Towards ESG-Driven Project Development in Kenya: A Regulatory Perspective

1.?????Introduction

In previous articles, we have addressed the Environmental, Social and Governance (ESG) revolution in financing and lending, exploring the various forms of ESG lending together with the legal and regulatory framework underpinning ESG lending and financing in Kenya. However, ESG lending is but one component of the expanding ESG landscape.

ESG was first coined in the global financial ecosystem in the 2006 United Nations-supported Principles for Responsible Investment (PRI) report and is most popularly associated with financial evaluations of companies. However, the adoption of ESG practice has grown into a multifaceted wave building towards a sustainable and socially responsible economy. One component of this is ESG project development which is becoming pertinent to large-scale infrastructure projects that are anticipated to have a significant impact on the environment and community. ESG considerations are increasingly shifting the objects of infrastructure projects from short-term profitability to long-term sustainability.

ESG represents a more holistic and comprehensive approach for establishing long-term value when undertaking activities than existing regulatory frameworks. ESG project development therefore refers to the process of planning, designing and implementing projects that integrate environmental, social and governance considerations into the fibre of large-scale infrastructure projects. This ensures that ESG principles are embedded at every developmental stage.

ESG project development is driven by various factors including an acknowledgment of the social and environmental impact of major infrastructure projects and growing demands for sustainability from the financial sector. To achieve good ESG performance, the following key elements would need to be integrated into the development lifecycle of an ESG project: -

(i)??????????????an analysis of the potential environmental impact of the project and measures geared towards the mitigation of adverse environmental consequences;

(ii)?????????????an assessment of the project’s potential social impact and identification of ways to ensure that the project produces a social benefit to the stakeholders and local community involved or impacted by it;

(iii)???????????ensuring that the project is operated and managed in accordance with good governance principles including transparency and accountability measures. This can be implemented following the administrative requirements of relevant laws and regulations and adopting robust monitoring and reporting systems.

2.?????Regulatory Framework(s) informing Sustainable and Responsible Project Development in Kenya

There is no primary law guiding the implementation of ESG standards in infrastructure projects in Kenya, and therefore no statutory standard that can be sourced from one place. However, a review of the Kenyan legal and regulatory framework reveals provisions that speak to ESG principles in the context of project development. It is important to note, however, that the statutory provisions which apply will vary depending on the specific context that the project is being undertaken.

2.1. Environmental Impact

Environmental considerations have long been a cornerstone of large-scale infrastructure projects, owing to the substantial impacts that such projects tend to have on the immediate ecosystem and local community. For this reason, environmental safeguards often underpin infrastructural developments from inception to conclusion of the entire development lifecycle.

Environmental sustainability in Kenya is principally protected under the Constitution of Kenya, 2010 (the “Constitution”). In particular, the Constitution recognises the right to a clean and healthy environment and, by inference, requires that infrastructural projects be carried out in a way that promotes sustainable development and protects the environment.?

The Environmental Management and Coordination Act, No. 8 of 1999 (“EMCA”) is the primary legislation governing environmental management and conservation; and requires that all development projects undergo an environmental impact assessment (EIA) to assess the potential environmental and social impacts of the project. EMCA also requires issuance of licenses by the National Environment Management Authority (“NEMA”) for an infrastructural development to proceed. The regulatory provisions of EMCA are further supported by guidelines issued by NEMA, which provide guidance on undertaking environmental and social impact assessments in compliance with EMCA and other relevant legal frameworks, which correspond with ESG principles.

Generally, the ‘E’ aspect of ESG is supported by a range of laws and regulations in Kenya that target environmental protection and conservation. They ensure that large-scale infrastructure projects are undertaken in a way that is environmentally sustainable.

2.2. Social Benefit

In the context of large-scale infrastructure projects, the ‘S’ in ESG is concerned with the social impact of the project on the local communities and stakeholders involved in or in close proximity to the project.

Social sustainability ensures that a project has a positive impact on the community, and that the benefits arising therefrom are distributed fairly. Social sustainability contemplates community engagement through public participation, labour rights, human rights and corporate social responsibility (CSR) among other factors. In the context of large-scale infrastructure projects, these factors would need to be woven into the fabric of the development to ensure that the project fulfils ESG standards.

Legal frameworks in Kenya touch on the social function of ESG by protecting the rights of workers, regulating the impact of projects on the environment, ensuring engagement with impacted communities, upholding human rights, and encouraging corporate social responsibility by companies. For instance, labour rights and protections are primarily contained in the Employment Act, No. 11 of 2007, which promotes social sustainability through minimum wage, working hours, and occupational health and safety standards for employees.

The ’S’ dimension of ESG is also supported by the land law dispensation in Kenya by ensuring the proper management and administration of land, including processes that would apply in large-scale infrastructure developments. This involves the protection of individuals, communities, and other stakeholders that may be affected by land transactions. Such protections can be sourced from the Constitution, the Land Act, No. 6 of 2012, Land Registration Act, No. 3 of 2012 and the National Land Commission Act, No. 5 of 2012, among other legislative texts.

These are just some of the laws that support the social function in ESG project development. Taken together, such laws and regulations ensure that infrastructural developments are socially responsible and contribute positively to the development of local communities.

