Thursday, 09/11/2023 15:09

How companies can ensure best results from ESG

Businesses in Việt Nam have been paying more and more attention to Environmental, Social, Governance strategies, but what exactly does this mean for firms who follow that path? Việt Nam News reporter Lê Hương spoke with a number of experts to gauge their opinions on this matter.

Businesses need clear and proper guidelines on ESG

Ramla Khalidi, UNDP Resident Representative in Việt Nam

Ramla Khalidi - UNDP Resident Representative in Việt Nam. Photo Courtesy of UNDP Vietnam

How do you assess the implementation of ESG goals by Vietnamese businesses?

We are hearing a lot of talk about ESG, or environmental, social, and governance in business these days.

And it's very much linked to green growth, and corporate responsibility, and corporate sustainability. And this is important for a lot of reasons.

Having proper ESG guidance, allows companies and businesses to access markets and to access capital.

For example, we know that the European Union is progressing rapidly on its regulations for businesses that want to export to the European market, to make sure that they are measuring their ESG standards, and also that everyone in their supply chain is able to measure and disclose ESG. So that's an important reason to align.

The second is, of course, access to capital and access to loans, and that's becoming a condition.

So disclosure, ESG disclosure is becoming one of the conditions to be able to access that kind of financing.

Despite all of this, what we also know is that uptake in Việt Nam continues to be rather limited.

So although there are some exceptions with joint stock companies, or a few for runners in the Vietnamese market, nonetheless, uptake is still limited, especially among small and medium enterprises.

And what we're hearing is that they find this difficult to understand that it's complex, and they don't know where to start.

They also lack the resources and capacity to sort of begin this process and know where to begin.

So I think yes, I think all that to say is that it's important, it's where the where the businesses need to be heading, but we're not there yet.

What would be UNDP’s recommendations for the Vietnamese government to help accelerate the ESG progress in businesses?

What we would recommend is that focus or priority be given to small and medium enterprises, especially those that are looking to export to external markets.

And those who are involved in the energy transition, for example, I think those are critically important that they are prioritised in terms of building their capacity to be able to respond to ESG requirements disclosure requirements.

At the same time, there's also a need for the government to adopt green taxonomy. And to adopt a framework for ESG reporting. Both of those are important.

There are a lot of models around the world.

But Việt Nam needs to build on those models, learn from the examples, and then have a local context, locally contextualised taxonomy, and locally contextualised framework that can help support advancing this agenda forward.

Companies face challenges, but fruits will be sweet

Martin Rama, Former Lead Economist for Việt Nam at the World Bank

Martin Rama - Former Lead Economist for Việt Nam at the World Bank. File Photo

What do you think about the importance of ESG to Vietnamese enterprises?

Everywhere, enterprises are run for profit, that is a main objective. But along the way, as they try to make profits, they can do also other good things, or other bad things. Examples of bad things are like an industrial firm that pollutes the sea; a real estate company that demolishes building with heritage value;  a company that pays bribes and corrupts officials.

These are bad things we don't want them to happen. And if possible, we'd like firms also to do good things like firms to be especially green, or to promote women to leadership positions, or to be ethical and transparent, and ESG about these good things.

My first example of being green is for the E in environment. My second example, promoting women is for the S in social. And my example about being ethical and transparent is about governance, the G.

So we want possible that to happen. Now, we have to recognise many firms have relatively low capacity, so they better focus on making profits that what they are supposed to do. But creating the space for firms, large firms prestigious firms, to also show their commitment to environmental, social, and governance goals is a good thing.

What are the challenges for Vietnamese enterprises to practise today? 

The challenges are the same everywhere, not just in VietNam, there are two challenges.

The first is the potential cost of ESG.

It is fashionable these days to say that ESG is a win win that if you do things that are good for the environment, you are also more profitable.

But the reality is that often is not the case. Otherwise, firms will be doing anyway.

So, monitoring the quality of the water is costly for the real estate company probably could have made bigger profits by building high rise than by preserving an old building and creating a contract centre in it, which will have been very good for society but not for its profits.

So the first issue is, there is a potential trade off between profits, and ESG. The second issue is measurement. How do we know that a company is really committed to ESG, we can know whether it makes profit or doesn't make profits. But anyone can declare, oh, I'm green, I'm committed to zero emissions.

And by now, because of these measurement problems.

In advanced economies, there is an entire industry trying to measure companies in an ESG ranking, which ones are greener or more socially inclusive or more transparent.

The problem is that you need a lot of assumptions to these rankings because you need to understand the production processes of each company.

