ESG Law has become an integral part of the oriented development and operation of an enterprise. Increased scrutiny from investors, changes in expectations of consumers and customers, and changes in public policy mean companies are facing new pressures to evaluate, publish, and improve ESG-related issues.
1. Introduction
The phrase Environmental, Social, and Governance (‘ESG’ or ‘ESG criteria’) first appeared in 2003 in a United Nations report called ‘Who Cares Wins’ and is applied by investors and managers in the management and development of their businesses [1].
For operation, enterprises as well as countries realize that this is a necessary criterion for the sustainable development of an enterprise and one that investors consider themselves when choosing businesses in which they invest. In Vietnam, the ESG criteria have been known since 2017, although it is still vague, but through the process of trading with transnational enterprises as well as investment funds, enterprises in Vietnam acknowledge that the ESG criteria is no longer a standard for sustainable development, but it is also considered a prerequisite for the subsistence of each enterprise, especially after the severe impacts of the Covid pandemic.
The Law on Environmental Protection 2020 is a legal document that directly regulates the issues regarding the Environment in the ESG standard.
2. Understanding ESG Law
ESG is an acronym that includes E-Environmental (environment), S-Social (society), and G-Governance (corporate governance); this is a set of standards to measure factors related to sustainable development and the impact of enterprises on the community. When it comes to ‘the environment’, it can be understood that enterprises need to comprehensively consider issues of energy, waste treatment, nature conservation, the greenhouse effect, building eco-friendly supply chains, and others to ensure the sustainability of the environment. In other words, the enterprises not only focus on financial benefits but also need to ensure they are ‘green’ for the environment, not only for the present but sustainably for the future.
For the ‘society’ criterion, this requires criteria for enterprises to maintain harmony between business profits and consumers, harmony in relationships with partners, suppliers, customers, government, and especially with the community. Accordingly, about the community, besides earned benefits, enterprises should also join with the government in social security issues.
The remaining criterion in the ESG standard is ‘governance’, which is to maintain sustainability, and enterprises should harmoniously balance the relationships between them and their members and shareholders against conflicts of interest. Fairness and transparency should be ensured between enterprises and shareholders and between members and shareholders to maintain internal stability and avoid disputes and conflicts that affect the business’s stability. Especially for listed companies on the stock exchange, this factor plays a key role in their securities transactions.
The above criteria contribute to forming a common standard called ESG, which is considered the basis for assessing the sustainability of enterprises. Currently, investors are concerned about the traditional business model because of the potential risks in the dissatisfaction of environmental–social–governance standards. If not fully meeting these criteria, enterprises will face the risk of instability from internal conflicts or violations of the law and more concern, boycotts from customers.
In recent years, with the effects of climate change or conflicts arising from members of large-scale corporations, investors have been more hesitant to invest, thereby viewing ESG as an indispensable standard and using ESG as a measure of enterprises. They have issued a set of criteria to evaluate the satisfaction of an enterprise’s ESG, from which they can consider whether to invest in the enterprise.
3. ESG Law in Vietnam
3.1 Introduction
Catching up with the global investment trend, the Government of Vietnam has developed action plans for each period, specifically to implement the National action plan on green growth for the period 2014–2020, the Governor of the State Bank issued Directive No 03/ CT-NHNN dated 24 March 2015, related to the green credit promotion and management of environmental and social risks within the scope of credit granting activities. In 2018, the green banking development project in Vietnam was approved.
The approval of this project also contributes to increasing the awareness of the enterprises operating in the fields of finance and banking that are responsible for environmental issues. However, this just scratches the surface, because these projects and plans only generally recognize the responsibility of enterprises to the environment, but not responsibilities to society and governance.
As of the time of writing this article, the Vietnamese Government has not issued a specific document in which ESG is concretized as a set of standards to evaluate the operations of enterprises like the ISO standards that we have applied. The State Securities Commission was one of the earliest Vietnamese state management units involved in the development of criteria for sustainable corporate development, but they are currently only recognized principles for determining whether an enterprise meets the Environmental and Social criteria; there are no specific regulations that fully recognize the ESG criteria.
Thus, when an enterprise develops a set of ESG standards, the enterprise must check the legal provisions of each criterion, and based on that, form a separate ESG standard corresponding to the enterprise. In the same way, investors or funds will develop their own sets of ESG standards based on which to evaluate the invested enterprise to determine its eligibility to receive investment capital.
Although the general provisions for ESG standards have not been regulated by the Government of Vietnam, when separating each environmental-social-governance criterion, it can be seen that these regulations are scattered in specialized legal documents.
3.2 Environment
The Law on Environmental Protection 2020 is a legal document that directly regulates the issues regarding the Environment in the ESG standard. Although this document does not have any provision on how to determine whether an enterprise meets the ‘environmental’ criterion, it sets out the ways that enterprises should behave to protect the environment. Accordingly, there are several actions that enterprises must not take towards the ultimate goal of environmental protection, specifically, as in Article 6 of the Law on Environmental Protection, there are prohibited acts in environmental protection as follows:
- Failure to transport, bury, discharge, and burn solid and hazardous waste by technical process and regulations of law on environmental protection.
