ESG 2023 Comparisons

Kenya’s ESG Evolution: Navigating the Path to Sustainability

Environmental, social, and governance (ESG) has featured prominently in discourse surrounding business, enterprise, and development initiatives. Over the past several years, governments and government entities, businesses and ordinary citizens have all become increasingly aware of the impacts business practices have on the planet’s resources, global economies, the growth and development of societies, and citizens’ overall quality of life. ESG regulation and compliance has now emerged with the aim of entrenching environmental protection and conservation, social justice and responsibility, and good governance practices in business operations. Kenya’s ESG landscape is evolving and moving towards the codification of ESG standards, ESG reporting frameworks, and monitoring and evaluation of compliance with ESG standards across various sectors.

ESG legal and regulatory framework in Kenya

The Constitution of Kenya 2010 protects the right to a clean and healthy environment, and the right to have the environment protected for the sake of present and future generations (underscoring the principle of inter-generational and intra-generational equity). It also guarantees the right to property and describes the circumstances under which a person’s property may be compulsorily acquired subject to due compensation under applicable law including the Land Act 2012. This right is extended to untenured occupants in specified circumstances but who may not hold title to the land.

The Constitution also recognises and elaborates on the rights of children, persons with disability, youth, minorities and marginalised groups, and elderly members of society, and guarantees every person the right to fair labour practices.

The Environmental Management and Co-ordination Act 1999 (EMCA) establishes the National Environment Management Authority (NEMA) as the overseer of all environmental matters and policies. EMCA also has robust provisions on environmental planning, conservation, how to conduct environmental impact assessments and environmental audit and monitoring. All these must be complied with.

The Prevention, Protection, and Assistance to Internally Displaced Persons and Affected Communities Act 2012 requires the government and any other organisation to prevent internal displacement in various situations including those resulting from development projects and where there are compelling and overriding public interests, such displacement must be conducted in accordance with the Act and the Great Lakes Protocol on Protection and Assistance to Internally Displaced Persons to which Kenya is a signatory.

Under the Companies Act 2015 directors are required to include information on the impact of the particular company’s business on the environment in their annual report/business review.

The Mining Act 2016 requires all mining activities to comply with all laws concerning the protection of the environment. Further, a person cannot be granted a mining licence unless they obtain an environmental impact assessment, social heritage assessment, and have an approved environmental management plan. Every application for a mining licence should include a proposal with respect to social responsible investments for the local community which are captured in a community development agreement and communities have the right to object to the grant of a licence. Royalties payable include ten percent to the community where the mining operations occur.

The Climate Change Act 2016 distinguishes public and private sector duties pertaining to climate change adaptation and mitigation and also gives NEMA the mandate to monitor compliance with these duties. This Act additionally gives the Cabinet Secretary in charge of environment and climate change the powers (in consultation with the Cabinet Secretary in charge of Finance) to grant incentives to climate change initiatives. The Climate Change (Amendment) Act 2023 amends the Climate Change Act 2016 to provide a more robust framework for the regulation of carbon markets in Kenya. Carbon trading projects are required to undergo environmental and social impact assessment and they must specify the environmental, economic, or social benefits of the project. This Amendment Act also provides for implementation of projects through a community development agreement (especially where community land is involved). Community-based agreements should contain provisions acknowledging that 40% and 25% of aggregate earnings in land-based projects and non-land-based projects respectively shall go towards community development.

The Petroleum Act 2019 requires that 5% of the national government share of the profits be allocated to the local community while the Energy Act 2019 entitles the community to 5% of the royalties due under a geothermal licence.

“Local content” obligations are found in the Mining Act, Petroleum Act, Energy Act and, more recently, the Public-Private Partnerships Act 2021, amongst others, with companies required to give preference to local services, locally manufactured goods, and qualified and skilled Kenyans when it comes to employment.

“Mwongozo – Code of Governance for State Corporations” is dedicated to the management, governance, and oversight of state corporations. The Code encourages boards of state corporations to adopt a holistic approach to social, economic, and environmental issues in the core business strategy, and take into account in their decision making, the impact of the organisation’s operations on the community and the environment.

The Proceeds of Crime and Anti-Money Laundering Act 2009, the Anti- Corruption and Economic Crimes Act, and the Bribery Act 2016 all seek to regulate the financial behaviour of companies with a view to reducing illicit financial flows and corruption which undermine revenue mobilisation for the government of Kenya. They also provide a framework for asset forfeiture and the recovery of stolen assets.

