The Role of ESG in Investment Due Diligence for Businesses in Kenya
Environmental, Social, and Governance (ESG) considerations have emerged as crucial components in investment due diligence in Kenya, significantly influencing risk assessment, stakeholder trust, and long-term sustainability. Integrating ESG into due diligence processes has become a priority for investors who seek responsible and sustainable investments. This shift toward ESG is not only a global trend but also increasingly reflected in Kenya’s financial and regulatory landscape, supported by recent frameworks and case precedents.
Why ESG Matters in Due Diligence
Traditionally, due diligence focused on financial performance and operational aspects. However, ESG factors add a crucial layer that evaluates a company’s ethical practices, environmental impact, and governance standards. According to a 2022 report by Mondaq, ESG-driven due diligence allows for a more comprehensive view of a company’s risk and societal impact. Kenyan regulators, including the Capital Markets Authority (CMA) and the Nairobi Securities Exchange (NSE), encourage businesses to adopt ESG disclosures, aligning with international standards to foster transparency and enhance market credibility.
Notable ESG Cases in Kenya
Several high-profile cases in Kenya highlight the implications of incorporating ESG in due diligence and the risks of neglecting these factors:
- The AMU Coal Power Project: In 2019, Kenya’s National Environmental Tribunal revoked a license for a proposed coal plant by AMU Power Company in Lamu, citing inadequate public consultation and potential environmental harm. Following strong community and environmental objections, the courts intervened, underscoring the need for rigorous Environmental and Social Impact Assessments (ESIAs). This case demonstrates how ESG due diligence can protect local ecosystems and communities while avoiding reputational damage for companies.
- Kakuzi PLC: Allegations of human rights abuses against agricultural giant Kakuzi led to significant financial consequences for its UK-based parent company, Camellia PLC, which settled related claims for over KES 696 million. In response, Kakuzi implemented a human rights policy, established a grievance mechanism, and created a dedicated human rights division. This example shows the far-reaching effects of ESG deficiencies and emphasizes the need for due diligence that addresses social risks as part of investment assessments.
- James Finlays Kenya: Accusations of sexual exploitation by contractors within the tea company prompted Finlays to launch independent investigations and enhance employee safety programs. This scandal highlighted the value of ESG evaluations in managing social risks and protecting employees, a factor critical to investor decisions and corporate reputation.
ESG Frameworks in Kenya
Kenya has taken meaningful steps to support ESG integration. In 2021, the NSE introduced an ESG Disclosure Manual, encouraging listed companies to embed ESG strategies into their corporate governance. By aligning with these guidelines, companies can proactively identify and manage risks, meeting the expectations of both local and international investors.
In banking, the Kenya Bankers Association’s Sustainable Finance Initiative pushes for the incorporation of ESG risks, especially climate-related risks, into credit assessments. By extending evaluations to environmental and social impacts, Kenyan banks are demonstrating that ESG is increasingly central to risk management across the financial sector.
According to a report by the International Comparative Legal Guides (ICLG) several legislative proposals in Kenya aim to strengthen ESG frameworks. Among these is the Preservation of Human Dignity and Enforcement of Economic and Social Rights Bill, 2021, which seeks to outline a structure for safeguarding human dignity and enforcing economic and social rights. This Senate bill would also set up a system for promoting and monitoring how county governments comply with Article 43 of the Kenyan Constitution, which guarantees economic and social rights.
Additionally, the Carbon Credit Trading and Benefit Sharing Bill, 2023 proposes a regulatory structure for managing carbon credit trading and equitable distribution of related benefits. The Digital Health Bill, 2023 also reflects emerging concerns around ESG by aiming to regulate the handling of sensitive health data securely and responsibly.
Advantages of ESG in Investment Due Diligence
Embedding ESG in investment evaluations provides several advantages:-
- Risk Mitigation: By assessing potential environmental liabilities, social risks, and governance gaps, companies can identify and address issues before they lead to crises. For example, ESG audits can uncover regulatory non-compliance in areas such as emissions or labor practices, preventing costly fines or operational interruptions.
- Enhanced Corporate Reputation: Companies that proactively adopt ESG practices demonstrate a commitment to ethical operations, which can attract investors focused on sustainability. This reputational benefit is crucial in sectors with direct environmental impacts, such as energy and agriculture.
- Regulatory Compliance: Adherence to ESG standards can facilitate compliance with emerging regulatory frameworks, such as the requirements by the NSE and CMA. Adopting voluntary ESG reporting, as seen in several Kenyan companies, enables businesses to stay ahead of mandatory compliance and builds investor confidence.
Practical Steps for Companies
Companies aiming to integrate ESG in due diligence can start by establishing internal ESG policies coupled with regular ESG Audits to identify compliance gaps and areas for improvement. In addition, it is important to embed ESG in Corporate Strategy whereby alignment with business goals, enhances sustainability that is integral to their operations.
Another key practical step would be developing transparent reporting as recommended by the NSE, allowing stakeholders to track performance and build trust through transparency (Roedl.com).
In conclusion, as Kenyan companies increasingly embrace ESG, investors are now considering these factors crucial in due diligence to ensure responsible, sustainable, and risk-mitigated investments. By adopting frameworks like the NSE’s ESG Disclosure Manual and learning from cases like those of AMU, Kakuzi, and Finlays, businesses can align their practices with global ESG standards, attracting conscientious investors and ensuring long-term operational resilience.
Article by Elizabeth Museo, Communication
References:
The ESG Reporting Frameworks Applicable in Kenya. https://thelawyer.africa/2024/03/04/esg-reporting-frameworks-in-kenya/
Lamu Coal Plant Case: https://www.unep.org/news-and-stories/story/lamu-coal-plant-case-reveals-tips-other-community-led-campaigns
ESG 2023 – Kenya | Global Practice Guides | Chambers and Partners. (2023). Chambers.com. https://practiceguides.chambers.com/practice-guides/esg-2023/kenya/
Group, G. L. (2024, January 17). International Comparative Legal Guides. International Comparative Legal Guides International Business Reports. https://iclg.com/practice-areas/environmental-social-and-governance-law/kenya
VIOLENCE AND SEXUAL ASSAULTS AT KAKUZI FARM. (n.d.). ICoCA – International Code of Conduct Association. https://icoca.ch/case-studies/violence-and-sexual-assaults-at-kakuzi-farm/
ENVIRONMENTAL SOCIAL AND GOVERNANCE (ESG) LANDSCAPE IN KENYA: KEY CONSIDERATIONS FOR LISTED AND NON-LISTED ENTITIES IN KENYA | MMAN ADVOCATES. (2022). Mman.co.ke. https://mman.co.ke/content/environmental-social-and-governance-esg-landscape-kenya-key-considerations-listed-and-non
ESG in M&A Transactions – A Report from Kenya. (2024). Roedl.com. https://www.roedl.com/insights/esg-news/2024-2/esg-ma-transactions-report-kenya
The Draft ESG Disclosure Manual And ESG Reporting In Kenya. (2022). Mondaq.com. https://www.mondaq.com/corporate-governance/1155416/the-draft-esg-disclosure-manual-and-esg-reporting-in-kenya