Detail report on

Environment,
Social and
Governance
Reporting

E S G

For further Consultation and queries please contact:

Bidur Luitel
Principal,
Bidur Associates, Chartered Accountants

Cell : +977- 98512 38754

Email : [email protected]
[email protected]
: [email protected]
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Viber : +977- 98512 38754
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 Detail report on Environment, Social and Governance Reporting

Table of Contents

Introduction about ESG and Sustainability Reporting ...................................................................................... 3

Features of ESG ............................................................................................................................................... 5
Global ESG Framework .................................................................................................................................... 6
Benefits of implementing ESG .......................................................................................................................... 9
Financial Reporting and ESG & Sustainability Reporting .............................................................................. 10
Integrated Reporting and ESG & Sustainability Reporting ............................................................................. 11
Investment and ESG ...................................................................................................................................... 12
ESG and Sustainability in Nepal .................................................................................................................... 13
ESRM Guideline ............................................................................................................................................ 14
ESG and FDI ................................................................................................................................................. 15
ESG in South Asia ......................................................................................................................................... 16
Roles of Regulatory Authority ........................................................................................................................ 17
Challenges in Implementing ESG ................................................................................................................... 17
Way Forward ................................................................................................................................................. 18

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 Detail report on Environment, Social and Governance Reporting

Introduction about ESG and Sustainability Reporting

ESG Stands for Environment, Social and Governance. ESG reporting means communicating
the impact of environmental factors, society and good governance to the business
organization and effect of the business organization to the environment and the society.
Businesses are run within the environment and society. The discloser of the relationship in
between the nature and the society along with the good governance is ESG reporting. It is
the integration of 3Ps i.e. process, people and policy.

In today's world, running business does not mean only to attain profit, but also the impact of
the business towards the ecosystem and the society. The major elements of ESG are
explained below:

a) Environment
Environment is the surrounding on which the business is operating. Business has effect
on the environment through its operation. Environmental factor refers to the impact of
business on the natural ecosystem. Increasing industrialization has polluted the
environment. The natural environment like back to 50- 60 years ago does not exist
anymore. Planet is no more like yesterday. The species of animal and plants extinct with
the flourish of industry. Air has been contaminated resulting into the development of
new diseases. Environmental factor on ESG measures the consideration of ecosystem by
the business houses. It is the consideration of environmental issues like waste, animal
treatment, natural resources conservation, etc.

b) Social
Social factor in ESG refers to the stakeholders, both internal and external of the
organization such as Employees, Shareholders, suppliers, customers, Government,
society on which it belongs, etc. Business can only be sustained when the stakeholders
are satisfied with the business. Social aspect of business means the responsibility of the
business towards the society. How the society is benefitted from the business? Are the
employees paid good remuneration? Are the employees are safe? What's the program
of organization towards the social development? Spreading awareness among the

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people, preserving values and beliefs, teaching the ethics, preserving social and
historical sites, increasing employment opportunities, etc. and so on are the areas of
social factor. Social factors encompass a wide range of considerations, including but not
limited to LGBTQ+ equality, racial diversity within the organization at all levels, and
inclusive programs and hiring policies. Additionally, the assessment takes into account
how a company engages in social initiatives that extend beyond its immediate business
scope, aiming to contribute to the greater societal well-being.

c) Governance
Governance is the overall mechanism adopted by the entity by which the organizations
are directed and controlled. It is the set of policies, procedures, rules and regulations.
Accountability, Transparency, Responsibility and Fairness are the pillars of Good
Governance. Corporate governance encompasses the interactions and dynamics
between a company's leadership, board of directors, shareholders, and other
stakeholders. Its primary objective is to foster a moral, transparent, and responsible
management approach within the organization. The focus of corporate governance is to
establish procedures and practices that facilitate the achievement of business goals
while instilling confidence in stakeholders regarding the integrity and reliability of the
company. By upholding high standards of governance, businesses aim to inspire trust
and ensure that their actions align with the best interests of all stakeholders involved.

