A LEX Africa webinar on Environmental, Social and Governance (ESG) issues on the continent.
Natalie Scott, director of Werksmans Attorneys, the LEX Africa member firm for South Africa, moderated the webinar and introduced the speakers from other LEX Africa member firms, namely Seyram Dzikunu, a partner at Ghanaian firm Bentsi-Enchill, Letsa & Ankomah, Hend El Hakim, a partner at Egyptian firm Marghany Advocates and Deogratias Nteziryayo, an associate at Rwandan firm, Certa Law Chambers. LEX Africa is an alliance of independent law firms which was formed in 1993 and has over 700 lawyers in 30 African countries.
SIM card dumping case study
During the webinar, Scott presented the speakers with a theoretical example of a case involving SIM cards that covered many aspects of ESG and the associated risks that can arise due to e-waste issues.
This case study features ABC Technology, a company that manufactures SIM cards, is incorporated in South Africa and has two shareholders, one in Egypt and one in Rwanda.
The SIM connects the user to their chosen mobile network operator and is made up of an electrical circuit which stores the user’s information and the network operator’s information as they are required to do and is made up of silicon and certain metals like phosphorus and gold.
ABC Technology prides itself on its governance and policies and has processes and procedures in place to monitor compliance with all local ESG-related laws, and in particular has an extended producer responsibility scheme in place to minimise e-waste relating to the reduction, reuse, recycling and recovery of e-waste. It also complies with all reporting requirements.
ABC is the sole shareholder of three companies in Africa, namely DF packaging a company established in Ghana, JKL Manufacturing and Distribution, a company established in Egypt, and MNO Suppliers a company established in Rwanda.
ABC Technologies exports the manufactured SIM cards to DF packaging, JKL Manufacturing and Distribution and MNO Suppliers, each of which packages the SIM cards itself, using recycled paper and plastic, to sell to customers in the local market.
Recently there have been reports of significant deposits of e-waste in landfills in Ghana and Egypt a large portion of which are SIM cards, and which carry the ABC Technology branding and the DF Packaging branding.
The SIM cards found in landfills in Egypt carry the ABC Technology branding and the JKL Manufacturing and Distribution branding.
In Rwanda, the company discovered several thousand SIM cards claimed to have been sold to local customers that have been abandoned in a warehouse on the outskirts of Kigali. All bear the ABC Technology and MNO Supplier branding.
Each company has conducted its own internal investigation and it was discovered that in Rwanda the SIM cards were not actually sold but were stolen from the premises of MNO Suppliers by an employee in an elaborate cover up, and some of which ended up in the landfill.
In Egypt there have been claims that the SIM cards were not compatible with the local mobile network operators, and they were collected by independent third parties who were not paid by or related to JKL Manufacturing and Distribution and dumped in a landfill. JKL has no knowledge of the incompatibility claims or of the dumping.
In Ghana, the company paid a registered e-waste collector to dispose of the SIM cards in a responsible manner, but the e-waste collector merely collected the cards and illegally dumped them.
Key ESG issues in each jurisdiction
This case study set the scene for highlighting the key ESG issues arising in Egypt, Rwanda and Ghana and explains why these are important from a legal perspective.
Hend ElHakim from Egypt said the main focus relates to climate change, which plays an increasingly important role in e-waste management in Egypt. “Recently there have been many governmental conferences and seminars to raise public awareness on this aspect. Also, we have been facing a huge problem with e-waste and waste in general, especially dumping in seas and water fields, and one of the main problems currently is waste management, especially e-waste, and we have recently enforced a law to regulate this in 2020.”
Seyram Dzikunu from Ghana agreed that one of the key ESG issues is climate change. “Ghana is a signatory to the Paris Agreement and, recently, in compliance with Article 4 of the Paris Agreement, it updated its nationally determined contribution, and in that update, it set a 10-year target for itself from 2020 to 2030. Ghana hopes that by implementing its updated nationally determined contributions, it will be able to mitigate the impact of climate change on the country’s economy and its citizens.”
To operationalise Article 6 of the Paris Agreement which deals with carbon emission reduction and implementation of nationally determined contributions, the government has established the Ghana Carbon Registry, an online database for quantifying and verifying greenhouse gas emissions and reductions of projects, issuing carbon credits from such projects and tracking carbon credits in an efficient and transparent manner.
Another topical issue is energy transition, and Ghana has laws plans and policies creating an enabling environment for energy transition, these include the Renewable Energy Act, 2011 (Act 832) and the Renewable Energy Master Plan. These laws and policies have set targets for the country to achieve a gradual transition from fossil fuels to renewable energy. The 2022 National Energy Statistics show that, in 2021, the energy generation mix stood at approximately 34.1% from hydro, 65.3% from thermal and 0.55% from renewables. The share of renewables in the mix has increased from the 2020 share of 0.28%. Although this shows some level of progress, this is far below the set target of 10% from renewables by 2030.
