Sustainable Pathways: The Key to Vietnamese Businesses’ Market Resilience
As a nation heavily reliant on exports, Vietnam stands at a critical juncture as global markets increasingly prioritize sustainability. This shift towards protectionism and stringent sustainability standards poses significant challenges to key sectors of our economy. Despite recent economic growth, Vietnam's starting point in addressing environmental and social governance (ESG) concerns is challenging, with significant emissions and environmental impact issues to tackle.
ESG Strategy from a Business Perspective
ESG is a framework encompassing environmental, social, and governance standards for company operations. It serves as a guide for stakeholders to understand how an organization manages risks and opportunities across three dimensions.
E - Environment focuses on energy consumption, waste discharge, and natural resources management. Key aspects include climate impact, pollution, waste management, and resource usage.
S - Social factors emphasize responsible business practices, encapsulating employee well-being, diversity, hiring practices, customer safety, privacy, data security, product management, accessibility, and community investment.
G - Governance involves control mechanisms, procedures, and practices guiding decision-making. Companies need to address business ethics, competitive behavior, transparency, tax practices, audit, leadership structures, remuneration, risk management, and ownership succession.
The Vietnamese Government's Commitment to Sustainability
Over the past three decades, Vietnam's coal-driven economy has made it a leading global contributor to GHG emissions, experiencing the fastest growth rate worldwide. Ranking 21st globally and second in East Asia for GHG intensity, Vietnam's emissions growth has outpaced that of China and the Philippines. Between 2000 and 2015, Vietnam's GDP per capita rose from $390 to $2,000, while GDP per capita emissions more than quadrupled. This surge has led to severe air pollution, especially in urban areas like Hanoi, with significant health and productivity costs estimated at 1% of GDP in 2022. Without technological, industrial, and policy reforms, GHG emissions could nearly quadruple by 2050 (Exhibit 1). This could rapidly stain the efforts of Vietnam, which has otherwise consistently progressed on other dimensions of ESG, which allowed it, in turn, to increase its global export competitiveness.
Exhibit 1. Greenhouse Gas Emissions (GtCO2e) in Vietnam by 2050
Source: McKinsey’s analysisEmbracing the urgency to fight climate change, Vietnam is determined to become a net-zero economy by 2050 under the NDCs. In the COP26 conference, Vietnam updated its Nationally Determined Contributions (NDCs) to include a pledge to achieve a 15.8% reduction in emissions by 2030 using domestic resources and 43.5% reduction with international support. These efforts, supported by relevant ESG policies and regulations, are designed to galvanize businesses into playing a greater role in achieving national ESG objectives.
ESG and Business Success
ESG creates winners among businesses, governments, and society. While Social and Governance factors are more commonly embraced by export-oriented industries, those addressing sustainability and climate change today are poised to be the leaders of tomorrow - precisely because this dimension will become a differentiating factor as. ESG has become more mainstream.
We see five areas in which the implementation of an ESG strategy is necessary to maintain business success:
1. Evolve to meet the global standards and maintain market access:
Vietnam, an export-driven economy, relies heavily on the European Union, which accounts for 16% of its export goods, making it the third-largest importer of Vietnamese products. Among the top ten export items in 2023 (Exhibit 2), a significant number are impacted by the EU's Green Deal—a comprehensive set of policy initiatives aimed at achieving climate neutrality by 2050. For example, the Common Fisheries Policy, part of this Deal, demands a sustainable overhaul of the entire food value chain. Vietnamese fisheries must develop a sustainable system of farm operations and water usage while minimizing environmental impact to meet the EU regulations; and strictly adhere to requirements on food safety and animal welfare. Similarly, the Carbon Border Adjustment Mechanism (CBAM) requires steel and iron exporters to adhere to the EU’s carbon emission standards or face a carbon price or CBAM tax. To remain competitive, Vietnamese export companies must urgently implement sustainable transition strategies. Embracing these changes is essential to secure their future in the sustainability-driven market.
Exhibit 2. Top 10 Vietnamese export goods to the EU and related initiatives
2. Enhance brand image and reputation:
Companies adopting ESG commitments enhance their public image and reputation, vital for attracting and retaining customers. Consumers are increasingly aware of and concerned about the ethical implications of their purchases. Recently, Vinamilk, Vietnam’s leading dairy company, has been recognized as a Top 5 global player in sustainability, achieving a Sustainability Perceptions Value of USD 253 million. The company is the only Southeast Asian company to be featured in this prestigious top five.
3. Reduce costs significantly:
ESG initiatives can also help substantially reduce costs, especially mitigating rising operational expenses, including those related to raw materials, water, and carbon. For instance, Thanh Thanh Cong - Bien Hoa has saved about 73% of water cost from external providers through implementing a Cooling Tower system, which cools the water to 350°C to 380°C for recirculation. More generally, we often estimate when developing decarbonation pathways for companies that around a third to half of the levers necessary to reach net-zero (on scope 1 emissions) also have a positive impact on the P&L (Exhibit 3).
Exhibit 3. Example of a transformation journey focused on decarbonization
4. Attract and retain employees:
A strong ESG commitment enhances a company's appeal as an employer, creating a more engaged and motivated workforce. However, findings from PwC’s Asia Pacific Workforce Hopes and Fears Survey 2022 indicates increasing dissatisfaction among employees in the region, with 73% feeling unsupported in efforts to reduce their company's environmental impact. This highlights the critical need for companies to not only adopt ESG policies but also to implement them effectively and communicate their efforts clearly to employees.
