ESG in Kenya: Frameworks, Standards, and Regulations

As we gear up for the Africa Shared Value & Environmental, Social and Governance (“ESG”) Summit in October 2024, it is an opportune time to take a step back and review ESG from the Kenyan context, our regulations and practice.

ESG is a management and analysis tool that sheds light on how an organization operates in its non-financial pillars and is increasingly becoming a key consideration for measuring how sustainable business operations are and the ethical impact of investments in organizations.

E: Covers environmental factors affecting climate change such as carbon footprint, water usage, greenhouse gas emissions, deforestation, pollution mitigation, effect on biodiversity and waste management.

S: Relates to social standards affecting human capital and human rights such as workplace diversity and inclusion, equity, health and safety, talent management, and privacy and data protection.

G: Relates to the governance of an organization from board composition, decision making, sustainability oversight, compensation, corporate ethics, and as wide as political contribution. By focusing on the non-financial pillars of ESG, an organization can continuously assess and sustain its growth while fulfilling a social mission. This approach also enables socially conscious investors to evaluate and select potential investments more effectively.

“...the transition to ESG is a pure transformation. It does not consist of a few isolated actions, but rather of integrating ESG criteria into all aspects of the company, including business strategy, operational models, daily operations, and even financial decisions. It is a transformation that affects the very raison d'être of the company, its impact on the world, and the way it aligns its business model with society's needs.” - PWC

ESG Reporting and Disclosures

ESG standards and frameworks are set principles that guide ESG reporting and the related disclosures at the organization level. Frameworks focus on what and how information is collected while standards are technical and provide specific reporting metrics. Although a universal framework or standard has not yet been developed, the existing options enable consistent conclusions to be drawn when comparing reports from different organizations. ?

Some of the existing ESG reporting standards include:

• European Financial Reporting Advisory Group (EFRAG) developed by the European Commission
• International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards by the International Sustainability Standards Board (ISSP)
• Sustainability Accounting Standards Board (SASB) standards which are closely connected to the IFRS standards.

Some of the common ESG reporting frameworks include:

• Climate Disclosure Standards Board (CDSB) framework and Task Force on Climate-related Financial Disclosures (TCFD) framework that focus on the environment component of ESG, specifically on climate aspects.
• International Integrated Reporting Council (IIRC) framework which promotes integration across all kinds of ESG reporting
• Global Reporting Initiative (GRI) framework that widely captures multiple aspects of ESG.

In subsequent articles, we will delve deeper into the standards and frameworks and the general practice in Kenya.

ESG in the Kenyan Context

As the over-arching law, the Constitution of Kenya provides for the right to a clean and healthy environment and the right to healthcare, housing, freedom from hunger, social justice and education. Further, existing legislations cover various aspects of ESG, such as the Environmental Management and Coordination Act and the Climate Change Act (cover issues under the E); the Employment Act and Data Protection Act (covers issues under the S); and the Companies Act, Limited Liability Partnership Act (cover issues under the G).

Further to these laws, several institutions have prepared guiding frameworks, policies or manuals to guide ESG practices development in their respective sector. These include:

• The Nairobi Securities Exchange ESG Disclosures Guidance Manual published by the Kenya National Securities Exchange in November 2021. Its objective is to improve and standardize ESG disclosures and reporting by listed entities.
• The Central Bank of Kenya has a Guidance to institutions licensed under the Banking Act on Climate-Related Risk Management published in October 2021.
• The Stewardship Code for Institutional Investors by the Capital Markets Authority (CMA) aims to encourage deliberate and responsible management and oversight of assets by institutional investors.

Emerging Trends

In conclusion, even with the growing regulation and interest in ESG, some challenges are emerging namely:

• ESG remaining voluntary and dependent on self-audits by companies which could lead to greenwashing through mis/overstating of the activities undertaken or their impact.
• ESG reporting remains voluntary and, coupled with the absence of standardized frameworks and standards, leads to inconsistencies when comparing reports across organizations.

Author: Lucy Monyenye Ocharo

Legal Counsel & Policy at EED Advisory Limited.