Existence of the organization and business over the time is sustainability. Businesses with its
operation disregarding the environment, society and governance cannot be sustained in
today's world. Today, business is not only making products, sales and generating revenue
but also impact of these on the environment and in society. Business has to run in society
and environment so it is important to satisfy the society and environment. The prudent
utilization of finite resources is crucial to promote sustainability and secure the needs of
future generations, while maintaining the current quality of life. A sustainable society
embraces social responsibility by prioritizing environmental protection and striving for
dynamic equilibrium within human and natural systems. By adopting this approach, we can
ensure the well-being of both present and future generations.
Sustainability and ESG (Environmental, Social, and Governance) are closely related
concepts, yet they differ in scope and application. Sustainability is a broader term that
encompasses a company's overall actions and objectives, which can vary across different
organizations. On the other hand, ESG provides a specific framework comprising
environmental, social, and governance criteria that companies can utilize to measure and
disclose their performance. ESG is particularly significant in the investment domain, where
these criteria play a vital role in informing decision-making processes for firms.
By presenting this information in a comprehensive report, a company's progress in these
three areas can be assessed in relation to benchmarks and goals. ESG reports serve the
purpose of providing complete transparency regarding the environmental, social and
governance impact of an organization to a wide range of stakeholders including investors,
employees and customers. It enables stakeholders to make informed decisions, encourages
accountability and fosters a deeper understanding of the company's commitment to
sustainable practices.

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Features of ESG
Environmental Social Governance
 Climate Change  Employment Equality  Compensation of
 Pollution Levels and gender diversity employees and board
 Management of water  Product safety concerns executives
and other Resources and liability  Board and company
 Hazardous materials  Employee Health and diversity
and their disposal Safety  Tax strategy and
 Carbon footprint and  Training and accounting standards
whether it uses development  Bribery and corruption
renewable energy  Animal Testing  Fraud
 Clean Energy Initiatives  Supply Chain  Ethics and Values
Transparency  Transparency and anti-
 Human Rights corruption
 Privacy Issues  Shareholder's Rights

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Global ESG Framework

ESG framework provides the direction for the

disclosure for the variables for the ESG
measurement. There is not a specific framework for
the ESG reporting. Companies may use any of the
frameworks. Using the framework, company
discloses their sustainability related procedures
and policies, practices and other information
related to ESG.

Some most used ESG frameworks are highlighted below:

1) Carbon Disclosure Project (CDP):

The Carbon Disclosure Project (CDP), a non-profit organization, collects voluntary data
from companies and cities on their environmental impact and strategies. It aims to
provide transparency and accountability to investors and other stakeholders. Today,
more than 590 institutional investors use the data for ESG analysis. Organizations
voluntarily disclose information in three areas: climate change, forest management and
water security. The CDP then grades each organization from A to F for its performance.
Investors use this data for ESG analysis, which evaluates which companies are most
viable considering climate risk. Other stakeholders receive information about the
maturity of the organization's environmental action plans, such as checking whether a
buyer or supplier is in line with their responsible sourcing strategy.

2) Dow Jones Sustainability World Index (DJSI):

The Dow Jones Sustainability Index (DJSI) is a comprehensive assessment of corporate
performance in the context of economic, environmental and social factors. It evaluates
various aspects including corporate governance, risk management, branding, climate
change mitigation, supply chain standards and labor practices. The main objective of
DJSI is to identify the companies that conduct themselves in a dignified and ethical
manner.
Companies are analyzed based on their adherence to both general and industry-specific
sustainability criteria across 60 industries defined by the Industry Classification
Benchmark (ICB). A growing trend in the industry is to weed out companies that fail to
meet strict and ethical standards.
The DJSI provides valuable insight into a company's overall sustainability performance
by considering economic, environmental and social aspects.

3) IFRS Sustainability Disclosure Standards

These standards are developed by International Sustainability Standard Board (ISSB)
which was followed by IFRS foundation in 2021. The objective of this is to create a
unified set of disclosure standards that can be used globally to report ESG data to
investors.
On 26 June 2023 the ISSB issued its first two inaugural standards related to
sustainability-related disclosures in capital markets namely:
1. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial
Information and

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2. IFRS S2 Climate-related Disclosures.

