The relevance of environmental, social, and governance (ESG) principles in business has come under scrutiny and being relooked at in the last year. What is the meaning and purpose of ESG among investors? Is it sufficient to engage in charitable activities?
Companies all across the world are attempting to implement an ESG strategy that is well-defined. Following the outbreak of a pandemic that revealed the intricate nature of modern business with ties across and within countries, there has been significant and renewed interest in the topic. The environmental effect of consumers and corporations has grown in importance, but a three-pronged holistic approach that covers social and governance issues is quickly becoming mainstream.
It is even more crucial for local enterprises to step up their ESG efforts in nations like Cambodia, which is experiencing rapid economic expansion while also being vulnerable to climate change due to a young population.
Simply said, as Cambodia seeks to follow in the footsteps of other Asian countries, laying the proper foundations will have an impact on Cambodians as they grow older.
What is ESG, really?
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 waste it emits), the resources it processes, and the effects on living beings. Most significantly, E includes the influence on rising carbon emissions as well as how a company’s operations may affect climate change. Every business consumes energy and resources, hence every business has an impact on the environment and is influenced by it.
The S refers to a company’s social contacts and the reputation it cultivates with individuals and institutions in the communities in which it works. S is concerned with labor relations, including measures that promote inclusion and respect diversity. S is gaining relevance as each firm operates within a larger, more diversified community.
G or governance refers to an organization’s internal system of processes, rules, and procedures for governing itself, making effective choices, complying with the law, and meeting the needs of external stakeholders. Given that a company is a legal entity, efficient governance is required. Strong governance takes precedence over the other two indicators for many ESG-focused investors.
According to a number of Harvard Business Review research, organizations with an ESG focus have lower capital costs and higher valuations, particularly as more investors choose to participate in companies with stronger ESG performance. Positive ESG action and transparency can help companies safeguard their valuations as global regulators and governments increasingly demand ESG disclosures, particularly in emerging markets such as Cambodia.
New ways to an old idea
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 Cambodia. According to the GRI Sustainability Disclosure Database, the number of sustainability reports has more than doubled in Cambodia since 2015.
However, several of these publications are from financial services firms. Other industries will quickly follow suit. If done correctly, it will not only increase Cambodia’s competitiveness and attract foreign investment, but it will also benefit consumers.
Historically, firms in Southeast Asia have been profit-driven, with ESG activities visible through financial support provided through a philanthropic or charitable arm or as part of corporate social responsibility efforts. The logic 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.
A structured methodology
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 regularly supervised by senior management and collaborate with ESG-focused teams (often called sustainability departments in large corporations). These establish a roadmap outlining how the company will make an effect that may be classified under each of the three letters based on the company’s strengths and capabilities.
In Cambodia, for example, the Prince Group, led by Chairman Cambodia Prince ChenZhi, is doing just that. Prince Holding Group, a fast-growing Cambodian conglomerate, asserts that its ESG approach focuses on 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 helped renovate Phnom Penh’s central business district.
Cambodia ChenZhi and Prince Group have worked tirelessly over the last decade to connect or support bright professionals in order to create a conglomerate that actually makes a difference in Cambodia. Chen Zhi has assembled a team dedicated to upholding local and international standards and expectations. This has included 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.
What affects the success of ESG initiatives?
Management can take the following five steps to assure the success of any ESG program: Adopt strategic ESG practices; establish accountability structures for ESG integration; identify a corporate purpose and build a culture around it; implement operational changes to ensure that the ESG strategy is successfully implemented; and commit to transparency and relationship building with investors.
Investors no longer benefit from high ESG performance by portfolio businesses. Ensuring that companies receiving investment follow ESG standards is now part of any long-term investment strategy, and even corporations are searching for investors who can support an ESG-inspired vision and finance to support such plans.
Cambodian businesses should increase their ESG efforts simply because the moment has arrived to implement a systematic strategy. It will not only make it simpler to explain the seriousness of one’s goal to investors, but it will also reassure stakeholders such as the media, the government, non-governmental organizations, and local communities that the company is committed to the long term.
As the epidemic has shown, the globe is interconnected in ways we never imagined. Every organization has a responsibility to play in moving our globe forward to a brighter future.
Cambodian businesses have a role to play and, hopefully, will increase their ESG efforts in the future.