This newsletter gives you highlights of selected sustainability insights that were, perhaps, too long (you) didn’t read (TLDR) or there’s just too much out there to read. The highlights presented cover insights gleaned from a global, regional (African), and national (Kenyan) perspective. Happy reading!
GLOBAL: California Signs Climate Disclosure into
In October 2023, the State of California signed into law that companies doing business in the state with annual revenues of USD 1 Billion and more are to report on both direct and indirect GHG emissions starting 2026. Another law also came into being, the Climate-Related Financial Risk Act, that companies generating USD 500 million and more report on their financial risks related to climate change and their plans to mitigate these risks.
About 53 of the World’s Fortune 500 are based in California, and despite push back from the California Chamber of Commerce and other lobby groups, dozens of major companies e.g. Microsoft, Apple, Patagonia, among others support these rules.
Many global and large companies already provide climate-related disclosure; and around the world reporting requirements are increasing from the EU to New Zealand, to Singapore to Kenya.
According to KPMG’s Survey of Sustainability Reporting 2022: 96% of the world’s largest 250 companies already provide sustainability disclosure. Asia Pacific leads with 89%, Europe 82%, Americas 72% and Middle East & Africa 56% of the top 100 companies in these regions reporting on sustainability. The Global Reporting Initiative (GRI), Taskforce on Climate Related Financial Disclosures (TCFD), and Sustainable Development Goals (SDGs) were the most used anchors for sustainability reporting.
California is home to global technology companies e.g. Apple, Google, etc; leading retailers e.g. Walmart; and global oil and gas companies e.g. ExxonMobil, Chevron, etc. A number of large US banks e.g. Wells Fargo, Bank of America, etc also do a significant amount of business in California. These laws are likely a major step is embedding climate disclosure and tangible climate action, in Corporate America – and beyond.
My two cents: Cities, which are governed by states, have a critical role to play in addressing the climate emergency and the actions to mitigate it and adapt to it – when push comes to shove, it is the governor who is in the hot seat (remember C-19). Cities are at the heart of the economy, and nearly half of world populations today live in urban areas. We need leadership at all government levels tackling climate change in ways that can deliver systemic change. The IPCC is very clear that there is little time left, so if there’s a big lever that can be pulled… let it be pulled.
EU Carbon Border Adjustment Mechanism (CBAM) Kicks In
The EU’s CABM took effect October 2023, it aims to put a price (tax) on carbon emitted from carbon intensive goods entering the EU helping to ensure the EU’s climate objectives are not undermined, and to promote cleaner production in non-EU countries.
EU-based companies pay about EUR 80 to emit one ton of carbon dioxide. Under the CBAM, importers will be charged the same as domestic producers. Importers are expected to start reporting (only) as of 31st January 2024.
The EU is concerned about carbon leakage – the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission constraints. In a sense it is how the EU is tackling offshoring production to other non-EU countries with ‘weaker’ regulation and governance on GHG emissions.
The CBAM will initially apply to (initial phase): Cement, iron and steel, aluminium, fertilisers, electricity and hydrogen in the starting pilot phase, but it will expand over time to cover sectors in the EU Emissions Trading Scheme.
In the initial phase, importers of goods will only report on GHG emissions (direct and indirect), without financial payments, but this will also change in the next few years. From 31st December 2024, importers will have to have authorized status to import any of the goods in scope (initial phase) into the EU.
Not surprisingly, the EU CABM has received mixed sentiments; some see it as a positive step in climate action, others as a protectionist measure. A recent article from The Conversation estimates that the new mechanism will wipe out 0.91% of the African continent’s GDP, with annual losses of nearly USD 6 Billion. India and the US have introduced on their own measures in response.
My two-cents: Once again supply chains are taking a bigger role in climate action, and business accountability for emissions – in time with punitive financial repercussions – is taking effect. International disclosure expectations are now driving national private sector agendas, thanks to globalization. I cannot deny the pain of the pressure and resources needed to meet disclosure expectations today. But I do hope that in 2030 we will feel a little better that we did go through the pain (and probably still will be), but we will be seeing some results, or understand why there are no results.
