BUILDING SUSTAINABLE BUSINESSES IN NIGERIA: A LOOK AT ESG POLICIES

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By Seun Timi-Koleolu and Olawale Atanda

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Introduction

Businesses continuously seek to balance profit-making with ethical standards. One effective approach to achieving this is by integrating sustainable and responsible practices into their operations. As a result, investors, particularly Venture Capital firms and institutional investors, are increasingly focused on responsible investing—choosing businesses that uphold ethical and sustainable practices. A key way for businesses to demonstrate this commitment to ethics and sustainability is by adopting sound environmental, social, and governance (ESG) practices, usually formalized in an ESG Policy.

More investors now require companies to have an ESG Policy either before or shortly after investment, a practice known as ESG investing. These policies help stakeholders understand how an organization manages the risks and opportunities associated with ESG factors. Consequently, companies seeking investments are increasingly ensuring they have these policies in place to guide their operations.

In this newsletter, we will explore the three pillars of ESG and how each can be practically applied by companies to guide their activities.

1. Environmental Practices

The first step for businesses is to audit their operations to understand their environmental impact and outline steps to mitigate harmful or undesirable practices. Below are some ways businesses can implement environmentally sustainable practices.

Sustainability in Office Administration – Simple changes, such as transitioning from paper to digital records, can significantly reduce waste and conserve resources. Companies could also consider eliminating paper usage altogether. Another effective practice is shifting from diesel generators to solar power for backup which reduces harmful emissions.

Supply Chain –  Improving sustainability throughout the value chain is another important area. Companies can require their service providers adhere to sustainable practices. For instance, a restaurant might pivot to using packaging companies that utilize biodegradable packaging and incorporate bicycles and electric scooters for deliveries to reduce emissions.

CSR Initiatives – As part of their Corporate Social Responsibility (CSR), businesses can support environmental causes, thereby demonstrating a commitment to environmental improvement by investing in initiatives that benefit the ecosystem.

2. Social Practices

Social practices are essential for businesses to enhance their social responsibility toward employees, customers, suppliers, and the communities they serve. Some of the initiatives include:

Diversity, Equity, and Inclusion (DEI) – Businesses should aim to build a workforce that reflects the diversity of their customers and the wider community. This means creating an inclusive environment where all employees are respected and given equal opportunities, regardless of race, gender, disability, or background. Practical steps could include implementing DEI policies that promote inclusive hiring, closing pay gaps, and providing comprehensive parental leave.

Employee Well-being – Companies should prioritize a supportive work environment that focuses on employee mental health, fair wages, and opportunities for career development.

Community Engagement – Businesses can also give back to the communities they operate in. For instance, a medical facility might show their commitment to the welfare of their local community by offering free health check-ups to residents.

3. Governance Practices

Sound corporate governance is the foundation of a sustainable business. Businesses should strive to uphold the highest standards of ethics, accountability, and transparency in their operations. Key areas of good corporate governance include:

Legal and Regulatory Compliance – Businesses must demonstrate a commitment to adhering to all applicable laws, including obtaining the necessary licenses for their operations. This also involves compliance with employment laws, such as the Labour Act, and international best-practice frameworks like the UN Guiding Principles on Business and Human Rights.

Governance Structure – Adopting governance practices suited to the company’s stage of growth is important. This may involve establishing a robust board structure, regularly reviewing governance practices, and ensuring transparent decision-making processes. Businesses can improve board diversity by maintaining balanced representation, particularly in terms of gender diversity. Also, it is advisable to adhere to governance regulations such as the Nigerian Code of Corporate Governance. For businesses in regulated sectors, compliance with sector-specific governance codes is mandatory. Such codes include the Central Bank of Nigeria’s Code of Corporate Governance for banks and other financial institutions and the National Insurance Commission’s Code of Corporate Governance for insurance companies.

Ethical Business Conduct – Businesses should have a code of conduct that outlines their commitment to high ethical standards, including zero tolerance for corruption, fraud, or unethical behavior. Implementing a whistleblower policy can further encourage employees to report concerns without fear of retaliation.

Data Privacy and Security – Businesses naturally deal with the personal data of their customers, employees, and other stakeholders in the course of their operations. Hence, protecting user data is a core responsibility of a business. Businesses should implement stringent data protection measures that comply with national and international regulations. Businesses should regularly audit their data systems to ensure that the highest levels of security is maintained. Nigerian businesses in particular must adhere to data protection laws and regulations such as the Nigeria Data Protection Act 2023 and the Nigeria Data Protection Regulations 2019.

