What’s holding Vietnam’s adoption of ESG back?

Vietnam is an economy in a hurry. This year GDP growth is expected to be humming along at almost 7% in the rebound after the Covid-19 pandemic. Renowned for its economic openness, Vietnam has become a manufacturing powerhouse – often the cheaper alternative to China – albeit with a need to upgrade its infrastructure. Yet Vietnam’s developing-nation status means it has been set a lower bar on climate change. Its focus remains on growth. The country’s middle class, for example, is expected to double from 32 million out of a population of 97 million last year, to 67 million people a decade on in 2030.    The updated climate plan that Vietnam submitted to the United Nations last year was no more ambitious than earlier ones. The country’s greenhouse gas emissions are likely to grow significantly by 2030. Rachel_HillThe fact that concerns about climate change have been allowed to take a back seat may not augur well for improved reporting on the ESG issues. It’s not surprising then that while the global awareness of ESG issues has increased, in Vietnam its impact on companies and regulators has been constrained. That is because the country lacks both strong local laws and local institutional investors to bring pressure for strong ESG practices into the public and private sectors. To abide by the UN’s Principles for Responsible Investment (PRI), a fund manager like Dragon Capital expects to be asked about ESG on Vietnam’s government bonds, although it’s impossible to take the same approach as we do with corporates. On the other hand, there is some comfort to be found in the willingness of the World Bank, the International Finance Corporation and other Western sovereign investors that invest and run projects in Vietnam. So what is holding the adoption of ESG standards back – apart from the general lack of awareness? After all, public companies in Vietnam will perform environmental and social impact assessments before embarking on a major project. However, these are often perfunctory.  Where progress has been made in lifting these standards to a global level, it’s often been only in environmental matters – or corporate governance related to environmental issues. After all, the quality of the environment has a visible impact on people.     What needs fixing? Access to information, for a start. Frontier markets like Vietnam present a challenge to international investors, and even more so when it comes to ESG. The reach of mandatory disclosure is limited, while there are only a few blue-chip companies that demonstrate a strong culture of voluntary disclosure.    Similarly, while ESG standards might be applied to private investments, public equities are quite a different matter. There is little an institutional investor can do to force public companies to shed light on their ESG records. When it comes to state-owned entities, that task is even harder. Overseas institutional investors, therefore, will have to continue to drive the ESG agenda, increasing awareness in government and companies, as well as pushing for greater disclosure. The fact that banks are becoming unwilling to finance carbon-intensive projects aids the cause. At Dragon Capital our active ownership strategy is voting, engagement, and advocacy. We have set up an ESG management framework, and established a team to monitor the ESG ratings of companies we invest in. We have also gone to regulators with a call for mandatory disclosure of greenhouse gas emissions for public companies. Positively, in late 2020, the State Securities Commission of Vietnam issued regulations, which requires listed companies to report carbon emissions. Ultimately, we believe that foreign investors have a duty to push for higher standards. Rachel Hill is a director at Dragon Capital Vietfund Management. © 2021 funds global asia

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