Environmental, Social, and Governance (ESG) are increasingly recognised as essential elements in corporate management strategies. ESG represents non-financial factors that companies should consider alongside financial considerations when making business decisions. Unlike in the past, where financial implication was the sole criterion for management decisions in a company, ESG mandates evaluating elements that impact a company’s value and sustainability over the long term.
While the Environmental aspect of ESG is well-known, particularly concerning carbon emissions and the goal of achieving net zero by 2050, ESG encompasses much more. The Social pillar addresses a wide range of issues, from human rights and the treatment of employees and customers to diversity, inclusion, and community impact, including Indigenous communities. The Governance pillar focuses on how organisations are managed, covering risk management and business ethics. Deficiencies in governance often lead to scandals, such as Enron scandal 2001 in the United States, where fraudulent accounting practices led to one of the biggest corporate collapses in history. Another example is the allegations of irregularities and corruption in procurement of two Airbus aircraft in the early 2010s by Nepal Airlines Corporation. Reports indicated that there were overpayments and kickbacks, with various government officials and airline executives allegedly involved in inflating prices and receiving illegal commissions. This not only led to a financial loss for the state-owned airline but also damaged its reputation both domestically and internationally.
The Development of ESG Principles
The concept of ESG aligns closely with the Creating Shared Value (CSV) approach introduced by Michael E. Porter and Mark R. Kramer in 2011, which emphasises the intersection between corporate success and social progress. CSV and ESG focus on sustainable, long-term strategies that benefit both the company and society, moving beyond traditional profit-centric models. ESG emphasises addressing the needs and interests of all stakeholders, including financial markets, employees, civil society and the legal system. Companies with strong ESG performance are linked to long-term stability and attractiveness to investors, a positive and ethical work environment for employees, corporate responsibility, and regulatory compliance. For example, NMB Bank provides green financing to support hydropower projects, which not only help address Nepal’s energy needs but also promote sustainable development by reducing dependence on fossil fuels. This approach aligns with CSV principles by addressing a critical societal need – sustainable energy – while creating economic opportunities and ensuring long-term profitability for the bank through a diversified and resilient loan portfolio.
In 1997, the Global Reporting Initiative (GRI) was established to address environmental concerns and later expanded to include social and governance issues. The 2000 Millennium Summit led to the creation of the Millennium Development Goals (MDGs), which set the stage for more candid discussions on ESG factors. Since then, several frameworks, such as the Principles for Responsible Investment (PRI), the Climate Disclosure Standards Board (CDSB), and the Sustainability Accounting Standards Board (SASB), have been developed to guide companies on integrating and reporting ESG factors. These frameworks encourage businesses to contribute to achieving the Sustainable Development Goals (SDGs) 2030 by adopting sustainable practices and transparent reporting.
Why ESG is Critical in Modern Business?
ESG management is a crucial technique for businesses aiming to achieve sustainability across environmental, social, and governance domains. Leading organisations worldwide prioritise ESG practices to improve operational efficiency, brand credibility, risk management, and investor appeal. For corporate managers, integrating ESG into their strategic decision-making processes is essential for managing risks, enhancing corporate reputation, and ensuring regulatory compliance. In Nepal, the Chaudhary Group (CG) integrates ESG principles into its corporate strategy through initiatives led by the Chaudhary Foundation, focusing on corporate social responsibility, environmental conservation, and ethical business practices. Similarly, Unilever Nepal, a leader in sustainable business, aligns its sustainability and business strategies through the Compass initiative, proving that strong financial performance and sustainable practices can go hand in hand. Siddhartha Bank Ltd. and NMB Banks Ltd. also demonstrate their commitment to ESG by investing in green financing, climate change initiatives, and digitisation to reduce their carbon footprint while aligning with the Sustainable Development Goals (SDGs).
By prioritising ESG, companies contribute to the well-being of the environment and society while driving financial performance. This approach meets the growing demand from investors and consumers for responsible business practices. As the global market increasingly shifts towards sustainability, companies that proactively address ESG issues are better positioned to thrive and maintain a competitive advantage. With the rising legal requirements for ESG disclosure, it is imperative that senior management prioritise these factors to ensure their organisation’s sustained success and compliance.
Viewing ESG as a Strategic Advantage
The debate over whether ESG should be viewed merely as a compliance concern or as a strategic opportunity is crucial for modern businesses. While compliance focuses on adhering to regulatory requirements, treating ESG solely in this manner can significantly limit its broader potential. Instead, companies should embrace ESG as a strategic opportunity to adapt to the rapidly evolving market landscape. By proactively managing and transparently reporting on ESG factors, businesses not only fulfil regulatory and societal expectations but also bolster their brand reputation, attract and retain top talent, and enhance financial performance. This approach provides a competitive advantage in an increasingly sustainability-focused business environment. By actively engaging with ESG initiatives, companies can drive innovation, increase their positive social impact, and contribute meaningfully to sustainable development, positioning themselves as leaders in responsible business practices and creating long-term value for all stakeholders.
ESG in Action
To fully integrate ESG into business strategies, it is crucial that these principles become deeply embedded in the organisation’s culture. This cultural integration means that ESG considerations are not just a separate initiative, but rather a core element that influences every decision and action taken by the company. By making ESG a core part of the company culture, businesses ensure that their operations consistently reflect a commitment to environmental sustainability, social responsibility, and strong governance. This integration aligns the organisation’s goals with broader societal values, helping it address sustainability and ethical challenges more effectively. Moreover, a strong ESG culture builds a more resilient business model, capable of adapting to changing market conditions and regulatory requirements. It also enhances the organisation’s reputation, making it more attractive to customers, investors and employees who value responsible practices. Ultimately, this approach contributes to long-term success.