4. Operationalizing and Measuring ESG

Once concerns are identified across the three pillars of ESG, businesses must clearly outline how their commitments to improvement will be implemented and measured. To operationalize ESG, businesses should:

-Encourage employees to integrate ESG considerations into their daily decision-making.

-Make ESG a regular agenda item in board and management meetings.

-Review ESG practices annually to ensure they remain aligned with the business’ core values.

Measuring progress involves publishing periodic ESG Reports to showcase the company’s advancements in environmental and social initiatives. These reports typically cover areas such as:

-Carbon footprint metrics and overall environmental performance.

-DEI statistics and results from employee engagement surveys.

-Governance practices, including updates on board composition.

-Contributions to the community.

Conclusion

Integrating ESG practices into business operations is no longer optional but a necessity for sustainable growth. By focusing on environmental, social, and governance pillars, businesses can not only meet regulatory requirements but also build trust with investors, employees, and the communities they serve.

Footnotes

  1. Please see our previous newsletters on ESG here – (i) https://pavestoneslegal.com/esg-investing-a-guide-to-attracting-investors/, (ii) https://pavestoneslegal.com/the-rising-importance-of-environmental-social-and-governance-esg-principles-to-the-business-environment/
  2. Please see our newsletter on the CBN Code of Corporate Governance here – https://pavestoneslegal.com/regulatory-update-cbns-new-corporate-governance-guidelines-for-banks-commercial-merchant-non-interest-and-payment-services-banks/

TAX REGULATIONS IN NIGERIA: UNDERSTANDING THE IMPACT OF RECENT REFORMS

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By Aderonke Alex-Adedipe and Ebikeniye Best

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Introduction

There is a current shift in the tax administration system in Nigeria which is observed in the promulgation and reform of existing regulations in recent months. Some of these reforms are aimed at enhancing revenue generation, improving compliance, and boosting economic growth, especially within pioneer sectors of the economy.

In this newsletter, we analysed some of these changes and their impact on Nigeria’s tax administration.

The Value Added Tax (VAT) (Modification) Order 2024 (the “Order”)

The Order was signed on September 1, 2024, and it modifies Parts I and II of the First Schedule to the VAT Act (“the Act”) and extends the list of exempted items under paragraph 2 of the Order. These modifications are set out below.

A. List of Exempted Goods

In addition to goods exempted under Part I of the First Schedule of the Act, items such as equipment and infrastructure related to the expansion of Compressed Natural Gas (CNG) and Liquefied Petroleum Gas (LPG), including conversion kits; Domestic Liquified Natural Gas (LNG) Processing Facilities and Equipment, Electric Vehicles, Parts, semi-knock-down units for the assembly of Electric Vehicles, Biogas and Biofuel equipment and accessories for clean cooking and transportation are now exempted from VAT. The Order also expands the list of related services exempted from VAT – CNG and LPG conversion and installation services and manufacturing, assemblage, and sale of electric vehicles.

B. Definition of Petroleum Products

Also, the definition of “Petroleum products” has been expanded to mean “feed gas for all processed gas, aviation turbine kerosene, premium motor spirit, automotive gas oil (AGO), household kerosene, locally produced liquefied petroleum gas, compressed natural gas, imported liquefied petroleum gas, and crude petroleum oils”. Thus, it expands the previously exempted items to include AGO, CNG, LPG and feed gas for all processed gas. Particularly, the VAT exemption for AGO takes effect from October 1, 2023.

Proposed Nigeria Tax Administration Bill, 2024 (the “Proposed Bill”)

On October 4, 2024, the Federal Government of Nigeria, proposed a bill which seeks to mandate all individuals engaged in banking, insurance and stockbroking to present a tax identification number (TIN) before opening or operating any account. The Proposed Bill is aimed at ensuring tax compliance and optimizing revenue collection across Nigeria.

Furthermore, the Proposed Bill sets out to grant the relevant tax authorities the power to automatically register individuals who fail to apply for a TIN. The tax authorities are also required to notify these individuals of such registration.

The Proposed Bill however states that non-resident individuals who earn only passive income from investments in Nigeria will not be required to register, rather they will provide the necessary information as may be required by the tax authority.

Also, the Proposed Bill provides penalties for non-compliance. Where a taxable individual fails to register for taxes, such an individual would be liable to a penalty of N50,000 for the first month and N25,000 for each subsequent month of failure to register.

Deduction of Tax at Source (Withholding Tax) Regulations 2024 (the “Regulation”)

The Federal Ministry of Finance in July 2024 issued the Regulation to streamline the withholding tax process in Nigeria. The Regulation, therefore, amongst other things provides for transactions which are exempted from withholding tax, such as distributions or dividend payments to a real estate investment trust or real estate investment company; across-the-counter transactions, technological or scientific innovation, etc.

