In today’s competitive corporate world, investors must carefully examine the environmental, social, and corporate governance aspects of companies they wish to invest in before deciding on an investment idea. They must also fully understand how to embrace opportunities and manage risks around sustainable issues. That brings us to a key metric called environmental, social, and governance (ESG).
ESG generally assesses a company’s performance and practices around three pillars: environmental sustainability, societal responsibility, and corporate governance. It simply offers a metric for measuring opportunities and weighing risks along those pillars.
In capital markets, ESG comes in handy when evaluating investment plans, which we call ESG investing.
Interestingly, the term ESG first came to the spotlight in 2004 following a UN Report dubbed ‘Who Cares Wins,’ which focused on guidelines for integrating environmental, social, and governance matters in asset management, financial market, securities brokerage, and related financial disciplines,
But even so, that wasn’t the genesis of ESG. It has been an evolution. Back in the 90s, we used to use the term’ Environment, Health, and Safety’ (EHS), and in the 80s, the name Corporate Sustainability emerged. At the turn of the millennium, the term had evolved to Corporate Social Responsibility (CSR). Now, we are talking about ESG.
We will discuss the evolution of the term ‘ESG,’ examine what it means, and explain why it matters to you as a company. Let’s dive in!

Key Takeaways
- ESG is a model that assesses a company’s performance and best practices based on three critical metrics or pillars: environmental sustainability, societal responsibility, and corporate governance.
- The ‘environmental aspect’ of ESG focuses on lessening a company’s ecological footprint to contribute to a safer and more sustainable ecosystem.
- The ‘social aspect’ of ESG focuses on promoting social responsibility, encouraging inclusivity at the workplace, and engaging the community.
- The ‘governance aspect’ of ESG ensures that a company observes ethical practices in decision-making, responsible leadership, and communication transparency.
- ESG is generally essential for investors in assessing opportunities and weighing risks involving companies they associate with.
- ESG is also crucial for improving a company’s competitiveness score and business growth.
- The term ESG has evolved from Environment, Health, and Safety (EHS) in the 1980s, Corporate Sustainability in the 1990s, and Corporate Social Responsibility (CSR) in the early 2000s.
- ESG is currently in effect in Kenya and mandatory for NSE-listed companies.
- Companies in Kenya should familiarize themselves with the existing ESG regulations and should invest in ESG reporting.
- ESG reporting can be learned, and the training is vital to overcoming existing ESG reporting challenges.
What is ESG?
ESG or Environmental , Social, and Governance is a framework for assessing a company’s performance and day-to-day practices regarding environmental, social, and corporate governance matters. ESG is also a way of measuring opportunities and associated risks based on ecological sustainability, societal responsibility, and corporate governance—what we know as the pillars of ESG.
ESG is critical for evaluating an organization’s environmental, social, and corporate governance impact. It demonstrates a company’s commitment to better and more responsible practices, which is critical not only for companies but also for investors and other stakeholders.
What Are the 3 Pillars of ESG?
The three pillars of ESG, also known as its principles, are environmental sustainability, societal responsibility, and corporate governance. Let’s see what the three entail:
1. Environmental Sustainability
The ‘environmental sustainability’ aspect of ESG addresses a company’s environmental impact. It touches on ecological topics such as climate change, deforestation, carbon emissions, greenhouse gas emissions, water management, and many others.
Overall, environmental sustainability focuses on a company’s ability to reduce the ecological footprint, which is the rate at which we consume resources and produce waste, compared to the rate at which nature absorbs and utilizes the waste. A lower ecological footprint ultimately translates to a safer and more sustainable planet.
2. Social Responsibility
The ‘social responsibility’ pillar examines a company’s impact on the people and community and focuses on human rights and social inclusivity.
Social responsibility emphasizes the relationship between the company and its stakeholders. It often involves measuring an organization against Human Capital Management (HCM) metrics such as worker engagement and fair wages.
A good ESG framework, however, concentrates on the internal social impacts, the social impact outside the company’s walls, and the social impact on the supply chain partners.
3. Corporate Governance
The ‘corporate governance’ aspect of ESG mainly weighs in on how a company is run and directed. A practical ESG framework seeks to define just how a company’s leadership incentives align with the stakeholders’ expectations, how the company views and honors shareholders’ rights, and the existing internal controls for promoting accountability and transparency by the leaders.