The NSE ESG Disclosure Manual 2021 was developed by the Nairobi Securities Exchange making the NSE the fourth exchange in Africa to publish ESG reporting guidelines. It provides a standardised form of ESG reporting for listed companies in Kenya though it may also apply to non-listed companies that wish to progressively integrate ESG in their strategy, operations, and performance management.

The Capital Markets Authority (CMA) Code of Corporate Governance Practices for Issuers of Securities to the Public 2015 addresses matters relating to board operations and control, rights of shareholders, stakeholder relations, ethics and social responsibility, accountability, risk management and internal control, and transparency and disclosure. Boards are mandated to disclose a statement of policy on good governance and the status of compliance with the Code every year in their annual reports.

The Kenya Bankers Association Sustainable Finance Initiative (SFI) 2015 recognises the role of the banking and finance sector in achieving the sustainable development goals (SDGs) and calls on banks to stop focusing on financial returns alone, but to also give attention to the economic, social, and environmental pillars of development. It outlines principles governing sustainability and sustainable finance while detailing procedures for implementation by boards and management in order to realise these principles.

Aside from complying with local laws and sectoral guidelines, companies are also adopting various international standards and initiatives.

• The UN Guiding Principles on Business and Human Rights (UNGP) have been domesticated through the National Action Plan on Business and Human Rights (2020–2025) (NAP) which focuses on five thematic issues identified by stakeholders, namely:
1. land and natural resources;
2. labour rights;
3. revenue transparency;
4. environmental protection; and
5. access to remedy.
• The NAP outlines concrete commitments by the government for addressing adverse business-related human rights impacts.
• “The United Nations Global Compact Network – Kenya” brings together entities in the private sector and supports them in the management of environmental, social and governance obligations and the implementation of the Global Compact principles of universal sustainability. Members’ participation in the initiative is voluntary. The Kenyan chapter of the Global Compact has a membership of 288 participating companies from different sectors:
1. food and agriculture;
2. energy;
3. manufacturing;
4. banking and finance;
5. telecommunications;
6. media;
7. textiles; and
8. healthcare.
• The Global Compact’s Communication on Progress (CoP) self-reporting mechanism for participating companies encourages and facilitates annual reporting on progress with ESG compliance.
• In the absence of locally prescribed standards, the Global Reporting Initiative Sustainability Reporting Standards (“GRI Reporting Standards”) are applied by companies in Kenya. The NSE ESG Manual was a product of joint efforts between the GRI and NSE.
• The International Sustainability Standards Board (ISSB) released Sustainability Reporting Standards (IFRS S1 and IFRS S2) on 26 June 2023. The standards were subsequently launched by the Institute of Certified Public Accountants of Kenya (ICPAK) on 5 September 2023. IFRS S1 highlights the general requirements for reporting risks and opportunities pertaining to sustainability that may affect companies’ liquidity, while IFRS S2 covers disclosure of climate-related risks.
• Various multilateral institutions such as the World Bank Group have development ESG standards designed to help avoid, mitigate, and manage risks and impacts as a way of doing business in a sustainable way, including stakeholder engagement and disclosure obligations of the client in relation to project-level activities. Notable ones include the International Finance Corporation (IFC) Performance Standards on Environmental and Social Sustainability.

Navigating ESG in Kenya: lessons from recent cases

In recent times, Kenya has witnessed a growing awareness of ESG concerns, prompting the government, corporations, and multinationals operating within its borders to review their operations and the projects they undertake. This transition toward ESG integration reflects a commitment to promoting sustainable, responsible, and ethical investments.

However, as ESG principles gain prominence, so does the risk of ESG-related litigation. Notably, Kenya has experienced a surge in ESG-related litigation cases encompassing a wide range of legal actions taken against organisations for failing to meet ESG standards, whether by environmental harm, social injustice, or governance malpractice. Some of the recent cases include the following.

Kinangop Wind Park Project (KWPP)

The 60.8 MW KWPP in Nyandarua County was the first fully licensed, independent large-scale wind farm to reach financial close in Kenya and on completion (scheduled for Q2 2015) was due to deliver electricity derived from renewable energy to approximately 150,000 Kenyan households.

Constitutional Petition No 13 of 2015 (Moffat Kamau & nine others versus Aelous Kenya Limited, Kinangop Windpark Limited, and eight others) was filed in the Nakuru Environment and Land Court (ELC) by landowners within the KWPP. They sought orders declaring that the project was illegal due to violations of their rights to a clean and healthy environment and improper acquisition of Environmental Impact Assessment (EIA) licences. The court ruled that a fresh EIA, complying with environmental laws, must be conducted for the project to proceed. It emphasised the importance of following environmental regulations, even for economically beneficial projects, to prevent environmental degradation and climate change. The court’s priority was to protect the environment for current and future generations. Due to the consequent delays brought about by the court cases and hostilities from the community, the KWPP was cancelled in 2016.

