Over the past few years, increasing attention has been given to how environmental, social and corporate governance (ESG) issues impact investment decisions. Many socially responsible investors have moved away from purely focusing on financial performance and short-term gains and are instead taking a view on longer-term sustainability of an issuer’s business practices. The demand for ESG information globally has lead to more countries, including Kenya, adopting ESG disclosure and reporting requirements, especially for listed companies.
The Nairobi Securities Exchange (NSE) recently published the ESG Disclosures Guidance Manual (the ESG Manual) at the end of November 2021. The ESG Manual provides listed companies with a guide on how they can “collect, analyse, and publicly disclose important ESG information”, which aligns with international reporting standards, including the Global Reporting Initiative 2018. The ESG Manual aims to facilitate the ease of comparing ESG performance amongst listed companies by providing a set of guidelines for reporting.
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 of their businesses and formalise their ESG strategies. However, the reality is that while for the past few years, many listed companies had already implemented some form of ESG reporting, not only to meet the demands of the growing number of institutional and sovereign investors with ESG investing approaches, but also as a means of pursuing long-term economic growth in a more sustained way, there were no clear reporting standards that applied and there was an inconsistent approach to ESG practices. This meant that previous ESG reporting by listed companies was fragmented. The ESG Manual will go a long way in creating a consistent and transparent disclosure framework.
Listed companies in Kenya have been granted a one-year grace period to integrate and comply with the ESG reporting requirements. The Capital Markets Authority of Kenya and the NSE are also in discussions to introduce an ESG index in future which would track the performance of companies with superior ESG practices. Given the diversity of industries represented on the securities exchange, it will be interesting to see the proposed metrics and the weight given to different ESG factors when formulating the rating system for the index.
Some Kenyan listed companies were already ahead of the curve in relation to their internal ESG reporting processes. However, all listed companies should dedicate time and resources to verify whether their ESG framework is aligned with the ESG Manual, as well as determine what steps they need to take to be fully compliant before the end of the grace period.
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