Why is ESG Important?
ESG is quite crucial for different reasons, and here are the ones worth knowing:
a) ESG’s importance for investors
ESG generally enables investors to invest with a purpose. It measures investment opportunities and weighs them against potential risks to make it easy for investors to make sounder decisions.
An ESG investment strategy doesn’t just provide information on financial return but also one that aligns with laid-out ethical values, and that’s a win-win for both the investor and community.
b) ESG’s importance to business growth
ESG is critical to improving a company’s market competitiveness and status by helping investors and corporate heads make the right decision after measuring the risks and opportunities. Ultimately, this boosts the company’s chances of growing and expanding its market scope.
c) ESG and environmental impact
As an ESG pillar, environmental sustainability focuses on a company’s ecological footprint. That means avoiding practices that could potentially make Mother Nature unsafe. Ultimately, ESG protects the environment from carbon emissions and other pollutants that could destroy our planet.
d) ESG and social impact
Think of ESG as a way of nurturing better social relations. It involves everything that makes a company socially responsible, engages the community, and promotes inclusivity. The social element of ESG stresses social responsibility, fair labor terms, human rights, and employee health, to name a few.
e) ESG and corporate governance
The governance aspect of ESG is about observing strong ethical practices when making corporate decisions. It depicts responsible leadership, accountability, transparency, and fair remuneration.
The Evolution of the Term ‘ESG’
It was a journey before the name ESG became prominent in 2004. In the 1980s, the term EHS (Environment, Health, and Safety) was used in the United States to define regulations that minimize and manage negative externalities like pollution to chase economic excellence and growth. The framework was also meant to improve corporate standards and employee labor relations.
In the 1990s, a new term emerged: Corporate Sustainability. Corporate Sustainability was motivated by company heads’ desire to concentrate more on minimizing their environmental impact beyond the usual mandated relations.
Overall, corporate sustainability was employed as a marketing approach to overstating (which others may say to misrepresent) environmental impact and efforts.
In the 2000s, companies started to entertain ideas that responded to corporate sustainability and social responsibility, which gave birth to the term ‘Corporate Social Responsibility’ or CSR.
In 2004, the UN released the ‘Who Cares Wins’ Report that I mentioned earlier, and people started talking about ESG instantly. The 2004 Un Report recommended incorporating ESG into brokerage services, financial markets, asset management, and related fields.
What’s the Difference Between ESG and CSR?
Though the terms ESG and CSR are often used interchangeably, they aren’t the same. ESG (Environmental, Social, and Governance) measures a company’s overall performance based on environmental, societal, and corporate governance aspects.
On the other hand, CSR (Corporate Social Responsibility) expresses a company’s commitment to running responsibly and ethically. CSR depicts a company’s efforts to benefit the community and the environment.

The difference is that ESG focuses more on opportunities and risks and is purely data-driven. CSR, in contrast, isn’t data-driven as it focuses more on employee engagement and improving corporate reputation.
The other thing is that ESG is more standardized and quantifiable due to data-based approaches.
Recent ESG Developments Across the Globe
Around the globe, ESG has gained momentum in recent times. In 2020, for example, the ‘Big Four’ accounting firms (PricewaterhouseCoopers, Deloitte, KPMG, and Ernst & Young) and the World Economic Forum unveiled standardized metrics for stakeholder capitalism to improve ESG reporting by corporate entities.
In 2021, the European Union’s Sustainable Finance Disclosure Regulation, which focused on sustainability reporting for investor firms and financial institutions, went into effect.
In 2022, the U.S. Securities & Exchange Commission proposed amendments to reporting requirements and disclosures for investment funds using the ESG framework.
The same year, the Sustainability Accounting Standards Board ( or SASB) and the Climate Disclosure Standards Board ( or CDSB) were consolidated into what we now know as the International Financial Reporting Standards ( or IFRS), which sets accounting standards for financial settlements by corporate entities.
A year later, the EU’s Corporate Sustainability Reporting Directive was enforced, which initially required corporate entities to file annual reports on business opportunities and risks on environmental and social impacts. Judging by the trend, we also expect some key ESG developments in 2024 and beyond.
What Are ESG Regulations?
ESG Regulations refer to rules, guidelines, and standard procedures that govern a corporate entity’s environmental, social, and governance aspects. They aim to hold companies accountable for their impact on the environment, society, and management.
The regulations ensure that investors are aware of the impact the firms they invest in have on the ecological system and community. In Kenya, several ESG regulations are worth mentioning. Let’s talk about that next.
ESG Regulations in Kenya
The Constitution of Kenya 2010 widely embraces ESG. On the environmental sustainability pillar, Article 42 institutes the right to a healthy and cleaner environment as a fundamental human right.
On the other hand, Article 69 obliges the government of Kenya to conserve and protect the environment, as Article 60 and Article 66 emphasize promoting sustainable use, exploitation, and management of the environment.
Article 43 mentions the right to suitable housing, healthcare, food, and education for all Kenyans. Meanwhile, Articles 52 through 57 discuss the rights of children, seniors, people living with disabilities, marginalized groups, and minorities to access opportunities through affirmative action programs.
On the social pillar, the 2019 Data Protection Act enactment reinforces Article 31 of the 2010 Constitution, which promotes data security and privacy. In solidarity with the social pillar, the 2007 Employment Act Number 11 regulates local employment practices asserting fundamentals like employee rights, minimum wage, and work safety.
On the corporate governance pillar, the 2015 Companies Act Number 17 highlights the duties of a director, underscoring the need to act in good faith and consider the impact the company’s operations have on the environment and community.
Kenya has also endorsed or supported several international agreements on ESG, the most recent being the Paris Agreement, which has helped Kenya formulate policies for addressing climate change. The 2018 National Climate Change Action Plan (NCAP), the National Climate Change Framework Policy, and the National Climate Finance Policy are classic examples.

