From Profit To Purpose The Role of ESG in Corporate Sustainability and Nepal's Path Towards Compliance

The Shift in Corporate Focus

In August 2019, 181 CEOs from the Business Roundtable (BRT) redefined the purpose of corporations, shifting from a shareholder-focused approach to a stakeholder-inclusive model. They emphasised creating value for customers, employees and shareholders alike. This pivotal declaration marks a move toward prioritising sustainability, social responsibility and ethical governance alongside profitability. The global shift toward corporate sustainability is evident in initiatives like the European Parliament's Directive on Corporate Sustainability Due Diligence (EU 2024/1760), 2024. This directive emphasises reforms in corporate governance and sustainable finance to align with the Paris Agreement and EU’s ambitious climate goals.

Understanding ESG: What Does It Entail?

ESG, which stands for Environmental, Social and Governance, serves as a comprehensive framework to evaluate the non-financial impacts of companies and investments based on socially responsible objectives. The ‘E’ (Environmental) aspect includes elements like energy efficiency, carbon footprint, greenhouse gas emissions, deforestation, biodiversity conservation, climate change mitigation, pollution control, waste management, and water use. The ‘S’ (Social) dimension focuses on labour practices, workplace diversity, wage equity, human rights, community engagement, health and safety protocols, supply chain management, and overall social justice. The ‘G’ (Governance) element examines corporate management, including board structure, executive compensation, transparency in political contributions, anti-corruption measures, and oversight of environmental and social commitments.

Why ESG Compliance is Crucial

Nepal’s ‘Long-term Strategy for Net-zero Emissions’, published in 2021, outlines a vision to achieve net-zero emissions between 2020 and 2030 and complete net-zero status by 2045. This ambitious plan aims to position Nepal as a key player in global climate mitigation through clean energy trade. Despite contributing only 0.1% of global greenhouse gas emissions; 48 million tonnes of CO₂ in 2019, Nepal has seen emissions rise by 26.86% between 2012 and 2019, primarily driven by agriculture (54%) and energy (28%).

Nepal’s vulnerability to climate change disproportionately impacts those below the poverty line, with a study by the Asian Development Bank projecting a 2.2% annual GDP loss by 2050 due to climate-related effects. To address these challenges, integrating ESG frameworks is crucial, especially while the costs of inaction remain manageable. Evidence supports this approach; a global study (2013–2021) found that companies with strong ESG ratings achieved annual returns of 12.9%, compared to 8.6% for those with weaker scores.

Internationally, the European Union's commitment to achieving climate neutrality by 2050, with a 55% emissions reduction target by 2030, underscores the role of corporate sustainability in reaching these goals. Nepal can similarly leverage ESG practices to align its net-zero objectives with economic and environmental resilience.

ESG Status in Nepal: The Emerging Landscape

Nepal's journey toward integrating ESG practices is gaining momentum, with institutions like Yeti Airlines and NMB Bank taking initial steps by disclosing carbon emissions and committing to sustainability initiatives. To further institutionalise ESG practices, Nepal Rastra Bank (NRB) joined the Sustainable Banking and Finance Network (SBFN) in 2014. In 2022, NRB introduced the Guideline on Environmental & Social Risk Management (ESRM), requiring banks and financial institutions (BFIs) to incorporate environmental and social risk assessments into their credit risk management frameworks.

The guideline requires BFIs to follow a structured eight-step process to complete Environmental & Social Due Diligence (ESDD). First, projects are screened against a list of excluded activities. Next, loans are categorised by size or type (e.g., small loans in critical or non-critical sectors, term finance or project finance) to determine the level of E&S appraisal required. This is followed by an ESDD review, which examines compliance with national environmental and social regulations, such as obtaining necessary permits (e.g., BES (Brief Environmental Study), IEE (Initial Environmental Examination), or EIA (Environmental Impact Assessment) approvals) and aligning with international standards.

Based on the findings, an E&S risk rating is generated, classifying loans as Low, Medium, or High risk. For Medium and High-risk transactions, a time-bound action plan is integrated into loan agreements to address identified issues. After this, transactions are escalated to the relevant authority depending on the risk level. Continuous E&S risk monitoring is conducted to ensure mitigation measures are effective throughout the project lifecycle. Finally, BFIs report E&S performance annually to senior management and Nepal Rastra Bank, ensuring accountability and alignment with regulatory guidelines.

These developments align with the global rise of sustainable investing, a trend that underscores the importance of ESG compliance for trade and investment prospects. As ESG compliance becomes integral to international trade, Nepal faces growing pressure to align with global standards. Key trading partners: India, China, the United States, and the European Union account for 90% of Nepal's total trade in Fiscal Year 2079/80 and are progressively adopting stringent ESG regulations. Aligning with these norms is crucial for Nepal to sustain and expand its trade relationships, ensuring competitiveness in a market increasingly shaped by ESG priorities.

Until the mid-2010s, ESG data was underutilised by investors. Today, over 1,150 institutions, representing $70 trillion in assets, have committed to the United Nations Principles for Responsible Investment (UN PRI). Thematic bonds, such as green, blue, social, or sustainability bonds, are becoming popular tools for financing sustainable projects.

Nepal, with its vast hydropower potential, stands out as an attractive destination for sustainable investments. The country aims to expand its hydropower capacity to over 7 GW by 2031, requiring investments of $5.5 billion. Diversifying into solar and other renewable energy sources will further support Nepal's transition to green mobility and hydrogen-based solutions.

Path Forward for Nepal

To fully integrate Environmental, Social and Governance (ESG) principles, Nepal must adopt a multifaceted approach tailored to its unique socio-economic and environmental context. First, regulatory frameworks need to be strengthened. The Securities Board of Nepal (SEBON) should issue comprehensive ESG guidelines to ensure compliance and attract responsible investments. These frameworks could emulate models like India’s Business Responsibility and Sustainability Reporting (BRSR) system, which has proven effective in streamlining ESG practices.

Encouraging voluntary ESG reporting by companies is a key strategy for driving sustainability. Unilever, for instance, has set a strong example by aligning its operations with sustainability objectives, which has helped attract significant investor interest. To promote this, the government should offer incentives to companies that adhere to ESG compliances. For example, the Indian government provides tax breaks, preferential financing, and sustainability certifications to companies meeting specific ESG standards, encouraging broader corporate engagement in responsible practices.

The Environmental and Social Risk Management (ESRM) guidelines issued by Nepal Rastra Bank currently overlook the governance aspect of ESG. Governance, covering anti-corruption measures, executive accountability and stakeholder inclusivity, is critical for achieving meaningful results. Its exclusion risks creating an imbalanced ESG strategy.

Nepal must also address the pervasive issue of greenwashing, where companies superficially adopt ESG measures without genuine implementation. Avoiding this pitfall requires organisations to embed sustainability deeply into their corporate values, mirroring companies like Microsoft that integrate ESG into strategic planning rather than treating it as a compliance checkbox.