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From the US to Europe and into Africa there is rising confusion on the fate of transition to the much-hyped investments and financial decisions tied to environmental, social, and governance (ESG) issues.
A crisis out of the Russia-Ukraine conflict has triggered a potential reversal of large portions of the ESG philosophy as more nations contemplated returning to fossil fuels such as coal, crude oil, and natural gas to safeguard their energy security.
Suddenly more arguments are calling for more fracking, more coal, and more gas in the name of US and European energy security.
Several European Union member countries including Germany, Italy, Austria, and the Netherlands have already signalled reverting to higher coal usage to produce electricity amid reduced gas flows from Russia.
Sarcastically, regulators in the US and Europe are cracking down on greenwashing-- a harmful and deceitful way of advertising that a company is more sustainable than it is-- by financial firms while companies and governments are reneging environmental goals to turn to fossil fuels to reduce dependence on Russian gas. This is causing deep confusion among corporates—many of which have already embarked on adopting ESG in their operations.
“Europe, Russia, and China have all taken a step back because of the geopolitics but they can maintain pressure on us because of the financing structures. When we are told jump we ask how high,” Johnson Nderi, a financial analyst said.
“They told us to abandon cola in Lamu and we did at a time India and China were projecting growth in coal,” he said.
The ESG is a concept that consumers and investors should evaluate firms based on their environmental and social record and their governance, typically using numerical scores.
The idea is meant to encourage businesses to deal with their negative externalities to reduce their carbon footprint and invest in climate action.
Dealing with and reporting on harm reduction to the environment is making business sense as consumers now align with companies that are environmentally conscious while financiers are declining to fund businesses that cause climate change.
Regulators are trying to future-proof companies within their jurisdictions from being locked out of financing options that may destabilize operations if the firms they regulate cannot access local and international finance.
In Kenya, the ESG concept is already catching on with the Central Bank of Kenya (CBK) even issuing climate finance reporting guidelines warning lenders to take climate change seriously, especially with global resolutions like the Conference of Parties (COP 26) in Glasgow Scotland having a direct impact on credit, market, liquidity and reputational risks of local banks.
The Nairobi Securities Exchange (NSE) also issued an ESG manual guiding listed companies on measuring and reporting ESG matters, becoming the fourth exchange in Africa to do so.
This has seen financing dry up for some investments as banks turn away customers whose business is not compliant with ESG measures.
ESG matters are being discussed in boardrooms, factored into key management decisions, and negotiated into transaction documents.
The country saw its first green financing raised by real estate developer Acorn Holdings which floated Sh5.7 billion Green Bond in 2020 which is behind student hostels brand Qwetu.
Startups such Arc Ride, Basi Go, Roam have attracted funding to the tunes of millions of dollars to scale e-mobility solutions while lenders are lining up funds for electric vehicle financing. NCBA has for example already launched a Sh2billion electric vehicle financing kitty.
KCB Bank was also accredited by the United Nations Green Climate Fund in 2020 as the first financial intermediary for the implementation of green financing in East Africa.
Finance sustainable projects
The lender considers raising more than Sh11.4 billion through a green bond to finance sustainable projects.
Family Bank become the fourth bank to officially join the United Nations Global Compact network committing to building a sustainable business in Kenya.
Investors are prioritising ESG and future sustainability issues as key metrics when contemplating potential buys and international partners now require banks to ensure onward lending goes to climate-friendly businesses.
Absa Regional Corporate Director, East Africa, James Agin said in a previous interview said following CBK advisory and requirements from funding partnerships the bank has been encouraging its customers to adopt ESG or risk losing out on funding.
“It’s something that we are embracing and working with partners the likes of IFC to ensure that both us internally in the bank and our clients fully understand that for us to continue working together that will be very important to ensure that whatever we do together complies with ESG,” Mr Agin said.
“Also the central bank has been at the forefront of climate funding and lending to the extent that we are also ensuring that we also embrace that all activities that our customers do, to comply to the fact that its not having any adverse impact on climate.”
Globally, however, the surge in inflation has pushed policymakers away from ESG and climate action in favour of fossil fuels to manage geopolitical challenges on the fallout of the Russian war in Ukraine.
Dutch farmers have been protesting a government plan to curb nitrogen pollution, while a regulatory crackdown on misrepresenting ESG portfolios is likely to cull growth in the sector.
In a June 23, 2022 letter, the American Bankers Association and bank trade associations around the US asserted that they should be at liberty to make their lending and investment decisions, and that “banks should not be used as proxies to effectuate environmental or other social policy goals.
Environmentalists are worried the global rollback of ESG would derail the concerted efforts to address the problem of climate change.
The International Monetary Fund (IMF) says many climate opportunities are unable to secure sufficient financing while those that do are most likely to attract a small pool of specialized investors demanding high returns in a developing and relatively illiquid asset class, with debt being the main instrument
Stakeholders are calling for reforms in the approach to address the shortcomings of the ESG structures.
ESG suffers from certain flaws including a lack of universal reporting standard, being voluntary hence unenforceable, and greenwashing where firms hoodwink the public on compliance.
In Kenya for instance, only seven out of 63 listed firms have complied with the NSE directive to begin making the disclosures following the release of the guidelines in December 2021. This low compliance is linked to the fact that there is currently no enforcement of the guidelines.
Despite the rollback, climate change remains one of the most challenging issues that countries will face in the coming decades.
The recent spikes in the cost of fuel and food—and the resulting risks of social unrest—underline the importance of investing in green energy and boosting resilience to shocks.
Kenya is looking for a sustainable way to enhance climate change financing including the Financing Locally Led Climate Action Programme (FLLoCA), the first national model of devolved climate finance, which supports partnerships between government and citizens to identify and invest in solutions to address climate change.
Through collaborative partnerships between communities and both the national and county governments, the programme aims to build capacity for planning, budgeting, reporting, and implementation of local climate actions in partnership with communities.