A snapshot of ESG in Vietnam

No longer niche, ESG links directly to value creation 19 min read

Environmental, Social, Governance (ESG) is not only a focus of sustainable investing internationally but has become increasingly popular in Vietnam as a means of long-term value creation.

Together with the rise in global demand for compliance with ESG standards, the Vietnamese Government and businesses across a wide spectrum of industries are increasingly making efforts to address ESG-related issues and promote best ESG practices. It is hence crucial for companies and investors operating there to understand the country's current legal framework in relation to ESG. 

In this Insight, we give an overview of ESG and the legal landscape in Vietnam and examine the key legal considerations for each of the three pillars of ESG.

Key takeaways

• ESG practices have become increasingly popular in Vietnam, primarily due to the Government's promotion of them, and to investors' growing demand for sustainable investment.
• The increased social pressure to address ESG concerns means failure to do so can lead to serious reputational harm. Additionally, some key ESG considerations involve legal obligations, and businesses must adequately address these to avoid exposure to liabilities and litigation. Furthermore, research has shown that good ESG performance can result in higher financial gains and sustainable value.
• Businesses need to stay across the applicable ESG legal framework and current ESG practices, and periodically measure their current ESG performance against them.

What is ESG?

Environmental, Social and Governance are the three key pillars for a company conducting its business sustainably and responsibly.

ESG covers a broad spectrum 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 derive from international law, local law and soft law standards (eg agreements, principles and declarations that are not legally binding).

Key drivers of ESG

Social pressure: The primary factor driving ESG is the increased social pressure on businesses when it comes to their accountability and obligations to society. Such pressure comes from a wide range of internal and external stakeholders, including investors, employees and the community. A failure to address ESG concerns could lead to serious reputational harm.

Legal requirements: Even more importantly, some key ESG considerations are recognised as legal obligations (such as those relating to data privacy protection and anti-discrimination ), mandating businesses to comply with ESG-related obligations to a certain extent. Accordingly, companies need to adequately address ESG-related regulatory concerns, to avoid exposure to legal liabilities and litigation.

Financial gains and sustainable value: Furthermore, research has shown that businesses with good ESG performance can reduce costs through energy and resources efficiency, increase productivity and reduce the risk of regulatory interventions, eventually resulting in higher financial gains and sustainable value. So, ESG is no longer a niche strategy but directly links to business values.  

Current ESG practice and trends in Vietnam

The popularity of ESG practices has grown rapidly in Vietnam in recent years, with the primary driving force being the Government's increasing efforts to promote ESG-related practices, and investors' growing demand for sustainable investment.

Nationally, as one of the countries most affected by climate change, Vietnam has put it at the top of its ESG agenda. At the 26th United Nations Climate Change Conference of the Parties (COP26) on 1 November 2021, Vietnam pledged to reach a net-zero carbon emission target by 2050, stop deforestation by 2030, and phase out coal-fired power by 2040. Recently, the Ministry of Natural Resources and Environment (the MONRE) has partnered with the International Finance Corporation and Citibank for support and resources to help Vietnam achieve its goals. 

In the private sector, major investment firms have pledged to commit to ESG investment by adopting the United Nations Principles for Responsible Investment. Increasing interest in ESG practices of investors – especially foreign investors – has spurred private sector participation. Companies (domestic and foreign-invested) across various sectors have committed to address ESG-related issues within their businesses. Common issues include improving working conditions, combating climate change, and enhancing corporate governance.

Environment, or 'E', assesses how a business interacts with, and impacts, the environment during its operation.

Vietnam has recently affirmed its commitments in various international forums, especially the COP26, to join hands with other countries in dealing with environmental issues. To fulfil such commitments, the National Committee Implementing Vietnam's Commitments in COP26 was established by the Prime Minister on 21 December 2021, followed by the issuing of various national policies and regulations detailing specific targets corresponding to each commitment.

The current domestic law on environmental protection also highlights harmonisation with international environmental laws to combat climate change. The Law on Environmental Protection (the LOEP), which came into effect on 1 January 2022, and its guiding instruments introduce further details of implementation and enforcement of the targets and commitments in practice.

Below are the key considerations for business as to environmental protection under Vietnam's international commitments, national policies and current regulations.

