Tough nut to crack for businesses to embrace ESG

Since the middle of last year, the EU has been applying a carbon border adjustment mechanism (CBAM). Vietnam’s exports of cement, steel, aluminium, and fertiliser to the EU market has faced two major barriers including safeguard measures and the CBAM.

There still exists a gap between foreign businesses’ ESG expectations and actual progress in some areas, Photo: Shutterstock

The CBAM is aimed to levy a carbon tax on all goods imported into EU markets, based on the intensity of greenhouse gas emissions in the host country’s production process.

At present, this mechanism is in phase 1 when exporters have to declare emission levels. However, when the CBAM mechanism embarks upon the next stage, exporters from Vietnam will have to buy CBAM emission certificates from 2026.

“This will affect exports from Vietnam, especially the steel industry,” said Jennifer Pham, a regional advisor on sustainable value chains at the Danish Embassy to Vietnam, at a May discussion on decarbonising the Vietnamese steel industry held in Hanoi.

Currently, steel is one of the biggest carbon emitters in Vietnam. It is estimated that the steel sector will emit about 122.5 million tonnes of CO2 by 2025 from an estimated 120 million last year, and 132.9 million by 2030, accounting for about 17 per cent of the country’s total emissions.

Figures from the General Department of Vietnam Customs showed that last year, Vietnam exported over 2.5 million tonnes of assorted steel products to the EU, doubling 2022, and accounting for 23 per cent of the country’s total export volume.

According to experts, such a policy will be among many others that the EU, a key export market of Vietnam, will apply in the future, and the same is also true for many other export markets of Vietnam.

“Thus, businesses must well prepare for meeting the EU’s new requirements if they want to continue exporting to this large market,” Pham said.

Many solutions can be applied by businesses, including environmental, social, and governance (ESG) criteria, which are now being globally paid attention to by all stakeholders including managers, customers, investors, and consumers.

ESG incarnates the three key pillars for a company conducting its business sustainably and responsibly. It covers a wide range of issues, including climate change and resource efficiency, human rights, labour relations, cybersecurity and privacy, anti-bribery and corruption, and transparency and disclosure. ESG standards typically derive from international law, local law, and soft law standards, for example agreements and declarations that are not legally binding.

At the RIS.ER 24 conference themed “ESG – Motivations & Breakthroughs” on May 23 in Hanoi by Worldbasesys Co., Ltd in collaboration with VIR, experts said that the world is facing complex climate, social, and geopolitical issues and addressing ESG priorities is more important than ever.

They also underlined that promoting adoption throughout the value chain can encourage greater private investment in sustainable development, resulting in greater impact. In the landscape of modern business, ESG considerations have become key factors shaping corporate strategies and decisions.

Major benefits

In the dynamic Vietnamese business environment, many companies are increasingly acknowledging the importance of employee wellbeing and social equity. They have been earmarked part of their budget specifically for ESG initiatives.

For example, over the past 15 years, TH Group has been operating a $1.2 billion farm cluster project in the central province of Nghe An, featuring a state-of-the-art dairy cow farm and fresh milk production plan.

TH Group has carried out many different programmes and projects on nutrition and health protection. Such initiatives include the Nutrition Scheme; the School Milk Programme, the School Health Programme; and a model on school meals with ensured nutrition in combination with an increase in physical exercise for pupils.

In addition, TH Group also established the For Vietnamese Stature Foundation, which embraces the sponsorship and protection of children. It has also accompanied a television programme in a bid to expand communications and provide useful information for children and the public about how to take care of and protect the children, contributing to forming and developing the young generation’s physical and mental health.

“We are considering sustainable development including ESG as a prime priority in our business and production activities,” a representative from TH Group told VIR.

The ESG conference last week reported that enterprises should begin applying ESG as soon as possible as external and internal risks are increasing fast. Over the past years, many companies in Vietnam like TH Group have been developing ESG as a priority in their activities, and this has helped them improve their competitiveness and ensure sustainable development.

“ESG matters are among key priorities for foreign businesses in Vietnam to facilitate business expansion while meeting sustainable development goals,” said Vietnam Briefing, a subsidiary of consultancy firm Dezan Shira & Associates. “However, there is plenty of scope for companies and government stakeholders to work together to deliver optimal economic development outcomes.”

Differing perspectives

According to Dezan Shira & Associates, as Vietnam steadily attracts foreign direct investment, manufacturers and foreign invested enterprises have begun actively participating in the country’s ESG initiatives to foster sustainable growth as well as meet high compliance standards in key export markets.

“However, challenges persist in Vietnamese firms effectively implementing ESG strategies, partly due to differing perspectives on the government’s commitment to ESG and the nascent market-based mechanisms,” Vietnam Briefing said.

The Vietnam Business Forum a few months ago initiated a study with over 650 responses, aiming to gather and analyse the ESG perspectives of foreign companies operating in Vietnam.

Among factors impacting foreign businesses’ ESG initiatives in the country, a comprehensive and transparent regulation framework plays an important role. Currently, Vietnam faces room for improvement in this area.

What is more, there still exists a gap between foreign businesses’ expectations regarding government support for ESG and the actual progress.

Only a quarter of businesses express confidence in Vietnam’s commitment to sustainable and green development. When seeking government backing for their ESG efforts, financial incentives and regulatory relief rank high on their list of expectations.

“As Vietnam continues its journey towards sustainable development, addressing these challenges and aligning expectations with tangible actions will be pivotal,” Vietnam Briefing said.

Many have pointed out a series of difficulties and obstructions for the application of ESG. They said that enterprises now are in critical need for initial investment to implement ESG priorities.

ESG will also change people’s habits, which will cause difficulties during deployment, especially in the context that the companies have got used to focussing on their traditional habits.

“In addition, pursuing ESG values will require big and strong determination, but after heavy investment on ESG, companies will be able to reduce risks and improve their prestige. This will also help enterprises find it easier to obtain bank loans and expand exports,” said Dang Dinh Quyet, vice director of Hoang Ngoc Trading Company in Hanoi.

“Many companies in the EU, Japan, South Korea, and the US have required their overseas partners, including those from Vietnam, to apply ESG standards. For example the EU’s CBAM will greatly pressurise many exporters from Vietnam,” Quyet said.

Professor Bui Anh Hoa, head of the School of Materials Science and Engineering at Hanoi University of Science and Technology, said that though ESG is the key for businesses to boost exports and improve competitiveness, challenges remain.

“For example, under the CBAM, the biggest impediments now for the steel industry is to change heating materials. This would mean a significant change from coal to other types of environmental-friendly energy such as hydrogen,” Hoa said.

“But production of hydrogen energy remains limited in Vietnam due to the high costs and high technologies used, in addition to policy difficulties. Thus, it is almost impossible for the industry to become carbon-neutral over the next decades.”

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