Corporate governance is a further issue receiving attention in Ghana. “In the past few years, we’ve had a meltdown in the financial sector and a lot of these companies were not following corporate governance standards and rules. The Bank of Ghana in 2018 issued a Corporate Governance Directive to all financial institutions and they’re required to comply with it. Then in 2019, we passed a new Companies Act, which sets up a framework for corporate governance, and promotes new prudence in management, effective boardroom practices and shareholder activism. And last year, the Institute of Directors launched a national corporate governance code, which they hope will be the national standard that stakeholders will follow in dealing with corporate governance issues”.
Deogratias Nteziryayo said the top concerns in Rwanda are climate change, inclusive technology, and compliance and accountability. Speaking on climate change, he highlighted that Rwanda has experienced a temperature increase of 1.4% since 1970 (which is higher than the global average) and this is expected to rise to 2.0% by the 2030’s. An extreme increase in rainfall is another issue that has established climate change as the first priority in Rwanda. “Rwanda has adopted a policy action plan that is going to facilitate the maintenance of its environment.”
Another important issue is waste and pollution, with the promotion of the circular economy being one of the policy directions that Rwanda has taken. This includes the implementation of the national e-waste policy, “mainly since e-waste management is not effectively executed, we cannot guarantee climate stability,” said Nteziryayo. The vision of the policy is to ensure the effective and efficient management of e-waste for a safe environment and human health protection towards a sustainable green economy development. He also highlighted that in Rwanda there has been an increase in promoting the use of electric vehicles to cut carbon emissions. This includes tax-free imports of electric vehicles.
Moving on to the topic of inclusive technology and social justice, he said Rwanda envisions to establish itself as the financial hub of Africa, with the goal of promoting inclusive and accessible technology for all. In addition, the recent establishment of a fintech regulatory sandbox will enable financial institutions and fintech players to experiment with innovative financial products or services in a live environment, he said. “With this initiative, we will assess whether the benefits of innovative ventures are accessible to every Rwandan and will not violate other rights such as data protection and privacy.”
Rwanda also ranks among the best countries in Africa as far as governance and reduced levels of corruption is concerned due to policies and strategies to ensure compliance and accountability.
Scott noted “as demonstrated by the speakers, ESG is being taken seriously throughout Africa” before moving on to speak about South Africa. South Africa has had a second publication of an entirely new climate change bill that has yet to be passed, and which replaces the 2018 bill. There has also been a significant uptake in respect of particularly environmental issues in the form of the National Environmental Management Waste Act. “There are also significant moves towards extended producer responsibility programmes right from production to completion, to distribution and then bringing it back within the life cycle of waste.” South Africa currently has electricity cuts several times a day, so renewable energy has again become a significant focus and there has also been some movement in relation to electronic vehicles. There is also a Green Paper on electric vehicles setting out what is anticipated and what the guardrails will be.”
Scott also noted a raft of biodiversity-related legislation has also come into effect in terms of what is required by persons and companies to deal with sustainability issues arising in the environment and preserving the general life cycle of all the organisms within a biosphere. “We have also seen the number of penalties being increased in relation to failure to comply with any ESG laws, for example, in relation to e-waste, which is the topic of this discussion. The penalties have been increased and we are now looking at fines of 10 million South African rand or 10 years in jail, with the risk of jail time especially focusing people’s minds on the risks. So, I think there has been a significant amount of progress.”
Back to the SIM card case study
Scott then returned to the ESG aspects of the case study involving the illegal dumping of the ABC SIM cards in their respective jurisdictions.
Dzikunu was asked to explain what the key risks are in relation to the example that it would raise for DF Packaging in Ghana. “The Hazardous and Electronic Waste Management Control Act, 2016 (Act 917), and Hazardous, Electronic and Other Waste (Classification), Control and Management Regulations, 2016 (L.I. 2250), require the manufacturer or distributor or wholesale equipment supplier to take back used or discarded electronic equipment that is manufactured or sold, for recycling.” In other words, they are required to follow the extended producer responsibility rule and will be responsible for their product until the end of its life and must ensure it is disposed of responsibly, in an environmentally friendly manner. Anybody who is responsible for the collection of waste is also required to make sure that they dispose of it in an environmentally sound manner that protects human health and the environment against adverse effects that can result from hazardous waste.
From the facts provided, ABC technology exported the SIM cards to DF Packaging. Under the laws of Ghana, DF Packaging would therefore be the recipient of the SIM cards, so they would be the importer. They hired a registered e-waste collector to collect the waste, but the e-waste collector did not dispose of the product in an environmentally sound manner, as is required by the law in Ghana. So, DF Packaging would be liable for breaching the law because of the extended producer responsibility principle, which requires them to make sure that products are properly disposed of. Just hiring someone to dispose of the product is not sufficient. They need to make sure it is done. They would be liable for a fine ranging from $1000, to almost $11,000. There’s also a potential jail time of six months to two years. Where a company is found liable under the law, the officers and managers of the company could be personally liable as well. So that is the legal risk that the company is going to face. The recycler would also face a fine and possible imprisonment.
