CFO Jackline Engefu discloses the salient points of ESG altering financial realities

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In this CFO East Africa thought leadership piece, Jackline Engefu, group CFO of Cold Solutions Kenya, details the present benefits that accrue to an organisation that authentically adheres to ESG practices.

Responsiveness by investors and other stakeholders in Environmental, Social and Governance (ESG) matters have increased, where investors of startups and established corporates alike are equally becoming more astute and demanding for more disclosure from enterprises through Responsible Investment (RI).

The aim is to adopt corporate activities and practices of reporting the ESG impact that could either contribute to a positive and negative outcome towards a sustainable development.

Looking after the finance department for organisations funded through private equity funds, most of which are foreign-based, I happened to notice that the ESG plays a major role in RI as it goes over and above financial returns therefore deliberating the move for positive and beneficial effects to all stakeholders around its operations.

ESG practices and reporting comes with value creation and preservation of financial and societal values to stakeholders through development of strategies that manage material ESG risks and capture related opportunities. According to a 2020 global survey by FTSE Russell sustainable investment is now firmly part of the mainstream, with 81 percent of EMEA asset owners expressing interest in applying ESG considerations in investment criteria.

Most investors are keen on several ESG metrics that assure them of the sustainability of their investment as well as all stakeholders involved. As a CFO and a participant during the due diligence exercises, with the aim of onboarding investors, I became aware of their keenness of certain factors, some of which incorporate environmental policy, health and safety of measures, people in terms of diversity, corporate code of ethics, and litigation matters.

Personal experience

There are present benefits that accrue to an organisation that adheres to ESG practices authentically and during my career - as a numbers person - I have personally experienced them.

One of the benefits is raising capital through demonstration of responsible investment practices. This has attracted capital from sustainability conscious investors such as Development Finance Institutions (DFIs) and private equity funds. The higher the ranking rates are in relation to certificates, such as the green building IFC edge certificate, the more attractive the organisation brands itself to its investors. This being mentioned, it’s important to note that financial institutions like banks have a package in terms of interest that is lower and ranging between the bracket of green financing.

As a CFO one is responsible for Enterprise Risk Management (ERM). You cannot therefore address ERM efficiently while leaving out the top ESG metrics that include presence of litigation, data and security incidents, and environmental and safety issues, among others. This in turn mitigates anticipated risk based on ESG. This means looking at strategic risk, financial risk, and reputational risks.

It is estimated that climate or environmental disasters like earthquakes and floods happen on average every four to five years. While implementing and monitoring ERM processes, we were alert and considered organisational preparedness.

This is what moved us as an organisation to embark on having two types of insurance policies that are new within the insurance space in Kenya and are related to matters of ESG:

  • Climate risk; and
  • Data and cybersecurity cover.

Risk ratings

As part of the cold storage logistics industry, our organisation is among the few in the country that has an ammonia plant, which is used as a cooling mechanism. Ammonia use is aimed at reducing greenhouse gas emissions, which negatively affects the environment.

The immediate benefits from this have been through our organisation’s risk rating under general and all risk insurance being reduced at the point of implementing and enhancing ESG and in turn lowering climate risk as well as data and cybersecurity premiums payables.

The integration of ESG within the organisations’ processes, procedures and reporting enhances regulatory compliance which aids in being in a prepared state for future ESG-related regulations and policies.

An effective ESG integration reduces the presence of litigations related to employees. Apart from the adherence to labour laws, the organisation enhances mitigation of this risk by integrating health and safety rules including medical cover, protective wear, and considering non- discriminatory practices within the organisation. This integration can be through incorporating ESG metrics into the human resources policy documents.

IFRS standards

IFRS S1 and IFRS S2 require the organisation to have financial sustainability reporting from 2024 onwards. Further to this, having an external assurance review is key in vouching for the accuracy of the information shared. Transparency on the impact of a business is essential for continuous improvement, both for the organisation and stakeholders. This builds trust among the affected stakeholders and ultimately enhances the image of the organisation.

ESG corporate value facilitates innovative and cost-effective ways of carrying out activities. This can be through recycling water and using solar. The latter can bring in a saving of between 20 percent to 35 percent, as electricity costs are currently in an increasing trajectory influenced by inflation rates, fuel costs and the weakening of Kenyan shilling. The value proposition here is reduction of cost through implementation of an environmental policy.

As we implement the metrics, performance disclosure on ESG demonstrates transparency and commitment to sustainable investment by the board and senior management. It is important that the reporting adheres to the relevant standards, like the Global Reporting Initiative.

While interacting with a fellow CFO, whose organisation has won several awards in relation to ESG reporting and practices, it became clear to both of us that when embarking on this ESG journey CFOs must appreciate that it’s a gradual process of continuous improvement - and that data integrity and avoidance of greenwashing at all costs is key.

Businesses are gradually moving away from investment solely for financial benefit rather than for financial gain with impact and sustainability to all stakeholders. We, the leadership in finance, play a pivotal role in this change.

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