Navigating Environmental & Social Management System (ESMS) Developments in FDI Contracts

The current business landscape has been transformed by various initiatives geared towards combating climate change, calls for racial equity, improvement of labour standards coupled with the changing role of corporations and business. It is imperative for foreign direct investors in Kenya to ensure a balance of economic, social and environmental issues. There has been an increase of sustainability-themed financial products with governments moving to put in place regulatory frameworks for sustainable finance. According to the World Investment Report 2022, sustainability-themed investment products in the global financial market amounted to $5.2 trillion which was a 63% increase from 2020. The report further reveals that not all this investment is truly sustainable and therefore a limited alignment with the sustainable development goals (SDGs).

Institutional investors and other asset owners have increased actions related to sustainable investments and those that mitigate sustainability-related risks in various international markets. With the role that the capital markets play in ensuring sustainable investment, the Nairobi Securities Exchange (NSE) issued the Environmental, Social and Governance (ESG) Disclosures Guidance Manual which aims at improving and standardizing ESG information that is reported by listed companies.

For businesses to thrive and be eligible for financing they need to build their resilience and operate in a sustainable way while embracing the needs of the environment and those of the societies around them. Kenya is yet to adopt a comprehensive regulatory regime that requires all businesses to have regard and also report on ESG initiatives that they have taken. With the commitment by the government to combat climate change, it is foreseeable that a regulatory framework dealing with ESG compliance particularly for climate change will be adopted. A regulatory framework around climate corporate accountability would also ensure that private companies adhere to ESG best practices.

Foreign direct investors may face some challenges when it comes to this rapidly evolving landscape. Being aware of these challenges equips investors with the requisite knowledge on how the company can assess the ESG related risks and opportunities. The implementation of legal requirements that demand that investors provide ESG disclosures may bring unique challenges associated with the identification of risks across the various chains in their businesses and also understanding the options for mitigation.

In order to manage ESG risks and tap into opportunities, companies need to be aware of the reporting requirements that apply such as those that apply to listed companies in Kenya. Investors also need to consider international best practices when it comes to compliance and implement voluntary disclosure standards as guiding frameworks. Investors may also need to include ESG considerations when it comes to procurement and clauses in contracts. In addition to this, it is essential to develop effective and smart policies and practices around ESG governance.