Globally, both IFRS S1 and S2 are effective for annual reporting periods beginning on or
after 1 January 2024 with earlier application permitted. However, it is yet to be
pronounced in Nepal.

The objective of IFRS S1 is to require an entity to disclose information about its

sustainability-related risks and opportunities that is useful to users of general purpose
financial reports in making decisions relating to providing resources to the entity.

IFRS S1 requires an entity to disclose information about all sustainability-related risks

and opportunities that could reasonably be expected to affect the entity’s cash flows, its
access to finance or cost of capital over the short, medium or long term (collectively
referred to as ‘sustainability-related risks and opportunities that could reasonably be
expected to affect the entity’s prospects’).

IFRS S1 prescribes how an entity prepares and reports its sustainability-related financial
disclosures. It sets out general requirements for the content and presentation of those
disclosures so that the information disclosed is useful to users in making decisions
relating to providing resources to the entity.

IFRS S1 sets out the requirements for disclosing information about an entity’s
sustainability-related risks and opportunities. In particular, an entity is required to
provide disclosures about:
a. the governance processes, controls and procedures the entity uses to monitor,
manage and oversee sustainability-related risks and opportunities;
b. the entity’s strategy for managing sustainability-related risks and opportunities;
c. the processes the entity uses to identify, assess, prioritise and monitor sustainability-
related risks and opportunities; and
d. the entity’s performance in relation to sustainability-related risks and opportunities,
including progress towards any targets the entity has set or is required to meet by
law or regulation.

The objective of IFRS S2 is to require an entity to disclose information about its climate-
related risks and opportunities that is useful to users of general purpose financial reports
in making decisions relating to providing resources to the entity.
IFRS S2 requires an entity to disclose information about climate-related risks and
opportunities that could reasonably be expected to affect the entity’s cash flows, its
access to finance or cost of capital over the short, medium or long term (collectively
referred to as ‘climate-related risks and opportunities that could reasonably be expected
to affect the entity’s prospects’).

IFRS S2 applies to:

a. climate-related risks to which the entity is exposed, which are:
i. climate-related physical risks; and
ii. climate-related transition risks; and
b. climate-related opportunities available to the entity.

IFRS S2 sets out the requirements for disclosing information about an entity’s climate-
related risks and opportunities. In particular, IFRS S2 requires an entity to disclose
information that enables users of general purpose financial reports to understand:

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a. the governance processes, controls and procedures the entity uses to monitor,
manage and oversee climate-related risks and opportunities;
b. the entity’s strategy for managing climate-related risks and opportunities;
c. the processes the entity uses to identify, assess, prioritise and monitor climate-related
risks and opportunities, including whether and how those processes are integrated
into and inform the entity’s overall risk management process; and
d. the entity’s performance in relation to its climate-related risks and opportunities,
including progress towards any climate-related targets it has set, and any targets it is
required to meet by law or regulation.

4) Task Force on Climate-related Financial Disclosures (TCFD)

TCFD is more popular in United Kingdom, which come into effect in 2022 requiring the
companies to publish detailed information about the impact of climate change on their
business. Climate-related financial reporting TCFD presents a significant challenge for
companies because it requires them to collect and analyze vast amounts of often
unrecognized data related to their climate-related risks and opportunities. It takes
significant effort to obtain participation and collect information from the entire
organization. Potentially new knowledge and skill sets are also needed to ensure that
data and methodologies are appropriate, accurate and reliable, and to analyze potential
risks that have not previously been considered or are difficult to measure. TCFD
embraces the following principles:
 Show your working
 Ensure your analysis is forward-looking
 Make your report easy to navigate for external readers
 Include the right details to enable transparency
 Ground your reporting in your industry’s context

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Benefits of implementing ESG

To Shareholders/Investors
 High level of assurance on their investment
 Promotes long-term financial viability, opportunity, and returns
 Better operational Efficiency
 Enhanced portfolio performance