Climate change

Vietnam's key commitments on, and targets for, combating climate change can be summarised as follows:

The current Vietnamese regulations also impose various obligations and requirements on entities operating in Vietnam, in an effort to deal with climate change. The two key goals are the reduction of GHG emissions and protection of the ozone layer.

Greenhouse gas emission reduction

The Law on Environmental Protection sets out a list of entities in Vietnam that are subject to GHG inventory (GHG emitters). Accordingly:

• GHG emitters are required to reduce their GHG emissions by, among other things, conducting GHG inventory, and building and implementing their own plans for GHG reduction.
• Each GHG emitter can only discharge GHG within its GHG emission quota allocated by the MONRE (expected to commence in 2026) on an annual basis, its latest inventory result and its GHG reduction plan. It can only exceed its quota by buying, bidding for or borrowing GHG emission quotas or carbon credits of other entities in the carbon trading market.

Carbon trading market

Although regulations on carbon trading market remain general and overarching, at this stage it appears from the LOEP and its guiding documents that the carbon trading exchange will operate as follows:

• Selling, buying, bidding for, transferring, borrowing, returning carbon credits/GHG emission quotas must be conducted via the carbon trading market (which is not yet established).
• GHG emitters, and any organisation or individual having carbon credits (ie a tradable certificate recording the right to emit 1 ton of CO₂ or CO₂e obtained from domestic or international carbon credit trading or setoff programs and projects), wishing to trade their carbon credits and GHG emission quotas on the carbon market must submit an application to the MONRE to have such credits/quotas certified by it; and, based on the certificates from the MONRE, proceed to trade their carbon credits/GHG emission quotas on the carbon trading market.

No further guidance on the operation of the carbon trading exchange has been provided. A detailed legal framework on trading carbon credits in Vietnam is road-mapped to be completed by the end of 2027.

The Government seeks to establish and pilot the domestic carbon market from 2025 to 2027, envisioning that the domestic carbon market will be officially operating in 2028 and connected with carbon markets in the region and the world by 2030.

Ozone layer protection

The law imposes nationwide caps on consumption of ozone-depleting substances and HFC (controlled substances), and restricts the production, import and export of certain ozone-depleting substances and products containing, or made with, such substances.

Use of controlled substances and products containing, or made with, controlled substances must be registered with, and reported to, the MONRE and such products are treated as hazardous waste.

Energy and natural resources

In line with international efforts to save energy and natural resources, Vietnam has made the following key international commitments and set the following national targets:

Further, under the existing regulations on environment protection, there are various obligations and requirements imposed on entities operating in Vietnam, in an attempt to preserve energy and natural resources. Specifically:

Energy

Enterprises in Vietnam are subject to various specific obligations for efficient and effective use of energy, including improving operation systems and processes to optimise the use of energy, utilising existing alternative energies (eg solar power, daylight and natural wind), and regularly repairing and maintaining devices/equipment to minimise energy loss.

Specifically, the demand for renewable energy has been rising rapidly in recent years, with the Government expecting that renewable energy projects (including small-sized hydro, wind, solar and biomass projects) will account for 21% of the overall electricity capacity by 2030. In order to meet these targets, the Government has rolled out a series of regulations aimed at clarifying the legal framework and incentives for the development of renewable energy projects. For more details on renewable energy, please see our previous Insight.

Natural resources

With the aim of preserving natural resources, entities using eg land, water, air and minerals in their operation are required to:

• obtain required licences/permits before exploiting and using natural resources (eg mining permits, surface/groundwater exploitation and use permits);
• apply advanced technologies and techniques in business to minimise and prevent pollution;
• monitor the release of wastewater, dust and emissions into the environment; and
• restore, remedy and improve polluted areas, and compensate for loss and damage from pollution caused by such enterprises.

Waste treatment and recycling

At the resumed session of the fifth meeting of the United Nations Environment Assembly of the United Nations Environment Programme in February and March 2022, Vietnam joined other member states to adopt a resolution to negotiate a legally binding agreement on ending plastic pollution by 2024.

Nationally, the Prime Minister has set out the following specific targets to deal with waste management:⁶

• by 2025, 85% of plastic waste generated must be reused, recycled and treated, and 50% of the plastic waste in seas and oceans must be reduced;
• by 2030, 95% of urban municipal solid waste must be collected and treated properly, and 100% of urban organic waste and 70% of rural organic waste must be recycled; and
• by 2050, 100% of solid waste must be collected and treated properly.

