ESG Reporting And Disclosure Mandates: Legal Obligations And Optimal Practices

INTRODUCTION:

The market landscape has undergone significant transformations, with heightened expectations from both consumers and employees towards corporate entities. Business owners and industry leaders face mounting pressure from regulators and stakeholders to demonstrate responsible and sustainable practices. In this evolving environment, embedding Environmental, Social, and Governance (ESG) factors into business strategies is no longer optional but essential. Doing so not only ensures resilience in the face of new challenges but also contributes to creating a more sustainable and equitable business environment. ESG considerations now form a critical part of decision-making processes for investors, corporations, and stakeholders. This work delves into the components of ESG strategies and explores the legal framework necessary for standard business practices to align with ESG principles.

WHAT IS ESG?

Environmental, social, and governance (ESG) is a framework used to assess an organization's business practices and performance on various sustainability and ethical issues. It also provides a way to measure business risks and opportunities in those areas. In capital markets, some investors use ESG criteria to evaluate companies and help determine their investment plans, a practice known as ESG investing.¹ ESG guides the assessment of a business's impact on the environment, customers stakeholders, and society at large. While sustainability, ethics, and corporate governance are typically considered non-financial performance indicators, an ESG program ensures accountability and the implementation of systems and processes to manage a company's impact. This includes aspects like its carbon footprint and how it treats employees, suppliers, and other stakeholders. ESG initiatives also contribute to broader business sustainability efforts, aiming to position companies for long-term success through responsible corporate management and business strategies.

COMPONENTS OF ESG²

1. Environmental: This examines how a business performs as a steward of the natural environment by focusing on and analyzing factors such as climate change, waste management, energy consumption, pollution, biodiversity, waste management water usage, and circular economy. These metrics assist investors to gauge and regulate the company's commitment to environmental sustainability and its efforts to reduce its ecological footprint.
2. Social: Social responsibility is a crucial aspect of ESG investing. It evaluates the relationship between the company, employees, host communities, and other stakeholders. It focuses on employee relations, diversity, health, and safety as well as working conditions. The social factors include labour practices, human rights, gender diversity, and community relations. Social indicators provide investors with insights into a company's commitment to fair labour practices and social justice.
3. Governance: Governance criteria focus on leadership oversight and direction, board diversity, executive compensation, audits, shareholders' rights, intellectual property protection, and adherence to ethical business practices. It also examines the nature of company policies as they affect disclosures, transparency, board structure, anti-bribery, and corruption. Good governance is a key factor in curtailing business risks and ensuring transparency.

BENEFIT OF ESG PRINCIPLES IN NIGERIA

Nigeria is the largest economy in Africa with a youthful and rapidly growing population, thus making it an ideal place for investment.³ Sadly, it is a country faced with major socio-economic challenges such as corruption, infrastructure deficit, insecurity, extreme poverty, food insecurity, energy poverty, unemployment, poor healthcare, and a dysfunctional education system. To reverse these ugly trends, a collaborative approach must be adopted by business leaders and the government to jointly take steps and introduce initiatives that will engender sustainable development in Nigeria. One way of engaging in such partnership is through the incorporation of ESG principles and activities into business operations given the linkage between the application of ESG principles and sustainable development.⁴ From a business-level perspective for companies operating in Nigeria, some of the recognized benefits of this cooperation, which are based on the implementation of a well-defined ESG framework are as follows:⁵

1. It enhances corporate reputation and improves stakeholders' perception of the business.
2. Creates a positive synergy with sector regulators and other government actors, which reduces regulatory and political risks.
3. Mitigates operational risks (e.g., employee strikes, environmental disasters),
4. Mitigates community disputes, which are prevalent in Nigeria, particularly in the extractive industries.
5. Aids in the establishment of a social license to operate, which is critical when operating in a developing country like Nigeria.
6. It improves managerial decision-making and enhances long-term value creation.
7. It enhances the ability of the company to attract, retain, and motivate top talent-employees.
8. It improves the development of Nigerian content, which is critical to sustainable development.
9. It improves employees' performances, resource efficiency, cost savings, and productivity.
10. It facilitates access to capital.

