By Prof. Kariuki Muigua, SC, OGW, PhD, FCS, FCIArb, Ch.Arb, Managing Partner, Kariuki Muigua & Co. Advocates
The Nairobi Stock Exchange ESG Manual maps seven (7) key steps in ESG reporting to create an Annual ESG Report. These steps are setting governance structures, performing situation analysis, undertaking materiality analysis, developing value creation strategies, creating ESG report content, seeking internal and third-party assurance on ESG disclosure topics and publishing the ESG report. In the first place, the listed company has to create the requisite governance to oversee the ESG reporting. In essence, this entails the listed company obtaining the buy in from the Board and senior (executive) management on ESG reporting. An ESG committee of the Board may also need to be constituted and an ESG team appointed and resourced to undertake ESG reporting. The organization also needs to set the objective for ESG integration and reporting and appoint an ESG reporting team.
Good corporate governance practice now entails sustainability integration into business strategies. This is necessitated by the fact that ESG issues pose significant business continuity and long-term viability risks for the organisation. They also present significant opportunities for shareholder value creation. Hence, the Board and Senior Management has a responsibility to ensure that a process exists to identify, assess and manage ESG related risks and opportunities in the organization. However, the Board retains overall accountability for ESG performance and disclosure to stakeholders. The question is, thus, what is the role of the Board with regard to ESG reporting under the Manual.
As the representative of the shareholders and other stakeholders, the Board is expected to ensure that the long-term sustainability of the organization is assured and is demonstrated through senior management’s decisions on operational aspects of the business. In that regard, the Board holds the CEO and senior management to account on corporate sustainability performance as a fiduciary responsibility to stakeholders. There is elaborate legal and policy framework outlining the expected role of the Board with respect corporate sustainability, environmental management and social responsibility in Kenya. The legal framework includes the Constitution of Kenya, the Companies Act (No. 17 of 2015), Capital Markets Act (Cap 485a), the Environment Management and Coordination Act (No. 8 of 1999), the labour and employment laws, Bribery Act (No. 46 of 2016), Proceeds of Crime and Anti-Money Laundering Act (No. 9 of 2009) and Anti-Corruption and Economic Crimes Act (No. 3 of 2003) among others.
On its part, the Kenya Companies Act enjoin company directors to review environmental, social and community issues that may affect the future development, performance, and position of the company. With regard to policy and regulatory framework, the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 requires companies to put in place environmental, social and governance (ESG) frameworks and proposes public disclosure of ESG performance in annual reports. The Mwongozo Code of Governance for State Corporations requires the Board to ensure that the strategy of the organisation is aligned to the long-term goals of the organization on sustainability so as not to compromise the ability of future generations to meet their own needs.
The Board is also expected to monitor the organisation’s performance and ensure sustainability. The ESG Manual requires Boards of Listed Companies, to facilitate integration of ESG into strategy, operations and performance management, to form a committee of the Board that oversees sustainability matters in the organisation, including the ESG reporting process. However, where a separate committee is not feasible, the ESG Manual allows the sustainability committee to sit within the strategy committee of the board but with clear ESG related terms of reference. In this regard, the ESG Manual directs boards needing additional guidance on the composition and functions of a sustainability committee to seek it in the Social and Ethics committee requirements for South African Companies. The Board is also expected to task the CEO to appoint and resource a focal point for sustainability within the organization who is referred to in the document as the Sustainability Manager.
On the other hand, the Chief Executive Officer (CEO) of the listed company is responsible for providing sponsorship for the ESG reporting process which includes appointing and resourcing the Sustainability Manager for the organization. To ensure ESG integration in the organisation, the ESG Manual requires CEO to routinely engage with internal and external stakeholders to assess needs and address concerns and assess materiality of ESG topics in the context of the business and its stakeholders. It is also the responsibility of the CEO to set policies and directives to guide management of material ESG issues. Further, the CEO is required to design ESG metrics and evaluate them as part of routine organizational performance management.
It is also the responsibility of the CEO to ensure a capacity building plan is in place to create awareness of current and emerging ESG topics and build competencies in ESG management. The CEO must also foster and embed a sustainability culture within the organisation by appointing and sufficiently resourcing the Sustainability Manager and developing and approving an annual ESG implementation plan for the organisation. The CEO also bears the responsibility of demonstrating consideration of ESG factors in strategic decision making, for example, in market entry, product design and recruitment decisions. The CEO is also tasked with disclosing ESG performance to stakeholders on an annual basis. S/he also chairs the management committee on ESG which the manual recommends should be composed of the CEO, the Sustainability Manager and heads of department from across the organization.
This is an extract from Kenya’s First ESG Law Book: Embracing Environmental Social and Governance (ESG) tenets for Sustainable Development” (Glenwood, Nairobi, July 2023) by Hon. Prof. Kariuki Muigua SC, OGW, PhD, FCS, FCIArb, Ch.Arb, Professor of Environmental Law and Dispute Resolution, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Lifetime Achievement Award 2021 (CIArb Kenya), African Arbitrator of the Year 2022, Africa ADR Practitioner of the Year 2022, Member of National Environment Tribunal (NET) Emeritus (2017 to 2023) and Member of Permanent Court of Arbitration nominated by Republic of Kenya and Academic Champion of ADR 2024. Prof. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Prof. Kariuki Muigua teaches Environmental Law and Dispute resolution at the University of Nairobi School of Law, The Center for Advanced Studies in Environmental Law and Policy (CASELAP) and Wangari Maathai Institute for Peace and Environmental Studies. He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Prof. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Managing Partner of Kariuki Muigua & Co. Advocates and Africa Trustee Emeritus of the Chartered Institute of Arbitrators 2019-2022. Prof. Muigua is a 2023 recipient of President of the Republic of Kenya Order of Grand Warrior (OGW) Award for his service to the Nation as a Distinguished Expert, Academic and Scholar in Dispute Resolution and recognized among the top 5 leading lawyers and dispute resolution experts in Band 1 in Kenya by the Chambers Global Guide 2024 and was listed in the Inaugural THE LAWYER AFRICA Litigation Hall of Fame 2023 as one of the Top 50 Most Distinguished Litigation Lawyers in Kenya and the Top Arbitrator in Kenya in 2023.
