TerraLex Cross-Border Guide to Cross-Border Guide to ESG and Sustainable Finance

The Capital Markets Act, CAP 485A places a disclosure obligation on issuers of securities to (i) the Capital Markets Authority; (ii) the members of the company and other holders of its securities; (iii) any listing exchange; and (iv) the general public. Amongst the information to be disclosed by the listed companies or unlisted companies that issue securities to the public is the state of the corporate governance of the company and its subsidiaries.

The Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 (the “Code”) was issued by the Capital Markets Authority. This Code applies to listed companies or unlisted companies that issue securities to the public. The board of directors have various disclosure obligations under the Code as follows:

• disclosure of the company’s policy on corporate social responsibility and investment;
• disclosure of the company’s environmental, social and governance policies and implementation thereof in the company’s annual report and website;
• disclosure that a governance audit assessing the degree of adherence to good corporate governance practices has been carried out and coordinated by the company secretary at least annually; and
• disclosure of any non-compliance with the Code to relevant stakeholders such as the Capital Markets Authority.

The Nairobi Securities Exchange (NSE) ESG Disclosures Manual provides guidance to listed companies on the NSE on the public reporting of their ESG performance at least annually. Listed companies had a one-year grace period from the issuance of the guidelines (November 2021) to interact with the ESG Reporting steps provided in the guidelines. Thereafter, they were expected to include a sustainability and ESG report in their integrated reports containing – at minimum – the mandatory ESG disclosures identified in the Manual such as environmental compliance and emissions.

The Climate Change Act No. 11 of 2016 imposes climate change obligations on private entities. The Act provides that the Climate Change Council may, by publishing a notice in the Gazette, require a private entity that is subject to climate change obligations to prepare reports on the status of its performance of climate change duties. These climate change obligations are consistent with the national goal of low carbon climate resilient development. The notice shall also prescribe the period for reporting.

The Central Bank of Kenya issued a Guidance Note on Climate-Related Risk Management. The Guidance is intended to enable banks in Kenya integrate the opportunities and risks arising from climate change in their governance structure, strategy, and risk management frameworks. It recognizes that climate change as a source of financial risks for financial institutions and corporate and therefore guides banking institutions in disclosing climate-related information to their stakeholders including the Central Bank of Kenya. It is worth noting that from 30 September 2022, each institution is required to submit a quarterly report to the CBK on the progress of its implementation of the guidance provided within 10 days after the end of every calendar quarter.

The Companies Act, No. 17 of 2015 requires directors of quoted companies to include in their directors’ report a business report containing information about environmental matters including the impact of the business of the company on the environment and social and community issues including information and company policies in relation to those matters. This report is to the members of the company.

Certain industry groups in Kenya have developed voluntary ESG related guidelines for consideration by member organisations. The Sustainable Finance Initiative Principles established by the Kenya Bankers’ Association are a set of harmonized guidelines on sustainable development. These Principles provide guidance to Kenyan banks on the entrenchment of financial risk considerations in their governance systems to include climate change and environment-related financial risks into their existing financial management practices and developing a disclosure approach for financial climate-related risks.

The ESG Disclosures Guidance manual passed by the Nairobi Securities Exchange recommends the adoption of the Global Reporting Initiative Standards as the common framework for ESG reporting by listen companies in Kenya. It notes that Listed Companies on the NSE that already report publicly on ESG performance have chosen the GRI standards as their preferred framework for ESG Reporting.

Additionally, under the Guidance on Climate Related Risk Management, the Central Bank of Kenya has a roadmap towards gradual adoption of the climate-related risk requirements outlined in the guidance. One of the activities is the disclosure of climate-related information to enhance transparency benchmarked to the Task Force on Climate related Financial Disclosures (TCFD) framework.

The Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 by the Capital Markets Act provides for the following ESG obligations: the Board shall ensure that the company exercises ethical leadership and responsible corporate citizenship in respect of the Company’s social and natural environments via:

• developing corporate citizenship policies that show consideration for society, communities and the environment;
• considering not only the financial performance of the company but also the impact of the company’s operations on society and the environment;
• protecting, enhancing, and investing in the well-being of the environment;
• ensuring that the company’s strategies promote the sustainability of the company, with special attention being given to environmental, social and governance aspects of the business that underpin sustainability;
• ensuring that a governance audit has been carried out at least annually by a competent and recognized professional accredited for that purpose by the Institute of Certified Public Secretaries of Kenya (ICPAK). The purpose of the governance audit shall be to assess the degree of adherence to good corporate governance practices such as corporate social responsibility and investment.

