The past year has highlighted the importance of environment, social and governance (ESG) practices for businesses. How do investors define ESG? Is it enough to operate a charity?
Companies around the world are looking to follow a well-defined ESG roadmap. Following the onset of a pandemic that demonstrated the complex nature of modern business with links across and within countries, there has been a substantial and renewed interest in the concept. The impact of consumers and businesses on the environment has steadily risen in importance but a three-prong holistic focus that includes social and governance matters is fast becoming common.
In countries like Cambodia witnessing rapid economic growth while also being vulnerable to climate change with a youthful population, it’s even more important for local companies to step up their ESG efforts.
Simply put, building the right foundations will make an impact on Cambodians as they get older as the country looks to follow a path traversed by other Asian countries.
What is ESG
According to McKinsey, the E in ESG, focusing mainly on the environmental impact of a company’s operations, can be assessed by the energy your company takes in (and the waste it discharges), the resources it processes, and the consequences for living beings. Most notably, E encompasses the impact on rising carbon emissions and how a company’s activities could impact climate change. Every company uses energy and resources so every company makes an impact, and is impacted by, the environment.
The S addresses the social relationships of a company and the reputation it fosters with people and institutions in the communities where it operates. S covers labor relations, particularly the policies respecting diversity and promoting inclusion. As every company operates within a broader, diverse society, S is rising in prominence.
G or governance covers the internal system of practices, controls, and procedures a company adopts in order to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders. Every company, given how it is a legal creation, requires effective governance. For many ESG-focused investors, strong governance comes ahead of the other two metrics.
A number of studies by the Harvard Business Review have indicated that companies with an ESG focus generally have reduced capital costs and will have better valuations, especially as more investors look to put money into companies with stronger ESG performance. Positive action and transparency on ESG matters can help companies protect their valuations as global regulators and governments increasingly require ESG disclosures, especially in emerging markets like Cambodia.
A concept gaining momentum
While the concept of “doing good” in business is not new, ESG values have only recently risen up the corporate agenda in Southeast Asia, and especially 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 come from companies within the financial services sector. It won’t be long until other sectors follow suit. If done right, not only will it boost Cambodia’s competitiveness and attract foreign investment, it will also improve consumer welfare.
Historically, companies across Southeast Asia usually focused on profits with ESG efforts apparent through the financial support offered either through a philanthropic or charitable arm or as part of corporate social responsibility efforts. The rationale would usually be that such initiatives would improve the company’s image while also making a difference but they would often be beholden to the whims of company leaders.
A more structured approach
Companies are now forming more structured programmes and looking to showcase their work on the ESG front through a well-designed programme. While traditional charity arms continue to operate, they are regularly supervised by senior management and work alongside ESG-focused teams (often called sustainability departments in large corporations).
For example, Prince Group led by chairman Neak Oknha Chen Zhi is doing exactly this in Cambodia. As a fast-growing conglomerate in Cambodia, Prince Holding Group states its ESG strategy has a three-pronged focus on education and youth development, healthcare, and community engagement.
The Group’s activities involve member companies like Cambodia Airlines, Prince Supermarket, Prince Bank, and Prince Real Estate, the latter of which has helped remodel the central business district in Phnom Penh.
Over a decade, Chen Zhi and Prince Group have diligently connected or supported talented professionals in order to establish a conglomerate that truly makes a difference to Cambodia. Chen Zhi has built a team that seeks to meet local and international norms and expectations. Over the past year, this has involved vaccines donations, large-scale donations in the aftermath of floods, an effective Covid-19 corporate response (that 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 as it will follow a master plan that will create a sustainable solution for living for the betterment of Cambodia.
Key to ESG success
To ensure the success of any ESG programs, there are five actions management can take: Adopt strategic ESG practices; create accountability structures for ESG integration; identify a corporate purpose and build a culture around it; make operational changes to ensure that the ESG strategy is successfully executed and commit to transparency and relationship building with investors.
Gone are the days when strong ESG performance by portfolio companies was a bonus for investors. Ensuring that companies that receive investment follow ESG practices are now part of any long-term investment strategy, and even companies are looking for investors who can support an ESG-inspired vision and look for funding that can support such plans.
Cambodian companies should step up their ESG efforts simply because the time has come to follow a systematic plan. Not only will it make it easier to convey to investors the seriousness of one’s mission, it will also reassure stakeholders like the media, the government, non-governmental organizations and local communities that the company is invested for the long haul.
As the pandemic has demonstrated, the world is linked in ways we could not have imagined before. Every company has a role to play in advancing our world towards a better future.
Cambodian companies have a role to play and will hopefully step up their ESG efforts in the future.