ESG in Cambodia: While the concept of ‘doing good’ is not new to businesses in Cambodia, there is a general lack of awareness of what Environmental, Social and Governance (ESG) actually means; it is a mistaken notion at worst or a conceptual ideal at best, but certainly not a priority concern or even an aspirational goal for most businesses here. In contrast, the adoption of ESG is fast becoming a global imperative for international businesses, especially in the aftermath of the COVID-19 pandemic. ESG in some sort becomes the new NTB (Non Tariff Barrier) for Western markets. 

According to a Deutsch Bank report, the pandemic has “reignited the societal debate about sustainability: harmful emissions have declined as a consequence of the global restrictions on movement and contact with other people, reduced economic activity and the slump in travel by air and other modes of transport, while water quality has improved”. Many now have a greater awareness of “how susceptible the world is to disasters caused by our way of life and doing business to date”.

Consequently, as more international investors and businesses increasingly demand that their suppliers and partners be ESG-compliant, and before the adoption of more stringent ESG requirements in business practices and contractual agreements become an immutable norm, particularly in regional and global legislation, there is pressing urgency for businesses in Cambodia to better prepare themselves to face this incontrovertible trend. Otherwise, they risk losing out to their ASEAN counterparts and competitors that are more ESG-aware and ready. 

In this article we will spell out what ESG means, conceptually and in tangible business practices, what the implications are if businesses remain non-compliant and what international players will be looking at when they look for ESG-ready or ESG-compliant businesses to collaborate with.

If you need further expert insights and in-market knowledge on ESG or the Cambodian market, contact us today.

What is ESG?

ESG stands for Environmental, Social, and Governance, encompassing a multifaceted approach to sustainable and responsible business practices. Environmental (E) focuses on a business’s impact on the environment, including energy consumption, waste generation, and climate change mitigation. Social (S) involves interactions with people and communities, emphasizing diversity, inclusivity, and responsible workplace policies. Governance (G) centers on internal governance, ethical decision-making, legal compliance, and responsiveness to stakeholders.

What is the difference between Corporate Social Responsibility (CSR) and ESG?

CSR is when a business involves their staff, and sometimes provides resources, for the betterment of the communities they operate in. For example, litter collections and other community and social volunteering. CSR is usually organized at a management level.

Importantly, ESG puts the ‘G’ – Governance – at the beginning and center of a company’s environmental and social strategies (perhaps it should be renamed GES!).

The board and leadership of a business commits to good governance practices and sets an example, as well as the strategies that the business will implement. This includes qualifications / certification of the board members, following compliance procedures and identifying key areas of business operations, such as climate change, human resources, sustainability, energy, waste and community impact.

Internationally, ESG has gained prominence as a critical aspect of business sustainability. Companies committed to ESG principles tend to enjoy lower capital costs, higher valuations, and improved access to finance. Moreover, the demand for ESG compliance from international investors and businesses is growing, making ESG readiness a competitive advantage.

What is the local interpretation of ESG adoption in Cambodia?

In Cambodia, ESG awareness is relatively low among businesses. While ethical business practices have been present, the systematic adoption of ESG remains limited. Sustainability reports in Cambodia have increased, particularly in the financial services sector, signalling a growing awareness of the importance of ESG. Historically, ESG efforts were often philanthropic or CSR initiatives, but as they are now transitioning into strategic, well-designed programs, Cambodian businesses need to step up their efforts in this imperative.

What are the challenges of ESG adoption in Cambodia?

Several challenges are apparent when it comes to ESG adoption in Cambodia, including:

  • Lack of Awareness: Many Cambodian businesses are unfamiliar with ESG principles and their significance, and why the traditional CSR or simply adopting the use of solar panels on rooftops do not qualify them as ESG-ready.
  • Complexity: ESG covers a wide range of issues, making it challenging for businesses to understand and implement.
  • Cost: ESG implementation is often viewed as an additional expense and unimportant hassle, especially for small and medium-sized businesses.
  • Data: Measuring and tracking ESG performance can be challenging in the absence of a standardized reporting framework.
  • Risks of Non-Compliance: Businesses that do not embrace ESG risk losing out on international investment opportunities and collaboration opportunities. Non-compliance can also hinder access to financing and affect competitiveness.

What are the potential benefits of ESG adoption in Cambodia, or at least readiness to adopt?

Businesses that are ESG-ready could enjoy various advantages, including:

  • Access to Finance: ESG-compliant businesses attract investments from both international and local sources, and are candidates for consideration by non-traditional sources such as impact investment, green financing, among others.
  • Cost Reduction: ESG practices enhance efficiency, reduce waste, and manage risks, leading to longer-term cost savings.
  • Enhanced Reputation: ESG-ready businesses are perceived as responsible and sustainable, boosting brand value and customer loyalty.
  • Competitive Advantage: ESG readiness sets businesses apart in an increasingly ESG-conscious market.