- Discharging wastewater and exhaust gases that have yet to be treated according to technical regulations on the environment into the environment.
- Dispersing and releasing into the environment hazardous substances and harmful viruses capable of infecting humans and animals, untested microorganisms, dead bodies of animals dying of epidemics, and other agents harmful to human health, creatures, and nature.
- Generating noise and vibration over the permissible level stipulated in technical regulations on the environment; discharging smoke, dusts and noxious gases into the air.
- Executing investment projects or discharging waste in case of failure to satisfy all conditions prescribed by the Law on Environmental Protection.
- Importing, temporarily importing, re-exporting, and transiting waste from foreign countries in any shape or form.
- Illegally importing used vehicles, machinery, and equipment to dismantle or recycling.
- Failure to operate works or take measures to prevent and respond to environmental emergencies by regulations of law on environmental protection and other regulations of law.
- Concealing acts of polluting the environment, obstructing and falsifying information concerning environmental protection activities, thereby resulting in adverse effects on the environment.
- Manufacturing and trading products harmful to humans, creatures, and nature; manufacturing and using raw materials and building materials containing toxic factors over the permissible level prescribed in technical regulations on the environment.
- Manufacturing, importing, temporarily importing, re-exporting, and selling ozone-depleting substances prescribed in the international treaty on substances that deplete the ozone layer to which the Socialist Republic of Vietnam is a signatory.
- Sabotaging or infringing upon natural heritage sites.
- Sabotaging or infringing upon structures, equipment, and facilities serving environmental protection activities.
- Abusing positions or powers to commit violations against regulations of law on environmental protection.
In addition to the provisions of the above-mentioned prohibited acts, there are specific requirements and responsibilities of enterprises based on their fields of operation, business sectors, scale, production projects, and environmental objects to be protected (such as water, soil, air, etc.). Some notable points are referred to below:
- Enterprises should actively develop assessments of the project’s potential impacts on the environment, which is demonstrated by their responsibility to prepare environmental impact assessment reports when implementing investment projects. This is a proactive measure to detect potentially harmful factors to the environment and propose solutions to prevent, treat waste, and remedy environmental problems.
- Enterprises should apply for an environmental permit. Accordingly, for several fields with potential risks to the environment, enterprises must carry out licensing procedures before operating.
- Enterprises shall provide their information and information of organizations and individuals related to environmental factors, implement preventive measures as well as measures to respond to environmental incidents, etc.
However, the above regulation is only for guidance for compliance with the law and the fact that enterprises fully comply with the provisions of the law on the environment does not mean that the enterprises meet the ‘environment’ criterion in ESG. Because the enterprise’s environmental responsibility is not only within the scope of complying with regulations on the use of resources, but the enterprise should also proactively have solutions to minimize the impact on the environment. Every enterprise should have innovative and creative solutions to minimize the impact of climate change on its business activities, as well as consider the option of using renewable energy.
3.3 Society
Similar to the ‘environment’ criterion, even if each criterion is separated, there is currently no document in Vietnam’s law that regulates and instructs enterprises on what to do to be considered as meeting the ‘society’ criterion, as well as there being no official definition according to the understanding of the Government of ‘what is the “society” criterion?’. Currently, enterprises are self-assessing and building the ‘society’ criterion based on both achieving profits and creating benefits and value for employees, customers, and communities. The success of an enterprise lies not only in business operation results but also in a commitment and fulfillment of responsibility to society and the community. The only values that bring meaning to people and the community are sustainable values because, after all, the interests of enterprises more or less depend on the benefits of society.
3.4 Governance
What is the ‘governance’ criterion and how is it determined? This issue has not been specifically regulated by any legal documents of Vietnam; it is similar to the ‘society’ criterion. The ‘governance’ criterion is scattered in specialized documents such as enterprise law, labor law, etc. Especially in the scope of internal governance of enterprises, members/shareholders, the Law on Enterprise 2020 has stipulated provisions that enterprises should comply with to create stability and harmony in the relationship between enterprises and members and between shareholders themselves to avoid conflicts of interest.
4. ESG Application Trend in Vietnam
Every enterprise should be equipped with ESG knowledge from the management board to its employees executing ESG.
4.1 Early Days of ESG in Vietnam
The term ‘ESG’ appeared in Vietnam before 2000; however, the majority of enterprises or experts in various industries were not interested in ESG nor understood the genuine nature of the term. When it first appeared in Vietnam, ESG was mainly applied by enterprises operating in the field of finance, but only in the state of exploration, or only applying part of the standard. Since 2017, an enterprise operating in the field of finance, namely the Ho Chi Minh City Stock Exchange, had launched the Vietnam Sustainability Index (‘VNSI’), but this Index only attracted a certain number of enterprises, even at the time in 2017, the issue of a ‘sustainable development index’ or ESG standards was still quite strange to Vietnamese enterprises.
4.2 Broadening Application of ESG
Actually, before the period of 2021–2022, the ESG concept was better understood and applied widely and evenly by enterprises in several fields, not only in financial businesses as previously. ESG has been carried out by many enterprises and applied thoroughly in business activities.
