ESG In Vietnam: Investing In Social And Governance Performance For Sustainable Growth

This article by Ramla Khalidi, UNDP Resident Representative, and Iain Frew, British Ambassador to Vietnam, highlights the crucial role of ESG principles in Vietnam’s business landscape. It stresses Vietnam’s commitment to adopting these principles for sustainable growth and competitiveness in the global market, with a focus on meeting new sustainability requirements from the EU and the UK.

In the landscape of modern business, Environmental, Social, and Governance (ESG) considerations have become key factors shaping corporate strategies and investment decisions. Vietnam stands at a crucial juncture where embracing ESG principles is essential for sustainable development and for maintaining competitiveness in the international market.

The Vietnam Business Forum’s focus on ESG could not be timelier. It reflects the nation’s commitment to achieving net-zero emissions and adhering to sustainable growth trajectories outlined in the National Green Growth Strategy. Moreover, responding to the demands from international financial institutions and markets, particularly the European Union and the UK, underscores the urgency for Vietnamese businesses to prioritize ESG performance.

Businesses in Vietnam who wish to export to the EU, or who are part of EU-bound supply chains, will need to prepare for new sustainability requirements, such as those under the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive.

In the same vein, Vietnamese businesses that supply products or services to UK companies may be expected to report on ESG measures or have proof of good ESG practices. It is increasingly difficult or even impossible to win a contract with larger companies or the government of the UK without this, as they are required to report various climate-related measures and the company’s climate strategy, following the Climate-related Financial Disclosure Regulations 2022.

We have seen businesses pay increasing attention to the environmental aspect of ESG, addressing issues like carbon emissions and circular economy practices. This is understandable in a country vulnerable to climate change and grappling with plastic pollution. At the same time, businesses must not overlook the Social and Governance dimensions. These pillars are equally vital for driving sustainability and creating long-term value for businesses.

Investing in social performance

The Social (S) pillar of ESG assesses how a business manages its impact on workers, customers, communities, and society at large. This includes promoting diversity, equity, and inclusion in the workplace, supporting fair labor practices, prioritizing supply chain responsibilities, adopting responsible marketing and advertising practices, and investing in local communities.

According to the Vietnam ESG Readiness Report 2022, only 16% of businesses operating in Vietnam prioritize social performance. This lack of investment may stem from the misconception that social investment conflicts with financial returns, posing a burden on operations. However, a closer look at the social indicators suggests numerous potential benefits translating into strong long-term value. These include increased productivity, innovation, stakeholder engagement, reputation enhancement, and investor confidence.

The hesitation of businesses in assessing social performance may also be partly due to its less straightforward or technical indicators. About 71% of Vietnamese businesses lack an understanding of ESG reporting data. Luckily, frameworks and guidelines exist to aid businesses in selecting the appropriate indicators and metrics. For instance, a key guidance on social performance for businesses can be found in the UN Guiding Principles on Business and Human Rights, which can support businesses in social and environmental due diligence.

In Vietnam, a National Action Plan on Responsible Business Practice, which seeks to align Vietnamese policy and law with UN Guiding Principles, has been approved by the Prime Minister and is under coordination with the Ministry of Justice. UNDP seeks to continue to support the Ministry of Justice and other government agencies in taking this plan forward and fostering knowledge-sharing and capacity-building among businesses and other stakeholders to better understand and apply these guidelines.

As part of the wider effort to support, UNDP and the UK Government recently collaborated on a project to actively engage the private sector in anti-corruption and compliance control, encouraging the business community in Vietnam to act collectively to improve the business environment. The business community was provided with knowledge and skills relating to compliance control, risk management, due diligence, and ESG.

The UK Government is also helping the Ministry of Planning and Investment and the State Securities Commission develop handbooks on ESG framework and climate-related financial risk disclosure for state-owned enterprises (SOEs), small and medium enterprises (SMEs), and listed companies. The UK Government will continue these efforts, and look to collaborate with other donors, to support Vietnam.

Investing in Governance

In Vietnam, Governance is a top priority for 62% of businesses. Governance refers to policies and practices that define the relationships within a company, including management, the board of directors, shareholders, and other stakeholders. It assesses how organizations are managed, directed, and controlled, focusing on compliance, integrity, and sustainability oversight. The relatively high priority given to the governance pillar reflects a commitment to responsible conduct, particularly in compliance, anti-corruption, and effective management.

Despite this focus on Governance, 76% of businesses surveyed by the ESG Readiness Report 2022 lack a clear ESG governing structure, and 65% do not involve the executive board in ESG matters. To avoid ESG programs becoming mere box-ticking exercises, governance structures should manage policy implementation and assess and drive forward business performance for long-term value and impact.

Various assessment frameworks can guide businesses in selecting indicators and metrics that align with their goals and stakeholder needs. Governance initiatives should intersect with other ESG elements, forming a comprehensive toolbox. These initiatives may include integrating ESG into decision-making processes, conducting regular audits, enhancing transparency and accountability through reporting, and fostering a culture of ethics and integrity.

UNDP’s SDG Impact Standards, a readily available management practice tool, is designed to guide businesses in effective governance. These standards provide a decision-making framework, helping businesses embed sustainability into their management and decision-making processes while filling gaps in current market practices.

Moving Forward

The current evolution of ESG increasingly calls for a more ambitious interpretation of materiality, going beyond risk management and ‘do-no-harm’ approaches to actively creating a net-positive impact while ensuring financial returns. While Vietnamese businesses currently lag in ESG practices, they have the opportunity to leapfrog on their sustainability journey. Despite challenges such as lack of knowledge, resources, and regulatory frameworks, Small and Medium Enterprises (SMEs), which comprise 97% of businesses in Vietnam, can leverage their agility and innovation to adopt ESG strategies more effectively. Moreover, SMEs stand to benefit significantly from ESG practices, including talent attraction, access to capital, and operational flexibility.

A comprehensive program is needed to build business capacity, facilitate access to ESG and impact investors, develop clear regulatory frameworks, and raise awareness about scientifically valid and impactful ESG practices.

With a strategic approach, defined targets, rigorous data collection, robust ESG management frameworks, and transparency, businesses can align with Sustainable Development Goals and create long-term value. Businesses should embrace sustainability management, measurement, and disclosure, fostering a culture of accountability and trust, and striving for tangible impacts on people, the planet, and sustainable growth in Vietnam.

The 2024 Vietnam ESG Investor Conference by Raise Partners and Vietnam Innovators by Vietcetera is a two-day event, gathering investors and funds, business leaders, Vietnamese and international governments, start-ups, experts, academia, and the media to spark meaningful collaboration and accelerate green and inclusive growth in Vietnam.

When: 8:30 AM - 4:30 PM, 16-17th May 2024
Where: New World Saigon Hotel76 Le Lai Street, District 1, Ho Chi Minh City

Event details: find out more HERE

The 2024 Vietnam ESG Investor Conference was made possible with the support of Dynam Capital and Vietnam Holding (Title Sponsor), Australian Department of Foreign Affairs and Trade (Leading Government Partner), British University Vietnam, HSBC Vietnam (Major Sponsor), New World Saigon Hotel (Venue Sponsor), S&P Global, DEEP C Industrial Zones (Expert Content Partner), Vero Asean (Official Communications Partner), Aden Services (Booth Sponsor), Eurocham, Nordcham, and AmCham (Promotional Partner), Marou, Cricket One and Every Half Coffee (In-Kind Partners).