strides in leading the region by incorporating ESG in its long-term goals. This is evident from 2008 when former President Mwai Kibaki launched Vision 2030, to be the development blueprint for the country. Vision 2030 provided the roadmap necessary for Kenyan companies and foreign corporations interested in investing in Kenya to make concerted efforts to realise social and environmental goals. The Vision 2030 blueprint opened the gateway to the sustainable finance initiative in 2013.[2] This was a banking sector-led initiative that put together a set of Principles: a Kenya-specific set of harmonised guidelines for sustainable development to be adopted across the banking industry in pursuit of meeting Vision 2030.[3] Since then, the Capital Markets Authority and Nairobi Securities Exchange (NSE) have spearheaded the movement on ESG and sustainability. The Stewardship Code for Institutional Investors (Stewardship Code) was gazetted in 2017 and presented a core reform to the corporate governance sector in Kenya. The Stewardship Code encourages companies to operate with a positive social impact. Investors are also encouraged to incorporate social, environmental and ethical initiatives into their investment processes.[4]

Additionally, the Kenya Companies Act (Act. No.17 of 2015) requires company directors to specify in their business review a description of the principal risks and uncertainties facing the company. The purpose of this business review is to create an understanding of the development, performance and position of the company. In the same vein, we note that directors are required to, as one of their principal duties, have regard of the impact of the operations of the company on the community and the environment.[5] In the case of a quoted company, this business review is required to also specify information about environmental, social and community issues.

On 29 November 2021, the NSE published the ESG Disclosure Guidance Manual (ESG Manual) in collaboration with the Global Reporting Initiative (GRI). The ESG Manual is the culmination of the NSE’s observation on the necessity of ESG principles as a benchmark on good governance after carrying out engagement with listed companies in Kenya. They noted a general awareness of ESG issues and corporate sustainability. However, the NSE concluded that there is lack of sustained capacity building on how organisations can integrate ESG into their strategies and ultimately, how to report ESG performance in a consistent, transparency and principle-based approach that meets stakeholder expectations hence the need for the ESG Manual[6]

Highlights of the ESG Manual

The ESG Manual provides a guide to listed companies to collect, analyse, and publicly disclose ESG details about their business activities. The ultimate goal is to encourage Kenyan companies to progressively assimilate ESG strategies in order to improve performance management and meet international best practices. The ESG Manual is divided into various sections that cover the ESG reporting process and they include:

We have set out in detail the highlights of the ESG Manual in a separate alert, which will follow.

Certain industry groups in Kenya already have established ESG reporting guidelines such as the Sustainable Finance Initiative (SFI) industry principles for the banking sector. These guidelines were established by the Kenya Bankers Association and the trade association for banks in Kenya. Furthermore, the Central Bank of Kenya has developed Guidance on Climate-Related Risk Management for the banking sector. The aim of the guidance is to sensitize the banking sector on mitigation of climate-related risks and harnessing of opportunities. You may access the alert here. With the uptake of ESG reporting it is expected that more trade associations and industry groupings in Kenya will develop specific ESG guidelines for adoption by their members.

What stakeholders should expect

For listed companies, they should carefully review the detailed guidance provided by the NSE to determine how they can incorporate it into their business activities. The NSE ESG Manual not only provides valuable best practices and principles for avoiding negative social and environmental impacts, but also the process to follow when reporting on ESG. Listed companies have been given a grace period of one year from the issuance of these guidelines to interact and familiarize themselves with the ESG reporting steps contained in these guidelines. Thereafter, listed companies will be expected to include a sustainability/ESG report in their annual integrated reports. Listed companies have been given the opportunity to choose whether to integrate their ESG report in their annual reports or publish separate ESG disclosures.

Conclusion

The NSE has carefully synthesised international best practices in ESG reporting with the particulars of the Kenyan corporate landscape. The manual draws on expertise from international guidelines such as the GRI Standards 2021 and the European Commission Guidelines on Non-financial Reporting 2019. As a result Kenyan listed companies and organisations have specific guidance on ESG reporting that did not exist before and are therefore encouraged to increase their efforts in integrating ESG in their general corporate governance goals. The ESG Manual indicates that ESG reporting will become mainstream for most major companies in the near future.

There are various benefits of the ESG Manual. First, the reporting process will eventually provide empirical data on the correlation of ESG performance and financial performance of companies. Stakeholders will be able to track the ESG performance of listed companies when they publish their reports. Secondly, Kenyan organisations will be compliant with international standards of ESG as the manual borrows heavily from the GRI standards. Thirdly, a 2020 report by KMPG states that 80 percent of companies worldwide now report on sustainability of their business.[7] This is evidence of a major shift in incorporating non-financial metrics in performance management.

Our corporate governance group is happy to support clients with capacity building, training and implementation of the ESG Manual.


Should you have any questions regarding the information in this legal alert , please do not hesitate to contact Rosa Nduati-Mutero

Rosa Nduati-Mutero
Partner
ALN Kenya | Anjarwalla & Khanna
rn@africalegalnetwork.com

 

Contributors: Sarah Njuguna, Associate and Olivia Njoroge

 

References:

[1] file:///C:/Users/oln/Downloads/nse-esg-disclosures-guidance-manual%20(1).pdf (Accessed on 25 October 2021).

[2] “The Time has Come:” The KPMG Survey of Sustainability Reporting 2020 https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/12/the-time-has-come-executive-summary.pdf (Accessed here on 25 October 2021).

[3] Financial performance of ESG integration in US investing, UNPRI, 2018. (Accessed here on 21 October 2021).

[4] Financial performance of ESG integration in US investing, UNPRI, 2018. (Accessed here on 21 October 2021).

[5] https://www.fmo.nl/esg-in-kenya. (Accessed on 22 October 2021).

[6] https://www.fmo.nl/esg-in-kenya. (Accessed on 22 October 2021).

[7] Section 143(1)d Companies Act, 2015.

 


The content of this alert is intended to be of general use only and should not be relied upon without seeking specific legal advice on any matter.