By Anthony Mugo
It may appear like a long time ago when the Nairobi Stock Exchange (NSE) gave listed companies the deadline of 22nd November 2022 to comply with environmental, social and governance (ESG) disclosures, over and above the conventional financial reporting. The move was in response to global trends that have seen investors demanding broader disclosures from companies, particularly those related to environmental sustainability and climate change. Shareholders and other interested parties are demanding information not only about profitability but increasingly about how those profits have been made.
Environmental issues of concern include the usage, management and conservation of natural resources such as energy, land, fresh water and biodiversity; reduction of carbon emissions; waste management and compliance with environmental regulations. Social issues have to do with the way companies deal with people, including employees, touching on safety, diversity, working conditions, and customer and consumer relations, among others. Governance is focused on elements such as board governance composition, diversity corruption or whistleblowing issues and shareholders’ rights, and responsibilities.
In Kenya and for some years now, several NSE-listed companies that include Safaricom, KCB and the Equity Group, have been producing ESG reports but voluntarily. To put its money where its mouth is, the NSE in November 2021, moved further and issued guidelines to ensure compliance with its new ESG reporting requirements. The Nairobi Securities Exchange ESG Disclosures Guidance Manual provides clear directions towards compliance with global ESG reporting standards. Going by the level of unpreparedness evident within most listed companies, it is clear that many of them will be hard-pressed to meet the NSE timeline. In a sense, therefore, the new NSE ESG disclosure requirements have put many listed companies in a quandary.
Whereas firms that have been reporting may have had the latitude to pick and choose what elements of ESG to report about, being compelled to report formally in line with existing globally recognised standards means changing the approach for those who have not been using these standards. The most popular is the Global Reporting Initiative’s Sustainability Reporting Standards, 2018 (GRI Standards), and the other is the Sustainability Accounting Standards Board (SASB).
Conforming to global ESG reporting requirements places new demands on boards and management teams of listed companies. The major one is to determine which ESG standards to report against. Having done so, listed companies will have to reorganise their management systems to create mechanisms for reporting, within the short time remaining to the deadline. They will then find it obligatory to develop formal ESG plans or strategies that will guide their ESG reporting going forward.
ESG reporting capacity
This unfolding development has resulted in an unprecedented demand for capacity building of management teams on ESG reporting. In an environment where ESG reporting has not been the norm, local expertise to help firms quickly meet the requisite reporting obligations is insufficient. This, however, is expected to change gradually as corporate consulting firms and tertiary institutions move to fill this gap in expertise.
Global reporting standards seek to bring about clear metrics against which companies weigh themselves to reap the benefits associated with compliance with ESG reporting. According to the NSE, these are the following:
- Investors can assess and preferentially invest in issuers that demonstrate better ESG-linked financial performance, resulting in more efficient capital allocation.
- Organisations that demonstrate responsible investment practices can access new sources of capital from sustainability-conscious investors such as development finance institutions (DFIs) and private equity firms.
- A holistic view of corporate value facilitates product innovation by enabling consideration and management of the embedded environmental and social impacts of products and services.
- Measuring and reporting ESG performance enables organisations to embed circularity in their operating models and achieve operational efficiencies by optimizing energy and raw costs in production.
- Organisations that demonstrate the additionality of ESG integration into their supply chains, production systems and service delivery can benefit from preferential access to new markets.
- The ESG value creation framework helps organisations to proactively address non-financial but critical environmental and social risks, thereby preserving and creating long-term value for stakeholders.
- ESG integration enhances regulatory compliance and helps anticipate the impact of future ESG-related regulations and policies.
- Organisations are perceived as responsible corporate citizens and achieve brand value enhancement by systematically identifying and responding to stakeholder needs and expectations.
Firms’ role in meeting SDG targets
The push to integrate ESG reporting derives from global efforts in achieving sustainability as contained in the Sustainable Development Goals (SDGs). Sustainability has been defined by major authorities as “meeting today’s needs without compromising the ability of future generations to meet their needs.” Indeed, many companies have opted to base their reporting on the SDGs. Given the 17 SDGs cover a range of areas, the common scenario is that firms report against SDGs that are impacted by their businesses.
Even within specific SDGs, firms have to determine which topics relating to those SDGs are material for them. The Global Reporting Initiative, which is behind the GRI Standards plans to develop lists of material topics for 40 sectors. Firms working in these sectors will then be obliged to report against the topics to be considered compliant, highly systematic processes and one that needs specialised knowledge to complete successfully.
For more information, contact Angela at LEAD-EHA: angela@lead-eha.org. E-MAIL: info@lead-eha.org Website: www.lead-eha.org