Within the current legal framework, entities in Vietnam are, in general, required to take proper measures in dealing with waste treatment and recycling of recyclable products or packages. These include:

For waste treatment:

• declaring the type and volume of hazardous waste in the application for an environment permit or environmental registration;
• collecting, classifying and storing waste separately by type, to avoid pollution;
• collecting and transferring certain waste to licensed establishments for proper waste treatment; and
• reducing, reusing and recycling waste, to optimise energy.

For recycling:

• by itself, or via a third-party recycling service provider, conducting recycling in accordance with the mandatory recycling rate and specifications stipulated under the law; or
• financially contributing to the Vietnam Environmental Protection Fund, to assist with the recycling of products and packages.

Green marketing

There are a number of national labelling programs in Vietnam to certify products and services as environment-friendly and meeting a certain level of environmental protection and sustainable development.

The most popular labelling programs are Vietnam Green Label (Nhãn Xanh Việt Nam) and Energy Label (Nhãn Năng Lượng), details of which are set out below:

Licensing and ongoing compliance supervision requirements

Based on environmental factors such as exploitation of natural resources or environmental sensitivities of an investment project, the law classifies investment projects into four groups (Group I to Group IV), with decreasing levels of risk of creating adverse impacts on the environment. Depending on the classification, an investment project may be subject to various environmental licensing requirements before going into operation and to reporting obligations during its operation. The key requirements are set out below:

The 'S' component in ESG comprises a wide range of social factors in a company's relationship with its community, suppliers, customers and employees. In Vietnam, these issues are most prevalent in employment law. In addition, investors are frequently concerned with data privacy laws, which are fairly new and still developing in Vietnam. Below we give an overview of common issues under Vietnamese law and those that investors are most concerned about.

Diversity and inclusion

The Labour Code⁷ generally prohibits an employer from discriminating against its employees on the basis of gender, race, colour, social class, marital status, beliefs, religion, HIV infection, disability, or establishment of or participation in the activities of a trade union. Regarding gender equality, male and female employees must be treated equally in terms of recruitment, employment, training, working hours, salary and promotion.

Discriminatory practices may subject the employer to a wide range of administrative fines. Further, discriminatory conduct on the basis of gender that prevents the employment of any person may constitute criminal liability under the Penal Code.

Forced labour

The law generally prohibits labour coercion (defined as using force, threatening to use force or using other tricks to coerce a worker to work contrary to their will); maltreatment or sexual harassment at the workplace; and taking advantage of an apprenticeship or trade-training program to seek profit from or exploit an employee.

Breach of such prohibitions may subject the employer to administrative sanctions or criminal penalties, depending on the degree of violation.

Child labour

The Labour Code permits the employment of children under 18, subject to different levels of protection for three age groups: under 13, from 13 to under 15, and from 15 to under 18. Applicable requirements include record-keeping and reporting obligations, restrictions on work hours and restrictions on types of jobs.

Sexual harassment

Sexual harassment in the workplace is prohibited. The new Labour Code of 2019 sets out various protective measures preventing sexual harassment, which are more intensive than those in the old Labour Code of 2012. Among other things:

• Enterprises may discharge an employee on the basis of them having committed sexual harassment conduct as prescribed under the enterprise's internal labour rules; and
• An employee may unilaterally terminate their labour contract without providing any advance notice if they are sexually harassed at the workplace.

Privacy and data protection

Vietnam's relatively new and still-developing data privacy laws are spread across different statutes. Primary legislation includes the Civil Code, the Law on Cybersecurity and the Law on Information Technology, which tend to be broadly drafted, thus leaving their precise application open to interpretation.

Current data privacy laws generally require the data owner's consent for any collection, use or disclosure of personal data, and require data processors to implement managerial and technical measures to safeguard personal data.

In early 2021, the Government issued a draft decree on personal data protection, which proposes fairly strict and developed rules on data privacy. Among other things, the draft proposes a definition of sensitive personal data, exceptions to the consent requirement, stringent rules on cross-border transfer of data, and higher penalties for administrative violations of data privacy laws.