[1] For more information, please see our previous newsletter.

The Impacts of the Reforms

Some noticeable impacts of these reforms include:

A. Enhanced Revenue Generation: As noted above, the recent shift in the tax administration in Nigeria, aims to enhance revenue generation. Thus, if the Proposed Bill is passed into law, there will be an increase in the number of taxpayers, and this will create an avenue for the government to generate funds.

B. Economic Growth: Ultimately, effective tax reforms can contribute to broader economic growth by providing the government with the resources needed for infrastructure, education and health services.

C. Energy Transition: The expansion of the list of VAT exempt goods and services under the Order shows the adoption of natural gas as an alternative source of fuel for Nigerians. This will help in making the environment more sustainable for Nigerians to live in. This can also increase foreign investments.

Conclusion

These reforms present opportunities for economic growth and development across emerging sectors such as clean energy. It is also expected that tax efficiency will improve the state of the economy, create jobs and an improved business environment where increased taxes are collected from individuals who ordinarily refrain from paying taxes.

 

REGULATORY UPDATE: THE NIGERIA FOREIGN EXCHANGE (FX) CODE

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By Seun Timi-Koleolu and Qasim Ogunjimi

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Introduction

In light of ongoing challenges in the Nigerian foreign exchange market, including recent distortions driven by speculators and illicit traders, the need for a robust regulatory framework has become increasingly urgent. In view of this, the Central Bank of Nigeria (CBN) has introduced the Nigeria Foreign Exchange Code (the “FX Code”), effective October 14, 2024, to enhance the integrity and operational efficiency of the Nigerian Foreign Exchange Market (NFEM). This comprehensive framework establishes robust guidelines for licensed banks and financial institutions, including Bureau de Change (BDC) operators, International Money Transfer Operators (IMTOs), FinTechs and others organisations engaged in wholesale foreign exchange transactions (“Market Participants”).

The FX Code aligns with the principles set forth in the FX Global Code maintained by the Global Foreign Exchange Committee (GFXC) and aims to promote ethical conduct and best practices within Nigeria’s foreign exchange landscape.

At the core of the FX Code are six key principles: Ethics; Governance; Execution; Information Sharing; Risk Management and Compliance; and Confirmation and Settlement Processes. These principles not only ensure high standards of ethical conduct and operational excellence but also allow for a transparent, competitive, and fair market environment. The focus of this newsletter is to examine the compliance requirements outlined in the FX Code, emphasizing its six key principles.

COMPLIANCE REQUIREMENTS UNDER THE FX CODE

To ensure that Market Participants align with the FX Code, several compliance requirements have been established. These requirements are designed to promote accountability, transparency, and adherence to high ethical standards in the foreign exchange market. The key compliance obligations include:

  1. Self-Assessment and Reporting: Market Participants are required to conduct a thorough self-assessment of their adherence to the FX Code and submit a detailed compliance report to CBN by December 31, 2024. This assessment must evaluate their current practices against the standards set forth in the FX Code. This report should highlight their level of compliance, strengths and identify any areas requiring improvement.
  2. Implementation Plan: Alongside the self-assessment, each Market Participant is required to submit to CBN by December 31, 2024, a compliance implementation plan that has been approved by its Board of Directors. This plan should detail the strategies and steps the institution will take to achieve full compliance with the FX Code.
  3. Quarterly Reporting Mechanisms: Following the initial compliance assessments and plans, Market Participants must also provide ongoing updates to the CBN. They are obligated to submit quarterly reports on their level of compliance to the Financial Markets Department of CBN within 14 days after the end of each calendar quarter. This process ensures continuous monitoring and reinforces the commitment to uphold the principles of the FX Code.
  4. Other Compliance Requirements: In addition to the primary obligations outlined above, Market Participants are expected to adhere to several other compliance requirements, including but not limited to:
  • Training and Awareness: Conduct regular training sessions for employees to ensure their understanding of the FX Code and its principles.
  • Internal Controls: Establish robust internal control mechanisms to continuously monitor adherence to the FX Code and detect potential violations.
  • Record Keeping: Maintain accurate and comprehensive records of all transactions, communications, and compliance activities to demonstrate adherence during audits.
  • Risk Management Framework: Implement a framework to identify, assess, and mitigate risks associated with FX activities, including monitoring market conditions and counterparty exposure.
  • Governance Structures: Establish clear governance structures outlining roles and responsibilities related to compliance, including appointing compliance officers and ensuring Board oversight.
  1. Enforcement of the FX Code: Please note that the FX Code provides that CBN may take appropriate enforcement and other administrative action including monetary penalties as provided for under the CBN Act 2007 and Banks and Other Financial Institution Act 2020 against any Market Participant for failure to comply with the FX Code.