Under the Companies Act No. 17 of 2015, directors have a duty to promote the success of the company while having regard to the impact of the operations of the company on the community and the environment

No.

No. There are no specific regulations in Kenya regarding advertising with ESG claims.

There is no specific legislation that mandates the imposition of special ESG rights and/ or obligations on suppliers. However, if a supplier falls within a sector with ESG-related legislation has been passed or guidelines have been issued then the supplier must comply with the same. The parties can decide under contract to impose an ESG obligation on a supplier based off which sector the supplier operates.

Currently, there is no specific regulation regarding liability owed to shareholders/ investors on losses to the company from positive ESG efforts.

Currently, the ESG Rules provided for within this legal guide do not provide for liability owed to shareholders where non-compliance causes loss to the company.

Currently, the ESG Rules provided for within this legal guide do not provide for liability owed to customers, creditors, or other affected parties where non-compliance causes a loss to them.

We have provided for the ESG rules applicable in Kenya within this legal guide.

Not yet. Currently, the focus in on increasing the uptake of entities complying with the ESG Rules identified within this guide.

Currently, there are no statutory sustainable finance and investment frameworks followed in Kenya.

The Sustainable Finance Initiative Principles established by the Kenya Bankers’ Association are a set of harmonized guidelines on sustainable development. These Principles provide guidance to Kenyan banks on the entrenchment of financial risk considerations in their governance systems to include climate change and environment-related financial risks into their existing financial management practices and developing a disclosure approach for financial climate-related risks.

There is no specific legislation that mandates financial institutions, investment advisors, and/ or pension institutions to consider ESG factors when making investment decisions. However, if it falls within a sector for with ESG related legislation has been passed or guidelines have been issued then the financial institution, investment advisor or pension institution must comply with the same.

No.

There are no special measures against greenwashing. However, there is legislation in place that touches on and protects consumers’ rights. The Constitution of Kenya provides for the salient consumers rights including the right to protection of their health and safety. The Competition Act No. 12 of 2010 and the Consumer Protection Act No. 46 of 2012 expressly prohibit misleading representations by businesses regarding goods or services including misleading environmental claims. The Consumer Protection Guidelines issued pursuant to the Competition Act also prohibits misleading marketing of goods and misleading representations. It would be a violation of the Competition Act for a supplier to make statements that are incorrect or likely to create a false impression, whether intentional or not. This includes advertisements or statements in any media or on product packaging and any statement made by a person representing a supplier’s business.

There are no specific Kenyan sanctions for “greenwashing”. However, where an entity provides misleading representations in respect of goods and a consumer suffers loss or damage, the entity shall be liable to compensate the consumer for the loss or damage. Additionally, under the Competition Act a person shall be liable, on conviction, to imprisonment for a term not exceeding 5 years or to a fine not exceeding 10 million Kenya Shillings or both. The Consumer Protection Act provides for a general penalty of 1 million Kenya Shillings or imprisonment for a term not exceeding 3 years or both.

No.

We are likely to see the development of a comprehensive framework on ESG disclosures and reporting so as to deal with the lack on uniformity in disclosure by entities in Kenya. This comprehensive framework shall also apply to all companies; not only listed companies or companies operating in certain sectors.

Additionally, under the Guidance on Climate Related Risk Management, the Central Bank of Kenya has a roadmap towards gradual adoption of the climate-related risk requirements outlined in the guidance. One of the activities is the disclosure of climate-related information to enhance transparency benchmarked to the Task Force on Climate related Financial Disclosures (TCFD) framework. This activity is to be carried out between January 2023 and June 2023. Although there is yet to be any developments with this, we are likely to see the Central Bank of Kenya make efforts towards developing a framework to guide in the disclosure of climate related information.

Currently, ESG considerations have been integrated into a majority of investment decisions in Mergers & Acquisitions. To assist in investment stewardship, there has been a push from investors and assets managers for standardized, comparable, and decision-useful disclosures. We are likely to see laws and regulations passed by the relevant authorities on ESG related information that investors can rely on when assessing investments.

Kenya is likely to see the continued development of a more comprehensive and harmonized ESG disclosure and reporting framework aimed at addressing inconsistencies across sectors. Regulatory focus is expected to expand beyond listed companies and regulated financial institutions to include a broader range of entities. In the financial sector, the Central Bank of Kenya has already begun implementing climate-related risk management and disclosure requirements, signaling a gradual transition from voluntary guidance to more structured and learnable regulatory expectations aligned with international standards such as the Task Force on Climate-related Financial Disclosures (TCFD).