ESG due diligence: the Ghanaian perspective

This article explores the concepts of ESG and ESG due diligence, highlighting their significance and the advantages of incorporating ESG due diligence within the Ghanaian context. The benefits of ESG due diligence extend far beyond mere compliance and include risk management, enhanced reputation, and fostering positive relationships with stakeholders and the wider community.

ESG due diligence has emerged as a critical factor in global investment decisions, driven by a growing emphasis on sustainability and responsible business practices. In Ghana, where economic development intersects with environmental and social concerns, understanding ESG is essential for fostering sustainable investment practices.

ESG represents a comprehensive framework used to assess a company's sustainable business practices. In essence, it evaluates how well a company:

• Manages its environmental responsibilities;

• Addresses social impacts; and

• Upholds governance practices.

By scrutinising these factors, investors and stakeholders gain deeper insight into a company's long-term sustainability or otherwise.

ESG due diligence is the systematic assessment and evaluation of a company's environmental, social, and governance practices to determine their impact on numerous stakeholders, the environment, and long-term financial performance. It entails obtaining relevant data, analysing risks and opportunities, and consulting with internal and external stakeholders to find areas for improvement and compliance with industry standards and best practices.

Traditional due diligence entails a thorough investigation to verify information in transactions or business decisions, reduce risks, and ensure compliance, whereas ESG due diligence is the process of uncovering a company's ESG policies and risk factors, analysing sustainability, social impact, and ethical practices alongside financial considerations. This information informs investment decisions.

By integrating ESG considerations into due diligence processes, investors can better assess the overall health of their investments while also promoting responsible business practices and contributing to positive societal outcomes.

Each of the three key ESG factors plays a crucial role in promoting sustainable business practices.

The environmental factor refers to the actions taken to protect and preserve our surroundings. This includes:

• Mitigating air and water pollutants, such as reducing emissions from industrial activities and wastewater treatment; and

• Managing waste production through recycling initiatives and waste reduction strategies.

The social factor focuses on an organisation's cultural, safety, and ethical standards. This includes:

• Labour management practices, such as fair wages and employee benefits; and

• Inclusion initiatives aimed at promoting equal opportunities and reducing discrimination.

The governance factor focuses on the regulations and policies that govern an organisation. This includes:

• Shareholders’ rights and directors’ duties to ensure fairness and transparency in corporate governance; and

• Business ethical standards that promote integrity, honesty, and ethical conduct in all business dealings.

It is important to note that ESG factors vary across industries in Ghana, requiring different tailored approaches for each sector. For instance, a mining company is required to obtain an environmental permit from the Environmental Protection Agency (EPA) before operating under a mineral right. The Minerals and Mining (Local Content and Local Participation) Regulations, 2020 also sets out requirements for the use of Ghanaian expertise, goods and services, businesses, and financing in the mining industry.

Although ESG is not explicitly mentioned in Ghanaian laws, the country's legal framework embodies the fundamental principles and concepts of ESG. This integration can be observed across various legislative instruments, such as:

• The Constitution;

• The Bank of Ghana’s Sustainable Banking Principles and Sector Guidance Notes;

• The Companies Act, 2019 (Act 992);

• The Environmental Protection Act, 1994 (Act 490);

• The Minerals and Mining Act, 2006 (Act 703); and

• The Labour Act, 2003 (Act 651).

Furthermore, regulatory authorities such as the EPA, the Labour Commission, and the Bank of Ghana are tasked with enforcing aspects of ESG within their respective jurisdictions.

ESG due diligence requires a thorough understanding of the company's business model, products and services, and operational practices. This involves examining financial statements, governance structure, conducting employee interviews, and researching the company's public image. Therefore, in conducting an ESG analysis, we must assess the company’s ESG track record to determine if any areas of concern exist.

The following are some frequently used tools for conducting ESG due diligence in Ghana.

The use of frameworks such as the Global Reporting Initiative (GRI) provide guidelines for companies to report their sustainability performance. These frameworks help to standardise reporting practices and facilitate comparisons across companies and industries. For example, financial institutions such as Access Bank Ghana have committed to implementing the GRI sustainability reporting standards. By integrating ESG issues into its business strategy, the bank aims to enhance its sustainability performance while contributing to social and environmental well-being.

