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*
The ESG Manual defines situational analysis as a process by which an organisation’s internal and external environment is analyzed in order to evaluate its current and potential capabilities to build stakeholder value. In the ESG reporting context, a situational analysis is performed to achieve an understanding of the organisation’s strategy, an understanding of the organisation’s internal and external stakeholders and their respective needs or expectations of the organization and an assessment of the value that ESG integration brings (potentially) to the organisation. The ESG reporting team should work with the organisational strategy team to understand the key strategic priorities of the business. The team is also expected to obtain a good enough understanding of the financial ambition, key products and markets and the business and the operating model of the listed company.
As a matter of fact, ESG reports target a very wide set of stakeholders compared to financial reporting. Thus stakeholder analysis, prioritization and engagement critical in ESG reporting to ensure that the ESG reports meets the needs of these diverse sets of stakeholders. Here, the term “stakeholders” is used to refer to all entities or individuals “that can reasonably be expected to be significantly affected by the reporting organisation’s activities, products and services, or whose actions can reasonably be expected to affect the ability of the organisation to successfully implement its strategies and achieve its objectives.” According to the ESG Manual, stakeholders are not only investors and regulators, but also include “those who are invested in the organization (such as employees and shareholders), as well as those who have other relationships to the organisation (such as other workers who are not employees, suppliers, vulnerable groups, local communities, and NGOs or other civil society organisations, among others).”
The assessment of stakeholder needs is a very critical step in ESG reporting and the ESG Manual recommends that the respective organization consider several factors in assessing stakeholders. The first factor to consider is the economic influence of the respective stakeholder. This is the ability of the stakeholders to influence the ability to perform economic activities through financial capital and through operating permits and licenses. Examples of stakeholders who wield economic influence include shareholders, investors, regulators, and joint venture partners. The second critical factor in assessment of stakeholders is social influence. The ESG Manual defines this as “the ability to influence the ability to acquire a social license to operate.” The key examples of organizations stakeholders who have social influence include politicians, local NGOs and community groups.
The environmental impact of the activities of the organization is also a key determinant of the relevant stakeholder. In this regard, stakeholders are identified based on those who rely on or are interested in the same natural resources exploited by the organisation and the organisation’s environmental impacts. These could include indigenous communities, county administration and the neighbourhood of the organization’s operation. Fiduciary responsibility is also key in assessment of stakeholders and refers to legal, financial and operational responsibilities the organisation has to stakeholders such as financiers, regulators, suppliers and customers. In addition, proximity stakeholders are those persons and entities that are directly affected by the day to day running of the organisation. They include employees, customers, suppliers and local communities. There are also stakeholders who are identifiable by their dependence in that they rely on the organization and its activities for their economic and social wellbeing. These include employees and suppliers along with their dependents and local communities.
In ESG reporting process, stakeholder engagement is critical in determining materiality of ESG topics for disclosure. However, different stakeholders have different kinds and levels of needs and the ESG Manual recommends the prioritizing of stakeholders according to their level of influence and expectations from the organisation. The Manual proposes that the ESG team use a stakeholder prioritization matrix to assess the importance of an organisation’s ESG impacts to the decision-making activities of these stakeholders. Where the respective stakeholder falls within the matrix depends on their level of interest in the organization and ability to exert influence. Stakeholders are classified in four categories, namely high influence but low stakes stakeholders, high influence and high stakes stakeholders, low influence and low stakes stakeholders and low influence but high stakes stakeholders.
Low influence and low stakes stakeholders include researchers, media and suppliers who the organization need to monitor regularly. Stakeholder engagement for low influence and low stakes stakeholders include actively influencing positive perception through media channels, publicly acknowledging the organisation’s interest in their views by soliciting comments on ESG performance, inviting them to launch of the ESG report and review analysis of their position regularly. Low influence but high stakes stakeholders need to be engaged routinely and examples include customers, civil society and media. Their engagement strategy should include providing regular updates on ESG performance, regularly soliciting views on the organisation’s performance with regards to ESG issues, ensuring communication is targeted to their specific needs and expectations on the organisation and managing emerging issues immediately.
On the other hand, examples of high influence but low stakes stakeholders include retail investors, social media and lenders who need to be engage routinely. The ESG Manual enumerates the engagement strategies for high influence but low stakes stakeholders as including soliciting their focused involvement and input regularly, involving them in key decision points, actively soliciting views on the organisation’s performance with regards to ESG issues, managing emerging issues immediately and reviewing analysis of their position regularly. Lastly, high influence and high stakes stakeholders include regulators, investors and employees who require regular communication from the organization. According to the ESG Manual, engagement strategies for high influence and high stakes stakeholders including incorporating them as part of the governance structure in the organisation, communicating ESG impacts frequently to them, actively soliciting their views on the organisation’s performance with regards to ESG issues and manage emerging issues touching on them immediately.
The sample outline framework for an ESG Report provided under the ESG Manual under Annex 1 recommends that the Message from the Board Chair should contain “how stakeholder expectations are identified and the framework that exists to ensure that these are addressed.” In addition, stakeholder engagement is recommended to form a key part of the ESG report. As part of the Stakeholder engagement, the ESG Manual recommends outlining the approach to identifying and prioritizing stakeholders and the stakeholder engagement strategies for the identified and prioritised stakeholders relevant to the ESG issues of the Organization.
*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, p. 13-15; Available at: https://sseinitiative.org/wp-content/uploads/2021/12/NSE-ESG-Disclosures-Guidance.pdf(accessed on 04/06/2022).