As ESG becomes a cornerstone of corporate strategy, many companies are appointing a Chief ESG Officer (CESGO) to signal their commitment to these issues. This role is essential for integrating ESG efforts across all functions and ensuring these initiatives are aligned with the company’s overall strategic objectives. The CESGO works closely with the CEO and other executives to drive ESG policies throughout the organisation, fostering a cohesive approach to environmental, social and governance issues that reflects the company’s values and goals.
Aroon Yun highlights two critical factors that determine the effectiveness of ESG initiatives: Materiality and Transparency. For ESG initiatives to be impactful, companies must focus on factors that are material to their specific industry and operations. This means identifying and addressing ESG issues that significantly affect their business performance and align with stakeholder expectations. By concentrating on material issues, companies can ensure that their ESG efforts are relevant and effective. Additionally, Transparency is crucial for building trust with stakeholders. Clear and honest reporting on ESG practices not only demonstrates a company’s genuine commitment to sustainability but also enables stakeholders to make informed decisions. Transparent communication about ESG activities and performance fosters credibility and accountability, enhancing overall stakeholder confidence and support. Together, these factors ensure that ESG initiatives are both strategic and trustworthy, driving meaningful progress toward sustainability and ethical governance.
Dambisa Moyo, in her “10 ESG Questions Companies Need to Answer” published in the Harvard Business Review, challenges companies to deeply consider their ESG strategies, focusing on long-term value creation and operational resilience. Key questions include:
- Is ESG undermining your company’s competitiveness?
- Does driving the ESG agenda mean sacrificing company returns?
- How are you navigating ESG trade-offs?
- How does ESG change due diligence?
- Should you become a public benefit corporation?
- How should corporations address societal concerns such as racial equity?
- How do you develop a global approach to ESG?
- How do we build an ESG framework that is future-proof for tomorrow’s economic realities?
- How do you vet company performance on ESG?
- How should corporates navigate the ever-changing landscape of ESG?
The Complexity of Measuring ESG
ESG data can be subjective, leading to varying assessments by different research agencies. The multifaceted nature of ESG poses a significant challenge, as the World Economic Forum identified 21 core metrics and 34 expanded metrics to measure a firm’s ESG impact, while Thomson Reuters Refinitiv uses over 450 metrics to compute ESG scores. This variability not only makes it challenging for organisations to benchmark their performance against peers but also complicates the decision-making process for investors, who may find it difficult to discern a company’s true ESG standing. As a result, the lack of consensus on what constitutes meaningful ESG performance and the diversity in evaluation methods underscores the need for more standardised, reliable and transparent ESG reporting practices.
ESG framework for Nepali corporate sector
Nepal currently lacks comprehensive ESG guidelines across various sectors, which presents a significant challenge for effective implementation and accountability. While Nepal Rastra Bank (NRB) has developed the Environmental and Social Risk Management (ESRM) framework for banks and financial institutions, similar frameworks are urgently needed in other sectors to ensure a uniform approach to sustainability and ethical governance. Establishing sector-specific ESG guidelines would help companies understand and integrate environmental, social and governance considerations into their operations, enhancing transparency, fostering responsible business practices, and aligning with global standards. Moreover, a comprehensive ESG Framework for the Nepali Corporate Sector should be prepared encompassing strategies for efficient resource management, pollution control, and climate change adaptation, alongside promoting fair labour practices, diversity, inclusion, and community engagement. Governance standards should emphasise ethical conduct, board oversight, and robust risk management. The framework must outline clear implementation guidelines, including strategy development, action plans and training, as well as establish metrics, reporting standards, and regular audits for monitoring ESG performance. Continuous improvement through feedback and innovation will ensure the framework remains relevant and effective in fostering long-term corporate responsibility and sustainable development in Nepal. As Nepal progresses toward a more sustainable future, creating and enforcing ESG guidelines across all sectors is essential for fostering economic resilience and social equity.
Way Forward
As the world faces increasing challenges related to climate change and social issues, ESG considerations will continue to play a critical role in how companies and investors operate and measure performance. Companies that view ESG as a strategic opportunity rather than merely a compliance requirement are more likely to drive innovation, enhance social impact, and achieve sustainable growth. For Nepali companies, fulfilling ESG criteria can significantly enhance their attractiveness not only to domestic investors but also to foreign investors, who increasingly prioritise sustainable and ethical business practices in their investment decisions. By demonstrating a commitment to environmental, social, and governance standards, domestic companies can gain a competitive edge in securing foreign direct investment, which is crucial for their expansion and overall economic development of the country. Moreover, robust ESG practices can help mitigate risks and provide greater transparency, thereby fostering investor confidence and facilitating long-term investment partnerships with international stakeholders.
To draft an effective regulatory framework for ESG in Nepal, the government should start by setting clear guidelines and standards aligned with international best practices, such as those established by the Global Reporting Initiative (GRI) or the Principles for Responsible Investment (PRI). The framework should include mandatory ESG reporting requirements for all companies, with specific metrics for environmental, social and governance performance. The government could also introduce incentives like tax breaks or subsidies for companies that demonstrate strong ESG performance. Additionally, penalties or fines should be established for non-compliance to enforce adherence. Collaboration with industry stakeholders, experts, and civil society organisations is crucial to ensure the framework is practical and achievable. Lastly, the government should invest in awareness programmes and capacity building to help companies understand the importance of ESG and how to integrate these principles into their operations effectively.
Dr Thapa is Lecturer at Central Department of Management, Tribhuvan University
