Given its geography and demography, Egypt has been particularly supportive of international actions taken to mitigate the effects of climate change. Since Egypt’s ratification of the United Nations Framework Convention on Climate Change in 2005, Egypt has been continuously attempting to integrate the required policies to mitigate the effects of climate change on Egypt. The Egyptian Constitution, adopted in 2014, confirms the right of each citizen to a healthy environment and considers the protection of the environment a national duty. It also requires the State to take all necessary actions to protect the environment and to use it with caution to ensure the achievement of sustainable development and the rights of future generations therein. In light of this, Egypt Vision 2030 was announced in 2015 including a Sustainable Development Strategy and the National Climate Change Council was established to oversee the developments in this area. Further, the Investment Law was issued in 2017 requiring investments to be mindful of the society, environment and public health. In May 2022, a comprehensive National Climate Change Strategy 2050 was also issued.1
In July 2021, the Financial Regulatory Authority (FRA), in charge of supervising non-bank financial institutions and markets, including the stock exchange, issued two decrees requiring listed companies and non-bank financial institutions – subject to a specific threshold – to make annual disclosures pertaining to social, environmental and governance issues.2 During the same month, the Central Bank of Egypt (CBE) issued a paper for discussion regarding sustainable finance, as well as guiding principles for sustainable finance.3 The CBE requires banks to take all the necessary actions to implement those guiding principles. Some of those principles set out new standards for choosing projects for financing, which companies (shareholders and directors) will have to take into account.
The CBE issued mandatory regulations through a circular in November 2022 to require banks to:
- set up an independent unit that deals with sustainability and sustainable finance by 01 April 2023;
- starting 2024, submit periodic reports, including a quarterly report on sustainable finance activities, and a yearly sustainability report by 31 March of each year;
- starting July 2023, engage an environmental consultant certified by the Ministry of Environment to assess environmental risks for major projects seeking funding; and
- integrate sustainable finance policies into lending and investment policies.4
Directors’ Duties and Climate Change
While the Egyptian Companies Law No. 159 of 1981 (the Companies Law) does not explicitly state that directors have a fiduciary duty towards the shareholders, the company, the employees, the environment or any other stakeholder, directors are considered agents acting on behalf of the shareholders in their management of the company. Such understanding is explicitly stated in section one of chapter two of the old commercial code5 issued by Royal Decree No 1 of 1883. This understanding was also confirmed by various court decisions and Council of State opinions and rulings. Accordingly, under Egyptian Law, directors are only required to act in accordance with their mandate as determined by the shareholders of the company.
In addition to the above, non-bank financial institutions are subject to Corporate Governance Rules issued by the FRA Decree No 100 of 2020 (Corporate Governance Rules), which provide further explanation on directors’ role as stated in the current law but do not expand on the duties. The Corporate Governance Rules provide that the byelaws of the company must determine the competences of the board of directors and the obligations of its members in detail. Board members are required to dedicate sufficient time to fulfil their responsibilities and to observe the interests of the company and the shareholders.
Here, it must be noted that the Companies Law gives minority shareholders (those holding 5% or more of the capital) the right to request the suspension of general assembly decisions that work in favour of certain shareholders to the exclusion of others. Accordingly, board decisions that are taken in light of such mandate from the shareholders will be automatically suspended following the suspension of the general assembly decision. It follows that directors are expected to observe the interests of the company (as defined by the shareholders’ mandate to the board of directors) without prejudice to the interests of the minority shareholders.
In light of the above, directors will be required to observe the risks associated with climate change to the extent that they are required to do so by virtue of their mandate as determined by the company’s shareholders. In other words, the shareholders will have to mandate the directors to observe the risks associated with climate change in the management of the company and the directors will have to ensure the executive management’s compliance with this requirement. The extent to which the board of directors will be considered to have fulfilled its mandate is a matter that is determined by the relevant court.
Directors' Disclosure Obligations and Climate Change
As mentioned above, the FRA has issued a decree which requires boards of directors of listed companies to disclose – in their annual reports – the company’s environmental, social and governance practices. Further, if the issued capital of the company or its net shareholder equity exceeds 500m Egyptian pounds, then the board of directors will have to make certain climate-related financial disclosures.
The above disclosures are not expected to be in the form of narrative reports written by the companies. Rather, the FRA prepared two forms for the required disclosures and annexed them to the above-mentioned decrees. Each form includes a set of questions that reflect the standards that are being evaluated. The company is then required to answer each question with ‘Yes’ or ‘No’, and to write a clarification or comment on its answer. For example, the company may comment that it is in the process of taking specific procedures to comply with this element and that it is expected to finalise these procedures within a specific period. In some circumstances, the FRA determines the information that is required to be clarified.
The environmental disclosures include questions related to environmental operations and supervision, carbon emissions, used energy sources, use of water and waste management. Social disclosures include questions related to gender diversity, wages, turnover rates of employees, non-discrimination, professional health and safety, children, forced labour, and labour rights. Governance related disclosures include diversity in the board of directors, anti-corruption measures, codes of ethics, and data privacy. As to climate-related financial disclosures, they include elements of governance, strategy, risk managements, metrics and targets. The FRA has annexed to the above decisions a third annex in which it defines many of the terms used in the two disclosure forms.
The FRA further requires listed companies, targeted by these two decisions, to submit to the FRA a quarterly report stating the procedures that the company has taken or will take in relation to the required disclosures from 1 January 2022. The first of such disclosures will be made during 2023, with the board of directors’ report prepared for the fiscal year ending in 2022.
It must also be noted that this decision does not directly require listed companies to comply with certain standards; however, it requires them to disclose their policies and the extent to which they comply with the standards set out in the forms prepared by the FRA.
Practical Implications for Directors
In order to avoid breaching the FRA’s decree referred to above, boards of directors will have to
- immediately commence reporting quarterly to the FRA on the actions their companies started to undertake to prepare the required disclosures, and
- prepare the required disclosures as part of their annual reports, the first being due for submission in 2023. Those annual reports are then required to be presented to the shareholders in the annual general assembly meeting and will be an opportunity for the directors and the shareholders to discuss the actions the company should take to mitigate climate risks.
- Dr. Ziad Bahaa-Eldin, Thebes Consultancy
- Nora Harb, Thebes Consultancy
- Ismail Ramadan, Thebes Consultancy