Environmental Social and Governance (ESG) Market Trends in Kenya
ESG feels like the popular kid on the block that everyone wants to talk about. We are seeing a rise in how often ESG matters are being discussed in boardrooms, factored into key management decisions and negotiated into transaction documents. Companies are increasingly taking into account environmental, social and governance issues from a value addition perspective in relation to their businesses as opposed to merely a risk mitigation measure. As M&A transaction lawyers, we have also observed the shift to investors prioritising ESG and future sustainability issues as key metrics when contemplating potential acquisitions as opposed to a simple compliance tick-box exercise.
ESG is not just a new trendy buzzword and has been around for a while. However, it has been thrust into the limelight in recent years as a result of various factors, including companies becoming more socially and ethically aware of the impact they want to make, the drive by investors to develop long-term sustainable business models, added pressure from customers and other stakeholders who are demanding increased accountability and new local, regional and global regulations creating mandatory compliance requirements.
In this article we have broken down the ESG components and highlighted a few of the key developments in Kenya and the challenges in implementing these strategies: –
Environmental
Kenya has had a strong legal and policy framework geared towards environmental preservation and restoration for a while. Article 42 of the Constitution of Kenya, 2010 (Constitution) enshrines the right to a clean and healthy environment for every person as a fundamental right within Kenya. Furthermore, Article 69 of the Constitution also places obligations on the State with respect to the environment, including sustainable management of natural resources, maintaining a minimum tree cover and protecting biodiversity. These obligations are given effect by various different legislation, for instance, the Climate Change Act, 2016, which provides the legal framework to achieve low carbon climate development.
Another notable move by the Government of Kenya towards climate change was when it became one of the first countries to ratify the Paris Climate Agreement and subsequently, in 2017, the Ministry of Environment and Natural Resources banned the use, manufacture and importation of all plastic bags used for commercial and household packaging. This led to manufacturers seeking out alternative packaging that is environmentally friendly.
The Kenya Green Bond Programme (KGBP) was launched in 2017 to promote financial sector innovation by developing a domestic green bond market to enhance ‘green’ investments. The KGBP initiative was brought together by the Kenya Bankers Association, Nairobi Securities Exchange (NSE), Climate Bonds Initiative, Financial Sector Deepening Africa and FMO- Dutch Development Bank. Classes of bonds are designed as ‘green’ if the issuer commits to use the proceeds of the bond in a transparent manner and exclusively to finance or refinance ‘green’ projects, assets or business activities with an environmental benefit.
Following the KGBP, the Capital Markets Authority (CMA) issued a Policy Guidance Note on Green Bonds in February 2019, which was followed by the launch of the first shilling-denominated green bond in East and Central Africa on the London Stock Exchange. The bond funds are geared to build 5,000 environmentally friendly student housing units.
The Central Bank of Kenya (CBK) in 2021 issued a guidance on climate related risk management (the Guidance) which was directed at commercial banks and mortgage finance companies (Financial Institutions) and informs them on how to manage their climate related risks by integrating climate related management into their business decisions and activities. Financial Institutions have been given till 30th June 2022 to provide the CBK with a plan on how they will implement the Guidance.
In addition, at the recently concluded Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) or COP26, which took place between 1 and 12 November 2021, Kenya’s commitment to the environment was visible through the several pledges it made to the preservation, restoration and promotion of environmental sustainability. These pledges inter alia included ending deforestation by 2030, continuing investment in renewable energy such that Kenya achieves 100 per cent renewable energy by 2030 and ensuring 100 per cent clean cooking by 2028; all part of the move towards the global net zero emission target.
Social
The recent Covid-19 pandemic has led to changes to work life as it was conventionally understood by both companies and employees. Employees are looking for more flexible work environments. Potential employees are also interested in working for companies that are active champions of ESG in their culture and work policies. In cognisance of the new labour trends, parliament is seeking to amend employment laws through the Employment (Amendment) Bill 2021. The Bill is aimed at addressing increased employee burnout and promoting employees’ work life balance.
