Edward Kerich is a partner at PwC in Kenya with responsibility for Environment, Social and Governance (ESG) advisory. He took time to speak to CFO East Africa about the ESG landscape in the region, including the challenges and opportunities of sustainable practices and reporting.
How did you end up with responsibility for ESG within your firm and what are some of the highlights that you have witnessed in your role?
I started off in audit of predominantly private companies in Kenya for about five years before relocating to London for two years. On returning to the country, I left audit after two years to join risk assurance services, which was concerned with governance risk and compliance. Around 2015, our department underwent intense training around this subject, which was packaged under different names including integrated reporting and corporate social responsibility. A year later, I took charge of sustainability advisory services at our firm.
It has been an interesting journey. I had my first encounter with emissions when we had a client in the aviation industry that was to be charged for emissions on landing in the UK. This sparked conversations with our global team on how to support the measurement of carbon emissions and to determine offsets such as tree planting activities in Ngong Hills and the Aberdare ranges. We have also been involved in a large telecommunications company where we sign off aspects of their sustainability report after auditing certain metrics that they disclose.
We have seen that the frameworks are limited when it comes to non-financial data unlike financial information, which has well-developed IFRS standards. For instance, when reporting on gender diversity, should interns and temporary staff considered part of the workforce.
The regulator in the banking industry in Kenya has issued guidelines to banks, which guides them on such reporting as exposure to environmental risk. We have supported several banks in compliance with these guidelines. We have also assisted companies in monitoring certain metrics such as the number of women in their supplier and distribution network.
Finally, at PwC, we are committed to achieving certain net zero targets and consequently we monitor our carbon footprint and put in place certain actions such as switching to low energy bulbs which have given us a significant saving in energy costs.
What are the challenges that you have witnessed in ESG adoption for companies in East Africa?
The biggest challenge has been the lack of appreciation of ESG as a priority in boardrooms. I recall doing training for a board of one of our clients and one board member who is a respected member of society questioned why this should be a priority in Africa where we have other issues such as feeding the poor. We had a robust discussion where we demonstrated that part of the reason we are having food shortages was as a result of prolonged drought in Kenya at that time, as a result of climate change.
Some companies will adopt ESG because it is a good thing while others will only do it for compliance purposes. I was part of the Nairobi Stock Exchange launch of their guidelines for listed companies and subsequently we have assisted a number of listed entities with compliance. Unfortunately, due to many standards and guidelines, it is not clear which are the most relevant and there have even been court cases to challenge applicability and adoption timelines.
Another challenge is the cost of adopting ESG policies and implementing changes in response to the environment through adoption of green energy such as installing solar panels. There is a high upfront cost which would be recouped in future but some entities do not have the capital for this right now. In terms of our capital markets, we have a limited number of green bonds to fund green initiatives in East Africa.
There is a lack of knowledge around ESG and their associated standards as it is still new to our markets with limited mastery. In this regard, it is important to lean on tools available for support in implementing ESG frameworks.
When it comes to ESG, is there a bias towards focusing on the environment rather than social and governance aspects?
The environment is certainly the most reported aspect and yet companies are doing a lot for their employees through medical welfare initiatives, privacy and general health and safety, which is not well reported. There are also many community initiatives and governance matters in place that are not well reported and consequently the conversation ends up drifting towards the environment. There are also guidelines on governance, anti-corruption and codes of conducts that companies have that they rarely report on.
There was an instance where two companies disclosed policies on anti-corruption and the number of employees dismissed for corrupt practices in one year. This became headline news, painting the companies in a bad light and in the subsequent year only one company repeated the disclosures. A certain bank also came under the social media spotlight after publishing statistics on gender pay disparities. The negative reactions are resulting in a reluctance to report on social and governance aspects.
In your view, where are we in terms of ESG adoption compared to where we should be?
PwC has a baselining tool which tells us where companies are. We have provided training and awareness for over 30 companies on ESG matters and prior to delivering the training we take the time to understand where they are. Our partner Risk Insight’s tool indicates that the current reporting environment is less than 30 percent of where we should be, which is supported by the data we have gathered. There is a lot that is being done and I expect that the 2024 reporting cycle will see more disclosures that should meet close to 50 percent of what is ideal for ESG purposes.
Listed companies and regulated entities like banks are required to report on ESG. What about private companies, are you seeing significant adoption among them?
We have seen private companies with an innovative mindset adopt ESG although these are fairly few and a significant number are falling behind. Given that their information is not publicly available, it is difficult to get a feel for what is being done privately with respect to ESG. Even if entities are not listed or regulated, we have seen instances of entities having to report on ESG as required by banks for funding purposes. Financial institutions are starting to report on how green their clients are. Some private companies are also subsidiaries of companies listed or regulated in the west and their parent companies are pushing down guidelines by which they need to abide.
Adoption is expected to accelerate as companies wrap their heads around carbon credits and trading. This will enable them to monetise their ESG practices and there are a number of case studies globally such as a Brazilian company that received carbon credits from having expansive grasslands. In East Africa, we have agriculture-based companies with a similar opportunity and many companies use green energy like wind and hydro power. There is still a lot of debate in this regard, about how to weight the credits but it is a journey that is headed in the right direction.
