In response to the escalating challenges posed by climate change, the International Finance Corporation (IFC) has declared that it will cease funding private sector entities failing to adhere to or report on environmental, social, and governance (ESG) issues. This strategic move by the IFC is anticipated to impact numerous firms, potentially locking them out of crucial financial support.
ESG standards evaluate how a company’s business practices impact the environment, communities, and employees in their pursuit of profits. As climate change concerns continue to intensify, regulatory bodies such as the Central Bank of Kenya (CBK) now mandate their regulated entities to disclose their ESG practices. The Bank of Uganda has also incorporated ESG adherence into its five-year strategic plan for the sector.
Mary Peschka, IFC’s regional director for East Africa, emphasized that the organization will withdraw from projects involving entities that do not demonstrate a commitment to addressing ESG gaps. She stated, “We will walk away from projects that have clients or sponsors that won’t commit to our ESG standards.”
Before engaging in business with a client, the IFC conducts thorough due diligence on the ESG front. A comprehensive plan is then formulated to address any identified gaps related to ESG issues. This stringent approach means that numerous private sector businesses in the region, currently not adhering to or reporting on ESG issues, may be ineligible to access concessional lending facilities provided by the IFC.
While currently, only banks are obligated to report on ESG issues according to the Central Bank of Kenya, a few other companies listed on the Nairobi Securities Exchange voluntarily disclose such information. Nevertheless, the significance of ESG is growing in relation to private businesses’ profitability, as consumers increasingly prioritize companies that demonstrate awareness and commitment to environmental and social concerns.
Mary Peschka emphasized that compromising on ESG commitments could lead to negative consequences for businesses. She noted, “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 has previously implemented similar programs in Rwanda, South Africa, and Tunisia, with the initiative now expanding to Kenya, Uganda, and Tanzania. This move underscores the growing influence of ESG considerations in shaping the landscape of corporate financing and underscores the imperative for businesses to integrate sustainable practices for long-term success.
Courtesy; Daily Monitor