Legal and Regulatory Changes to Incorporate ESG for Kenyan Enterprises

Many enterprises are looking at how the implementation of environmental social and governance (ESG) measures will contribute to the long-term success of their businesses. ESG has now become a metric that many enterprises use to measure the non-financial success.

The legal and regulatory framework around ESG compliance in Kenya is in its infancy stage. However, we are seeing the emergence of new laws and standards that are focused on the increase of ESG enforcement. Some commercial arrangements also require enterprises to implement ESC governance structures, policies, and operational frameworks especially when it comes to financing of projects.

In November 2021, the Nairobi Securities Exchange PLC (NSE) issued an ESG Disclosure Manual (the manual). Under this manual all the listed companies in the NSE are required to comply with the ESG reporting requirements. Under the manual, the listed companies had been given a year to comply with the ESG reporting requirements which period lapsed in November, 2022.

• The manual recommends that Global Reporting Standards be adopted as the framework to be used for the ESG reporting.
• The principles that are to be applied into the reporting according to GRI are; accuracy, balance, clarity, comparability, completeness, sustainability context, timeliness and verifiability.
• The GRI standards, the reporting standard includes the impact thy cause and contribute related to ESG and the impact related to their products and services.
• Under the manual, the listed companies will be required to include an ESG report in their annual integrated reports.
• The manual further requires that the listed companies should appoint a sustainability manager as a primary person when it comes to ESG related issues.

In 2021, the Central Bank of Kenya (CBK) issued a Guidance on Climate-Related Risk Management (the guideline) directed at financial institutions on the management of climate related risks through the incorporation of related corporate governance mechanisms. The guideline requires that financial institutions need to adopt robust governance structures that allow effective identification, management, monitoring and reporting of climate-related risks. The boards and senior management of these institutions will therefore be required to spearhead the implementation of the guideline. In addition to the incorporation of robust governance mechanisms, the financial institutions are required to adopt effective reporting approaches for the disclosure of the climate related risks.

Various approaches can be adopted when it comes to the reporting of the climate related risk since there is no unified reporting structure that has been provided under the guideline. Such disclosures may be done in the annual reports provided by the financial institutions. At the time of issuance of the guideline, the CBK granted a grace period of up to June 2022 to financial institutions to file plans on how they intend to comply with the guideline. Once the plans are approved the banks are required to file quarterly reports on how they intend to comply with the approved plans. In addition to these measures, financial institutions are required to sensitize their staff on climate change risk management.  Even though the legal and regulatory regime touches on specified sectors, there is a need for all enterprises to comply with ESG due to the benefits associated with it such as improved financial performance, attraction of investors and lenders, increased competitiveness, and improved operational sustainability.