Navigating ESG Trends in Vietnam: Progress and Challenges

Environmental, Social, and Governance (ESG) has emerged as a global priority, garnering interest from investors, customers, regulators, and stakeholders. This article provides insights into the current adoption of ESG principles in Vietnam’s corporate landscape, alongside governmental initiatives.

In Vietnam, embracing ESG practices not only enhances businesses’ reputation, mitigates risks, and improves efficiency but also attracts capital, opens new markets, and contributes to Vietnam’s Sustainable Development Goals (SDGs). Vietnam’s commitment to the 2030 Agenda underscores the pivotal role of ESG in meeting global standards and aligning with the United Nations’ SDGs.

According to Sustainalytics’s analysis about ESG disclosure and performance, Vietnam faces higher unmanaged ESG risks due to lower management scores and increased exposure in industries like steel, mining, oil and gas, electric utilities, and food. Given its vulnerability to climate change, Vietnam prioritizes analyzing ESG disclosures to address concerns effectively.

The Rise of ESG in Vietnam’s Business

Revealing Strong ESG Momentum in 80% of Vietnam’s Business Landscape

In a survey conducted by PwC and the Vietnam Institute of Directors (VIOD) involving 234 participants (including 55 from Public Listed Companies), it was revealed that 80% of Vietnamese businesses have either already made ESG commitments or are planning to do so within the next 2-4 years.

In Vietnam, Foreign Invested Enterprises (FIEs) are showing a strong commitment to ESG, with 57% explicitly stating their dedication. This trend is consistent with the expectation that many FIEs will be influenced by the established ESG practices of their parent companies overseas. FIEs are poised to play a vital role in advancing Vietnam’s ESG agenda by sharing best practices, offering technical assistance, and facilitating access to green finance and markets for local partners and suppliers.

On the other hand, Public Listed Companies (PLCs) in Vietnam are taking a cautious approach, with 58% indicating their intention to monitor and evaluate ESG developments before committing. In contrast, 40% of Private Family Businesses (PFBs) have already made ESG commitments, highlighting a strong sense of responsibility within this sector.

Governance Pillar Key for Vietnamese Companies While Brand Image Drive Intensified Efforts

Governance emerges as a primary concern for 80% of Vietnamese companies, as they believe strong governance improves decision-making in environmental and social aspects according to PWC’s Investor Survey. The survey underscores that, in the short term, governance exerts a greater influence on stock prices, while all three factors become imperative for long-term outperformance. The governance pillar also highlights sector-specific concerns, including risks related to events such as health, safety, data privacy, and security, which can have short-term effects on stock prices

Companies are increasingly motivated to intensify their efforts in addressing ESG-related issues due to external pressures from consumers, employees, and investors. In Vietnam specifically, 82% of respondents prioritize brand image and reputation as the primary driving force behind pursuing ESG initiatives, followed closely by the aim to remain competitive (68%). Additional motivating factors include employee retention and the need to respond to heightened pressure from investors and government entities.

Addressing the Disparity: Bridging the Gap between ESG Ambitions and Actions

While Vietnamese companies demonstrate commendable ESG commitment, there are significant gaps between ambition and action. According to PwC’s survey, 66% of Vietnamese companies have initiated ESG programs, but only 22% have comprehensive coverage. Additionally, 49% have a formal ESG structure, yet only 24% possess clear governance with defined commitments, roles, and responsibilities. Furthermore, only 35% involve their Board in ESG leadership, with larger firms displaying more leadership (40%) than mid and smaller ones (25%).

Moreover, only 22% have dedicated ESG leaders or Chief Sustainability Officers (CSOs), despite PwC’s analysis indicating that all (98%) of the highest-rated ESG companies have some level of CSO (Chief Sustainability Officers). Regarding risk metrics, 28% claim comprehensive sets, indicating a lack of knowledge or the abundance of available metrics for addressing ESG risks.

The survey also highlights that 71% of Vietnamese companies are in the initial stages of understanding or have not started incorporating ESG data. ESG reporting, crucial for conveying a company’s impact, is limited, with 70% having none or limited reporting. Additionally, only 36% undergo independent audit or verification of their ESG reporting, lower than the global average of 58%. Independent assurance in ESG reporting fosters trust, making it an essential aspect for organizations.

Challenges Hindering ESG progress in Vietnam

While this report sheds light on the challenges hindering ESG progress in Vietnam, it is crucial to address how these challenges are being addressed and what opportunities they may present for readers looking to navigate the Vietnamese business landscape in relation to ESG.

Approximately 20% of Vietnamese companies, particularly SMEs with fewer than 200 employees, currently lack ESG commitments or plans. This aligns with global findings from a PwC survey, where 60% of companies, mostly SMEs, cite lack of knowledge as a primary barrier to ESG progress, underscoring the need for proactive dialogue between the Vietnamese government and SMEs.

