ESG in Project Financing
- ESG Considerations in Project Finance
ESG considerations in project finance have always been key to understanding risk, due to the long-term nature of the investment. Now, the increased prominence of ESG presents a new dimension of investment, credit, and even reputational risk for a range of projects, from infrastructure to energy assets.
Below are some of the ESG considerations in project development that would apply in project financing:
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The demand for ESG information globally has led to more countries, including Kenya, adopting ESG disclosure and reporting requirements, especially for listed companies. The Nairobi Securities Exchange (NSE) in November 2021 published the ESG Disclosures Guidance Manual. The manual provides a framework and guide on how companies can “collect, analyse, and publicly disclose important ESG information”, which aligns with international reporting standards, including the Global Reporting Initiative 2018. The manual aims to facilitate the ease of comparing ESG performance amongst listed companies by providing a set of guidelines for reporting.
2. ESG Financial Instruments
Novel financial instruments that are becoming increasingly available to project companies engaged in ESG activities include green, social and sustainability bonds, whose proceeds are linked to ESG activities:
- Green Bonds are instruments where the proceeds are used solely to finance projects with environmental benefits i.e. projects in renewable energy, energy efficiency, land and water management, pollution prevention etc.
- Social Bonds finances projects that address a social issue by mitigating social harms or attempting to achieve positive social outcomes i.e. improving a community’s access to essential services, housing, food, water etc.
- Sustainability Bonds are bond instruments whose proceeds are used to finance a particular goal i.e. decarbonization or a combination of ‘green’ and ‘social’ projects.
Kenya’s first Green Bond was listed for trading on the NSE in January 2020. The bond, worth 4.3 billion shillings ($42.5 million), was issued by Nairobi-based property developer Acorn Holdings last October to build student accommodation.
3. Developments in ESG financing in Kenya
In October 2021, the Central Bank of Kenya (CBK) issued a new guideline to banks on climate-related risk management. The guidance requires banks to assess opportunities and risks arising from climate change, have in place climate-related risk management strategies, disclose climate-related information as part of an annual sustainability report and submit a quarterly progress report on the implementation of the strategy. Based on this, climate-resilient projects will therefore be top targets for funding by Kenyan banks.
With the continued shift from looking at sustainability as best practice to a mandatory compliance requirement for companies, as evidenced by the publication of the NSE ESG Disclosures Guidance Manual, we recommend that companies in Kenya should seek to familiarize themselves with the ESG reporting process outlined in the NSE ESG Disclosures Guidance Manual and project companies should leverage on investors’ interest in ESG to maximize opportunities to obtain financing or obtain favourable financing terms.
Disclaimer:
The information provided in this article is intended for informational purposes only and should not be construed as legal advice. Don’t hesitate to get in touch with us at info@koassociates.co.ke for any queries or legal advice.