To Business Houses To Society

 Enhance Sustainability  Foster quality life of public
 Cost Savings  Social Awareness
 Lower Employee Turnover  Pollution control
 Better operational Efficiency  Human Rights
 Risk Identification and mitigation
 Long term Value creation
 Builds customer loyalty To Ecosystem
 Emergency preparedness
To Employees
 Climate Risk and Mitigation
 Fair Remuneration
 Pollution Control
 Health and Safety
 Recycling Processes
 Good working conditions
 Water Management
 Employee development
 Energy Efficiency
 Satisfaction

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Financial Reporting and ESG & Sustainability Reporting

Communication of financial information to the stakeholders is financial reporting. Statement
of financial position, statement of comprehensive income, cash flows are the constituent of
financial statements. Financial transactions and event are only disclosed in it regardless the
non-financial element. It focuses primarily on the route of money of financial resources. The
main concern is how much income generated from which activities of the entity, whether
from financing or operating. Financial reporting shows the relationship between the
activities of the business towards the profitability irrespective of the sustainability,
environment and the society.

However, ESG and Sustainability reporting is different. It measures the impact of business
to the society and environment. This concept has the belief that, business cannot be
sustained without mitigating environmental risk, societal risk and risk of good governance.
Negligence towards the ecosystem and society will not carry the business on long run. The
resources are finite in the planet so must be utilized with due care. This reporting concept
discloses only the non-financial information that have impact on the sustainability of
businesses.

Financial reporting has the specified guidelines and standards in every countries which is
directed by the standards like IFRS, NFRS, US GAAP, etc. whereas there is no specific
framework and guidelines for ESG in many nations. Financial reporting is mandatorily
prepared and communicated to the stakeholders along with the disclosures as required by
the standards on accounting and regulatory body. In contrary to the financial reporting, ESG
and Sustainability reporting is voluntary responsibility of the enterprises which may employ
any of the ESG frameworks in most of the nations.

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Integrated Reporting and ESG & Sustainability Reporting

ESG and Sustainability Reports are yearly released documents providing comprehensive
accounts of the company's endeavors, undertakings, strategies, objectives, and
accomplishments in relation to its environmental, social, and governance commitments.
These reports commonly adhere to established reporting frameworks such as GRI, SASB,
TCFD, CDP, GRESB, SDGs, and others.
Integrated Reports represent a synthesis of conventional annual reports, which primarily
emphasize financial information, corporate structure, governance, risk analysis, and market
data, along with ESG reports. These reports harmoniously blend both dimensions to provide
a comprehensive overview of the company's performance, encompassing financial aspects
as well as environmental, social, and governance considerations.
ESG reporting is the disclosure of non-financial factors that impact on the sustainability of
businesses while integrated reporting covers both financial and non-financial factors in
relation to the business. In short, we can say that ESG reporting comes under integrated
reporting.

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Investment and ESG

Investing in which sector or on which company has been a big query for the investors.
Investor always tries to grab high return from his/her investment with minimum risk.
Numerous factors can affect the business. Considering those, investors make investment on.
Today investors are willing to invest on sustainable businesses. Investing to gain some
return in short period is no more going to exist. From short term return, investors are shifted
towards the long run.
Many of the investors are increasingly recognizing the importance of environmental, social
and governance (ESG) factors as an important aspect of their investment process. Unlike
purely profit-driven commercial investors, these institutions go beyond traditional financial
metrics and delve deep into ESG considerations to identify potential risks and uncover value
creation opportunities.
Incorporating ESG risk mitigation requirements into their investment strategies reflects a
proactive approach to managing the non-financial factors that could affect their portfolios.
These investors understand that considering ESG issues can reduce risk and increase
financial returns. Numerous studies have consistently demonstrated a positive correlation
between effective ESG risk management and financial performance.
ESG investing is a form of sustainable investing that considers environmental, social and
governance factors to judge an investment’s financial returns and its overall impact. As
sustainability demonstrates ESG reporting, all environmental and social risks and their
impacts are disclosed and actions to mitigate risks are reported, giving investors assurance
on their investment. ESG reporting is the tool for the sustainable investment. Things to be
considered other than financial factors are covered by the sustainability reporting, so it is
easier for the investors to decide where to invest. An investor has to invest his resources
based on the ESG score to make the planet better for living.
A growing fleet of investors adopting ESG risk mitigation requirements recognize that
effective management of environmental, social and governance factors is not only beneficial
to society, but is also beneficial to generate sustainable financial returns. By incorporating
ESG considerations into their investment processes, these investors are actively seeking
companies that are aligned with their values and demonstrate a commitment to long-term
success through responsible business practices.