AFRICA: Tax Transparency in Africa 2023
In July 2023, the Global Forum on Transparency and Exchange of Information for Tax Purposes, published its Africa Initiative Progress Report. Domestic resource mobilization, tackling tax evasion and all forms of illicit financial flows are lifelines to achieving the continent’s Agenda 2063, the SDGs and reducing dependence on external funding sources.
38 African countries provided input to this 5th edition report. The objective of the Africa Initiative is to unlock tax transparency and exchange of information for Africa ensuring that countries are able to leverage improvement in global tax transparency to tackle tax evasion.
UNCTAD highlighted that the African continent loses about USD 50 billion every year in illicit financial flows i.e. money “generated by methods, practices and crimes aiming to transfer financial capital out of a country in contravention of national or international laws (OECD, 2014). The continent needs about USD 200 billion every year to bridge the SDGs financing gap. So not surprisingly, tax mobilization and tax transparency are key levers for African countries to finance their sustainable development.
Reforming the international tax (and financial) architecture will also have a key role to play. The global financial architecture was design after World War 2 by and for industrialised countries. In 2023, well passed its due date, the international tax architecture is not representational nor responsive to the world’s needs. The UN Secretary General, in a policy brief ‘Our Common Agenda, policy brief 6’ has called for more inclusive processes to meet the needs and capacities of developing countries, reducing wasteful tax incentives and incentivizing taxation in source countries, and more global transparency and information sharing that is beneficial for all countries.
Through the work of The Africa Initiative, the report highlights that four African countries identified additional revenues totaling EUR 76.2 million last year alone. There is clearly significant potential for more revenue mobilisation through transparency, if countries have the will to do so.
From the KMPG Sustainability Survey 2022, only 25% of companies that report using the SDGs, actually report against SDG 16 – Peace, Justice, and Strong Institutions, this is where financial transparency sits (16.4, 16.5, 16.6).
My two cents: At the heart of tax evasion and illicit financial flows is secrecy – transparency and information exchange helps break this. Government leadership and business leadership must be willing to improve the wellbeing of the majority, not only a minority. If tax is the way to financing national wellbeing and prosperity, then transparency will be key. Citizens want to see their tax make a difference in their country’s prospects, not vanishing into a few people’s pockets.
KENYA: Sustainability Linked Loans Taking Root in Kenya
In September 2023, Safaricom secured a KES 20 billion (approx. USD 137 million) sustainability linked loan, the largest ever in East Africa and the first Kenya Shilling sustainability linked loan.
Sustainability (or ESG) linked loans are general purpose financial facilities that have their pricing terms tied to sustainability performance of borrowing company i.e. the interest rate depends on keeping to the sustainability practices in the borrowing agreement. Importantly, these loans are pegged to sustainability KPIs.
Often donors and multilateral finance institutions have led on sustainable financing. But banks can (and hopefully, will) be a leading source for sustainability lending. In Safaricom’s case; a consortium of banks – Absa Bank, KCB Bank, Stanbic Bank and Standard Chartered Bank come together to provide the sustainability linking financing required.
Safaricom is a recognized sustainability leader in Kenya and in Africa & the Middle East, and their leadership continues to influence and shift Kenya’s financial lending landscape. Safaricom has committed to use their sustainability linked loan (SLL) funds for transformational investments in reaching their net zero targets, progressing gender diversity, and social equality impacts; as well as their overall ambition to be a fully developed technology company by 2025. (Safaricom 2023 Sustainability Report).
Sustainable finance is an (early) emerging financing opportunity taking root in Kenya, and other countries on the African continent for those entrepreneurs, and business leaders who are courageous enough to see sustainability risks as business opportunities for resilience, future fit, deliver positive social and environmental impact and ensure prosperity. (e.g. Tanzania’s Gender Bond by NMB Bank, in South Africa RMB Bank’s sustainability linked loan to Mediclinic and Nigeria’s green bonds, among others across the continent.)
My two-cents: Without doubt, Safaricom has paved the way for what is possible for companies and for Kenyan banks. It will be interesting to see how sustainability linked loans evolve to not only cover large companies like Safaricom, but translate to SME financing. With our economy primarily driven by SMEs, these are the businesses that will get our country to a low-carbon and inclusive economy.