By Dr. Kariuki Muigua, PhD (Leading Environmental Law Scholar, Policy Advisor, Natural Resources Lawyer and Dispute Resolution Expert from Kenya), Winner of Kenya’s ADR Practitioner of the Year 2021, ADR Publication of the Year 2021 and CIArb (Kenya) Lifetime Achievement Award 2021*
Besides the Nairobi Stock Exchange and its ESG Disclosure Manual, there are several other organizations that have ESG reporting requirements relevant to listed companies in Kenya. These include the Capital Markets Authority, the United Nations Global Compact, various investment groups, the CDP and industry level reporting requirements like those imposed by the Central Bank of Kenya touching on the operations of licensed Banks. Here below, we explore the basics of each of these ESG reporting requirements and how listed companies in Kenya comply with it.
The Capital Markets Authority
The Capital Markets Authority (CMA) published the Code of Corporate Governance Practices for Issuers of Securities to the Public in 2015. It requires listed companies to explain in their annual reports how they have applied the recommendations contained in the Code. Within the Code, the CMA also provides examples of topics that the Boards of listed companies should treat as material. The ESG Manual gives guidelines how the ESG reporting approach suggested in it can be used to meet the reporting requirements of the CMA code. These include by identifying the CMA as a key stakeholder for listed companies within the situational analysis and stakeholder engagement phases. Second, it involves analysing the CMA’s expectations of the organisation and the reporting requirements contained in the CMA Code.
Third, complying with the CMA code under the ESG Manual means including disclosures requirements on the Code as part of the assessed material ESG topics for disclosure. These have been proposed as a mandatory disclosure topic for all listed companies, that is, governance under general disclosure topics. In addition, it takes generating content on the organisation’s performance around these topics using the guide proposed in this manual and reference to the GRI Standards on governance disclosures. It also entails submitting extracts or the full ESG report discussing performance on these indicators to the CMA within the agreed timelines with the CMA. In this case, the ESG report should be published within the reporting timelines required for CMA submissions.
Investor groups
As a way of managing assessed environmental and social risk in debt and equity investments, some institutional investors typically require the implementation of an environmental and social management system. Thus, depending on the assessed risk profile, beneficiary organisations are required to report at least annually on performance on several pre-identified environmental and social performance metrics. Through the reporting process proposed in this manual, listed companies should be able to develop content around the organisation’s approach to these topics and demonstrate performance during the reporting period. It is noteworthy that environmental and social risk management is one of the mandatory ESG topics proposed for all listed companies. The International Finance Corporation (IFC) Performance Standards on Environmental and Social Sustainability is one example of ESG indicators and metrics that investors commonly refer to when evaluating investments.
United Nations Global Compact
There are more than 200 organisations in Kenya, including some listed companies, that are participants of the Global Compact Network Kenya, the local arm of the United Nations Global Compact (UNGC). The UNGC has developed a set of 10 principles that organisations can voluntarily adopt and integrate into their own strategies and operations. These principles cover four issue areas including Human Rights, Labour, Environment and Anti-corruption. In turn, the Ten Principles of the United Nations Global Compact is a key guideline in that regard.
The UNGC encourages participants to self-assess, prepare, and submit a Communication on Progress (CoP) report to the UNGC on their performance around these four topical areas. According to the UNGC, “Your CoP should be fully integrated into your company’s main stakeholder communications, most often your annual or sustainability report.” By developing an annual ESG report discussing organisational performance around these topics, listed companies can submit an extract of the ESG report to fulfil the requirements of the annual CoP submissions to the UNGC. Further, applying the GRI standards ensures compliance to the CoP reporting requirements. Organisations can also refer to the UNGC guidance document on Using GRI’s Guidelines to Create a CoP.
The Carbon Disclosure Programme (CDP)
The CDP is a non-profit charity helps in promoting transparency in environmental reporting by cities and companies around the world. Signatory companies provide performance data on climate change, water security and deforestation on a selfdisclosure basis. This self-reported data is then used by investors and other stakeholders to make informed data driven decisions with regards to the reporting company’s environmental impacts. For example, investors can use data in the CDP database to calculate the carbon intensity of their portfolio. Investors can also select entities that demonstrate climate resilience by evidenced implementation of strategies that future proof their organisations against climate related polices and regulations. There is need to consider that the CDP and GRI use common metrics on reporting on carbon emissions. The ESG reporting presented in this manual can be used to collect and report data to the CDP. Organisations can select any or all the disclosure topics as part of their materiality assessment exercise and build reporting content within the ESG report that meets the CDP self-disclosure requirements.
Industry level reporting
Certain industry groups in Kenya have developed voluntary ESG related guidelines for consideration by member organisations. For example, in the banking sector in Kenya, the Kenya Bankers Association, the trade association for banks in Kenya, has developed the Sustainable Finance Initiative (SFI) industry principles for the banking sector. Further, recently the Central Bank of Kenya (CBK) 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. It also offers guidance on the development and implementation of appropriate climate-related strategies and policies. Given the current trajectory of ESG and emphasis placed by investors on ESG integration, it is expected that more trade associations and industry groupings in Kenya will develop specific ESG guidelines for adoption by their members. Industry guidelines provide relevant insights on ESG issues impacting the industry and listed companies can refer to such guidelines when identifying material ESG topics for disclosure using the framework proposed in this manual.
*This article is part of an ongoing series on ESG (Environmental, Social and Governance) in Kenya by Dr. Kariuki Muigua, PhD, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Publisher of the Year 2021 and ADR Lifetime Achievement Award 2021 (CIArb Kenya). Dr. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Dr. Kariuki Muigua is a Senior Lecturer of Environmental Law and Dispute resolution at the University of Nairobi School of Law and The Center for Advanced Studies in Environmental Law and Policy (CASELAP). He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Dr. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Africa Trustee of the Chartered Institute of Arbitrators and the Managing Partner of Kariuki Muigua & Co. Advocates. Dr. Muigua is recognized as one of the leading lawyers and dispute resolution experts by the Chambers Global Guide 2022.
References
NSE, “ESG Disclosures Guidance Manual,” November 2021; Available at: https://sseinitiative.org/wp-content/uploads/2021/12/NSE-ESG-Disclosures-Guidance.pdf(accessed on 10/02/2022).