Introduction
Environmental, Social and Governance (ESG) reporting refers to the practice of disclosing a company's performance in key areas related to environmental impact, social responsibility and corporate governance. This reporting goes beyond traditional financial metrics and aims to provide stakeholders with a comprehensive view of a company's sustainability efforts. By measuring and reporting on ESG, businesses can demonstrate their commitment to responsible practices and long-term value creation.
In recent years, ESG reporting has gained significant traction as businesses worldwide recognize the need to not only make profits but also contribute to sustainable development. Kenya has been making strides in ESG to align with global sustainability goals. We analyse the evolution of ESG reporting in Kenya and the existing legal and regulatory framework, while also highlighting the challenges and the way forward.
The statutory and regulatory framework for ESG Reporting in Kenya
In recent years, Kenya has experienced a burgeoning interest in sustainable development, with various sectors recognizing the importance of ESG factors. Both public and private entities have begun integrating ESG considerations into business strategies, reflecting a broader global trend. Financial institutions, including banks and investment firms, have begun evaluating ESG performance as part of their lending and investment decisions, underscoring the growing influence of these factors.
The Constitution of Kenya
Arguably, the Constitution of Kenya ushered a massive change of direction to environmental conservation and sustainability, social protection for specific groups and governance in Kenya. Some of the stipulations that relate to ESG disclosures under the Constitution include the following:
Environment aspect
Some of the stipulations that relate to ESG disclosures under the Constitution include:
Article 42 provides that every person has a right to a clean and healthy environment which includes the obligation to protect the environment for the benefit of both present and future generations.
Article 70 also establishes the enforcement mechanism through which one may apply to a court for redress where the right to a clean and healthy environment has been breached, denied, violated or infringed.
Article 69(1) obligates the State to ensure sustainable exploitation, utilization, management and conservation of the environment and natural resources and ensure equitable sharing of the benefits arising from the natural resources.
Social aspect
Under the Social aspect, Articles 52-57 of the Constitution provide for enhanced rights for people living with disabilities, marginalized communities, women, youth and children.
Article 11(2)(c) places an obligation on the State to recognize the role of science and indigenous technologies in development. The rights of the communities to receive compensation for their indigenous knowledge is also a key consideration under the social umbrella in ESG reporting.
Governance aspect
Article 10 of the Constitution provides the principles of governance that apply to both public and private entities when any of them applies or interprets the condition, enacts or interprets any law or implements any public policy decisions.
The relevant principles of governance, as set out under article 10(2) include human dignity, equity, social justice and inclusiveness, equality, human rights, non-discrimination and protection of marginalized communities. In addition, good governance, integrity, transparency, accountability and sustainable development are also included in the list of principles of good governance.
Legislative instruments
The Climate Change Act of 2016 and the Environmental Management and Coordination Act of 1999 are the two major legislative instruments with respect to environmental protection in Kenya. The Climate Change Act establishes the regulatory framework to be used when responding to climate change: it mandates each State organ to set up and implement mechanisms for sustainability when performing their respective duties. In addition, each State organ is obligated to report annually to the Climate Change Council established under the Act on the status of the implementation of all assigned climate change and sustainability programs.
The National Environmental Management Act of 1999 provides for the establishment of NEMA, which is responsible for environmental management and protection in Kenya. While it focuses on environmental matters, its regulations can indirectly influence ESG reporting practices by emphasizing environmental impacts and conservation efforts.
On the social side, companies are obligated by legislative instruments like the Data Protection Act of 2019, the Employment Act of 2006 and the Consumer Protection Act have inherently reformed how companies approach marketing, employment and product development. In addition, ESG disclosures currently form part of annual reports done by companies as they’re required to under the Companies Act.
Ratified international instruments
Part of Kenya’s local ESG trends are resultant of the ratification of certain international instruments. In particular, Kenya ratified the Paris Climate Change Agreement in 2017 and has developed an ambitious National Climate Change Action (NCCAP). The NCCAP outlines Kenya’s strategy to address climate change challenges. As part of this plan, businesses are urged to integrate climate change considerations into their operations and report on their efforts to reduce carbon emissions and adapt to changing climatic conditions.
Moreover, Kenya has also ratified international instruments with social implications like the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights, and this serves to heighten the place of social considerations for entities operating in Kenya.
