Interest ascends for ESG-based investing

While ESG investment in Vietnam has not reached maturity, it holds potential for capital attraction, Photo: Shutterstock

According to PwC projections, by 2026, fund assets focused on environmental, social, and governance (ESG) globally are expected to constitute 21.5 per cent of total investment assets, reaching an estimated $33.9 trillion. This growth, averaging 12.9 per cent annually, significantly outpaces the broader investment market’s 4.3 per cent growth rate.

In Asia, particularly in Vietnam, the trajectory towards sustainable investment has gained momentum, spurred by robust government initiatives aimed at sustainable development and stable economic growth. This shift has notably heightened investor interest in ESG-focused investments.

Since its introduction in 2017 by the Ho Chi Minh City Stock Exchange, the Vietnam Sustainability Index (VNSI) has spotlighted the top 20 corporations with good ESG performance. The VNSI not only underscores the investment appeal of sustainable stocks but also serves as a benchmark for international institutional investors adhering to ESG investment principles, paving the way for future investment products such as exchange-traded funds and index derivatives. Despite this progress, specific ESG-oriented investment funds tracking the VNSI remain scarce.

In 2022, the State Securities Commission of Vietnam endorsed the establishment of the open-ended United ESG Vietnam Equity Fund (UVEEF) by UOB Asset Management Vietnam. The fund stands out as the first in Vietnam’s financial market to dual-screen for ESG compliance alongside traditional fundamental analysis for its stock selections, marking a rare focus on ESG factors within the market.

Truong Minh Hung, head of ESG Investment at UOB Vietnam, said, “The integration of ESG considerations into the investment process is still in its infancy in Vietnam. However, there’s a growing interest from investors, especially among the younger demographic, in such investment avenues.”

The UVEEF prioritises stocks of companies that not only adhere to stringent ESG standards, as evaluated by the fund, but also show solid fundamentals and promising business outlooks.

“In 2023, the UVEEF’s investment performance significantly outstripped the market, with the net asset value per fund certificate increasing by 17.7 per cent, a clear 5.5 per cent above the VN-Index,” Hung said.

He anticipated continued investor attraction to sustainable funds as the global acknowledgment of climate change’s impacts deepens and more countries pledge to shift away from fossil fuels. Additionally, the rising investor awareness about the significance of ESG investing reinforces this trend.

Financial experts, on the other hand, believe that while ESG investment in Vietnam has not reached the maturity seen in other regions, it holds considerable potential for capital attraction.

This potential is buoyed by the Vietnamese government’s determined push for a green transition, making the VNSI’s top 20 stocks - including companies like FPT, Vietcombank, Mobile World Group, and Vinamilk - attractive targets for major investment funds such as Dragon Capital and VinaCapital.

The challenge, however, lies in the absence of a standardised ESG framework, which has become a critical hurdle in drawing more ESG-focused investments to the country.

During the 2024 Vietnam Business Forum (VBF), the European Chamber of Commerce in Vietnam (EuroCham) voiced a pressing need for Vietnam to refine and consolidate its approach towards ESG standards.

“The current ESG regulatory landscape in Vietnam is scattered and lacks clarity, posing a significant barrier to investment. Establishing clear, unified ESG standards is imperative for Vietnam to stay competitive and fulfill its sustainability commitments,” remarked a EuroCham representative.

EuroCham advocated for the merging of existing ESG norms into a comprehensive legal framework, complemented by new legislation to plug any regulatory gaps and define clearer rules for foreign investors.

“There’s also a crucial need to boost awareness among stakeholders in both the private and public sectors about the significance of ESG standards in the investment sphere,” added the spokesperson.

Dominic Scriven, chairman of the VBF’s Capital Market Working Group, said, “Acknowledging the environmental dimension separately from governance is the first step in the ESG investment journey. Vietnam has already shown a strong commitment to this shift, particularly through its pledges at events like COP26.”

He further highlighted the necessity of developing a national ESG taxonomy in Vietnam. “Creating a clear framework that defines policies, regulations, and incentives for achieving carbon neutrality and promoting a circular economy is essential. This will lay the groundwork for businesses to develop targeted action plans and secure financing for these activities,” Scriven stated.

Vietnam ESG Initiative 2024: seizing green transformation opportunities Following the success of the 2023 Vietnam Environmental, Social, and Governance (ESG) Initiative, the Agency for Enterprise Development under the Ministry of Planning and Investment and the United States Agency for International Development (USAID) are co-hosting the 2024 Vietnam ESG Initiative.

Game-changing ESG initiatives expected With the Vietnamese government last week boosting commitments to supporting foreign-invested enterprises, more green business and funding initiatives are expected in the coming months.