Environmental impact assessments (EIAs) are conducted to evaluate the potential environmental impacts of proposed projects or activities. In Ghana, the EPA oversees the EIA process and requires companies to conduct EIAs for certain types of projects, such as mining and industrial activities.

For example, before closing a mine site, the holder of a mining lease must satisfy the chief inspector of mines that each source of potential pollution and component of the mining project that is to be closed is designed to be stable in the long term.

The holder of a mining lease is also required to post a reclamation bond based on an approved work plan for reclamation. The manager of a mine must, among other things, ensure that tailings are discharged into a tailings storage facility with more than one point of discharge and that the location of the tailings storage facility meets specific minimum standards and is not likely to result in a threat to human life and/or the environment.

Engaging with stakeholders – including local communities, regulators, and investors – is essential for understanding their perspectives and concerns regarding a company's ESG performance.

Tools for stakeholder engagement may include surveys, public meetings, and community consultations. For example, Atlantic Lithium, a mining company located in the Mfantseman municipality, organised a series of meetings to engage with relevant stakeholders and enhance relationships concerning its mining operations. The discussions focused on key matters such as operational activities, compensation for affected farmers and landholders, and the company's social responsibilities towards the communities where it operates; namely, Abonko, Anokye, Kuntu, and Ewoyaa.

Questionnaires or surveys tailored to assess ESG factors can be used to collect data from companies or suppliers. This can take the form of employer-employee engagements, community engagements, speaking to third parties for information regarding a particular area, and conducting interviews in a particular field. These questionnaires typically cover a range of topics, including environmental management, labour practices, human rights, supply chain management, and corporate governance.

Compliance with local laws and regulations related to environmental protection, labour rights, health and safety, and corporate governance is essential for ensuring ESG due diligence in Ghana. Companies must stay informed about relevant legal requirements and incorporate them into their ESG assessments and practices. For example, in Ghana, any company with foreign participation must be registered with the Ghana Investment Promotion Centre before the commencement of its operations (see the Ghana Investment Promotion Centre Act, 2013 (Act 845)).

ESG due diligence helps with strategic decision making by giving useful insights into the potential effects of corporate actions on stakeholders, the environment, and long-term financial performance.

Adhering to international frameworks such as the United Nations Sustainable Development Goals (SDGs), implementing industry-specific guidelines (for example, the Ghana Extractive Industries Transparency Initiative for mining companies), and engaging with local communities and civil society organisations to ensure inclusive decision making and accountability are examples of industry best practices and standards for conducting thorough ESG assessments in Ghana.

Internal ESG due diligence is the process of assessing and investigating a company's ESG practices and performance. This involves examining the company's standard operating procedures and ensuring adherence to good corporate governance. Internal policies are also aligned with the SDGs to support the sustainability of the business, and to positively impact external due diligence.

In addressing the “E” factor, a manufacturing company based in Accra that produces consumer goods begins its internal ESG due diligence by evaluating and assessing how efficiently it uses its resources – such as raw materials, water, and energy – in its manufacturing processes. As a result, the company identifies areas where it can optimise resource usage, reduce waste, and improve overall efficiency.

In addressing the “S” factor, a technology firm based in Accra shows commitment to ensuring fair labour practices and employer-employee relationships by complying with local employment laws, providing competitive wages, and establishing transparent communication channels. Additionally, the company conducts regular feedback sessions and employee surveys to gauge job satisfaction and identify areas for improvement.

In addressing the “G” factor, a financial services firm in Kumasi takes a proactive approach to internal ESG due diligence by thoroughly reviewing its governance structures for regulatory compliance. The company stays abreast of evolving regulations in the financial sector, ensuring that all internal policies and procedures align with local and international standards. Regular audits and assessments are conducted to identify and rectify any potential compliance gaps.

External ESG due diligence, on the other hand, involves evaluating a company's sustainability and responsible business practices before initiating new business relationships/partnerships, or when considering investment opportunities.