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ESG and Sustainability in Nepal

Nepal is in the early stages of ESG reporting. Compared to the world, Nepal has less carbon
emissions, less pollution and the impact of business houses on the environment is also less.
There are few production houses and industries in Nepal, so natural resources are yet to be
used like forest, soil, water, mountains etc. On developing the country and promoting
industrialization, natural resources will be used which can have a negative impact on the
environment. Steps have to be taken from now itself to keep the environment clean.
Therefore, every business house needs to pay attention to the risk of environmental
degradation. Every company needs to develop mitigation strategies.

In Nepal, ESG reporting is voluntary responsibility of the business organizations. The Nepal
Rastra Bank has taken significant regulatory steps to encourage green investing by
implementing various policy provisions. These provisions aim to incorporate environmental
considerations into the decision-making processes of Banks and Financial Institutions (BFIs).
One such provision is the introduction of the Environment and Social Risk Management
(ESRM) framework, which mandates BFIs to assess environmental risks in accordance with
national laws before extending credit facilities to businesses.

By implementing the ESRM framework, the Nepal Rastra Bank ensures that BFIs thoroughly
evaluate the potential environmental impacts associated with the businesses they provide
financial support to. This assessment helps identify and mitigate environmental risks,
fostering sustainable practices and reducing the negative ecological footprint of funded
projects.

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ESRM Guideline
The core objective of the ESRM Guideline is to require Bank and Financial Institutions to
integrate Environmental & Social risk management into the overall credit risk management
process in order to fully inform the credit authority of Environment and Social risks prior to
the financing decision regarding individual transactions. An Environment &Social policy
states a B/FI’s vision and mission with respect to the environment, society and contributions
to sustainable development. It is a short, written statement, approved and supported by
senior management that articulates the B/FI’s commitment to integrating E&S
considerations into its business activities as well as contributions to sustainable
development. The typical E&S policy may include one or more the following statements and
commitments:
 Incorporating E&S risk considerations into all financing activities
 Setting strategic E&S objectives, such as offering new products that address E&S
sustainability
 Excluding financing clients whose business activities do not meet the B/FI’s principle
 Establishing applicable E&S requirements for clients such as complying with national
E&S regulations and international standards
 Communicating E&S expectations to all staff, clients and other external stakeholders
 Committing to improving the overall E&S performance of its portfolio through enhanced
risk management
 Committing to continually building capacity of its staff to manage E&S risks

The ESRM is supported by the checklist E&S Due Diligence (ESDD) based upon which risk
rating score is given. This rating is indicative of the E&S risk and compliance level in the
actual transaction, irrespective of sector activity. The risks are categorized into "HIGH",
"MEDIUM" & "LOW". Based on the category assigned what have to be done or what actions
need to be taken are reported to NRB.

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ESG and FDI

Nepal is actively trying to attract foreign investment; however, the country is yet to see a
significant inflow of Foreign Direct Investment (FDI). Foreign investors often express
concern about the guarantee and security of their investments. The current financial
reporting framework may not provide sufficient information to instill confidence in
potential investors considering investment in Nepal. Consequently, there is a need to
establish a clear path towards sustainable investment to attract FDI. To address these
challenges and enhance investor confidence, it is crucial for businesses in Nepal to prioritize
Environmental, Social, and Governance (ESG) reporting. By incorporating ESG reporting
practices, businesses can provide investors with a comprehensive understanding of potential
future events and the impact of their operations on the environment and society.
Furthermore, ESG reporting underscores good governance practices within businesses. By
emphasizing transparency and accountability, it enables foreign investors to assess the
soundness of the company's governance structure and practices. This, in turn, facilitates the
investment decision-making process. Additionally, Nepal can benefit from promoting
sustainable practices across various sectors. Encouraging environmentally friendly
initiatives, social responsibility programs, and ethical governance practices can enhance the
country's attractiveness for foreign investors seeking sustainable investment opportunities.