Other instruments
Much of the activities related to ESG reporting have been undertaken within this area. While there’s little, if any, sector-specific statutes that provide for mandatory ESG reporting and disclosure, there are sector-specific guidance notes regulations that have fueled the growth of ESG reporting and disclosure in Kenya.
Environmental aspects
The Nairobi Securities Exchange Guidance Manual on ESG Disclosures stands tall when it comes to ESG disclosure and reporting in Kenya. The document guides ESG disclosure by listed companies and provides a common set of ESG metrics applicable to listed companies. While the manual is not specific to the environment, it pays homage to the need for listed companies to report their environmental and social impacts- be they positive or negative- and conform their strategies towards sustainable development.
In 2021, the Central Bank of Kenya issued a Guidance Note on Climate-Related Risk Management. The guidance note provides a framework within which financial institutions can mitigate against climate-change-induced financial risks and integration of different aspects of climate-change management into the business strategies and decision-making procedures of financial institutions.
Social aspects
The Sustainable Finance Initiative, which was adopted by stakeholders in the banking industry under the auspices of the Kenya Bankers Association, provides for social and environmental risk management, resource scarcity, and business ethics and values in Kenya’s banking industry. The initiative aims to integrate sustainability considerations into the financial sector. This includes encouraging banks to incorporate ESG criteria when making lending decisions and promoting the adoption of responsible investment practices.
The Capital Markets Authority’s Code of Corporate Governance Practices for Issuers of Securities to the Public requires such entities to undertake “integrated reporting,” which includes reporting on not only the commercial but also social and environmental context within which the issuer operates. In addition, such entities are obligated to employ a “triple bottom line “accounting system to take the social and environmental aspects of their performance into account. The code also mandates listed companies to ensure diversity within the boards in compliance with the Constitutional imperative set out under Article 10 of the Constitution.
Governance aspects
The aforementioned Capital Markets Authority’s Code of Corporate Governance Practices for Issuers of Securities to the Public provides the perfect example of instruments which have embedded ESG reporting into the DNA of business strategies for listed companies.
Aside from the above, the Central Bank of Kenya’s Guidance Note on Climate-Related Risk Management and the Kenya Bankers Association’s Sustainable Finance Initiative place a burden on the directors of both financial institutions and companies under CMA’s regulatory sandbox, to include ESG reporting, and develop strategies that include ESG considerations.
The NSE’s ESG Disclosure Manual also has implications for the governance of listed companies. Unlike in the past, listed companies are now required to implement ESG reporting into their reporting mechanisms.
Challenges and opportunities
Despite the ongoing efforts to establish a comprehensive regulatory framework for ESG reporting, several challenges persist:
Lack of standardization: the absence of standardized ESG reporting guidelines can result in inconsistent and fragmented reporting practices across different industries.
Data availability: limited access to reliable ESG data can hinder accurate reporting, especially in the social and governance dimensions.
Awareness and capacity: many businesses may lack awareness and understanding of ESG reporting's importance and may require capacity-building initiatives.
Enforcement: the effectiveness of the regulatory framework will depend on robust enforcement mechanisms to ensure compliance with ESG reporting requirements.
However, these challenges also present opportunities for progress:
Collaborative efforts: stakeholders including regulatory bodies, businesses, industry associations, and non-governmental organizations can, and should collaborate to develop comprehensive ESG reporting guidelines.
Capacity building: training programs, workshops, and educational resources will enhance businesses' understanding of ESG reporting principles and implementation.
Investor engagement: investors can exert pressure on companies to adopt ESG reporting practices by considering sustainability criteria when making investment decisions.
Technological solutions: utilizing technology for data collection, analysis, and reporting can streamline the ESG reporting process and improve data accuracy.
Conclusion
Kenya's legal framework for ESG reporting underscores the nation's dedication to cultivating sustainable development and ethical business conduct. By incentivizing companies to reveal their endeavours in ESG domains, Kenya is not only aligning with worldwide patterns but also positioning itself as an attractive hub for investments driven by social responsibility. As the challenges are mitigated, and the framework matures, the undeniable advantages of ESG reporting are poised to outweigh any associated cost implications.
Please note that this is not legal advice and is intended primarily for information purposes. If you require tailored advice or further information, please contact us at sarinke@mckayadvocates.com.