Story by Ngoc Lam - My Hoa

July 26, 2021

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Investment funds including Tundra Fonder or AFC Vietnam Fund are taking steps to invest in Vietnamese enterprises based on ESG criteria. Others, namely Vietnam Holdings or Dragon Capital, have adopted the UN Principles for Responsible Investment, dedicated to promoting environmental and social responsibility among the world’s investors. 

In July 2017, the Vietnam Sustainability Index (VNSI) was launched by the Ho Chi Minh City Stock Exchange (HoSE) to recognize and promote the best ESG practices implemented by public listed companies in Vietnam. 

Vinamilk, Vietnam's largest dairy firm, claimed the top spot with an overall ESG score of 90%, significantly higher than the average 58% and 1.5-fold higher than those in VN100 (100 largest companies on HoSE). 

Since 2012, Vinamilk has been issuing an annual sustainable development report in compliance with the global standards for sustainability reporting, separate from the financial statement. 

 

On top of that, the firm posted record growth in both revenue and profit with consolidated net revenue and after-tax net profit in 2020 reaching VND59.7 trillion (and $2.6 billion) and VND11.23 trillion ($490 million), respectively, increasing by 6% and 6.5%, in that order, compared to 2019. 

“Maintaining growth in extremely adverse market conditions is the result of our relentless pursuit of sustainable values that emphasize continuous development of dairy farming, digital transformation, and commitment to sustainable goals as well as social responsibility,” explained Vinamilk CEO Mai Kieu Lien on the corporation’s strong performance in a year when the dairy industry experienced a contraction of 6%. 

With Vinamilk being a prime example of how ESG can ensure sustainable growth, representative of Dragon Capital, however, noted the majority of Vietnamese enterprises are still focusing on business growth instead of taking a more appropriate look at ESG criteria. 

Vicente Nguyen, fund manager at AFC Vietnam Fund, told The Hanoi Times the biggest issue for Vietnamese enterprises in assessing ESG is the lack of awareness of its significance, which came from a rather short development phase (from 1975 to date), and the majority are still in the process of capital accumulation.

 

“Major firms such as Vingroup, Vinamilk, or Sovico, however, are taking steps in this regard and could set an example for others,” he argued. 

Investment funds could also play a role in this process by making use of their investment decision as a way to push local firms to change and adopt ESG criteria.

“For instance, our fund would rule out any investment decision for enterprises that are polluting the environment, causing high levels of carbon emissions, or having a bad public image. On the contrary, those that excel in these fields are given investment priority,” he added, referring to names under the fund’s investment portfolio such as Refrigeration Electrical Engineering Corporation (REE), Power Engineering Consulting Joint Stock Company 2 (PECC2), or Agriculture Bank Insurance Joint Stock Corporation. 

On the national level, Vicente Nguyen suggested the government collaborate with ESG consulting agencies that can guide local enterprises in taking this approach, at the same time offer incentive policies for them to raise awareness on ESG. 

While some Vietnamese enterprises have already begun to reshape corporate reporting to include ESG criteria and meet investor needs, Dr. Gregory Bournet, Partner, Head of Corporate Finance at PwC Vietnam and Malaysia, pointed out the fact that the guidelines for non-financial reporting data are still inconsistent, compared to the rigorous assurance requirements and regulations for financial reporting.

 

“This will be a challenge in evaluating the economic benefit of intangible assets such as environmental performance, governance, brand value, and reputation. These enterprises may experience difficulties in valuing the environmental impact and the related risks in their conventional lending and investment portfolios,” Gregory told The Hanoi Times.

To make steps towards sustainability, Gregory noted as the stewards of a company’s purpose, the board should play an important role in ensuring that the strategic plan of the company supports long-term value creation and includes strategies on economic, environmental, and social considerations underpinning sustainability.

