Amidst current trends on the African continent, there’s a notable surge in emphasis on sustainability. Many African nations are recognising its significance and putting Environmental, Social, and Governance (ESG) practices in their operations. Concurrently, governments are also taking decisive steps, enacting legislation and regulations to tackle pressing environmental challenges.
For instance, South Africa’s Climate Change Bill is gaining traction, echoing a broader regional movement. Meanwhile, Kenya’s launch of the Kenya Green Bond Programme in 2017 made history as the inaugural shilling-denominated green bond in East and Central Africa, finding a home on the London Stock Exchange. The Central Bank of Kenya has also stepped forward, developing a Guidance on Climate-Related Risk Management for the banking sector, which aims to sensitise stakeholders on mitigating climate-related risks on the one hand and harnessing opportunities on the other. Other trends include adopting national sustainable development plans that outline strategies to address climate change, promote social equity, and enhance governance.
We can observe the promotion of renewable energy and conservation and biodiversity protection. While most of these have already formed a part of many African countries’ legislative frameworks, an increased focus can only auger well for the continent and businesses, given the current climate crisis.– Sahondra Rabenarivo, Managing Partner, Madagascar Law Offices (ALN firm in Madagascar)
Green bonds are typically used by governments or corporations whereby the proceeds from the bonds are earmarked for financing or refinancing specific environmentally friendly projects. Green bond issuers provide transparency by disclosing the use of the proceeds and reporting on the environmental impact of the funded projects. They can effectively promote climate action by mobilising capital, encouraging sustainable investments, and building investor confidence. These are some ways that current ESG practices can mobilise climate action despite being seen as operating passively.
The Extent of ESG’s Role in Due Diligence for M&A Transactions
In terms of due diligence, while the extent and depth of ESG considerations may vary depending on the specific transaction and the parties involved, there is a growing recognition that ESG factors can significantly impact a company’s long-term success, reputation, and value.
As M&A transaction lawyers, we have observed the shift to investors prioritising ESG and future sustainability issues as a key metric when considering potential acquisitions as opposed to just a routine compliance issue. – Adeolu Idowu, Partner, Aluko & Oyebode (ALN firm in Nigeria)
Some of the ESG concerns that are increasingly integrated into due diligence undertakings include risk assessment, where ESG factors are evaluated to identify potential risks and liabilities associated with a target company, reputation and brand risks, financial performance and long-term value, whereby ESG due diligence may assess the target company’s ESG performance and its potential impact on financial performance and long-term value creation.
Contribution of ESG Transparency and Traceability to Growth of International Trade
ESG transparency and traceability promote international trade by enhancing compliance with social and environmental obligations. The global push towards greener and more sustainable trade has resulted in entities attracting sanctioning measures for breaches of ESG obligations along the production value chains. The sanctioning measures- which include fines, taxes and import restrictions, among others- create barriers to trade for goods that are not sustainably produced. Integrating transparency and traceability empowers industry participants to monitor value chains, pinpoint opportunities for efficient resource management, and ensure sustainable practices align with ESG obligations.
Notably, adopting ESG transparency and traceability must follow consistent, internationally endorsed best practices to prevent trade hindrances. Recognising the necessity for uniformity, the United Nations Commission for Europe established a transparency and traceability toolbox tailored for the garment and footwear sector. This toolbox empowers industry players to make informed decisions, ensuring adherence to globally accepted social and environmental standards within these industries. Applying comparable frameworks will be pivotal in framing transparency and traceability as facilitators, not impediments, to international trade.
Dealing with Challenges Associated with a Global Environmental Scheme
a. Greenwashing is a prevalent problem that the global environmental scheme faces whereby some companies/ entities are seen or known to propagate a misleading environmentalist image. This is in a bid to be seen to align with the market, which is leaning more towards ethical and sustainable products. Greenwashing is a tool used to increase a business’s sales and reputation in the market. It is, however, harmful in several ways. First, it misleads conscious consumers who would like to play their part in protecting the planet. Second, from a trade perspective, companies that are true to the environmental mission lose competitiveness in the market. This is because the production of sustainable products is more costly.
b. More specific and reliable disclosures are required in the fight against climate change Continuing trends demonstrate that disclosures in climate change are becoming more specific. As opposed to having companies reduce carbon emissions generally, companies are now required to disclose the specific carbon emission they are addressing, such as reducing methane or carbon monoxide. For example, in September 2021, the United States Securities and Exchange Commission (SEC) sent comment letters to several companies in different industries seeking more information about their climate-related disclosures (or lack of such disclosures in their SEC filings) referencing the SEC’s 2010 Guidance Regarding Disclosure Related to Climate Change. This trend and pressure on listed companies to give specific disclosures continue in the US, Europe, and other African countries.
This has also called for more sophisticated ESG data management systems to provide some cross-checks for data consistency. Although some data alignment solutions are developing, a global verification system for net zero commitments needs to be created. Clear, accessible data is vital, enabling leading entities to credibly prove their net zero progress. This transparency is essential to combat greenwashing, earn rewards from citizens, consumers, and investors, and ensure accountability amid ongoing growth and investments.
c. Fragmentation of the framework and efforts towards the protection of the environment One of the key challenges facing the global environmental movement is the fragmentation of the framework and efforts towards protecting the environment. This fragmentation can inadvertently lead to disparities in strategies, priorities, and methodologies among nations, potentially diluting the collective impact of these crucial initiatives. As diverse agendas and differing levels of commitment intersect, the global community grapples with reconciling these disparate efforts into a coherent force for change.
We have many multilateral environmental agreements, different in membership, scope, governance structure and funding mechanisms to enhance sustainable international trade globally. The plurality creates more confusion than it does providing solutions. There is, therefore, a need to harmonise the various laws to eliminate major differences and create minimum requirements or standards. – Daniel Ngumy, Managing Partner, Anjarwalla & Khanna (ALN firm in Kenya)
Conclusion and Way Forward
Stakeholder discussions on climate action create foundations for targeted and impactful initiatives. This article has explored the dynamic interplay between sustainable trade, investment, and the pivotal role of ESG principles and raised awareness on the raft of issues to consider in implementing trade agreements such as the AfCFTA when considering ESG sustainability principles.
While the discussions have highlighted the many points of intersection between international trade and ESG, they have also drawn attention to the need for specific measures geared towards environmental considerations. It is incumbent for industry experts to petition the policymakers to entrench ESG into the frameworks of trading blocs to promote more sustainable international trade within the continent. This will foster sustainable international trade across the continent and set a transformative precedent for responsible global commerce.