How can you raise awareness and readiness of ESG in Cambodia?

To improve ESG awareness and readiness in Cambodia, businesses are advised to establish governance, meaning that they create transparent governance structures and leadership teams to look into ESG practices and tracking. They should also look to set realistic goals, by developing an ESG plan that is achievable.

Businesses should also look to engage stakeholders, secure buy-in from employees, customers, and suppliers, which are crucial to becoming ESG-ready. Companies can seek the right expertise by collaborating with external organizations and consultants for guidance.

Monitoring and reporting is essential in order to regularly track and report on ESG performance and key learnings.

What are some examples of movements towards ESG principles in Cambodia? 

Case Study: Textile, Apparel, and Footwear Industry – ESG in Cambodia.

In Cambodia, the textile, apparel, and footwear industry has begun to embrace ESG principles. The Garment sector actually adopted Ethical Labor Standard way back in the early 1990s though it was not yet labeled ESG as such but it had all the flavor of it. Factories are installing solar panels to demonstrate environmental responsibility; this is an important first step, but is by no means the only requirement to becoming ESG-ready or ESG-compliant. Nevertheless, the industry recognizes the growing significance of ESG compliance and implications of non-compliance, particularly in response to international regulations like the German Due Diligence Law.

The Cambodian government acknowledges the importance of ESG adoption, especially in sectors like textiles, garments, footwear, and travel products, and has made moves to better recognize that adherence to ESG principles is vital to meet the demands of global buyers and remain competitive.

The significance of renewable energy (RE) policies is not lost on stakeholders in Cambodia’s industrial sector. EuroCham’s white paper, issued in September 2022, advocates for the adoption of effective RE policies and calls upon the government to eliminate capacity charges on solar energy while wholeheartedly embracing renewable sources. Recognizing the role of RE as pivotal for international manufacturers and investors seeking high-quality production, carbon neutrality, and sustainability, this directive underscores its paramount importance.

Moreover, Cambodia’s proactive stance in submitting the “Long-term Strategy for Carbon Neutrality (LTS4CN)” to the UN Framework Convention on Climate Change (UNFCCC) on December 31, 2021, deserves commendation. This strategic roadmap is expected to stimulate Gross Domestic Product (GDP) growth by approximately three percent and generate 449,000 jobs by 2050, thereby unlocking the economic benefits of sustainable practices.

Cambodia has also emerged as the first country in the ASEAN region to launch the Strategy for Carbon Neutrality 2050 in 2022. This ambition aligns with the Cambodian government’s pledge, articulated during the 2021 UN Climate Change Conference in Glasgow, to reduce greenhouse gas emissions by 40 percent by 2030.

What have Chambers of Commerce done regarding ESG in Cambodia?

With the support and cooperation of organizations such as GIZ FABRIC and TAFTAC, the European Chamber of Commerce in Cambodia (EuroCham) has forged a path forward with the creation of a Responsible Business Hub (RBH), underscoring the commitment to aiding Cambodian companies in understanding and complying with new mandatory standards. The first of its kind, Cambodia’s RBH, launched on 28 November last year, serves as a centralized resource to facilitate local exporters in their adherence to evolving social and environmental due diligence standards.

In essence, Cambodia’s embrace of ESG principles, renewable energy policies, and its resolute commitment to carbon neutrality is positioning the nation as a serious contender in the global business landscape. As more businesses and industry players recognize the significance of aligning with these sustainability imperatives, Cambodia can be better prepared for a transformative journey towards sustainable prosperity and responsible business practices. This compelling narrative underscores the country’s commitment to be a beacon of ESG adoption within the heart of Southeast Asia.

What are the key takeaways when talking about ESG adoption in Cambodia?

Given Cambodia’s penchant to leapfrog other emerging economies, more can be done and must be undertaken, so that ESG is not just a distant concept but an essential part of sustainable business practices in Cambodia. As businesses worldwide shift toward ESG compliance, Cambodia’s private sector should take active measures to embrace these principles. To that end, it is heartening that the textile industry has made progress in this endeavor. To succeed in the evolving global business landscape, greater awareness of ESG must be raised among Cambodian businesses, and more of them should be incentivised to adopt ESG practices, so that they can position themselves as responsible, sustainable contributors to the international marketplace.

Businesses keen on the steps to take to be more ESG-ready can check with Aquarii to find out which trusted consultancies will be able to help them on their ESG journey.

This has article has been created with the input of our valued partner Platform Impact.