Why integrate ESG plans into business?

Kenneth Atkinson - Founder and senior adviser Grant Thornton Vietnam

As various regulators around the world develop regulations to promote sustainability, environmental, social, and governance (ESG) considerations are becoming more of a focal point for companies both public and private, both in terms of practice and application but also from the perspective of customers and employees alike. Vietnam already has some reporting requirements for public and joint stock companies and these will increase as the country moves to International Financial Reporting Standards adoption. But currently they include a requirement for information about governance structure, business organisation, and management apparatus; as well as details of sustainable development goals and key programmes related to short- and medium-term goals. Companies are required to state the risks that may affect production and business activities or the implementation of the company’s goals, including environmental risks, natural disasters, epidemics, and more.

Management’s reports and assessments must include the assessment related to environmental criteria; assessments related to employee issues and corporate responsibility to the local community; and assessments from the board of directors on company operation (for joint-stock companies), with an assessment related to environmental and social responsibility. The company’s environmental and social impact reports must include information on aspects such as direct and indirect greenhouse gas emissions; raw material sourcing management; energy and water consumption; compliance of law on environmental protection; and green capital market activities under the guidance of the State Securities Commission, which also encourages businesses to apply international reporting standards in sustainability reporting.

The Singapore Stock Exchange has announced a requirement for sustainability reporting from fiscal year 2022, when listed companies will be required to provide sustainability reports which include material ESG factors; climate-related disclosures; policies, practices, and performance targets; sustainability reporting frameworks; and associated governance structures for sustainability practices.

Apart from the regulatory reasons for ESG and sustainability, why should companies do more than the minimum required, to integrate sustainability? Let us first look at the investment and stakeholder environment. In 2020 professional investors funded more than three times as many assets into ESG-related exchange-traded funds than in 2019. Global assets under management in such funds grew from $6 billion in 2015 to $150 billion in 2020.

In recent studies, it has emerged that 80 per cent of mainstream investors consider sustainability information within investment decisions; 50 per cent of consumers are willing to pay a premium for products from a sustainable brand; 40 per cent of millennial jobseekers select a job over another because of an organisations sustainability practices; and 70 per cent of employees report that their company’s strong sustainability programme impact their decisions to stay long term.

Good reported sustainability practices place an organisation in a broader context and help differentiate them from some of the competition. Proactive and open communication strengthens the brand and reduces risks linked to reputation, and a well-embedded ESG framework signals high quality and long-term sustainable governance in order to attract capital. ESG also provides opportunities for improvement, efficiency, and reduced costs; while a sustainable perspective builds better relationships and keeps the organisation up to date on the demands from the external environment. This, in turn, can also help attract new talent and increase productivity through motivated employees.

Whilst companies in the region and Vietnam specifically are quite vulnerable to climate change, there will be demand for significant funding and investment in sustainability. In addition, international banks and government agencies are looking to deploy ESG-related loans, which normally offer lower interest rates.

It would be remiss not to discuss the climate risks and trends in Asia-Pacific and in Vietnam specifically, as these are also high on the agenda with the commitment to reach net-zero carbon emissions by 2050. It is widely reported that Asia-Pacific is expected to be one of the areas hardest hit by climate change, and that potentially 30 per cent of the Mekong Delta could disappear underwater by 2050.

We are moving to a new era with new norms and conditions, and the impact will likely be widespread. Businesses without a sustainable perspective and ESG platform will become a risk for clients, suppliers, lenders, and investors, limiting access to financing and capital.

Increased governance through new laws, regulations, and reporting requirements will also take place.