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Kenya’s steady march to sustainable businesses

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Kenya’s steady march to sustainable businesses


ODUNDO

Nairobi Securities Exchange CEO Geoffrey Odundo. NMG PHOTO

Sustainability, circular economy, clean technology… All these terms may have sounded alien to most Kenyan companies a few years ago, but today they are increasingly becoming essential as investors and regulators alike seek to build resilient and sustainable societies.

From marketing pitches to boardroom discussions, product development to launches, the debate on the role companies play in protecting the environment, society and governance have taken centre stage.

The events of the past two years show that the dichotomy of public vs private companies no longer exists because of a fast-changing corporate governance regime that’s pushing for an expanded role of businesses in society.

Opponents view the push as a weakening of for-profit firms, but proponents including activist investors in some markets like Europe believe the effort is novel and stands to benefit both shareholders and non-shareholder stakeholders in organisations.

Traditionally, firms have limited themselves to making financial disclosures in their annual reports, but investors are increasingly keen on learning how the companies are impacting the environment and the wider society, corporate governance practices, and fraud mitigation.

Companies that have incorporated these new standards in their operations have shown improvements in operations on individual Environmental and Social Governance (ESG) components.

Sustainability data firm ESG Book in July said companies with better governance scores outperformed more strongly than those with higher social scores. But as it becomes more mainstream, experts believe organisations that comply will outperform those lagging.

In Kenya, it’s still hard to measure the impact of the growing calls for C-Suites and boards to be more responsible and accountable, but trends show that promoting sustainable corporate behaviour could soon be a benchmark across the globe.

While Kenyan firms and Africa at large have lagged behind their counterparts in developed markets, there has been progress in the past one year as investors and boards embraced the new way of conducting business.

In 2021 for instance, the most sustainable firms were in Europe (46) and North America (33). Only Standard Bank Group, which owns Stanbic Bank, featured in the list of 100 most sustainable firms at 53 as compiled by Corporate Knights.

EU legislators and ministers have approved landmark regulations that require companies operating in the Eurozone to report on environmental and human rights issues in their operations.

And some activist investors have threatened to sever ties with firms have contributed to increased compliance in Europe and North America.

Kenya is making progress, already there are listed firms and small enterprises that have been reporting their ESG performance even in the absence of regulations.

Safaricom, East African Breweries, Nation Media Group, Bamburi Cement, KCB Bank Group, Kakuzi, and Standard Chartered are the firms that have issued an ESG report to the Nairobi Securities Exchange (NSE).

Last year, the bourse issued Environmental, Social, and Governance (ESG) guidelines for all listed firms in partnership with Global Reporting Initiative (GRI) and gave them a year, which elapsed last month, to comply.

The NSE directive was supposed to open the way for more comprehensive laws as has been witnessed in other jurisdiction such as the European Union.

“The NSE Guidelines will require listed companies to report publicly, at least annually, on their ESG performance through an integrated report or a separate sustainability report. This is intended to encourage uniformity in ESG disclosures even as a comprehensive ESG legal framework is awaited,” the NSE said last year.

As of last month, only 29 out of 63 or 46 percent of listed firms had complied with the NSE directive to make the disclosures following the release of the guidelines in November 2021.

NSE chief officer of regulatory affairs Loise Wangui said although the bourse gave companies up to a year to comply with ESG norms, there is no way to enforce this as it is still a voluntary affair.

“So when we have a global baseline ideally that is when we will have full compliance. Right now it is still more voluntary. We want our companies to mature in that area first,” she said.

While compliance is still low, there are signals that more firms will race to meet the targets to unlock more investor funding and improve relations with consumers who are increasingly demanding higher social and environmental responsibility from companies.

A survey done by auditing firm KPMG for the Top 100 midsize companies in Kenya reveals that 43 percent of the firms participated in the sustainability category out of which 78 percent said they have environmental policy.

About 11 percent of the companies surveyed said they are required to report on ESG matters by the regulator.

In other countries like the US, investors and regulators have mapped out how to enforce climate and ESG-related misconduct.

For instance, the creation of Climate and ESG Task Force by Securities and Exchange Commission (SEC) within the Division of Enforcement has pushed more companies in the North American country to repair their ESG and climate credentials.

As the need for companies to run sustainable operations in the country gathers pace, in the next few years Kenya is likely to witness standard regulations for providing reports on the social and environmental impact of firms.

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