4.3 Pioneering Enterprises and Investment Trends
Typically, there are several pioneering enterprises in the application and maintenance of ESG implementation in Vietnam, including the Vinamilk Company and Masan Group. As for investors, with the desire to find sustainably developed enterprises to eliminate risks from enterprises receiving investment capital, investment organizations have built their own sets of ESG criteria based on which they search for enterprises that they believe will give them substantial profits. Tundra Frontier, a fund specializing in investing in new markets, has also chosen to invest in ESG enterprises. To facilitate the selection of enterprises that meet ESG standards, this fund has also developed and applied eight ESG criteria to evaluate enterprises.
However, Vietnamese enterprises have not yet received high appreciation from investment organizations when it comes to ESG standards since, coming from a developing country, Vietnamese enterprises are mainly focusing on creating immediate profits and not concentrating on sustainability factors.
4.4 Impact of COVID-19 on ESG Adoption
From 2020 until now, the COVID-19 pandemic has caused substantial damage to many enterprises, but this is also a factor that accelerates the application of ESG; investors have changed the criteria for selecting enterprises to invest capital, whereby ESG has gradually replaced traditional financial indicators.
4.5 Growing Investor Interest and Enterprise Adaptation
All of this shows that investors and enterprises in the Vietnamese market are very interested in ESG criteria and Vietnamese enterprises are aware that the investment trend is directed to enterprises applying ESG. That is a reason why they need to change. Reality shows that some enterprises in Vietnam when applying ESG criteria have achieved certain results, which is making other enterprises believe that choosing to develop under ESG criteria is a good call.
4.6 Challenges and the Path Forward
Vietnamese law does not have any specific definition of ESG, official guidelines on ESG, as well as regulations defining the criteria to evaluate if an enterprise meets ESG standards, sanctions for enterprises when they do not meet the applied ESG standards, and as to which competent authority monitors the practice of this enterprise.
In other words, this is a situation where the needs of businesses are required but the legal corridor is not yet available. This leads to the fact that enterprises are vague on understanding ESG standards and applying them, most enterprises build their own set of ESG standards for their business operation, referring to the set of standards that investment funds use to identify businesses that are eligible to receive capital and the opinions of experts in this field.
5. What is the Solution for ESG Enterprises?
The priority for addressing the mentioned issues is undoubtedly for Vietnam to develop a legal corridor specifically regulating ESG. This would provide a clear and official foundation for enterprises when deciding to apply ESG standards and serve as a basis for investment funds to evaluate whether ESG enterprises are eligible for investment.
Moreover, a method for reporting ESG practices has yet to be developed and concretized by the law. Thus, developing this reporting method is essential, as enterprises applying ESG need to annually publish the sustainability indicators they have achieved, especially for those engaged in securities transactions. This step will ensure transparency and safeguard the interests of investors. The European Union’s recent issuance of the Sustainable Finance Disclosure Regulation can serve as a basis for formulating ESG reports.
While waiting for the government to establish a legal framework, every enterprise should equip themselves and their employees with ESG law knowledge, gradually building their own ESG practices. This can be based on the successes of enterprises highly appreciated by international organizations for their ESG application and the standards that investment organizations use to select enterprises for capital contribution.
Implementing ESG is a long-term process that requires enterprises to carefully plan the use of their personnel and ensure consistency with their chosen strategies, keeping in mind that finance is a critical factor in practically implementing ESG. Therefore, enterprises should develop and prepare a sufficient budget with a specific plan to ensure the smooth application and practice of ESG over a continuous period as planned.
Additionally, enterprises should also foster consensus and support from their members, shareholders, and the community for their ESG activities, as not all stakeholders may understand the concept of ESG and the significant financial costs incurred during the implementation process.
6. Conclusion
ESG law, as a global trend, has indeed received an enthusiastic reception from Vietnamese enterprises, recognizing that ESG-compliant businesses attract significant investment from those seeking sustainability. This acknowledgment has led Vietnamese enterprises to implement crucial changes in their operations to align with ESG criteria, a notable effort to keep pace with international developments.
On the government’s part, recent initiatives indicate a commitment to supporting enterprises in identifying sustainable development indicators and advocating for the legislative framework necessary to guide ESG law compliance. A key milestone in these efforts was the seminar titled ‘Accelerating mindset and system transformation to optimize sustainable corporate governance,’ organized by the Vietnamese Chamber of Commerce and Industry and the Vietnam Business Council for Sustainable Development (‘VCCI-VBCSD’) on 22 September 2022. As the inaugural event in the Vietnam Corporate Sustainability Forum (‘VCSF’) 2022 series, it drew participation from over 300 delegates, including representatives from ministries, sectors, business associations, international organizations, and enterprises, both in person and online.
The government’s proactive stance is sparking investor interest in the Vietnamese market, providing local enterprises with insights into how sustainable development not only paves the way for their future success but also contributes to national growth and the resolution of global challenges. This evolving landscape underscores the importance of sustainability in the corporate sector and highlights the role of governmental support in facilitating this transition.
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