Regulatory and fiduciary duties

Are institutional investors and financial intermediaries legally required to consider ESG factors when making investment decisions? Must any additional non-financial principles and objectives be considered?

Under the jurisdiction of the Capital Markets Authority (the Authority), institutional investors are required to have transparent, honest and fair practices in their dealings with the companies in which they invest. Institutional investors are further obligated take up the role of stewardship as the representatives of their clients or investors in listed companies and other approved products through their organisations. To effect this, they are particularly encouraged to make direct contact with the company’s management and board to discuss performance and corporate governance matters as well as vote during the annual general meetings of the company.

In making investment decisions, institutional investors are required to commit themselves to complying with principles of the Code of Corporate Governance Practices for Issuers of Securities to the Public (the Code) that governs the roles and responsibilities of institutional investors operating under the jurisdiction of the Authority.

The principles of the Code governing institutional investors should include:

  • public disclosure on discharge of stewardship responsibilities;
  • a policy on conflict of interest in relation to stewardship, which should be publicly disclosed;
  • monitoring and evaluation of their client’s investments;
  • guidelines on when and how they will escalate their stewardship activities;
  • a policy on voting at Annual General Meetings and disclosure of voting activity; and
  • a policy on periodic reporting to their clients.
Voluntary standards and best practices

What voluntary standards and best practices are commonly followed in your jurisdiction with regard to integrating ESG factors and other non-financial principles into investment decisions?

The following voluntary sustainability standards provide additional guidelines for sustainable business practices in Kenya:

  • international governance agreements and guidelines: the OECD Guidelines for Multinational Enterprises, the UN Global Compact and OHCHR Guiding Principles on Business and Human Rights; 
  • international multi-stakeholder initiatives providing standards for the social and environmental practices of firms, such as the ISO 26000 standard Guidance on Social Responsibility 2010;
  • private voluntary sustainability standards between players covering different sustainability metrics; 
  • industry association codes covering major areas of commercial activity; and 
  • company codes with specific policies on social and environmental issues.
Measurement, reporting and disclosure

What voluntary and statutory measurement, reporting and disclosure frameworks are followed in your jurisdiction with regard to ESG and other non-financial factors?

Boards are required to work continually towards the introduction of integrated reporting. Integrated reporting’ is defined as a process that brings together the material information about an organisation’s strategy, governance, performance and prospects in such a way that reflects the commercial, social and environmental context within which it operates. It provides a clear and concise representation of how an organisation demonstrates stewardship and how it creates value, now and in the future. Integrated reporting combines the most material elements of information currently reported in separate reporting strands (financial, management guidelines, governance and remuneration, and sustainability) into a coherent whole. 

Adoption of integrated reporting is intended to lead to disclosure that is more effective. From the company’s point of view, it means that more issues and areas have to be taken into account in running the business, including suppliers, customers, regulators, government, creditors, debtors, investors and even the community where this business is located. Taking care of the interests of varied stakeholders can only lead to better management and control of the company. 

Boards are required to consider not only the financial performance but also the impact of the company’s operations on society and the environment. The board is not just responsible for the company’s financial bottom line, but for the company’s performance in respect of its triple bottom line. ‘Triple bottom line’ means the accounting system that expands on the traditional reporting framework to take into account social and environmental performance in addition to financial or economic performance. This implies that the board reports to its shareholders and other stakeholders on the company’s economic, social and environmental performance.

Furthermore, the board is required to protect, enhance and invest in the well-being of the economy, society and the environment. Although the company is an economic institution, it remains a corporate citizen and therefore has to balance economic, social and environmental value. The triple bottom line approach enhances the potential of a company to create economic value. By looking beyond immediate financial gain, the company ensures that its reputation, one of its most significant assets, is protected. Besides, there is growing understanding in business that social and environmental issues have financial consequences.

Finally, the board is required to ensure that the company discloses its environmental, social and governance policies and implementation thereof in its annual report and website.

Ratings, indices and guidelines

What ratings, indices and guidelines are used to benchmark adherence to ESG principles and other non-financial factors in your jurisdiction?

In collaboration with the International Finance Corporation and issuers, the Authority developed offsite tools including the Corporate Governance Reporting Template and the Corporate Governance Scorecard for reporting, measuring and monitoring the application of the Code. The Reporting Template, completed and submitted by issuers, serves to enhance adherence to governance requirements as well as disclosing the status of application of each requirement.

The Corporate Governance Scorecard is assessed internally by the Authority to assess the level of implementation of the Code.

The Scorecard covers the following seven areas of the Code:

  • introduction to the Code (focus on commitment to good governance);
  • board operations and control;
  • rights of shareholders;
  • stakeholder relations;
  • ethical and social responsibility;
  • accountability, risk management and internal control; and
  • transparency and disclosure.
Incentives, benefits and financial support

Are any fiscal incentives or other benefits available in your jurisdiction to encourage institutional investors and financial intermediaries to integrate ESG and other non-financial factors into their investment decision-making?

At present, there is no fiscal incentive mechanism for ESG performance in Kenya, other than donations made to entities specifically exempted from Kenyan income tax are tax deductible in the hands of the donor.

However, in the stakeholder feedback section of the 2019 CG report, the Authority noted that it was tasked to incentivise issuers who demonstrate leadership in the application of good corporate governance practices. It was also pointed out that this should be balanced against management of conflict of interest by the regulator. Going forward, subject to stakeholders’ concurrence, the Authority will disclose the overall leaders and gradually move on to ‘good performers’ and eventually to ‘fair’ and ‘needs improvement’ based on their assessments. 

Impact investing

In addition to ESG factors, what considerations and practices are commonly integrated into impact investment strategies?

The following considerations and practices are commonly integrated into impact investment: 

  • market-based solutions to poverty alleviation; 
  • food security to vulnerable populations; and 
  • provision of services to low-income consumers in rural areas.