LEGAL MANDATE OF ESG IN NIGERIA

Albeit that there is no single legal framework on ESG in Nigeria, however, some laws make provisions for the components of ESG. For instance, the Constitution of the Federal Republic of Nigeria, 1999 (as amended) which is the grundnorm that regulates the environmental, social, and governmental activities of the country provides for ESG strategies such as Fundamental Objectives and Directive Principles of State Policy as well as Fundamental Human Rights.⁶ The Companies and Allied Matters Act 2020 also mandates directors as part of their duties to ensure that their company's operations are not detrimental to the environment in the community where they carry out business operations.⁷

The Central Bank of Nigeria in 2012 issued general and sector-specific sustainable banking principles to be adopted and implemented by all banks, discount houses, and development financial institutions.⁸ These principles aim to foster positive development impacts on society while protecting the communities and environment in which financial institutions operate. In 2018, the Nigerian Stock Exchange (NSE) introduced the Sustainability Reporting and Disclosure Guidelines aimed at integrating sustainability in listed companies.⁹ Also, the Nigerian Code of Corporate Governance issued by the Financial Reporting Council of Nigeria in 2018¹⁰ requires companies to pay adequate attention to sustainability issues as well as the general requirements of corporate governance. In 2020, the Securities and Exchange Commission (SEC) released the SEC Corporate Governance Guidelines (applicable to all public companies), which requires companies to, inter alia, recognize corruption as a major threat to national development and a sustainability issue for businesses in Nigeria. The Petroleum Industrial Act also mandates corporate organisations and settlors to establish a trust fund for the social welfare and development of their host communities.¹¹

CONCLUSION:

The incorporation of ESG factors into the strategies and operations of companies and organizations is essential for ensuring both profitability and sustainability for businesses. As a matter of urgency, the federal government should actively incorporate ESG principles into national legislation to promote high-quality business practices and propel Nigeria's sustainable development forward. By doing so, not only will companies operate more responsibly, but it will also foster a more stable and predictable market environment. This holistic approach aligns with global trends toward responsible corporate citizenship and positions Nigeria for long-term economic success.

Interestingly, ESG factors are now informing business decisions, capital funding options, and management strategies. It has become necessary for companies and corporate organizations to embrace and integrate ESG strategies in their corporate governance.

Footnotes

1. https://www.techtarget.com/whatis/definition/environmental-social-and-governance-ESG. Accessed on 16th February, 2024.

2. See the UN Global Impact Report, "Who Cares Wins- Connecting Financial Markets to a Changing World" available at https://www.sustainabilityinbusiness.org/blogs/who-cares-wins-the-report-that-started-esg. Accessed on 17th February, 2024.

3. Congressional Research Service, 'Nigeria: Current Issues and U.S. Policy (September 18, 2020)' available at: (https://fas.org/sgp/crs/row/RL33964.pdf) accessed 16th February 2024.

4. The World Bank Group, 'Incorporating Environmental, Social and Governance (ESG) Factors into Fixed Income Investment' available at (https://openknowledge worldbank.org/bitstream/handle/10986/29693/125442-WP-PUBLIC.pdf?sequence=5&isAllowed=y ) accessed 16th February 2024

5. See generally: Elizabeth Pollman, 'Corporate Social Responsibility, ESG, and Compliance' available at: (https://papers.ssrn.com. ) accessed 16th February 2024; NSE Sustainability Disclosure Guidelines; and Guy Alexander and Benson Adenuga, 'Performance beyond profit: Environmental, Social and Governance (ESG) leadership as a performance driver' available at: ( https://businessday.ng/opinion/article/performance-beyond-profit-environmental-social-and-governance-esg-leadership-as-a-performance-driver/) accessed 16th February 2024.

6. Chapter 2 and 4 of the 1999 constitution of the Federal Republic of Nigeria (as amended)

7. Section 305 (3) of the Companies and Allied Matters Act 2020.

8. See (https://www.cbn.gov.ng/out/2012/ccd/circular-nsbp.pdf. ) accessed 16th February 2024.

9. See ( http://www.nse.com.ng/mediacenter/pressreleases/Pages/NSE-Announces-its-Sustainability-Disclosure-Guidelines.aspx ) accessed 16th February 2024.

10. NCCG, principle 26. See ( https://sec.gov.ng/sec-corporate-governance-guideline-and-revised-form-01/ ) accessed 16th February, 2024.

11. Sections 234-257 of the Petroleum Industrial Act 2021.

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