Sustainability is no longer a secondary focus in the East African investment landscape. Rather, it is a deal filter, a pricing lever, and a route to increased cross-border capital.
Alternative investors can no longer afford to rely on broad, generalist approaches to articulate and quantify the effect of Environmental, Social, and Governance (ESG) drivers in their portfolios.
On the contrary, targeted, globally relevant yet deeply contextual disclosures are a must-have for investors, especially in Africa, where varied policies across countries can make it difficult to ensure alignment with global best practices.
Handling non-monetary indicators within ESG is essential for Private Equity (PE) firms as it provides stakeholders with a comprehensive understanding of a company’s operations and long-term viability through an impact lens, supplementing standard financial metrics.
As the regulatory environment becomes more stringent and investor demands for sustainable practices increase, a strong ESG strategy supported by precise data tracking will determine the value, expansion, and resilience of PE portfolio companies.
Kenya, for example, launched the jurisdictional adoption of ISSB (IFRS S1, S2) that follows a phased approach and steers the market toward meaningful and material sustainability disclosures instead of traditional CSR reports.
Increased stakeholder and investor scrutiny is another resulting factor, where institutional investors demand ESG compliance as a prerequisite for financing.
Firms without verifiable ESG metrics risk exclusion from funding pipelines. Locally, pension funds and sovereign wealth vehicles like Kenya’s Public Investment Fund are integrating ESG screening in asset allocation.
ESG-aligned firms gain reputational and financial advantages, creating a competitive edge. Evidence from the IFC’s 2024 Green Returns in Emerging Markets report shows that ESG-integrated funds in Africa outperform peers by up to 12 percent over five years due to reduced operational risks, stronger governance, and better stakeholder engagement.
Integrating ESG factors into PE investments offers benefits that extend beyond mere value enhancement and risk mitigation. General partners who incorporate ESG values into their investment strategies are often more successful in attracting capital than those that do not.
As buyers increasingly evaluate ESG performance in their decision-making processes, companies boasting strong ESG ratings frequently achieve higher valuations during exit transactions.
In response to the need for ESG alignment, alternative investment companies should include an impact lens in their investment cycles end-to-end, from sourcing to the point of exit.
This involves translating ESG factors into measurable financial impact that can be audited such as energy efficiency (OPEX), compliance (fines/levies avoided) among others.
To remain investible, firms must develop clear ESG governance systems rather than ad hoc initiatives. For example, ESG Policy Frameworks defining how sustainability is embedded across investment decisions, portfolio monitoring, and exit strategies anchored on global frameworks like SASB, IRIS+, and TCFD.
Dedicated ESG teams and ESG training is essential to equip investment professionals with skills in impact measurement, carbon accounting, and climate-risk modelling. ESG quantification now requires data-driven financial analysis and a direct link of sustainability metrics to free cash flow.
The need for ESG integration in Africa is becoming increasingly critical. During the recently concluded African Climate Summit held in Addis Ababa on September 8, 2025, it was clear that Africa needs to shift its focus from aid to investment.
Across East Africa, regulatory frameworks are tightening. The Nairobi Securities Exchange (NSE) ESG Disclosures Guidance Manual (2022) guides listed entities in Kenya on ESG reporting, which should be on a materiality basis.
Similarly, Kenya’s Capital Markets Authority (CMA) is exploring ESG disclosure requirements for private funds. Globally, investors are fast aligning with the EU Sustainable Finance Disclosure Regulation (SFDR) and ISSB standards, meaning that local firms must disclose ESG data to attract international capital.
For instance, Rwanda’s Green Taxonomy passed Cabinet approval in 2025, giving investors a shared language for “what counts as green” and is useful for fund mandates and labelled instruments.
East Africa’s investment future will be shaped by those who can measure, manage, and monetise sustainability now. ESG has moved from a compliance exercise to a performance language that investors now expect.
For firms and funds, the challenge is to turn ESG into a strategic advantage through credible data, skilled teams, and transparent reporting. Those who embed sustainability into decision-making will not only meet disclosure requirements but also attract global capital, build resilient businesses, and lead the region’s next decade of sustainable investment.
The writers are transaction advisory and sustainability consultants, respectively at Ernst & Young LLP.
