January, 05, 2023

Challenges in effective ESG reporting in Kenya

Multi Sector

ESG reporting is gaining fresh momentum in Kenya, as investor interest and activism rises globally. ESG stands for environmental, social and corporate governance issues that are of increasing concern, over and above financial returns provided by companies. It is the need of the hour for companies to understand their impact on environment and society, to maximize the positive and reduce negative. While many companies in Kenya have been reporting ESG, this has been largely inconsistent. This is not the fault of the companies, as there exists a veritable ‘alphabet soup’ or ‘ESG zoo’ of reporting standards and acronyms. The most widely used of these, globally and by listed companies in Kenya, is the Global Reporting Initiative (GRI) reporting standard. GRI is also recommended by the NSE manual, to help reduce uncertainties on which framework to apply, as well as for consistency in reporting in Kenya.

While the benefits of the ESG reporting are well documented, here are a few challenges in implementing ESG reporting in Kenya. Companies that ignore addressing these challenges are liable to miss out the most valuable benefits of ESG reporting such as accessing new sources of capital from sustainably conscious investors like pension funds, development finance institutions and private equity firms, as well as achieving operational efficiencies.

Four challenges exist in operationalizing an effective ESG reporting structure. These are setting governance structures, understanding reporting boundary, conducting materiality analysis and developing and publishing relevant ESG content. Let us examine each challenge in detail.

The setting of an active governance structure to drive meaningful ESG reporting is critical. The Kenya Companies Act of 2017 mandates company directors to review ESG issues that may affect the future performance of the company. The board provides oversight of the ESG reporting agenda endorsed by the CEO and driven by the Sustainability Manager. A great example of a well-designed ESG report is by Diageo UK, which mentions the CEO’s support for sustainability reporting in a letter at the beginning.

The reporting ‘boundary’ refers to all the entities a company has control over (‘organizational boundary’) and all those entities over which it exercises influence (‘operational boundary’) such as subsidiaries, suppliers, vendors and contractors. The upstream and downstream need to be considered, and the reporting boundary set accordingly. This may vary from company to company depending on the sector of the company and type of information needed.

Materiality refers to the principle that determines which topics are sufficiently important enough to require being reported. All ESG topics are not of equal importance to every company; disclosures relating to water waste and treatment may be more important to a chemical manufacturer as compared to a furniture company. Materiality is defined within the reporting boundary, and materiality analysis should ideally be carried out annually by listed companies.

Once the three challenges are addressed, it should be straightforward to select the relevant data. The Sustainability manager, supported by the CEO, will need to engage in stakeholder outreach, both internally and externally, to set up the relevant systems to gather the required information. At this stage, the GRI also provides guidance on how the sustainable development goals (SDGs) relevant to the ESG reporting process can be selected. Not all the SDGs are required, companies must select those most relevant to their business. This is important to avoid allegations of green washing, and report measurable and tangible annual progress in achieving the targets under the chosen SDGs.

The Nairobi Securities Exchange (NSE) took an important step for ESG reporting by publishing the ESG Disclosures Guidance Manual in November last year. The manual provides a clear roadmap to collect, analyze and publicly disclose important ESG information as per international reporting standards. Listed companies in Kenya have a one-year grace period to integrate and comply with these standards; all listed companies are expected to share ESG reports as part or in addition to their annual corporate reporting requirements by 2023. This will allow investors as well as the public to understand and compare ESG performance of different companies. Listed companies as well as SMEs that aspire to be listed should proactively leverage the ESG manual and expert advice to benefit from effective ESG reporting.

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