5. Increase investor confidence:
Investors are increasingly attentive to ESG factors, with nearly 80% considering them important in investment decisions and about 50% are willing to divest from companies that fail to take actions on ESG issues. Thus, companies aligned with ESG expectations attract more investments and maintain investor confidence.
Exhibit 4: The case study of Vinamilk
Vinamilk is a standout example of ESG implementation in Vietnam, ranking for six consecutive years as the Top 10 sustainable development enterprises of Vietnam in the field of production. Vinamilk’s efforts to incorporate ESG standards into their operations have helped its ESG score be higher than the industry average and VN100 average. It can offer a good example to other companies about where to get started when it comes to ESG.
Vinamilk’s environmental initiatives promote using green energy sources like CNG and biomass, while installing solar energy systems at its factories and farms. In 2022, 86.8% of the energy used in production was green and clean.
Social aspect involves the contribution to the national economic development with VND 4,415 billion to the State Budget in 2021 and engaged in numerous community support programs, such as the Stand Tall Milk Fund, School Milk Program, Central flood support, etc.
Governance practices utilize a three-line defense model to ensure professionalism, objectivity, and independence in management processes. This framework effectively controls and manages various risks, such as product quality, environmental responsibility, climate change, regulatory compliance, health and worker safety.
Challenges in Implementing ESG in Vietnam
Despite progress, Vietnamese businesses face several challenges in implementing ESG strategies.
1. Lack of knowledge:
The primary challenge arises from the lack of preparedness among companies, especially SMEs, to initiate ESG commitments. Additionally, the emergence of diverse standards and criteria from multiple organizations– such as VNSI, CSI, ISO26000–complicates businesses’ decision-making processes in selecting and implementing sustainable development practices.
2. Financial constraints:
Financial constraints significantly hinder ESG implementation for businesses. Publicly listed enterprises must annually evaluate and publish ESG reports to comply with regulations. Effective ESG programs also require continuous monitoring and assessment of performance indicators, which demands financial resources and technological capabilities that many SMEs lack. As a result, only a few large-scale Vietnamese enterprises and publicly listed companies have been able to fully implement comprehensive ESG strategies, underscoring the challenges posed by financial limitations in meeting ESG criteria.
3. Lack of Transparent Information:
ESG-related data is complex and diverse, posing challenges in both collection and quality assurance. Businesses often struggle to process and analyze this data due to unclear collection rules, lack of standardization, and inconsistent reporting standards for ESG indicators. These issues result in transparency gaps and uncertainty about data origin and quality, making it difficult to compare and evaluate company performance accurately.
Where to start: 3 levers to incorporate ESG practices
Vietnamese businesses are stepping up in their ESG journey but the gaps between ambition and action can hinder their progress. To ensure a successful implementation of ESG, companies should adopt several strategies to incorporate ESG practices effectively:
1. Strong Governance Framework:
The governance framework integrates critical ESG factors across all facets of business strategy, operations, and decision-making. It emphasizes cross-functional collaboration in delegating authority for ESG-related decisions. This structured approach ensures decisions are data-driven and fosters accountability through board and management oversight.
Action:
The ESG governance structure includes defined roles, responsibilities, and KPIs, establishing clear targets and goals.
A comprehensive reporting roadmap for ESG issues should be implemented to communicate progress regularly and report back to the Board.
A helpful starting point is often defined by regulations and norms in european markets, which can help define the minimum requirements.
2. Leverage Senior Leadership:
Boards play a crucial role in prioritizing ESG by guiding resource allocation and management attention. Leading practices suggest Boards ask targeted questions to tailor governance structures for effective ESG oversight aligned with company specifics.
The rise of roles like Chief Sustainability Officers (CSOs) underscores their pivotal role in driving and implementing ESG initiatives. CSOs grasp the interconnectedness of ESG issues while focusing on the organization’s sustainability goals.
Action:
Appoint a dedicated CSO to develop a comprehensive plan with clear deadlines.
Establish a Board subcommittee for strategic guidance and oversight.
Enhance internal and external communications to affirm commitment to ESG efforts.
3. Set Clear ESG Targets and Metrics:
Consumers, investors, and governments increasingly prioritize businesses that excel in ESG performance. Traditional financial metrics provide only a partial view of a company's overall performance. Today, organizations must illustrate how environmental, social, and other factors influence their strategy, operations, and long-term outlook. Integrating ESG risks into the Risk Management Framework is essential as it aligns strategy with risk assessment, ensuring companies understand and mitigate potential impacts on their business.
Action:
Develop an ESG strategy centered around key performance indicators (KPIs) to drive business decisions.
Identify impactful ESG initiatives that can enhance cash flows, operational efficiency, and financial health. This approach sets a foundation for sustainable development and reinforces commitment to stakeholders.
Typically, make decarbonization of operations the cornerstone of an ESG strategy: it is easy to understand, will increasingly be in the spotlight among investors and customers, and can become a powerful “north star” for the company journey (while conversely, companies with prominent ESG agendas that do not include decarbonization run the risk of being exposed as inconsistent).
ESG is not just a trend but a critical framework for business sustainability and success. In Vietnam, the government's commitment and growing market demand are driving ESG adoption. By understanding the motivations behind ESG and implementing practical strategies, businesses can navigate the challenges and leverage ESG to stand out in the competitive landscape, ensuring long-term success and sustainability.
By Huyen Dao - Research Analyst at Delta West and Delta West Team