Today, investors want to invest in businesses that have ethical, sustainable, and well-governed policies. This means scrutinising factors such as the entity's environmental impact, treatment of employees, community engagement, adherence to ethical business practices, and overall corporate governance.

The "E" aspect of external ESG due diligence focuses on evaluating the following environmental factors that may impact investment decisions:

• The company's compliance with environmental regulations; and

• The company’s efforts to reduce carbon emissions and resource usage.

The "S" aspect refers to the following social considerations that may impact investment decisions:

• Evaluating how the company manages its relationships with various social stakeholders and addresses social issues; and

• Examining the company's interactions with local communities, including social responsibility initiatives, philanthropy, and efforts to contribute positively to the well-being of the areas where it operates.

The "G" aspect relates to governance factors that affect how appealing the business is to investors. This entails assessing the following:

• The company’s compliance with the values of transparency, responsibility, and ethical behaviour; and

• The company's shareholder engagement and rights, such as voting rights, disclosure policies, and shareholder concerns.

ESG principles bolster a company's reputation and stakeholder trust by:

• Demonstrating eco-friendly practices such as energy efficiency and waste reduction, bolstering public perception;

• Engaging stakeholders and communicating openly about ESG initiatives, fostering trust through dialogue;

• Maintaining robust governance structures, transparent decision-making, and ethical leadership, enhancing perceived trustworthiness; and

• Adhering to legal and regulatory requirements, and being accountable for actions, instilling confidence among stakeholders.

Implementing ESG factors is crucial for business success in Ghana, where culture heavily influences business practices. Two approaches exist: internal and external implementation. Below are practical examples for perspective.

An external implementation of ESG is a business's conduct with its environment and stakeholders, such as its customers and the community. In the mining industry, for example, the land from which minerals are extracted may be owned by a family or a stool (a symbol of traditional authority over a tribe/clan in Ghana); hence, it must be granted by the head of the family acting in consent with the principal elders of the family or by the chief occupying the stool with the consent and concurrence of the principal elders of the stool. It is only thereafter that the mining licence will be granted by the government of Ghana. In such a situation, it is only possible to succeed by involving the community and ensuring that the business impacts it positively by giving back to the community.

An internal implementation of ESG is a business’s conduct with its most valuable asset: human resources. Companies in Ghana are mainly run by management and a board. For sustainability, SMEs must:

• Establish accountability measures for the managing director and the board;

• Implement policies to govern employees; and

• Improve financial reporting for effective decision making.

Performance management and training systems are practical tools for employee management as they become aware of their value in the company and produce results that ensure the SME'S productivity and sustainability.

In the banking industry, retaining a customer is crucial. To do this, the bank's employees must constantly engage with the customer by building trust and confidence through interpersonal relations. One way to achieve this is by speaking in the local language of the branch location, which customers are more familiar with. They must engage in community activities to give back to the community by engaging in promotional activities such as raffles or draws to keep the community engaged. The above are all efforts to build trust and confidence to retain business and be sustainable.

Implementing ESG due diligence is crucial for fostering sustainable business practices in Ghana. It helps companies to manage risks associated with their operations and ensures compliance with environmental regulations. For instance, mining companies must adhere to environmental regulations by registering with the EPA and monitoring resource consumption, emissions, waste generation, and overall ecological footprint.

It also promotes good labour practices and examines governance structures and ethical standards within organisations. For example, management must comply with decisions made by the board. Additionally, in cases where decisions exceed management's authority, such as setting financial ceilings for procurement, obtaining approval from the board is mandatory.

In conclusion, embracing ESG due diligence in the Ghanaian business landscape is not just a regulatory necessity but an essential one.

By embracing ESG principles, companies can manage risks proactively, build trust with stakeholders, and contribute positively to the sustainable development of their operations and the wider community.

As global awareness and emphasis on ESG factors continue to grow, integrating ESG due diligence into business practices is not just a choice but a necessary step towards resilience and competitiveness. This helps businesses to align with investor expectations and attract capital for growth and expansion.

Investors are increasingly considering ESG factors when making investment decisions; hence companies with strong ESG performance are more attractive to investors seeking sustainable and responsible investment opportunities.