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 Nairobi Stock Exchange (NSE) ESG Disclosures Manual (ESG Manual) defines value creation as “creating (and preserving) financial and societal value for stakeholders by developing strategies that manage material ESG risks and capture related opportunities. Value creation is the next step of ESG reporting after situation analysis and stakeholder engagement and materiality analysis. It entails the listed company developing value creation strategies around risk and opportunity management for assessed material ESG topics. According GRI, three aspects that distinguish value creation, namely, value is created within the context of sustainability, value creations delivers benefits beyond financial gain and value creation is about delivering value to multiple stakeholders.
As it is, material ESG topics invariably present significant business risks and opportunities for organisations and their stakeholders. Therefore, the ESG Manual recommends that Organisations develop value creation strategies around these material topics to ensure that risks are identified, assessed, and managed – and opportunities captured. For example, taking air emissions as the material disclosure, opportunity assessment discloses potential for sustainable investments, trigger of product innovation and revamping the supply chain strategy. At the same time, risk assessment highlights potential strategic risks, financial risks, reputational risks and compliance risks. In terms of performance disclosure, there is need for trend analysis, peer comparison, estimated projected performance and determine the report against criteria, for example the GRI Standards.
Opportunity assessment
The ESG Manual recommends that organisations should identify impacts on future strategy, that is, impacts on future revenues, cash flows and operating costs by emerging trends in ESG, and implement scenario-based solutions that capture new opportunities for stakeholders. In this respect, the ESG reporting team can work with the corporate strategy unit within the Organisation to perform the Organisational SWOT in the context of current and emerging ESG issues. At this stage, the ESG team should also be on the lookout for opportunities to create shared value for the organisation based on the SDGs. For example, to capture climate related opportunities, organisations can raise capital to finance “green projects” through issuance of green bonds that target an increasing number of ESG focused investors. Further, Organisations can also implement energy efficiency programs and invest in renewable energy to cut future energy costs and ensure compliance with emerging climate related regulations. Such approach helps the organisation demonstrate contribution to the SDGs, namely, SDG 13 on Climate Action.
The ESG Manual recommended if necessary that organisations consider justifying ESG related investments by setting an internal price of ESG impacts. For instance, the organization can consider setting an internal price for carbon emissions, water abstraction or use of natural resources that the organisation extracts freely from the environment. This approach facilitates quantitative cost analysis, for example, through discounted cash flow analysis and subsequent justification of investments that mitigate the organisation’s impacts in these areas.
Risk assessment
With respect to risk assessment, the ESG Manual notes that global studies have shown environmental and social related risks are the most significant risks that business leaders are concerned about. In addition, business leaders now globally acknowledge the impact that ESG related risks are likely to have on their strategies and business models. As a starting point, ESG risks can be identified, analyzed, and managed as part of this wider enterprise risk management process as most NSE listed companies have implemented an enterprise risk management framework. The Manual recommends that listed companies seek expert ESG subject matter advise on how to mitigate significant ESG risks. Further, it directs that the organisation continuously evaluate the strategic, financial, operational and compliance risks that it is exposed to relative to its ESG risk profile. For instance, increasing emphasis on climate change mitigation by regulators and investors exposes organisations to non-compliance risks and possible divestment by investors. Human rights issues in the supply chain, whether real or perceived expose organisations to significant reputational risks. It is recommended that the Board be appraised on a regular basis on how the organization is managing these risks.
Performance disclosure
The NSE ESG Manual notes that “performance disclosure on ESG performance demonstrates transparency to stakeholders and a commitment to responsible investment by the Board and Senior management of the reporting Organization.” It recommends that listed companies document a process for collecting, analyzing, and reporting ESG performance data to stakeholders. ESG disclosure/sustainability reports assess prior period (usually financial year) performance of identified material ESG topics within the reporting boundary against set criteria. Hence, the manual provides guidance to listed companies on how to report on a variety of typical material ESG topics in various sectors while applying the GRI Standards. The ESG Manual recommends measurement as the sure way to guarantee management of the attendant ESG issues as what gets measured get managed. As it notes “Organisations that set ESG metrics and implement a system of collecting, analyzing, and reporting ESG performance see improvements in their ESG performance over time.”
*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 04/06/2022).