“With a clear understanding of the principal risks of the company’s business, the board can determine a suitable risk appetite, along with a risk management framework to identify, manage and monitor significant financial and non-financial risks. Boards also need to ensure awareness of the long-term benefits of an ESG focused strategy - not only for the companies themselves but for the society as a whole,” he asserted.

 

Capital flowing into ESG-aligned funds is an inevitable trend as world’s major powers, including the US, Japan, South Korea, and Europe are focusing on ESG criteria to address environmental issues, reduce carbon emission and social inequality,” Vincente Nguyen stressed. 

The amount poured into sustainable funds globally rose exponentially to US$1.9 trillion in the first quarter of 2021 from $84.5 billion in the same period last year.

“Such funds would focus their investment on companies with high ESG rating. Therefore, those adopting ESG criteria in a comprehensive way would help them access investment opportunities from investors,” he asserted.

On this issue, Gregory from PwC said in 2020, an increasing number of companies and countries made commitments to reduce carbon emissions and announced net-zero targets.

“There are banks, institutional investors, and private equity funds that have made commitments to reorient their strategic directions and evaluate both existing and future investments through an ESG lens,” Gregory continued.

 

“It is anticipated that these commitments will impact all sectors. Apparently, greater commitment to ESG factors is changing the way businesses are valued and their attractiveness to investors,” he added.

With more investors wanting to align their investment with their broader societal concerns, Gregory suggested investors around the world have been embracing “sustainable investing” and allocating ever-increasing capital based on a firm’s ESG performance.

As ESG’s rising profile offering opportunities to increase societal value creation, Gregory explained it is “not only a solution to managing reputational risk, [but also] an opportunity for streamlining the business model and brand enhancement.”

A PwC’s analysis shows that ESG-aligned funds cumulatively outperformed their traditional counterparts by 9% from 2010 to 2019. Research also shows that diverse companies, in which more than 30% of leaders are women, are, on average, 15% more profitable than those that are not diverse, and businesses that score highly on sustainability tend to perform better than those that do not.

Indeed, Gregory said share prices for companies that have the highest ESG ratings are outperforming others.

“On average, they fell less far and have recovered more quickly than the market since the onset of the Covid-19 crisis,” noted Gregory.

“In Vietnam, holistic integration of ESG criteria in long-term business strategy is still in its early stages. However, we are seeing an accelerated trend of focus on renewables, waste/water management, and recycling sectors,” he continued. 

 

Taking a more detailed view on the prospect of enterprises with ESG criteria, Vicente Nguyen from AFC Vietnam Fund said besides the opportunity of receiving investment from sustainable funds, they could “be given priority to access markets with high ESG requirements.”

“The US, EU, or Japan have not adopted such criteria to assess those looking to penetrate these markets, but there is a high chance that they could be compulsory requirements in the future,” Vicente Nguyen noted, expecting companies to make changes accordingly. 

“Multinationals such as Google, Apple, Facebook, or Samsung in Vietnam are planning for a shift from using fossil energy to renewables and meet ESG criteria. This would create competition among firms to follow suit and eventually improve the environment,” he continued. 

With low-income groups being the most vulnerable to Covid-19 impacts and in need of social support, Vicente Nguyen expected companies with high ESG awareness would be the pioneering force in extending their support. 

 

“We have seen such kind acts from large corporations such as Vingroup, Van Thinh Phat or Vinamilk in contributing to the society, with the latest example giving an active response to government’s call to aid the Vietnam Fund for Vaccination Prevention of Coronavirus Disease 2019,” Vicente Nguyen said, calling them signs of advancement in civilization and humanity. 

Although the levels of post-pandemic reopening can vary between countries in the region, by many indications, the next six to 12 months would be exciting times for mergers and acquisitions, Gregory from PwC noted. 

Overall, the prognosis for deal-making in 2021 is positive and M&A may be a leading factor in the economic recovery in South East Asia. With that being said, the investment trend based on ESG criteria will certainly be increasing in the region, including in the Vietnam market, he concluded.

 

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