The Environment, Social, and Governance (ESG) concept has increasingly become more critical in many countries' development trajectories. Though this has been novel in the Cambodian context, raising awareness among the public and pushing for greater focus on ESG will be crucial in driving sustainable practices in Cambodia. More challenges are evident in integrating ESG in Cambodia, and one of the most pressing challenges is the lack of a legal framework.

Sao Phal Niseiy of Cambodianess speaks with Sao Socheata, who is currently serving as Deputy Director of the English Language-Based Master of Law (ELBML) Programme at the Royal University of Law and Economics, to explore the importance of ESG and how Cambodia can foster such practices.

Sao Phal Niseiy: The global emphasis on Environment, Social, and Governance (ESG) reflects the growing importance of securing a sustainable future. This shift also introduces new layers of complexity to the legal landscape surrounding ESG, necessitating an expanded legal framework. Your expertise in this area is invaluable. Could you provide insight into the legal significance of ESG?

Sao Socheata: ESG is a broad framework for assessing a company’s overall performance in light of its environmental, social, and governance factors. Central to ESG performance and reporting is due diligence – that is the assessment of business impacts on the environment and people.

Adopting ESG helps companies operate legally and responsibly, while maintaining competitiveness in the market. In Cambodia, while we do not have an express ESG law, various domestic laws that apply to business activities address different aspects of ESG. For instance, the Environmental and Natural Resources Code and related environmental laws cover due diligence requirements concerning adverse environmental and social impacts, touching on the ‘E’ and ‘S’ aspects of ESG.

Cambodian laws that protect human rights, labor rights, and consumers, for example, cover the ‘S’ aspect of ESG. Then, the Law on Commercial Enterprises and other corporate laws regulate corporate governance matters, the ‘G’ aspect. Thus, adopting ESG, especially in line with international standards, will not help companies comply with domestic laws.

In recent years, there is a rise of due diligence laws, especially in Europe, that require businesses to consider human rights and sustainability in their business operations and practices. These laws are relevant and essentially enhances ESG performance and reporting. For instance, the EU’s Corporate Sustainability Reporting Directive (CSRD), which focuses on ESG reporting, entered into force in January 2023. This April, the EU also adopted the Corporate Sustainability Due Diligence Directive (CSDDD), which requires EU-based companies to conduct human rights and environmental due diligence in their supply chains.

Through supply chain relationships, Cambodian companies that export to the EU, while not legally required, will have to assess, mitigate and address their impact on human rights and the environment to maintain their foreign market access. In addition to this transnational effect, the rise of due diligence law, coupled with heightened expectation for more responsible business practices globally, e.g., by consumers and investors, will encourage more adoption of ESG in Cambodia. There are already efforts by the government to promote ESG adoption in the country, e.g., incorporation of ESG aspects in relevant laws, policies, guidelines, etc. 

Sao Phal Niseiy: Over the past decade, corporate social responsibility (CSR) has become a buzzword for sustainable business practices. Now, there is a clear emphasis on building momentum to promote ESG (Environmental, Social, and Governance) principles. Can you explain the significant differences between ESG and CSR?

Sao Socheata: Essentially, CSR is about the integration of social (and also environmental) considerations in business decision-making. The EU defines CSR as ‘the responsibility of enterprises for their impacts on society’. According to Carroll’s CSR pyramid, CSR starts with an enterprise making profit, complying with the law, being ethical, and being a good corporate citizen through voluntary philanthropy. CSR is voluntary and is more about how a company spends money. In Cambodia, CSR remains more about philanthropy or charitable donations. 

As mentioned earlier, ESG is a broad framework for evaluating a company’s overall performance in relation to sustainability. It involves the integration of environmental, social, and governance factors in addition to the financial considerations in business decision-making. Essentially, ESG is a factor for assessing how responsible a company is. It aligns with the UN Sustainable Development Goals (SDG) and the concept of responsible business conduct (RBC). RBC is not entirely voluntary. As explained, many aspects of ESG performance are mandated by law. In addition, ESG is more about how a company makes money.

To sum up, there are some overlaps, but CSR and ESG are different concepts. 

Sao Phal Niseiy: Despite its crucial significance, the ESG concept remains novel in many places across the globe, including Cambodia. However, Cambodia's complex and fragmented ESG landscapes, with various laws embedding different aspects of ESG, present a unique challenge. Would harmonizing these regulations benefit Cambodia more? 

Sao Socheata: ESG is not a new concept or practice in the West, but it remains novel and unfamiliar in Cambodia. That said, ESG has started to gain traction in Cambodia in recent years. As noted, while Cambodia does not have a clear law on ESG, ESG aspects are covered under a wide range of our domestic laws. In this context, to enable effective adoption and implementation of ESG, there is a clear need for more harmonized laws and regulations.

In fact, there are options for the government to consider. For instance, we can add clear ESG performance and reporting requirements into existing applicable laws, e.g., the Environmental Code, the Labor Law, the Law on Commercial Enterprises, etc. Alternatively, we may consider adopt a due diligence law, e.g., something similar to the German Due Diligence Act or the EU CSDDD, setting clear requirements for businesses to implement and report their ESG performance.