It is important for Nepal to create an enabling environment that supports sustainable

investment and addresses the concerns of foreign investors. This includes implementing
appropriate regulations, providing incentives for ESG reporting, and promoting stakeholder
engagement to ensure that businesses operate in a socially and environmentally responsible
manner.

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ESG in South Asia

Explicitly, ESG reporting is not mandatory in South Asia. However, in most of the countries
like India, Pakistan, Bangladesh, the regulatory bodies requires the similar type disclosures
from the companies supporting the ESG and sustainability. Corporate bodies in south Asia
use the framework as required by their regulator to disclose ESG and Sustainability.

Regulatory Body of stock exchange Securities and Exchange board of India have
introduced a framework for Business Responsibility and Sustainability Reporting (BRSR),
which includes ESG reporting, for listed companies in India. The framework somehow
similar to other frameworks of ESG and sustainability which provides a useful tool for
companies in India to report on their ESG performance and other sustainability-related
information.

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Roles of Regulatory Authority

The role of regulators is crucial in creating a regulatory framework that supports ESG
investments, incentivizing companies to adopt ESG practices, promoting transparency and
accountability, and collaborating with industry stakeholders and other organizations. ESG
and Sustainability Reporting is voluntary responsibility in Nepal. Similar to the ESG, Nepal
Rastra Bank requires the banks and financial institutions for ESRM Reporting. Also
Industrial Enterprises Act, 2076 also requires the Businesses to conduct Environment Impact
Assessment. Apart from this, there is no any framework for ESG reporting. The regulators
have the key role in making the Reporting mandatory.

The first and crucial role has to take by SEBON as it is the regulator for the listed companies.
SEBON should ask the businesses for ESG report for every listed company. NRB, Insurance
Authority and other regulators has to set the clear frameworks and guidelines to support the
ESG Reporting at the earliest possible.

In the light that ESG standards been developed and published by International
Sustainability Standard Board (ISSB), Nepal Accounting Standard (ASB) Nepal may soon or
later will make it compulsory for some entity having public accountability.

Challenges in Implementing ESG

ESG reporting can seem daunting because it is new, elusive, affects every financial process,
and because the stakes are so high for the sustainability-motivated investor. It can be
challenging for businesses to implement ESG reporting in the early stages. As of now, there
is no specific framework for reporting. For reporting, companies must maintain data to
measure impact. Nepali businesses do not have access to equipment to measure CO2
emissions, gases and other byproducts. Emission detection is more challenging than
measurement. Since Nepal is a multi-cultural and multi-ethnic country, it is challenging to
satisfy the society as a whole. For ESG reporting, the business needs to employ resources
only for conducting ESG reporting which may not be cost effective.

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Way Forward
Sustainability already plays an important role in shaping the future of the financial industry.
Indeed, assets under management with an ESG mandate are growing exponentially and
most financial market participants accept that this sustainability transition is something they
can no longer ignore. It is encouraging to see that discussions are moving away from
whether to do sustainable investing to which sustainable investments are available to invest
in. Sustainable investing has become a significant trend in the financial sector. On the other
hand, it is crucial to recognize that progress in this area can vary significantly across
different geographies and jurisdictions.

For sustainable investing to become mainstream, financial professionals need to have the
necessary skills and understanding of how to integrate ESG considerations in their
investment decisions and when advising clients. Any financial institution that wants to
provide services in this area needs to have compulsory ESG training for relevant staff. This
would enable front-office employees (such as investment advisors) to educate their own
clients and to raise awareness about this new way of investing by talking about it in relevant
events. ESG training would also be essential for middle and back-office staff responsible for
sustainability-related disclosures, reporting and risk management.

Indeed, I am convinced that sustainable investing is the future of finance. Certainly, there is
still a lot of progress to be made before it becomes truly mainstream. However, if the key
drivers discussed earlier can indeed generate the expected demand, and if there is
willingness from market participants, stakeholders and regulators to transform the
traditional way of doing finance, it is only a matter of time. I expect that in 5 years,
sustainable investing will just be called “investing,” as integrating sustainability
considerations will have become the new normal.

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