Manufacturers have had to change how they market their products and services to consumers given the recent legislative changes. However, even beyond legal requirements, consumers are driving change by demanding socially responsible behaviour from companies, which goes beyond the traditional annual corporate social responsibility PR event. With increased consumer activism in Kenya and in this day and age of social media cancel culture, companies have realised that consumers want to be associated with brands that are sensitive to climate change and sustainability concerns but can very quickly turn on brands that are found to be continuing practices on the wrong side of this trend.
Another key area of focus under the ‘social’ umbrella is gender equality, which is enshrined in the Constitution. The CMA has issued Guidelines on Corporate Governance Practices by Publicly Traded Companies, which require Boards to implement policies that assure diversity, including female diversity, in their composition. The NSE has also set a goal for Kenya’s 65 listed businesses to have at least a third of the board members to be female.
The protection of indigenous peoples continues to be a key area of focus for foreign investors within the ESG realm. Many projects that have a land component create Indigenous Peoples Plans that establish measures to ensure that the local community obtains culturally relevant social and economic advantages. These plans respect indigenous peoples’ dignity, rights, and culture; and ensure that indigenous peoples receive culturally appropriate benefits on par with other ethnic groups.
Finally, data privacy has risen to the forefront of consumer concerns in recent years. Following global landmark data privacy breaches, governments began to regulate data protection, commencing with the landmark General Data Protection Regulations (GDPR) driven by the European Union. In Kenya, the Data Protection Act 2019 is steadily being implemented with the release of various data protection Regulations in 2021, which will impact how organisations in Kenya manage the data that they collect. Purpose, openness, participation, constraints on usage, and collection limitations have to be considered by organisations collecting personal data.
Governance
In order to foster and sustain economic growth, governance matters have become increasingly important. A core framework for governance related matters is the Companies Act, 2015[1] (Companies Act), which in many instances places personal liability on directors of companies to ensure compliance. Moreover, many companies are choosing to follow global industry best practice and opting into standards and reporting indexes such as the IFC Performance Standards, Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI).
Accordingly, the CBK and NSE have launched guidelines that require the board of directors and senior management to take an active role in formulating and implementing ESG strategies, policies and reporting requirements. This, together with the Companies Act, places a greater responsibility on the directors of companies to report on matters related to ESG issues.
The CBK Guidance requires Financial Institutions to disclose climate-related information to the Task Force on Climate-related Financial Disclosures[2]. This should be done by early 2023. The Guidance has placed reporting obligations on the board of directors and senior management.
We had earlier reported on the NSE ESG disclosure manual, which was issued in November 2021(ESG Manual). Under the ESG Manual, listed companies have been given one year to integrate and comply with the ESG reporting requirements following the GRI standards.
These requirements and the general interest in ESG have led to additional requirements when hiring top executives and board members in companies. The principal officer, and in most cases, the CEO of a company, is seen as the ESG champion. Their role is instrumental in ensuring the company implements changes in ESG practice. We have noticed more job opportunities in this space and job descriptions include a requirement to hire personnel who understand and can implement ESG best practices.
Challenges
The long-term benefit of implementing an ESG strategy outweighs the cost. However, there are certain challenges we have observed that may be faced by companies when implementing an ESG strategy.
The following are some of the challenges you should be aware of: –
- Reporting standards
ESG reporting is largely voluntary and consequently inconsistent. There is no universal reporting standard and, as such, companies can choose to report on ESG using a variety of metrics and third-party disclosure frameworks such as the GRI and SASB. These standards may be used on their own or together. For many companies, this can often get confusing and costly.
- Enforcement
Due to the voluntary nature of reporting on ESG topics, the regulators have often taken the approach of “comply or explain”. This means that only the ESG topics that have been reduced to substantive law are enforceable while all others remain as recommended or best practice.
- Greenwashing
Companies may be tempted to join the bandwagon of ESG reporting and start misstating the credentials of some of their products, services and levels of compliance. This poses a real risk of litigation and reputational damage.
[1] No 17 of 2015 (Laws of Kenya), Section 655(4)b)
[2] Timeframe provided is January 2023 to June 2023