2.3. Governance Frameworks

The governance ‘G’ pillar assesses how well a company or organisation is managed and ensures that it is run in the best interests of its stakeholders. In this regard, governance touches on a broad range of issues, including matters such as reporting and disclosure mechanisms, corporate structuring, financial transparency, data privacy and protection and ethical practices. For the governance dimension of ESG to be met in large-scale infrastructure projects, there needs to be a clear understanding of a myriad of laws, regulations, policies and guidelines speaking to administrative operations and management. To offer a more defined picture of the same, some of these requirements are discussed below.

Depending on the legal vehicle(s) created to oversee the development of major infrastructure projects, the Companies Act, No. 17 of 2015 imposes several corporate governance requirements for companies established under it. For example, Section 655 of the Act requires directors to report to members on environmental matters, including the impact of the business of the company on the environment. Directors are also required to avail information on social and community issues, including information on any policies of the company in relation to those matters and the effectiveness of those policies.

Furthermore, large-scale infrastructure projects would need to comply with data protection laws, principally being the Data Protection Act, 2019 and its accompanying regulations. They provide for the rights of data subjects and obligations of data controllers and processors, principally striving to protect personal data disclosed to third parties. For a project to meet the governance function of ESG, the key stakeholders would need to adopt comprehensive data management practices on the use of personal data to ensure conformity with the aforementioned laws and regulations.

The requirements addressed above inform a small part of the regulatory framework speaking to the proper governance of a large-scale infrastructure project. Accordingly, project developers and other key stakeholders would need to review and observe the broad frameworks speaking to governance, to ensure responsible business practices through robust governance structures. ?

3.?????Regulatory Shortcomings barring the integration of ESG Considerations in Project Development

The lack of a uniform legal framework addressing ESG criteria means that there is limited institutional capacity to implement, enforce and monitor ESG standards in project development. This, in turn, makes it difficult for project developers and stakeholders in major infrastructural developments to seamlessly administer ESG standards in their activities.

Furthermore, the assorted range of laws applicable to ESG means that there is no coordination and integration among the different government authorities, project developers and stakeholders. This can lead to conflicting priorities and inefficiencies in the realisation of ESG in large-scale infrastructure projects.

Around the world, key regulatory frameworks are being implemented to ensure the enforcement of ESG standards. This is being achieved through robust disclosure requirements such as environmental and human rights disclosure obligations. In Europe, regulation and monitoring is being achieved through instruments such as the European Union (EU) Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS), and the EU taxonomy for sustainable activities vide the Taxonomy Regulation. The objective of these instruments is to increase transparency in companies and enable investors to apply ESG criteria in investment decisions.??

In Kenya, the Nairobi Securities Exchange (NSE) has developed an ESG Guidance Manual for listed companies in Kenya and other organisations interested in ESG reporting for corporate sustainability. The manual outlines useful guidance and best practices for disclosure on ESG performance by reporting on sustainable business practices. The manual seeks to encourage companies to consider the broader impact of their operations on society and the environment. It should be noted that mandatory disclosure requirements under the manual only apply to companies listed on the Nairobi Securities Exchange. ???

In light of the mounting pressures for ESG frameworks, further legislative action may be necessary in Kenya to ensure that project developers engaged in large-scale infrastructure developments are held accountable for their ESG performance. This can take alternative forms, including mandatory reporting and disclosure requirements, and performance targets. Such reforms would ensure that large-scale infrastructure projects are developed in a way that promotes a consistent principle-based approach for sustainable infrastructure and responsible corporate practices.

4.?????Why should project developers care about ESG?

From the foregoing discussion, ESG standards in project development are not regulated in Kenya. Instead, our regulatory framework contains a patchwork of laws that can inform ESG principles in major infrastructure developments. This presents challenges for its implementation and enforcement.

However, evolving global regulatory trends and international pressures are driving the adoption of ESG in major infrastructural developments, in turn accelerating a global momentum towards sustainable and responsible infrastructure. As a result, ESG considerations are becoming progressively important for project developers and other relevant stakeholders that want to be successful in the global marketplace.

In light of the above, it should be noted that there are tangible benefits to adopting ESG in project development. These benefits include:

(i)??????????????attracting diverse streams of investment and financing;

(ii)?????????????gaining preferential access to new markets;

(iii)???????????gaining a competitive advantage in relevant markets through brand value enhancement;

(iv)???????????meeting stakeholder expectations;

(v)?????????????enhancing project performance and innovation;

(vi)???????????generating long-term value;

(vii)??????????entrenching regulatory compliance;

(viii)?????????mitigating risks; and

(ix)????????????promoting community development.

In this regard, project developers should care about ESG principles, even in the absence of specific laws, owing to the significant impact and benefits that ESG performance can generate. By prioritising ESG principles, project developers position themselves for success in a sustainability-focused global environment.

5.?????Conclusion

Emerging ESG regulations are building on existing regulatory frameworks by imposing hard obligations to prevent adverse environmental and social impacts. This is being achieved through monitoring mechanisms and disclosure requirements. We anticipate that it will not be long before the trend on regulatory development takes effect in Kenya.

In view of this, it would be prudent for project developers and other relevant stakeholders to adopt ESG standards in project development, in order to align themselves with the rapidly evolving regulatory standards. This requires a review of internal strategies, policies and procedures by project developers that embrace the social responsibility and long-term sustainability of infrastructure projects.

Authors: Esther Omulele and Joy Muya