There’s also a reputational risk noted Dzikunu. If a company doesn’t follow international standards and local laws and the branding of the two companies ABC and DF Packaging is clearly displayed on the products, consumers, regulators and the community will associate the non-compliance and improper behaviour with these companies and their products, and this may result in consumers choosing not to patronise the product of a company that does not comply with environmental laws, thereby resulting in lower sales of the products. “There is also the issue of financial and investment risk.” Increasingly financing institutions are not only focusing on creditworthiness, but also whether or not companies are complying with ESG requirements. Investors have become socially conscious, and they are looking for companies that are compliant with ESG requirements. Thus, the dent in the reputation of DEF Packaging could affect its ability to obtain financing from banks and international corporations. Also, if DEF Packaging is a listed company, there could be a resultant drop in the value of the shares of DEF Packaging due to the bad publicity resulting from the illegal dumping.
In addition, there may be contractual risk where DEF Packaging has contracts with service providers and suppliers, some of these contractual agreements have representations and warranties where the parties undertake to operate in compliance with ESG principles and applicable local laws. Breaching these local laws and environmental principles would consequently mean breaching these supply or service agreements. Thus, DEF Packaging faces the possibility of having more contractors and suppliers refusing to work with them due to the breach of contract and the bad reputation they may suffer from being associated with DEF Packaging.
With regard to Rwanda, Nteziryayo noted “we adopted regulation on e-waste in 2018 and we also have regulations on environmental protection which impose not only monetary obligations, but also obligations on producers of electronic devices and equipment such as SIM cards producers like ABC, to manage the e-waste relating to their product.” Producers are required to register with the authorities and provide information regarding the estimated quantities and complete descriptions of their product imports. They must also establish and finance policies for the collection and management of e-waste. Government and other stakeholders consistently raise awareness about the importance of sound e-waste management and compliance with audits and inspections conducted by regulatory authorities.
Nteziryayo noted that the SIM cards were not actually sold in Rwanda, but were stolen from the premises of MNO Suppliers by an employee. The fact that the SIM cards were then abandoned could however still result in liability for MNO Suppliers with regard to internal compliance, internal management and audit issues. “The primary liability for the penalty or fine is upon the responsible individual. As for the ABC Technologies, according to Rwandan company regulations, liability is limited to the company and doesn’t extend to shareholders. So, ABC Technologies would not be liable unless it is established that the shareholder has abused the company status form for fraudulent or illegal purposes or abused the company’s assets as if they were personal assets.”
El Hakim commented on the key risks for JKL Manufacturing in Egypt and noted that in order for JKL to import the SIM cards, they needed to get several permits and approvals and licenses. She said the risk for JKL would be similar to Ghana. “We also have extended producer liability. So, even if it did not produce the SIM cards, they would still be liable. The fines have been heavily increased and can reach up to 1,000,000 Egyptian Pounds, with the fine doubling if this is not the first contravention. Up to five years in prison may also be imposed and this risk is an important incentive to ensure compliance.”
“Practically speaking, the Egyptian authorities will not be able to enforce any penalties on a foreign entity, especially if they are not present in Egypt, but they will definitely apply them to the Egyptian entity. Reputational damage is also an important consideration.
When it comes to financial risk Scott highlighted that significant fines play a role in preventing non-compliance. “But I think it’s jail time that’s the biggest deterrent and there are a number of areas in terms of potential double jeopardy involving whether or not the entities in one jurisdiction could potentially pass on liability to another. And shareholder activism is increasingly important.”
El Hakim noted that “shareholder activism is quite impressive in Egypt and has included them dedicating their social media and TV advertisements to fund campaigns for public awareness and to encourage consumers to even return the products. Some shareholders and some companies have even hired employees to go to consumers’ homes and collect, for example, the unused and the used cooking oil for recycling purposes. They also hand out pamphlets on recycling and the dangers of waste to raise awareness, because that’s relatively new to the Egyptian population. Sometimes the shareholder will even personally hire people to collect the used cooking oil, the used product, the unneeded products from the consumers’ homes and give them money or fresh cooking oil for it.” Egyptian law has also recently introduced the “Green Label”. “It’s a small green sticker that is put on the product of the producers to notify that they are trying to recycle their products and that they are basically in line with the with the latest clause for waste management.”
Dzikunu added, “Ghana has passed a new Companies Act which sets up a framework for corporate governance and promotes prudent management, effective boardroom practices and shareholder activism.” She said shareholders have a right to ensure that their companies are being properly managed so they can insist on putting in place more effective policies that the company should implement.