The absence of transparent regulations affects 67% of companies, highlighting the necessity for clear guidelines, a comprehensive country roadmap, and a level playing field to advance ESG strategies. Many businesses are eagerly awaiting clarity on Vietnam’s green finance rules and target areas from regulatory authorities.

Another significant challenge is the insufficient focus on upskilling Boards in ESG matters, with only 29% of survey respondents expressing confidence in their Board’s capabilities on ESG issues. This indicates a need for companies in Vietnam to prioritize training to enhance confidence levels in this area.

ESG compliance costs for businesses, particularly those mandated for publicly listed companies, involve significant financial and human resources. While larger Vietnamese companies pursue comprehensive ESG initiatives, smaller enterprises face constraints due to technological limitations and slow adoption of sustainable practices.

Moreover, businesses encounter challenges with various standards and indices, such as the Customer Satisfaction Index (CSI), ISO 26000, and the Sustainable Development Index (VNSI), complicating selection and implementation. It is imperative for businesses to thoroughly understand and consistently adhere to these standards.

ESG Policy Advancements

In response to heightened climate concerns, Vietnam’s government has prioritized ESG practices. Legislation addressing environmental protection, sustainable development, and corporate social responsibility has been enacted.

Reporting Mandates for Transparency

Circular No. 155/2015/TT-BTC mandates annual reports from public companies, disclosing their environmental and social impact. To encourage external assurance, the State Securities Commission collaborated with the World Bank Group to publish an Environmental and Social Disclosure Guide in 2016.

Stock Exchange Initiatives

The State Securities Commission of Vietnam (SSC), in collaboration with Ho Chi Minh Stock Exchange (HOSE) and German cooperation agency (GIZ), introduced the Sustainable Development Index (VNSI) on HOSE in July 2017. Aligned with global standards like the OECD Principles of Corporate Governance and GRI Standards, VNSI aims to identify ESG best practices among listed companies.

This cap-weighted, free-float adjusted index selects high-sustainability-score companies from the VN100, undergoes rigorous ESG evaluations, and updates in real-time every 5 seconds. Serving as a valuable reference and potential foundation for financial instruments, VNSI reflects HOSE’s commitment to innovative sustainability indexing with a focus on robust sustainability score reviews and meticulous data collection methods.

Global Commitments

At the 26th United Nations Climate Change Conference of the Parties (COP26), Vietnam pledged ambitious goals, including achieving net-zero carbon emissions by 2050, ending deforestation by 2030, and phasing out coal-fired power by 2040, highlighting the government’s dedication to global sustainability and ESG principles.

As previously mentioned in our previous report, Vietnam signed and released the official Power Development Plan VIII (PDP8) for 2021–2050, a significant energy reform initiative aligning with sustainable solutions in May 2023. Read our previous Vietnam Sustainable Investment Report here.

Vietnam plans to launch a carbon trade exchange in 2028, per a draft project by the Ministry of Natural Resources and Environment, aligned with Government Decree 06/2022/NĐ-CP. This initiative aims at greenhouse gas emissions reduction, ozone layer protection, and carbon market development. The draft proposes a carbon credit market pilot in 2025, focusing on formulating regulations for carbon credit management and greenhouse gas emission quota exchange until the end of 2027. Vietnam anticipates potentially selling 57 million carbon credits annually to international organizations, each fetching up to $5.

ESG transcends mere commitment, action, or reporting; it embodies a visionary approach and effective risk management. By adopting ESG practices, businesses in Vietnam can actively contribute to societal and environmental well-being, fortify their resilience, drive innovation, and elevate competitiveness. Acting as a catalyst for success, ESG benefits not just businesses but also governments and society at large, positioning those addressing sustainability and climate concerns today as leaders of tomorrow.

At ARC Group, we stand ready to assist businesses worldwide with our specialized expertise in ESG consulting. Our tailored services can aid you in:

• Develop and implement ESG strategies that align with your business goals, stakeholder expectations, and industry best practices.
• Measure and improve ESG performance using data-driven tools, frameworks, and indicators, and benchmarking against peers and competitors.
• Communicate and report ESG impact to internal and external audiences, using transparent, consistent, and credible methods and standards.
• Leverage ESG opportunities to access green finance, new markets, and innovation, and to enhance your brand value, reputation, and competitiveness.

We invite you to join us in this transformative journey and emerge as pioneers and leaders within the ESG landscape.

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References:

• Allen & Overy. (2022). A Snapshot of ESG in Vietnam.
• KPMG Vietnam. (2023.). Sustainable Supply Chain.
• United Nations in Vietnam. Sustainable Development Goals (SDGs).
• Vietnam Briefing. ESG Vietnam: Challenges & Potential
• Vietnam News.  EU Green Deal Poses Challenges to Vietnamese Businesses.
• VietnamPlus.  Vietnam’s Report on SDG Implementation Announced.