You need to understand what they will have done anyways, they were not ESG and the result is that many of these rankings of companies are very weakly correlated, like one thing that may say: 'Oh, this company is wonderful and ESG', but another one may come to a different conclusion. 

So these two problems, the possible trade off with profitability, and the measurement of what is really ESG are the main obstacles everywhere in Việt Nam and in the rest of the world.

Have you got any suggestions to Vietnamese enterprises and Vietnamese concerned agencies to reach global ESG criteria?

I have two suggestions. One positive and one negative.

On the positive side, it is great to create a space for ESG to flourish.

If companies want to brand themselves as committed to social environmental governance goals. That's very good.

If there are think tanks, not for profit organisations that want to rank companies based on their ESG performance. That's fine, provided that is done in a very transparent way because it could be used to trash competitors.

But provided isn't a transparent way if then a consumer says: 'oh, I'm willing to pay more for my coffee because it was grown in an environmentally friendly way'. Or because farmers were paid better.

That's a consumer choice, and it should be supported.

And if an investor says: 'I won't only want to put my money in companies committed to ESG'.

That's fine too.

The negative thing, nobody should be forced to participate in these schemes, because of the two risk I mentioned the risk of having lower returns and the risk of manipulation.

So I will not advise having say subsidised credit for companies committed to ESG.

That opens the door to all sorts of irregularities.

I will not put pension funds in ESG.

Because then you are taking the money of people who are saving for retirement for something that may or may not be profitable.

So these are the two sides that need to be balanced when trying to think about supporting ESG.

What kind of support should be provided to ESG? 

As economists would say: we will always go for the first-best. So for ESG, the first best is to have good regulations and to enforce them. If an enterprise pollutes, it should be fine. If a building has heritage value, it should be protected, if someone is paying bribes, should go to jail, these diverse bets.

Now, second-best is you cannot ensure that all these things happen. And so you try to operate through instruments like ESG.

From the perspective of the second-best, we cannot monitor everything. So the ethical commitment of firms is important.

If everything is well designed, this can be an acceptable second-best, but it can also be a weak second-best. So again, my recommendation is go for the first-best.

Firms need to consider making changes in the long-term

Nguyễn Việt Long, Partner, Consulting, Earnst & Young Vietnam Ltd

Nguyễn Việt Long - Partner, Consulting; Earnst & Young Vietnam Ltd. Photo Courtesy of E&Y Vietnam Ltd

What do you think about the situation of ESG practice in Việt Nam?

 In fact, Vietnamese businesses have already been practising ESG. ESG means environmental, social and corporate governance.

When entering the market, Vietnamese businesses must comply with Việt Nam's Environmental Law and they have already done this.

Let me take the example of textile enterprises; when they discharge waste, they must comply with the provisions of the Environmental Law and related laws.

Regarding social factors, the Labor Law and worker protections also exist and businesses must comply.

In terms of Governance, or corporate governance, the Enterprise Law is also mentioned. Especially for listed businesses, they must have very strict corporate governance.

In the banking sector, corporate governance is even more demanding due to legal requirements.

So we have already been practising ESG.

We need to have instructions for businesses with information to help them analyse what is good and what they must invest more in to achieve that standard.

I think that's the case in terms of economics; however, we also see the general picture of the international market, especially for firms that do a lot of business with foreign markets, ESG is not only a standard, but also a business strategy.

In the long-term future, businesses also need to consider changes in markets, business models and strategies.

Advantages there to be taken by following ESG path

Nguyễn Hoài Thu, Chartered Financial Analyst, Head of Investment at VinaCapital

Nguyễn Hoài Thu - Chartered Financial Analyst; Head of Investment at VinaCapital. Photo Courtesy of CFA Community Vietnam

What are the advantages that enterprises who practise ESG may have in the market?

According to our observation, investors, especially foreign ones, and recently more domestic investors and organisations, have been paying more attention to ESG when judging companies to invest in.

At first, this may start from well-developed countries in Europe or Japan. When they consider investing in Vietnamese enterprises or offering capital loans, they often ask the enterprises to report their situation and ESG practices in their operation. Enterprises that can meet the requirements often borrow capital at lower interest rates than normal loans.

In Việt Nam, big businesses are the most likely to apply high standards of ESG, while small businesses have not paid much attention to ESG.

We have ESG rankings for 123 companies listed on the stock market. The companies with the highest ESG marks are often companies in the fields of technology, consumption and banking, including leading enterprises like FPT, Vinamilk and MBank. VNS

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