Environmental, Social, and Governance (ESG) in Tanzania

What is ESG and its components?

Previously, I explored ESG Challenges in Emerging Markets [https://www.dhirubhai.net/pulse/esg-challenges-emerging-markets-amalia-lui-4tpzf ]. This short article focuses on breaking down the components of ESG and its regulatory framework in Tanzania.

ESG is sometimes referred to as impact investing, sustainable investing, and responsible investing and its components are evolving where there is addition of new components to it. ESG focuses on the assessment of internal factors/policies influencing the project, external factors influencing the project, and the project’s external influence on society. ESG imposes tangible and practical measurements and assessments on the environmental, social and governance factors of each project both internally and externally. It involves mandatory reporting requirements, compliance targets, and mandatory milestones to be achieved and requires a regulatory framework to support its implementation.

The key components of ESG are:

Environmental: Seeks to assess if the company recognizes and factors in the environmental issues. Everyone has experienced the effects of climate change although the intensity may differ depending on several factors. The company assesses itself and is assessed externally on its policies and activities on climate change, greenhouse emissions, biodiversity, carbon emissions, waste management, footprint in pollution, rehabilitation initiatives, etc.

Social: This caters to the company’s impact on people internally i.e. its employees and externally i.e. communities and society around the project by the company. It involves policies, and activities focusing on culture, the social impact of diversity, inclusivity, human rights, supply chains, and social services like education, health centres, employee benefits, etc.

Governance: It is focused on how the company is governed, its policies, compliance with regulatory frameworks and legal obligations, benefits, succession planning, board management, tax compliance, shareholder rights, inclusivity of employees in company operations, relationships with local authorities, etc.

Why focus on ESG in investment and projects?

ESG considerations are now critical for investors when assessing projects to invest in, financiers when assessing project finance requirements, and investees and project developers for attracting sustainable finance and investors. Since ESG compliance is now advocated globally by international, regional, and multilateral organizations, all parties involved in projects must consider the impact the relevant project has on stakeholders including customers, employees, suppliers, regulatory and local authorities, wider communities, neighbouring countries, and geo-political forces involving other governments. Despite ESG compliance challenges in developing countries, ESG-driven investment attracts more investments with long-term sustainability that Africa can significantly benefit from.

Does Tanzania law require ESG compliance?

Tanzania does not have a specific legislation focused solely on ESG compliance but there are multiple legislations which provide on matters which are under ESG compliance. Highlighting a few laws that apply to ESG in Tanzania:

(1)??????????????? The Environmental Management Act, 2004, and regulations made thereunder. This is the parent legislation that governs all environmental matters in Tanzania. It imposes an obligation (among others) to undertake environmental impact assessment studies (EIA Studies) on all projects which are out of character from its surroundings. The Act widely encompasses all commercial operations undertaken on land, and there is a requirement to undertake annual environmental audits and submit reports to the National Environmental Management Council (NEMC).

(2)??????????????? The Environmental Management (Control and Management of Carbon Trading) Regulations, 2022. These Regulations govern the application for a licence and selling of carbon credits. It is a fairly new legislation although there were carbon projects which were being registered under the old model when there was no specific legislation on carbon projects. So far, across various sectors, there is no legal obligation imposed under the law for projects to acquire carbon credits but there is interest locally and internationally in establishing and financing carbon projects in Tanzania.

(3)??????????????? Extractive and Energy sector laws: The energy, mining and oil and gas laws require project developers to undertake EIA Studies as per the environmental legislation. Also, the said laws impose the requirements to rehabilitate the project land following closure or completion of the relevant projects. There is an obligation to deposit a rehabilitation bond which shall be used to rehabilitate the project land and this obligation is imposed during the initial stages of setting up the project.

(4)??????????????? Employment, Human Rights, Workers Compensation, Occupational Safety, Local Content etc. are some of the multiple laws which ensure the protection of the employees, rights of the employees and the community members and overall safety requirements. Also, Tanzania has multiple laws affecting various sectors including mining, oil and gas, telecom, shipping, insurance etc. which mandate the requirement to have local partners/shareholders and/or local directors and prioritize local goods and services. These laws aim to ensure there are returns to local communities and at the same time, ensure participation and employment of Tanzanians across various projects in different sectors.

(5)??????????????? Also, there are laws ensuring compliance and disclosures by companies, requiring Government Authorities to act fairly and diligently in the discharge of their obligations, imposing requirements to obtain various licences and permits, including obligations to observe and implement corporate social responsibility and currently, there are specific corporate social responsibility regulations applicable to the mining sector.

(6)??????????????? Also, several Authorities have initiated steps in support of ESG despite the lack of specific ESG legislation, which are as follows:

(a)????????????? Dar es Salaam Stock Exchange (DSE) prepares an annual sustainability report which takes into account the ESG factors and focuses on having sustainable investment. At the same time, the Capital Market and Securities Authority of Tanzania (CMSA) endorsed DSE rules which require listed companies to address and report sustainability in their plans and operations.

(b)????????????? The Central Bank of Tanzania initiated the ESG journey through Climate-Related Financial Risk Management guidelines. Since then, we have seen several reputable banks in Tanzania issuing green bonds and climate funds which are dedicated to persons seeking to invest in the green space.

(c)?????????????? Also, the CMSA has introduced draft guidelines for Corporate and Subnational Sustainability Bonds, promoting sustainability financing.

Role of Clyde & Co in ESG compliance

As an international law firm, we have internal capabilities to assist projects in ESG compliance which includes advisory, reporting and due diligence support.

Disclaimer

The views expressed in this paper are those of the author only and should not be considered as an official interpretation, defamatory, or interference of any legislation, laws, or policies of any country including Tanzania. The contents of this paper should not under any circumstances be reproduced or used without the express written consent of the Author. It should not be considered as legal advice to any of its recipient(s) and should not be relied upon without obtaining further legal advice. We accept no liability for any loss occasioned or suffered due to the contents of this paper. The information contained herein is general and is not intended to address the circumstances of any particular deal. Although effort has been made to research and share the correct information, we do not provide any guarantee to such information.