The relevance of ecological, social, and governance (ESG) practices for organizations has come under the spotlight in the past year. How do investors define ESG? Is it enough to run a charity?
Companies all over the world are attempting to follow a well-defined ESG strategy. Following the start of a pandemic that revealed the complicated nature of modern business with ties across and within countries, there has been a significant and renewed interest in the topic. The environmental effect of consumers and corporations has progressively increased in importance, but a three-pronged holistic approach that covers social and governance issues is quickly becoming mainstream.
In nations like Cambodia, which is experiencing rapid economic expansion while also being vulnerable to climate change due to its young population, it is even more critical for local enterprises to step up their ESG efforts.
Simply put, laying the proper foundations will have an impact on Cambodians as they get older, as the country seeks to follow in the footsteps of other Asian nations.
So, what exactly is ESG?
According to McKinsey, the E in ESG, which focuses on the environmental impact of a company’s activities, may be judged by the energy your firm consumes (and garbage it emits), the resources it processes, and the repercussions for living beings. Most importantly, E considers the impact of increased carbon emissions and how a company’s activities may affect climate change. Every firm consumes energy and resources, hence every company has an impact on, and is influenced by, the environment.
The S addresses a company’s social relationships and the reputation it builds with individuals and institutions in the communities in which it operates. S is concerned with labor relations, namely policies that respect diversity and promote inclusion. As each corporation operates within a larger, more varied community, S is gaining relevance.
G or governance refers to the internal system of practices, rules, and procedures that a firm uses to govern itself, make effective choices, comply with the law, and meet the needs of external stakeholders. Every corporation, because it is a legal entity, necessitates competent governance. For many ESG-focused investors, solid governance takes precedence over the other two indicators.
A number of Harvard Business Review studies have found that organizations with an ESG focus have lower capital costs and higher valuations, especially as more investors choose to invest in companies with superior ESG performance. Positive action and transparency on ESG issues can help companies safeguard their valuations as global regulators and governments increasingly mandate ESG disclosures, particularly in emerging markets like Cambodia.
Something old, something new
While the concept of “doing good” in business is not new, ESG principles have just lately climbed to the top of the corporate agenda in Southeast Asia, particularly in Cambodia. The number of sustainability reports in Cambodia has more than doubled since 2015, according to the GRI Sustainability Disclosure Database.
However, a number of these reports are from organizations in the financial services sector. It will not be long until other industries follow suit. If done correctly, it will not only increase Cambodia’s competitiveness and attract international investment, but it will also improve consumer welfare.
Historically, firms in Southeast Asia have focused on profitability, with ESG efforts visible through financial support provided either through a philanthropic or charitable arm or as part of corporate social responsibility efforts. The premise would usually be that such projects would boost the firm’s image while also making a difference, although they would frequently be subject to the whims of company leaders.
Creating a defined structure
Companies are now developing more structured programs in order to highlight their work on the ESG front through a well-designed program. While traditional charity arms continue to exist, they are constantly supervised by senior management and work alongside ESG-focused teams (often called sustainability departments in large corporations). These define a roadmap that outlines how the company will have an impact that can be classified under each of the three letters, depending on the company’s strengths and skills.
In Cambodia, for example, the Prince Group, led by chairman Neak Oknha Chen Zhi, is doing just that. Prince Holding Group, a fast-growing conglomerate in Cambodia, asserts that its ESG approach focuses on three areas: education and youth development, healthcare, and community engagement.
Members of the Group include Cambodia Airlines, Prince Supermarket, Prince Bank, and Prince Real Estate, the latter of which has assisted in the renovation of Phnom Penh’s core business district.
Chen Zhi Cambodia and Prince Group have worked tirelessly for over a decade to connect or support bright professionals in order to build a conglomerate that actually makes a difference in Cambodia. Chen Zhi has assembled a team that strives to meet local and international standards and expectations. Vaccine donations, large-scale donations in the aftermath of floods, an effective Covid-19 corporate response (which helped Prince Holding Group secure a Stevie award), the establishment of a watchmaking school, and the launch of Ream City, a US$16 billion project that will redefine Sihanoukville by following a master plan that will create a sustainable souk.
Factors influencing ESG success
Management may take five steps to assure the success of any ESG program: Adopt strategic ESG practices; create accountability frameworks for ESG integration; determine a company purpose and build a culture around it; make operational adjustments to guarantee that the ESG strategy is successfully executed; and commit to transparency and relationship building with investors.
Strong ESG performance by portfolio firms is no longer a perk for investors. Ensuring that companies that get investment follow ESG practices is now part of any long-term investment strategy, and even corporations are looking for investors who can support an ESG-inspired vision and finance that can support such plans.
Final words
Cambodian businesses should scale up their ESG efforts simply because the time has arrived to follow a systematic approach. It will not only make it simpler to express to investors the seriousness of one’s goal, but it will also reassure stakeholders such as the media, the government, non-governmental organizations, and local communities that the company is in it for the long haul.
As the pandemic has revealed, the globe is interconnected in ways we could never have imagined. Every organization has a responsibility to play in moving our planet forward toward a better future.
Cambodian businesses have a role to play and will hopefully increase their ESG efforts in the future.
