Vietnam’s sustainability push

Vietnam has become a major destination for investment among multinational corporations over the past few years.

This surge in investment, along with the signing of major free trade agreements with the EU and the UK, and the Regional Comprehensive Economic Partnership (RCEP), has increased the emphasis on environmental sustainability in the country, though progress in the field is uneven.

‘You can find sustainability in the national strategic goals of several sectors, including agriculture, textiles, plastic and mining, though the last one is very vague,’ says Lê Kim, co-founder of CL2B, a sustainability advisory firm based in Ho Chi Minh City. ‘And there are general regulations on how businesses have to comply in ways that contribute to environmental protection and sustainable development.’

Domestic v global

However, there is a gap between multinational corporations (MNCs) and international investment firms on the one hand, and domestic companies on the other.

‘Some investment companies have ESG [environmental, social and governance] goals brought in from multinational corporations that are globally defined and that they want to focus on,’ Kim explains. ‘But with Vietnamese domestic firms, it’s what you call an opportunity economy, so they see demand for something and go into that in an informal way.’

Generally, according to Kim, these companies will jump into a sector where they see profit potential, and once they get a sense of what the sustainability regulations are, they will look for ways to skip over them.

This is possible because, although government regulations on sustainability exist, monitoring and enforcement are weak. As a result, regulation tends to be the weakest driver when it comes to pushing companies to pursue more sustainable practices.

‘Businesses will comply more with a free trade agreement, client demand or investor enforcement,’ Kim says. ‘Those three forces are higher for a business than government regulations, and some of the big manufacturing companies have good compliance because Vietnam is an export country and they are focused on market compliance.’

H&M Group is an example of an MNC with expansive operations in Vietnam and clearly defined sustainability goals that domestic suppliers and clients must meet.

‘In Vietnam, our own global requirements are complemented by national regulations on air emissions, waste management and effluent water treatment, among others,’ says Peter Ford, H&M Group environment programme specialist for Cambodia and Vietnam. ‘Suppliers report their sustainability progress and action under the industry-standard Higg Index. This annual reporting requires proof of action on topics such as chemical management, waste management and environmental management systems, all of which is independently verified by approved third parties.’

The small players

Meanwhile at the micro, small and medium enterprise (MSME) level, which includes 98% of all enterprises in Vietnam, sustainability has become a dividing line between businesses.

‘Sustainability is a new market segment,’ Kim says. ‘New businesses are adopting sustainable goals and missions, but some traditional businesses find it difficult to move in this direction. They have a traditional way of working, and it’s hard to change the culture. And if the market still demands the product, they’ll keep doing it that way because the cost to change is high.’

And if a company’s leader doesn’t have a vision for sustainability, as is often the case at older businesses, change is even harder to implement.

Challenges

For H&M Group, Vietnam’s ongoing struggles to integrate installed renewable energy into its electrical grid present a problem for the business’s sustainability goals, which include having a climate-neutral supply chain by 2030.

‘To achieve this, the supportive landscape for on-site photovoltaic solar must continue,’ Ford says. ‘We await the start of the DPPA pilot, and encourage the continued addition of renewable energy projects into the national grid over planned coal and LPG [liquefied petroleum gas] projects.’

The DPPA, or direct power purchase agreement, would allow electricity consumers such as factories, shopping malls and offices to buy power directly from a producer, such as a solar energy farm, instead of the national electricity provider. DPPA has been pushed by MNCs such as H&M but does not have a firm implementation date.

Ford also notes the need for affordable waste management solutions that provide an alternative to landfills, which are currently the most common method of waste disposal.

Poor understanding

To Kim, the biggest issue holding sustainability back is the failure among companies and their leadership teams to understand the macro issues and the impact that each sector has on the whole system.

‘We need everyone to have the same understanding to move forward,’ she says. ‘It’s clear that they can’t just work by themselves; they have to maintain relationships with other sectors, other stakeholders. Once they have that understanding, moving on is easy. But in Vietnam we’re struggling to make sure everyone has the same understanding of how something in another sector might impact them, or how their business can impact the environment.’

She says that companies often prefer to invest in something with a tangible impact. But environmental sustainability is often intangible since it’s hard to show how an action you took prevented something from happening.

‘When ESG work happens, it is still often done as branding and marketing, so there’s a lot to be done if a company wants to do real work,’ Kim explains. ‘We need to have a baseline for companies, and knowledge is lacking, so huge support is needed from the government and international organisations to build that base.’

On the positive side, Ford argues that Vietnam’s sustainability laws are evolving well, giving companies operating in the country a potential edge.

‘The planned DPPA pilot is one example of an environmental sustainability initiative in Vietnam that will offer a clear advantage to suppliers,’ he says. ‘Not only does this encourage further investment in renewable energy and upgrades to the national grid, but by ensuring that suppliers can meet the sustainability commitments of brands such as H&M Group, it boosts the attractiveness of Vietnam as a sourcing country.’