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Diagnostic Study – ESG integration by pension regulators in Kenya – 2023

Project background

Increasingly, companies and investors are being looked at to lead the charge in mitigating and adapting to climate change, reducing discrimination, and increasing transparency. Pension funds are major investors whose decisions can have a powerful impact on ESG factors. In just 22 countries, pension funds control $56.6 trillion in assets. But, given the variety of disclosure and reporting requirements, such as EU Taxonomy regulation and the Task Force in Climate-related Financial Disclosures, pension funds rely on their regulators to guide them on how to incorporate ESG factors in their investment and risk management processes.

These challenges are significant in Sub-Saharan Africa. The region has a Corruption Index score of 32 out of 100; the lowest scorer in the region was Somalia which scored 13 out of 100 as the president has recently dissolved anti-corruption commissions. This low regional ranking has economic implications seen by the recent grey listing of Nigeria and South Africa by the Financial Action Task Force. When it comes to human development, all the Sub-Saharan countries except Seychelles and Mauritius fall below the global average Human Development Index score. Additionally, African countries are some of the most vulnerable to climate-related risk, with drastic climate change causing knock-on effects within African economies that impact poverty, food security, and economic development. To mitigate these impacts and support global climate targets (such as the 2 degrees global goal under the Paris Agreement), African countries will need to dramatically increase investment in climate-related assets. Pension funds have the finance to mobilise for this cause and are therefore key role players.

Despite these challenges, Africa is lagging global developments in ESG disclosure including in the pension industry. Half of African pension funds do not disclose sustainability information about their investments. This is largely driven by a lack of regulation, policy, and voluntary initiatives to regulate and monitor ESG adoption by the pension industry.

To support the development of regulations and guidelines on ESG disclosures, regulators and the industry need to work together to identify gaps and solutions in each country. This will require capacity building and an in-depth knowledge of ESG risks.