CONCLUSION

The introduction of the Nigeria Foreign Exchange Code marks a significant milestone in the ongoing effort to stabilize and enhance the Nigerian Foreign Exchange Market. It is important for all Market Participants to familiarize themselves with the provisions of the FX Code and actively work towards meeting its compliance requirements.

 

For further readings on the Nigerian foreign exchange market, you can refer to our previous articles

  1. KEEPING UP WITH FOREIGN EXCHANGE REGULATIONS: NEW CBN MEASURES FOR INTERNATIONAL MONEY TRANSFER OPERATORS (IMTOs)
  2. RECENT CBN REFORMS IN THE NIGERIA FOREIGN EXCHANGE MARKET

FINTECH REGULATION IN NIGERIA: CBN DIRECTIVES ON PAYMENT TERMINAL SERVICES

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By Aderonke Alex-Adedipe and Hillary Okorotie 

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Introduction

As part of the Central Bank of Nigeria’s (the “CBN”) efforts to maintain a transparent transactions settlement system, the CBN issued a Payment Terminal Service Aggregator (PTSA) license to the Nigeria Interbank Settlement System (NIBBS) in 2011. In April 2024, the CBN also issued a PTSA license to Unified Payment Services Limited, therefore becoming the second PTSA license holder in Nigeria. This second license was issued to provide an efficient and transparent settlement system of all Point of Sale (PoS) transactions in the Country and to decentralize the sector.

Subsequently, via a circular released by the CBN on September 11, 2024, the CBN issued new guidelines requiring all Payment Service Providers (PSPs) to commence regularization and channel their operations through either of the two PTSA licensed operators.

In this newsletter, we highlight some of the functions of PTSA licensed operators and some of the important directives set down by the CBN to PSPs in Nigeria.

What are the Functions of a PTSA Licensed Operator?

Under the approved CBN Guidelines on the Operation of Electronic Transaction Channels, a PTSA has the following functions:

  1. Ensure all deployed PoS devices meet technical and operational standards through terminal certification processes.
  2. Establish a communication network that guarantees reliable PoS data traffic and ensures the service and availability expectations of the industry are met cost-effectively.
  3. Route all transactions from PoS terminals to the relevant acquirer or their designated third-party processor.
  4. Certify PoS terminals that meet the industry standards as approved by the CBN.
  5. Continuously monitor the availability and transaction traffic of all PoS terminals, providing detailed analysis and performance reports to the CBN and industry stakeholders.
  6. Ensure timely settlement for merchants and other relevant parties upon receiving settlement reports from card schemes or their appointed switches.

What are the New CBN Directives to all Relevant Stakeholders?

a.Transaction Routing:  All Acquirers1 must process transactions from PoS terminals at merchant and agent locations (whether on physical or electronic terminals) through one of the two Payment Terminal Service Aggregator (PTSA) licensed by the CBN.

b.Transaction Processing and Integration: PTSAs must ensure that all PoS transactions are sent to only those Processors2  that; (i) have been certified by the relevant payment scheme3;  (ii) are nominated by the Acquirer; and (iii) are licensed by the CBN. In addition, all licensed Processors must integrate with both PTSAs, giving acquirers the flexibility to choose which processor(s) and PTSA processes its transaction.

c.PoS Device Configuration: All Payment Terminal Service Providers (PTSPs) providing PoS devices must ensure that their PoS devices and software are configured  to route transactions through either of the PTSAs only, as directed by the Acquirer.

d.Monthly Reporting: In order to ensure compliance with the guidelines, all PTSPs are required to issue a monthly report to the CBN containing (i) details of the number of merchants and agents they manage and (ii) details of  the PTSA used to route the transactions. Each PTSA is also required to submit a monthly report outlining all transactions processed through its platform.

Conclusion

The decision of the CBN to decentralize the PTSA sector is commendable, creating opportunities for competition and providing participants with the ability to make a choice without over-burdening a single PTSA with excessive transactions.  It is also important that all relevant stakeholders align and adopt the new directives of the CBN to facilitate seamless electronic transactions in Nigeria.

 

 

Footnotes

1.Acquirers mean banks that enter into agreements with Merchants to accept payment using electronic payment methods.

2.Processors mean switching companies processing card transactions.

3.Payment schemes are systems or infrastructures used in processing electronic transactions.