The International Finance Corporation (IFC) has taken a decisive step, announcing that it will cease funding private sector companies that fail to adhere to or report on ESG issues, potentially excluding numerous firms from financial support. This is reported to be in response to the escalating threat of climate change, where Environmental, Social, and Governance (ESG) considerations have assumed a pivotal role in the corporate landscape.
ESG standards revolve around how companies’ business practices impact the natural environment, the surrounding communities, and their employees, all while pursuing profitability. Reflecting the global concern about climate change, regulators like the Central Bank of Kenya (CBK) now mandate their regulated entities to report on their ESG practices. The Bank of Uganda has incorporated ESG adherence into its five-year strategic plan.
Mary Peschka, IFC’s regional director for East Africa, conveyed to the Business Daily that the financier will discontinue engagement with projects led by entities showing no commitment to closing ESG gaps. She emphasized that the IFC will walk away from projects lacking adherence to its ESG standards.
“When we set out to do business with a client, our specialists and corporate governance team undertake due diligence on the ESG front and then put together a plan to close any gaps related to ESG issues,” said Ms. Peschka. This stringent approach means that private sector businesses not adhering to or reporting on ESG issues in the region will be ineligible for concessional lending facilities provided by the IFC.
Presently, only banks are mandated by the Central Bank of Kenya to report on ESG issues, although a few companies listed on the Nairobi Securities Exchange voluntarily disclose such information. However, ESG is gaining significance for private businesses beyond regulatory compliance, as consumers increasingly prioritize environmentally and socially responsible practices.
Ms. Peschka emphasized the business significance of ESG, stating, “If you start compromising on your commitments to ESG, it’s a slippery slope. ESG is good business. It’s not just because it’s the morally right thing to do. There’s lots of research that shows it translates to the positive bottom-line.”
The IFC’s initiative to enforce ESG standards has already been implemented in Rwanda, South Africa, and Tunisia. The extension of this program to Kenya includes services to Uganda and Tanzania, signaling a regional commitment to aligning business practices with environmental, social, and governance considerations.