Lake Turkana Wind Power (LTWP)

The LTWP is Africa’s largest wind-power project, producing 310 MW of electricity. It was set up on 150,000 acres of land used by pastoralists and allocated to LTWP in 2009 on a 33-year renewable lease by the Marsabit County Government. On 14 October 2014, residents of pastoralist communities in Marsabit sued to nullify the project, alleging illegal allocation of their ancestral land to LTWP. On 19 October 2021 the courts found that the land allocation was irregular, unlawful, and unconstitutional, and cancelled titles given to LTWP. Consequently, Marsabit County, the Land Registrar, and the National Lands Commission were granted a 12-month period from the date of the judgment to strictly comply with the existing law on setting apart, failing which the impugned titles would stand cancelled and the suit properties would revert to the community. However, as at the date of this publication, these authorities have not complied and as a consequence, the project land is at risk of being returned to the local community, placing the approximately KES80 billion investment in the LTWP in a state of uncertainty.

AMU coal power plant

The Kenyan government planned to establish a massive 1,050 MW coal-fired power plant in Lamu, operated by AMU Limited, which drew criticism due to potential environmental harm. Concerns encompassed air and water pollution, harm to marine ecosystems and mangrove forests, as well as health issues linked to coal pollution. Local communities and activists were apprehensive about health impacts and community displacement. In 2016, a Lamu community organisation challenged the environmental licence issued, and in 2019, NEMA was held to have violated regulations by not ensuring proper public participation while the project developer’s Environmental & Social Impact Assessment (ESIA) was found inadequate, ordering a new study if the project was to be pursued.

Solai dam

In 2018, a dam used for irrigation of a coffee plantation burst and flooded a village causing the death of at least 48 persons and displacing over 5,000 others. Investigations revealed that the dam had been constructed by unqualified staff, that the water permit had been issued irregularly, and NEMA had failed to ensure environmental compliance including the preparation of an ESIA. Subsequently, 1 of 27 recommendations by a Senate Committee was that the company should cede part of its farmland for resettlement of the displaced families. More recently, in April 2022, the court ruled that the matter was ready to proceed to a full hearing, with the farm owner and others being charged with 48 counts of manslaughter.

In the realm of ESG considerations, certain companies have responded positively when confronted with various ESG challenges by implementing strategies aimed at enhancing their ESG performance. Such companies include the following.

James Finlays Kenya (“Finlays”)

In February 2023, Finlays, a prominent company in the tea industry recognised for its tea production in Kenya, found itself embroiled in allegations of sexual misconduct exposed by the BBC. The exposé unveiled two contractors, working on Finlays’ sites, who were exploiting female workers by coercing them into providing sexual favours in exchange for job opportunities or improved working conditions, tragically leading to some women contracting HIV.

In its 2022 Sustainability Report (released in June 2023), Finlays responded to the BBC Exposé Documentary by launching two independent investigations. Additionally, Finlays implemented various measures to ensure worker safety including:

• terminating the contracts of the two contractors implicated in the documentary, banning them from entering Finlays, and reporting them to the police;
• launching an ongoing awareness campaign to promote confidential and anonymous whistle-blowing lines and grievance mechanisms;
• increasing the visibility of their welfare team on-site and aiming to hire at least eight new team members;
• providing private counselling and safeguarding support to all Finlays employees; and
• directly employing 800 workers who were previously contractors, reducing the overall number of contractors from 1500 to 700, and initiating plans to further reduce the use of contractor companies.

Kakuzi PLC (“Kakuzi”)

This subsidiary of Camellia PLC based in the UK became embroiled in a legal dispute when 85 Kenyan individuals filed a legal claim in the High Court in London against Camellia PLC. The claim was related to alleged human rights abuses attributed to Kakuzi which was accused of having committed atrocities and malpractices including killings, rape, sexual and gender-based violence, causing grievous bodily harm, abominable labour injustices, wanton violence, bad corporate governance and gross, historical land injustices which have dispossessed more than 13 neighbouring communities within Murang’a county. As a result, in February 2021, Camellia PLC ended up paying an estimated KES696 million to settle claims of the alleged human rights abuses.

Kakuzi has taken significant steps to prioritise human rights in accordance with the UNGP and established a Gender and Human Rights Division in 2020 and introduced a Human Rights Policy in March 2021. This policy outlines their approach to identifying, mitigating, and addressing adverse impacts on human rights throughout their operations and supply chains. The company also implemented an Operational Grievance Mechanism (OGM) called SIKIKA, focused on resolving complaints transparently and fairly while adhering to international human rights standards. An Independent Monitor ensures SIKIKA’s alignment with the UNGP’s effectiveness criteria, emphasising legitimacy, accessibility, fairness, and engagement with stakeholders.

