How Kenya’s ESG rules are unlocking green project fundsWednesday February 02 2022
Climate-related concerns are undoubtedly a global problem, yet they pose a more significant challenge for Africa, where extreme weather patterns impact the livelihoods of the vast majority of the population as discussed recently in the State of the Africa Climate Report, 2020.
While Africa is responsible for less than five percent of carbon emissions, it is most vulnerable to climate instability. Sub-Saharan Africa, in particular, is likely to suffer more from rising temperatures and sea levels, changing rain patterns, extreme weather conditions and population displacement compounding the challenges around food and water security, health and safety and economic empowerment.
Therefore, it is laudable that the Kenyan regulators have taken the lead and issued guidance on ESG and climate risk management. In October 2021, the Central Bank of Kenya (CBK) issued a new guideline to banks on climate-related risk management.
The guidance requires banks to assess opportunities and risks arising from climate change, have in place climate-related risk management strategies, disclose climate-related information as part of an annual sustainability report and submit a quarterly progress report on the implementation of the strategy.
It is expected that this will go a long way in informing the banks on supporting green banking and guiding them on communicating climate-related information to their stakeholders.
The Nairobi Securities Exchange (NSE) #ticker:NSE followed suit and soon thereafter in December 2021, became the fourth exchange in Africa to issue an ESG manual guiding listed companies on measuring and reporting ESG matters.
This mirrors and is in line with international standards for sustainability reporting and is a reflection of how ESG has become a significant concern for the investor community.
Companies are now taking proactive approaches to manage ESG risks and opportunities as part of their business strategy to create long-term value while focusing on the business's environmental and economic dimensions.
For NSE-listed companies, the mandatory reporting will aid all companies to start assessing their business models more critically and provide transparency to stakeholders on their business practices and their impact on the environment and society.
ESG is increasingly becoming a central topic for all stakeholders. Kenya is moving in the right direction on tackling ESG matters, especially around climate change. Issuing guidelines to assist companies in considering their business models more critically is the first step in the right direction.
There is also sufficient technical assistance available from various development institutions such as IFC, FMO, and CDC. However, proper implementation and follow-up will be vital to creating a sustainable future and serve as an example for other countries in the region to follow suit.
The need for businesses to now re-evaluate and make positive impactful changes to their operating structures through integrating ESG as a key business function is now becoming apparent.
A report by global accounting firm KPMG indicated that companies with stronger ESG performance are more likely to achieve better financial success, talent retention and long-term value creation.
The report, titled Integrating ESG into business, also advised that with the increasing investments in ESG and sustainability, corporates must respond quickly to investor demands for transparent and detailed ESG disclosures.
But aside from companies defining what sustainability means to them and disclosing what they are doing about this, stakeholder awareness and education are just as important and their engagement will play a critical role in the ESG journey.
Several institutions have already taken initiatives towards more climate-friendly policies and sustainability within the banking sector.
Absa Bank has been recognized as the first Bank in Kenya to join the Kenya Green Building Society (KGBS) to promote green initiatives to reduce water and energy consumption, plastic reuse, and recycling.
In November 2020, Kenya Commercial Bank (KCB) became the first institution accredited by the Green Climate Fund (GCF), allowing it to lend to green and climate-friendly projects in Kenya.
It is one of the three lenders in the Middle East and Africa that are part of the net-zero alliance, and it aims to be carbon neutral by 2028.
It intends to incorporate carbon accounting as part of its lending process and increase its portfolio lending to green projects (aiming for 25 percent of its lending portfolio by 2024). In addition, it announced plans to be the first commercial lender to issue a green bond in 2022.
Similarly, I&M Group offers a clean energy financing program for its customers in Kenya. Through the program, customers who adopt sustainable practices that enhance production cost efficiencies and lower the carbon footprint are offered favorable terms.
In addition to funding solar projects for SMEs and large corporates, I&M supports customers to switch and invest in clean energy alternatives through financing acquisition and setting up costs to entrench the green banking agenda further.
As an institution, I&M Group is also environmentally conscious, both its headquarters in Kenya and Rwanda being green buildings.
Equity Bank #ticker:EQTY , via its Foundation, is helping learning institutions switch away from traditional wood fuel to clean cooking solutions.
Companies, including banks, now have the power and resources to make solid actions that impact the climate, paving the way for a more sustainable and resilient future.
One hopes that other entities will follow suit to integrate ESG into their operating structures and drive the conversations around sustainability and climate change.
Gupta is the General Manager, Corporate Advisory at I&M Bank