However, ESG aspects and performance requirements vary, among others, according to sectors or industries, e.g., the garment, agribusiness, tourism, etc. Thus, it would be helpful to have a sector- or industry-specific guiding principles and guidelines to help companies adopt ESG and ensure effective enforcement and monitoring by the relevant state authorities. Cambodia may also start with enhancing ESG-related laws and regulations in its high-risk sectors, e.g., land and natural resources-related sectors. On this note, the Environmental Code demonstrate a push to the right direction.  

Sao Phal Niseiy: Incorporating more ESG considerations and principles into practices can be challenging as the regulations generally target and seek to transform the conventional practices of both private and public institutions. For example, private companies may find it more difficult to tailor their ESG practices to specific contexts.  Do you think there will be strong resistance to changes that could hinder the effective implementation of such legal frameworks? If so, what can be done to deal with such resistance?

Sao Socheata: Resistance could be contemplated for many reasons. Firstly, ESG operates in rapidly evolving regulatory and economic settings. For companies, adopting ESG could add extra burden administratively, operationally, and financially. They also may not know how to get started, e.g., which ESG framework and standards are suitable for their operations. With these difficulties, coupled with the lack of clear legal requirements, companies may not have the incentive to adopt ESG. 

To overcome such resistance, there is a need to make companies understand that adopting ESG will help them become a more responsible and competitive business, which is important for their long-term growth. That said, resistance may be minimized through the provisions of wide-ranging incentives for companies to adopt ESG in their operations and business relationships. Such incentives could include financial supports, tax exemptions, rewards, awards, ranking, etc. that provide monetary and/or reputational benefits for companies.

Although Cambodia does not have an ESG or due diligence legislation, a range of domestic laws cover some ESG aspects. Thus, non-compliance will give rise to legal liability, which may include civil and/or criminal sanctions of the company or its corporate officers. Thus, a mixture of the moral, business and legal rationales will minimize potential resistance and encourage or demand companies to adopt ESG.

Sao Phal Niseiy: Aside from the resistance, what do you think are other challenges we may face during the transitional period? 

Sao Socheata: Presently, there remains a lack of comprehensive legal requirements or guidance on ESG policy, benchmark, reporting, assessment, and rating in Cambodia. Lacking ESG-specific legislation, Cambodia primarily relies on piecemeal laws that address some ESG components. ESG-related legal requirements are under different laws and regulations which are scattered across different ministries and agencies and fragmented and sometimes overlapped. It is difficult for the relevant authorities and companies to identify a cohesive ESG framework. 

Companies may find it difficult to integrate and implement ESG in their activities and business relationships. The required actions and processes will vary from one company to another, e.g., depending on their size, structure and sector as well as the scale and severity of their risks. Thus, during the transitional period, companies likely find it difficult to choose the appropriate (international) framework or combination of ESG frameworks. There are numerous international ESG frameworks and standards. Relevant to this point is the challenge in meeting the expectations of the various stakeholders, e.g., the regulators, business partners, employees, consumers, affected communities, etc. Companies exporting or supplying the EU market will meet with higher expectations from their stakeholders than those just supplying the local market.

There are also challenges regarding the human and financial resources for developing, implementing, assessing, and reporting ESG performance. Small companies may not have the necessary knowledge and budget to adopt and implement ESG strategies. Compounding the problem is the fact that the ESG regulatory environment, including in Cambodia, is dynamic and fast evolving. Another challenge is getting internal buy-in, especially given the continued focus on CSR and philanthropic activities in Cambodia. 

Sao Phal Niseiy: Any effort to transform things that requires drastic changes will be possible when different stakeholders gain sufficient knowledge and a holistic understanding of the importance of such principles. What do you think are effective strategies for ensuring a smoother transition? 

Sao Socheata: Firstly, raising awareness and capacity on ESG principles and practices as well as applicable domestic laws to both the relevant state authorities and businesses is of key importance to promote the adoption and implementation of ESG in Cambodia. Secondly, promoting experience-sharing about ESG implementation by good-practiced companies would serve as an encouragement and guidance for other companies to kick start with their ESG policies and action plans.

On this note, it would be useful to have a publicly accessible platform that gathers ESG or sustainability reports and case study of best practices in Cambodia. Such a platform is not only a good reference points for companies wishing to start their ESG adoption, but also would allow the relevant stakeholders such as state authorities, CSOs, consumers, and the public to monitor, compare, or evaluate the sustainability performance of these companies.

It is crucial to have more ESG sector- or industry-specific performance and reporting guidelines and guidance for companies, especially in high-risk sectors. It is important to provide a wide range of incentives for companies to adopt ESG in their operations and business relationships. Such incentives could include financial supports, tax exemptions, rewards, awards, ranking, etc. that provide monetary and/or reputational benefits for companies. Lastly, strong mutually supportive collaborations between ministries, the private sector, the financial sector, CSOs, and academic are essential in promoting effective ESG adoption and enforcement in the country.