Working conditions

Vietnamese law has specific regulations in relation to working conditions of employees, including:

Labour union and strikes

• Internal labour rules (ILRs): Employers must have ILRs setting out, among other things, working conditions, order in the workplace, labour discipline and applicable disciplinary penalties. Employers with more than 10 employees must issue and register written ILRs with the labour authorities.
• Employee representative groups (ERGs): Traditionally, Trade Union (managed by the Vietnam General Confederation of Labour) is the only regulated organisation representing employees in an entity to protect the employees' rights and interests. As a consequence of Vietnam entering into various free trade agreements, the Labour Code now allows employees to set up or join an ERG operating independently from the existing state-run Trade Union system. An ERG must be registered with the authorities.
• Strikes: Employees have the right to go on strike provided, among other things, the strike is organised and led by a qualified ERG, and conducted in accordance with the procedures stipulated under the law.

Governance, or 'G', covers a broad range of corporate activities, including board and management structures, anti-bribery and corruption compliance, executive remuneration and information disclosure.

Anti-bribery and corruption

Anti-bribery and corruption is a key concern in any entity's governance. Regulations on anti-bribery and corruption are included in the Law on Anti-Bribery and Corruption (setting out general anti-bribery and corruption requirements) and the Penal Code (setting out bribery criminal offences and applicable penalties).

It is worth noting that Vietnamese law captures both public and private (commercial) bribery. Also, criminal liability for bribery offences is only applicable to individuals. Accordingly, when it comes to an entity's bribery act, the management of the entity and any person involved in the act may be subject to criminal liability in their personal capacity.

In practice, the Vietnamese Government has recently taken more aggressive measures in enforcement of anti-bribery and corruption, especially in the public sector.

Executive remuneration

The ESG consideration regarding executive remuneration involves inclusion of sustainability targets, to hold executives accountable and demonstrate their commitment to sustainability.

Under Vietnamese law, there is no such requirement to take a sustainability target into account when determining executive remuneration. However, together with investors' growing demand for higher standards of ESG compliance, this is likely to become a market trend.

Disclosure of information and ESG report

Vietnamese law requires Vietnamese public companies to disclose ESG performance in their annual reports, including water and energy consumption, employee-related policies, green capital market activities and their contribution to the community. The annual reports must be made public and submitted to the State Securities Commission of Vietnam and the relevant Stock Exchange.

In addition, public companies in Vietnam are required to disclose their financial, corporate governance and operation information (eg financial statements, corporate governance reports and insider trading transactions).

Private companies are required to submit certain periodical reports to the authorities (such as reports on implementation of investment projects and reports on labour usage), which are less extensive than those public companies must submit and do not include ESG considerations. 

Board diversity and inclusion

Board diversity and inclusion, as an ESG consideration, generally refers to the variety of backgrounds of a board of directors' membership in terms of skills, ages, genders, cultures, ethnicities and independence from the company's internal pressures.

Under Vietnamese law, a board of directors needs to have independent directors in certain cases (eg one fifth of an unlisted public company's board directors must be independent).    

Other than the requirements noted above, Vietnamese law does not have any specific regulations on board diversity and inclusion. In practice, some companies have adopted a higher standard, to ensure board diversity in terms of gender and background.

To keep pace with growing demand in the area of ESG, companies should stay informed about the applicable ESG legal framework and current ESG practices, and periodically measure their current ESG performance against such requirements and practices.

As an international firm, Allens has extensive experience advising clients on ESG. In Vietnam, we have advised a variety of clients on a span of ESG-related issues. Our combination of international expertise and local experience helps us navigate clients' concerns and add value to their businesses. Our ESG-related services include:

• advising on ESG-related regulatory requirements;
• undertaking risk and compliance assessments and reviews;
• reviewing and updating contractual documentation, to address ESG requirements;
• conducting internal compliance investigations and training;
• conducting due diligence on ESG-related matters as part of M&A deals, eg:
  • conducting an assessment of the target's compliance with regulations and voluntary commitments they have made, to establish whether they are compliant and whether their position is consistent with their own commitments;
  • identifying the target's material ESG risks;
  • making recommendations to rectify ESG non-compliance issues and for any improvements to be implemented post transaction; and
• advising borrowers and lenders involved in green financing and sustainable financing arrangements.