Evaluating ESG portfolio monitoring mechanisms in FDI-backed firms: A knowledge attitude practice (KAP) perspective on environmental sustainability in Kenya

This study assesses how monitoring systems are organized and understood in the operationalization of Environmental, Social, and Governance (ESG) under Foreign Direct Investment (FDI) funded firms in Kenya. The Knowledge–Attitude–Practice (KAP) framework was used to examine whether knowledge of ESG requirements translates into attitude and practice and also how accountability, incentive mechanisms, and governance impact implementation.Using a mixed-method design, a census was conducted on 67 firms that are backed by DFI and are registered by the Kenya Investment Authority in sectors that include infrastructure, agribusiness, and manufacturing. Semi-structured interviews and structured questionnaires were used to collect data from project managers and ESG focal persons. Chi-square tests, logical regression, and descriptive statistics were used to analyze qualitative data, as thematic coding was used to establish organizational practices and challenges. Study findings revealed a high knowledge of ESG, with 99.3% of firms having undertaken an Environmental and Social Due Diligence (ESDD), and those that had established Environmental and Social Action Plans (ESAPs) were 87.7%. However, there were no significant differences (p=1.0) between ESG gap identification and ESDD, showing weaknesses in investigative consistency. Despite 96.7% of firms including ESG clauses in their contracts, firms with proper Environmental and Social (E&S) indicators were only 42.7%, while 60.7% had no Key Performance Indicators (KPIs) incorporated into their ESG indicators. Logical regression results indicated that firms that had included ESG on their board agendas had 3.3 times more likelihood of integrating ESG in their executive KPIs (p=0.02319). Interest discounts, equity schemes, and bonuses that were being used as incentive mechanisms did not have any significant impacts on ESG-based disbursements. Executive appraisal embedded with ESG, institutionalizing milestone-linked disbursements, and financial incentives that are aligned with outcomes of sustainability are important. Regulators should strengthen ESG personnel capacity and require standardized reporting of reputational risks. This is the first study to apply the KAP framework used to monitor ESG in DFI–backed firms in Kenya. It contributes to a behavioral perspective to ESG research, showing that knowledge and attitudes do not always translate to practice, and proposes a governance-incentive-monitoring model for emerging markets.