Cambodia Investment Review

Cambodian SMEs Risk Losing Out To Regional Competitors That Are More ESG-Ready

Cambodian SMEs Risk Losing Out To Regional Competitors That Are More ESG-Ready

Cambodia Investment Review

As international investment landscapes are increasingly shaped by Environmental, Social, and Governance (ESG) criteria, Cambodian Small and Medium-sized Enterprises (SMEs) are urged to adapt their business models to meet these rapidly changing global prerequisites. Speaking to Cambodia Investment Review David Van, Director of Public-Private Partnership at Platform Impact, stresses the importance for local businesses to “catch the train” of ESG-oriented investment while it’s still gathering speed.

The growing momentum for ESG compliance comes from global consumers, who now require their suppliers to have more ethical supply chains, clean energy consumption in manufacturing, reduced environmental impact, and a positive social impact on local communities.

In the early 1990s, Cambodia made a pioneering decision in adopting ethical labor standards through the formation of the Better Factories platform, an initiative that has since bolstered the country’s garment industry. “While it wasn’t labeled as ESG back then, it already had the flavor of it,” Van remarked. Despite its success, the garment sector’s shift towards ethical practices was merely a steppingstone for the wider transformation now needed across all sectors.

Cambodia Needs to Carve Out Its Niche in The Rapidly Evolving ESG Landscape

Cambodia, a smaller market located between the two manufacturing mega-centers of Thailand & Vietnam, needs to carve out its niche in the rapidly evolving ESG landscape. Platform Impact, specializing in ESG-centric investments, has been at the forefront of this effort with a portfolio of $200 million. The firm aims to assist clients in conceiving bankable ESG projects, with an ultimate goal of placing Cambodia on the global map of ESG compliance.

Read more: Microfinance Association Hosts Workshop to Strengthen ESG

In light of new EU legislation taking effect in January 2024, which will make ESG compliance audits mandatory for EU and EU-based foreign firms, David Van strongly recommends Cambodian SMEs to begin incorporating ESG into their operations. “Education and awareness-raising must start at home,” he insists.

Echoing similar concerns, “Not to be an alarmist, but it is not an exaggeration to raise an early warning that if, for example, buyers in EU and other parts of the world were to insist on only dealing with suppliers or exporters that are ESG-compliant or are more ready to be ESG compliant, then Cambodian businesses could risk losing out on existing and future contracts”, says Michael Tan, CEO of Aquarii BD Cambodia. “This is a real business risk that more businesses in Cambodia must be attuned to”.

For years, Corporate Social Responsibility (CSR) activities, such as community volunteering and litter collection, have been common among Cambodian businesses. However, ESG takes a more comprehensive approach by placing Governance at the center of a company’s environmental and social strategies. “CSR involves occasional good deeds; ESG is a commitment that touches every aspect of business—from the boardroom to factory floors,” says Van.

Michael Tan (center) and David Van (second from right) attending the AVPN Impact Investment Roundtable 2023.

Michael Tan observed that most businesses tend to look at CSR as corporate volunteering such as engaging with charities and proving assistance to the disadvantaged, or the funding of campaigns and promotional activities to raise awareness about the environmental benefits of lowering carbon footprint. “CSR is still a good corporate culture to have, but ESG requires deeper commitment from business leadership as ESG is a more tangible measure of sustainability in environmental, social, and governance factors.”

To successfully adapt to ESG frameworks, Platform Impact suggests that local enterprises should have a clear governance structure, a committed leadership team, and must be in the stages of preparing for their next fundraising round, among other criteria. These businesses should also be willing to share key strategic information and be committed to tackling Cambodia’s most pressing social and environmental issues.

A Genuine Opportunity for Cambodian SMEs To Transform and Grow

Platform Impact has outlined sectors and impact theses where ESG can bring about significant change. These sectors range from agriculture and waste recycling to healthcare, safe and clean water, education, and affordable housing.

David Van believes that there is a genuine opportunity for Cambodian SMEs to transform and grow by adopting ESG frameworks. “Cambodia’s adoption of ethical labor standards in the 1990s helped to distinguish us in a crowded marketplace,” he said. “Adopting ESG will not only help our businesses survive but also thrive on the international stage.”

Given the urgent need for ESG compliance and the forthcoming EU legislation, Aquarii and Platform Impact are in discussion to jointly organize workshops with interested development agencies to help raise awareness amongst Cambodian SMEs that ESG is not just a good to have, but is fast becoming an imperative. The aim of the joint collaboration is to better prepare them, so that they could be better positioned to meet both local and international demand, thereby helping to forestall the risks of losing out to regional competitors that are more ready to be ESG-compliant, and potentially gaining a competitive edge in the global marketplace.

This pivot towards ESG isn’t just a trend but a crucial adaptation strategy for Cambodian companies, marking a departure from isolated CSR activities to a more integrated, board-level commitment to ethical and sustainable business practices.

Related Articles