ESG in Effect in Kenya
Each day, investors in Kenya call for more commitment to environmental and social governance from companies they invest in. Investors demand disclosures and honest reporting on issues concerning an organization’s environmental impact, social responsibility, and corporate governance, which has prompted relevant regulatory authorities to enforce obligatory reporting standards.
A local regulator like NEMA (National Environmental Management Authority), for example, has implemented legislation that requires project administrators to conduct an Environmental Impact Assessment (EIA) and submit the annual report to them (NEMA). That’s according to Section 68, Part 3 of the Environmental Management and Coordination Act (EMCA).
Cap 87 of the EMCA establishes that NEMA should coordinate and offer general supervision of all local environmental matters.
Meanwhile, the 2003 Environmental Impact Assessment and Audit Regulations and the 2012 National Guidelines for Strategic Environmental Assessment address strategic social and environmental impacts.
Moreover, the 2015 Code of Corporate Governance Practices for Issuers of Securities outlines the minimum standards for stakeholders of publicly listed companies and calls for the board of directors of such entities to adopt formal sustainable strategies, which is ESG in action.
The 2016 Climate Change Act Number 11 institutes the Climate Council, which the President of Kenya chairs, and whose duties include adopting the National Climate Change Action Plan and establishing targets for regulating greenhouse emissions. In contrast, the 2022 Waste Management Act Number 31 provides the institutional framework for sustainable waste management.
We’ve also seen ESG in effect in the banking sector and the financial market. For example, the Central Bank of Kenya issued commercial banks with Guidance on Climate-Related Risk Management (GCRRM) to develop and implement strategies that mitigate climate risks.
Mandatory GCCRM reporting kicked off in September 2022, which drove the Kenya Bankers Association to introduce a Climate-Related Financial Disclosures Template in 2023 to facilitate GCRRM compliance by all commercial banks.
Meanwhile, the Nairobi Securities Exchange unveiled an ESG Guidance Manual in November 2021 to mandate NSE-listed firms to disclose their annual ESG performance publicly, and that saw companies like KCB Group and Safaricom take proactive steps and voluntarily report their ESG performance.
What is ESG Investing?
ESG Investing refers to how organizations, more so corporate entities, score on environmental, social, and corporate governance metrics and prospective investment standards.
ESG investing is employed to screen investment opportunities according to corporate policies and standards and to encourage corporate entities to act responsibly.
In ESG investing, the environment metric gauges how a given company protects the ecological system, the social metric emphasizes healthy social relations between the company and stakeholders, and the governance metric gauges its corporate leadership, shareholders’ rights, and internal controls.

What is ESG Reporting?
ESG Reporting refers to measuring an organization’s performance based on environmental sustainability, social accountability, and corporate governance. Though it isn’t accounting-driven, it’s structured to provide investors and regulatory authorities with what they need to assess an organization’s ESG performance.
ESG reporting on environmental sustainability focuses on climate change, recycling and reusing efforts, and water conservation. In social accountability, ESG reporting addresses employee relations, labor standards, conflict management, and human rights.
On the other hand, corporate governance topics to highlight in ESG reporting include cyber security, executive evaluation and compensation, data privacy, corruption, and tax.
Overall, here are some notable benefits of ESG reporting:
- Correct ESG reporting attracts investors by demonstrating corporate transparency, accountability, and social responsibility
- ESG reporting enhances brand value and company reputation
- Improves operational efficiency and company productivity
- Helps with risk assessment and management
- ESG reporting creates long-term corporate value
- It drives positive corporate changes and innovation
- Improves company resilience
Is ESG Reporting Mandatory in Kenya?
ESG reporting is mandatory in almost every country, including Kenya. According to the 2021 ESG Guidance Manual unveiled by the Nairobi Securities Exchange, all NSE-listed firms, as mentioned earlier, should publicly disclose their ESG performance annually, both positive and negative results.
Of course, there are challenges when it comes to ESG reporting. However, as long as a company directly impacts the environment, community, and corporate governance, then ESG reporting is mandatory.
Where We Come in as Center for Corporate Governance
Kenya is still young in ESG reporting, and many companies find it challenging to report their ESG performance effectively. First, the country’s corporate governance structure isn’t the most developed, and standard reporting models are lacking.
Furthermore, there’s a notable lack of ESG awareness and understanding of its pillars or principles by company heads and stakeholders. That’s where we come in as the Center for Corporate Governance (CCG)
As CCG, we help companies understand their ESG obligations. We also help our client companies integrate ESG into their business strategies to promote ecological sustainability, societal responsibility, and better corporate governance.
Find out more about us and our service scope on our website!
Also Read:
- Impact of Digital Transformation on Corporate Governance
- The Role of Independent Directors in Modern-Day Governance
- Corporate Governance Audit Guide
- The Future of Corporate Governance
- Ethics and Integrity of Corporate Governance
- Fundamentals of COSO Framework
- The Role of Technology in Modern Corporate Governance