May 20, 2022 - 5 minutes read

The clock is ticking for corporations to integrate ESG systems into their frameworks

By Natalie Muthoni

On November, 29, 2021, the Nairobi Securities Exchange (NSE) launched its Environmental, Social and Governance (ESG) Disclosures Guidance Manual. These guidelines require that companies listed on the NSE report publicly on their ESG performance at least annually. Why is this important? Well, under the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015, the boards of listed companies in Kenya were already required to consider the ESG impact on their businesses and formalise their ESG strategies. Moreover, the impact of environmental, social, and corporate governance (ESG) issues on investment decisions are receiving more attention globally. Many socially responsible investors are shifting their focus away from financial performance and short-term benefits and toward the long-term viability of a company’s business operations.

Demand for ESG data has prompted many nations, including Kenya, to enact ESG disclosure and reporting regulations, particularly for publicly traded corporations. Already, with environmental, social, and governance policies woven into the Big 4 Agenda which emulates the Sustainable Development Goals (SDGs) to ensure by 2030, we address the global challenges we face, including those related to poverty, inequality, climate, environmental degradation, and peace and justice.

The ESG criteria works as a framework/tool that guides companies on how they should conduct themselves.

Corporate climate policy, energy use, waste, pollution, natural resource conservation, and animal treatment are all included in the environmental criteria. The criteria can also be used to assess any environmental risks that a firm may have and how those risks are being managed. Direct and indirect greenhouse gas emissions, toxic waste management, and environmental legislation may all be factors to consider.

The social criteria are concerned with the company’s stakeholder interactions. Does it have its ESG standards for suppliers? Is the company willing to offer a portion of its revenues to the community or encourage employees to volunteer there? Do the working circumstances demonstrate a high regard for the health and safety of employees? Or does the corporation take advantage of its customers in an immoral manner?

ESG governance principles ensure that a firm follows accurate and transparent accounting practices, selects leadership with integrity and diversity, and is accountable to shareholders.

ESG investors may demand guarantees that corporations avoid conflicts of interest when selecting board members and senior executives, that they do not utilise political contributions to get preferential treatment, and that they do not engage in criminal behaviour.

The NSE has a one-year grace period from the issuance of the guidelines for listed companies to interact and familiarise themselves with the ESG reporting process. So, to make the process smoother, the NSE has developed a manual that guides on how to identify and measure material ESG topics, how to embed ESG into an organisation’s strategy, operations, and performance management, and how to report on ESG performance, using an approach that meets international standards on sustainability reporting.

Following that, listed companies must deliver an annual ESG report, which can be integrated or separated.

 So, how does a business go about reporting on this? By using the Global Reporting Initiative Standards (GRI) as a standard framework. GRI has paved the way for the world’s most widely accepted sustainability reporting standards over the years. It consists of three universal standards that apply to all organisations and 33 topic-specific standards that are only applicable to organisations that are material. An organisation’s materiality assessment examines its operations for issues that may influence it and determines which are the most important and must be disclosed.

NSE, however, has also gone ahead to propose a list of mandatory ESG disclosures that listed companies must disclose to facilitate compliance with the CMA code and local regulations. Some of the topics include environmental and social risk management, stakeholder engagement, supply chain screening, human rights, and carbon footprint assessment.

Furthermore, the guidelines require listed companies to perform materiality assessments at least once a year and to publish a systematic, documented process for determining materiality for ESG disclosure issues.

 The guidelines recognize the importance of corporate governance in integrating sustainability across business strategy, operations, and performance management, and propose that the board and senior management bear responsibility for overseeing, financing, and implementing, with the sustainability manager being appointed and resourced to specifically oversee ESG matters within the organisation.

 Such personnel could benefit from programs such as GRI Sustainability Training Course and Professional Certification. As a GRI certified training partner, KCIC Consulting offers training that enables professionals to upskill, understand and communicate their organisations’ sustainability impact.

The modules introduce participants to sustainability reporting, the GRI standards, and how to integrate Sustainable Development Goals into sustainability reporting. It then dives deeper into the sustainability reporting step-by-step approach including conducting materiality assessment and stakeholder engagement.

Such efforts, as well as the NSE’s proposed responsible investing index, bring the sector closer to a point when stakeholders will be able to link financial performance to particular ESG measures.

In terms of internal ESG reporting systems, certain Kenyan-listed companies were already ahead of the curve. However, all publicly traded companies should devote time and resources to determining if their ESG framework is in compliance with the ESG Manual and what steps they need to take to become completely compliant before the grace period expires.

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