The Kipeto Wind Farm (“Kipeto”)

Kipeto is a 100 MW onshore wind farm in Kenya and the second largest wind farm in the country. Kipeto has undertaken a number of initiatives with the local communities including building 84 new homes for the landowners, creating over 400 jobs, and training over 200 people during the construction phase. 5% of the company’s annual turnover is given to a Community Trust Fund. Kipeto has also implemented a state-of-the-art Biodiversity Action Plan which includes an innovative Shut Down on Demand system which allows the temporary shut down of specific turbines when birds are spotted. This enables the avoidance of collisions and significantly reduces negative impact on the avifauna. The company also funds conservation and restoration initiatives in the surrounding area.

Hurdles in ESG compliance

• Voluntary reporting, voluntary compliance – in some highly regulated sectors, ESG compliance is a key determinant for issuance of licences and approvals. In other sectors, ESG compliance and reporting is voluntary, therefore, companies cannot be compelled to meet standards.
• Limited enforcement mechanisms – enforcement mechanisms against non-compliance where compliance is voluntary are limited. For instance, companies that fail to comply with the Global Compact’s ESG reporting policies are delisted as participants. Such are insufficient for pushing companies to meet ESG requirements. On the other hand, proceedings instituted in courts often lead to the delay of projects or complete cancellation leading to losses for investors.
• Emergence of sustainability and ESG reporting fraud – instances of fraudulent reporting on ESG achievements have been reported. Companies and individuals resort to these illegal measures to attract investors or meet regulatory requirements.
• Lack of institutional capacity to entrench ESG in company operations – since ESG reporting is still a relatively new area, many companies lack the technical expertise and financial capacity to entrench ESG in their operations. Efforts must be poured into training and institutional capacity building, which is often a costly affair.

Role of lawyers in ESG

Lawyers wield significant influence in navigating the complex realm of ESG and highlighted below are some key roles that lawyers can play.

• Advocacy and policy development – lawyers can actively participate in advocacy and policy development activities aimed at shaping ESG-related regulations in Kenya. These efforts aim to align national policies with established standards such as the GRI while tailoring them to address the specific ESG challenges and issues unique to the country. For instance, the preparation of the Guidelines for non-financial reporting is recorded in the NAP as a key task for preparation under the Companies Act 2015 and remains a pending action item.
• ESG reporting and disclosure – listed companies in the country are obligated to report on various ESG aspects of their operations. Lawyers play a pivotal role in helping these companies create ESG disclosure documents and reports that adhere to both international reporting frameworks, such as the GRI, and local regulations. Additionally, lawyers can assist in risk management by ensuring accurate and comprehensive ESG disclosures, thus mitigating potential legal and reputational risks associated with incomplete or inaccurate reporting.
• Legal compliance and advice – lawyers have the opportunity to provide ongoing compliance advice on the diverse array of environmental, labour, and corporate governance laws and regulations. This includes advising businesses on how to comply with statutes related to environmental protection, labour standards, and best corporate governance practices, ensuring that they operate within the boundaries of the law while promoting responsible and sustainable business practices in the Kenyan context.
• Risk assessment – lawyers can provide valuable assistance to businesses in Kenya by identifying and evaluating legal risks associated with ESG matters and supporting Human Rights Due Diligence exercises, all of which enable businesses to proactively manage and mitigate these risks, future-proofing their business, and safeguarding their operations and reputation in alignment with local regulations and international best practices.
• Supporting community engagement – lawyers can support clients in the development of effective community engagement strategies and negotiation of community development agreements as contemplated in the various legislative instruments.
• Litigation and dispute resolution – when ESG-related issues escalate to legal disputes, lawyers can step in to represent their clients. With the judicial system facing backlogs, alternative dispute resolution mechanisms can be promoted as well as recourse, where applicable, to a grievance and redress forum where projects are funded by multilateral development partners.

Conclusion

Kenya continues to make strides in development of ESG standards in various sectors. As a result, it is increasingly essential for governments and government entities, corporations, and project developers to align themselves with these rapidly evolving ESG standards. To ensure the sustainability and resilience of their businesses, it is prudent for them to review and adapt their internal strategies, policies, and procedures to embrace environmental, social, and governance responsibilities. By doing so, they can position themselves to thrive in an environment where ESG considerations are paramount and integral to long-term success.

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