ESG standards

Serving as an assessment tool for a company's practices based on their commitments and actions in protecting the environment and minimizing negative environmental impacts. ESG stands for:

• E - Environmental: Standards related to environmental protection and natural resource conservation, such as climate change impacts and carbon emissions, water and pollution management, resource extraction from forests,...

•  S - Social: Standards related to societal aspects, from basic issues like customer satisfaction to comprehensive issues like diversity, equity and inclusion, privacy, data security, community relations,... 

• G - Governance: Standards related to organizational operations such as corporate governance issues, intellectual property protection,...

Currently, the adoption of ESG standards is a trend among businesses.

• Demands from consumers: 

Today, with increasing awareness of human and environmental issues, modern society consumers not only demand quality and affordability but also sustainability and environmental friendliness in products. Moreover, many also care about a company's policies towards its employees and the community. Therefore, ESG standards are an inevitable trend forcing businesses to apply in order to compete and attract customers.

In a report at the World Economic Forum "Future Consumer in Fast-Growing Markets: ASEAN" published in June 2020, 80% of consumers in the ASEAN region were found to be interested in sustainability and had changed their lifestyles to become more environmentally friendly (Moore, 2022).

The latest data from the Edelman Trust Barometer report (2022) shows that how businesses treat employees and suppliers has been and is affecting consumer purchasing behavior. Accordingly, one-third of consumers have stopped using a brand they perceive as behaving inappropriately before a crisis; 71% say that if they perceive a brand prioritizing profit over people, they will never trust that brand again.

• Investor Demands:

The expectations from consumers have indeed reshaped the investment approach of investors recently. The Global ESG Standards Study in 2022 illustrates that ESG is increasingly emerging as a pivotal criterion in the eyes of global investors. By 2022, close to 90% of investment organizations have been factoring in ESG considerations when making investment decisions.

Opportunities and Challenges in Implementing ESG Standards

• Opportunities:

Top-line Growth: ESG plays a crucial role in strengthening market share for businesses in existing markets and expanding market share in new ones. By creating sustainable products, businesses attract a large number of individual and organizational customers. Additionally, implementing ESG also helps businesses build a network of connections with stakeholders in the community, thereby maximizing available resources.

Cost Reduction: Implementing energy and resource-saving measures such as using renewable energy, efficient lighting systems, water-saving equipment, etc., can significantly reduce management and operational costs. For example, the fast delivery company FedEx aims to convert its entire fleet of 35,000 vehicles to electric or hybrid vehicles. To date, the company has converted about 20% of its vehicles, resulting in a reduction in fuel consumption by over 50 million gallons (approximately 190 million liters).

Regulatory and Legal Intervention: Implementing ESG standards helps businesses better comply with regulations regarding the environment, labor, safety, etc., thereby minimizing the risk of legal violations and penalties. Partners, shareholders, and customers are increasingly concerned about a company's commitment to environmental, social, and governance issues. Implementing ESG standards can help build trust and enhance public relations, reducing the likelihood of negative legal issues.

Productivity Uplift: Businesses that implement ESG well often focus on the health and well-being of employees by providing a safe, healthy, balanced work environment, and development opportunities. This helps employees feel happier, more engaged, and work more efficiently.

Investment and Asset Optimization: ESG can enhance investment returns by allocating capital to promising and more sustainable opportunities (e.g., renewable energy, waste reduction, and air filtration systems). ESG can also help companies avoid long-term investment risks related to environmental issues (e.g., oil tankers).

• Challenges:

Lack of Robust Data: A lack of ESG information can increase financial risks for businesses. Investors and financial institutions are increasingly interested in ESG factors when assessing a company's profitability and sustainability. A lack of ESG data can undermine a company's credibility, affecting its ability to raise capital and market value. The lack of ESG data can also reduce internal motivation to improve environmental, social, and governance performance. Without clear information on ESG metrics and comparisons with other companies, businesses may not recognize their strengths and weaknesses, making it difficult to set improvement goals.

Concern About Performance and Sacrificing Returns: Businesses are always under pressure from investors to deliver high and stable returns. This makes them focus on short-term operational performance and profits, potentially overlooking long-term goals and other important factors such as sustainable development, social responsibility, etc. However, this factor is declining significantly as investors increasingly see both investment returns and sustainable development as beneficial.

Concerns Over Greenwashing: "Greenwashing" is the process of conveying a misleading impression or providing misleading information to enhance a brand's reputation, making baseless claims to deceive consumers into believing that a company's products are environmentally friendly. This is the third barrier and is becoming increasingly common (from 22% to 30% in 2022). Thus, more and more investors are concerned about the increasingly common issue of greenwashing, and managers may exploit ESG as a marketing and communication tool.

Other barriers include: Complex, incomprehensible, and inconsistent regulatory systems; Inappropriate products/strategies of the company; The nature of the industry focuses on short-term investment...

Evidence of the Importance of ESG for Businesses Today

Investing in ESG is crucial in many ways. The world's largest 80% of companies have reported facing climate change-related risks, while climate-related events could cost those companies $1.6 trillion by 2026. ESG is an important way to mitigate those risks.

Investing in ESG is also crucial financially. In a recent study, MSCI investigated the relationship between ESG investment and the stock market to see if there were any significant financial impacts. The study used a three-channel model to examine how ESG data is integrated into stocks transferred to the stock market. The study showed that ESG affects many values and efficiencies of businesses. Companies with higher ESG ratings show:

Higher profit potential: High ESG-rated companies demonstrate higher profitability and competitiveness. This often leads to higher profits and dividends - especially when compared to low-ESG companies.

Lower risk: High-ESG-rated companies experience fewer risks in major downturns. Low-ESG-rated companies are more likely to encounter these events.

 Chart: Survey results of organizational interest in ESG investments

Source: ESG Global Study 2022

When asked about the importance of ESG in investment approaches in 2022, over a quarter of global investors stated that ESG is a "focus" in their investment approach (26% compared to 28% in 2021). However, a higher proportion expressed their views on ESG investment as "acceptance" (34% compared to 32%) and "compliance" (29% compared to 24%).

Overall, Europe leads the world in ESG investment with 93% (compared to 79% in North America, 88% in Asia-Pacific). Specifically, 31% of European investors prioritize ESG in their investment approach (compared to 18% in North America, 22% in Asia-Pacific). This indicates that the investment market and legal framework in Europe are more mature. In contrast, North America is the least trusting and applying ESG in investments.

Furthermore, ESG is increasingly asserting its position in the investment world as research indicates that only 13% of global investors agree that ESG is a short-term and temporary trend. This suggests that most investors view ESG as an essential trend in the context of long-term investment.

Some exemplary businesses applying ESG standards:

• In Vietnam

Vietnam Dairy Products Joint Stock Company (Vinamilk)

Vinamilk is one of the successful companies in practicing ESG. The company has implemented the Vinamilk Ecological Farm project, which has brought about significant economic benefits. When factories and farms are operated using renewable energy, Vinamilk contributes to environmental protection through available resources, aiming to achieve net zero emissions by 2050.

Moreover, Vinamilk and the Resource and Environment Newspaper have signed a memorandum of understanding on implementing tree planting activities to offset carbon towards Net Zero, with a total value of 15 billion VND. This is part of Vinamilk's Net Zero 2050 Action Program to jointly achieve the goal of reducing net emissions to "0" as committed by Vietnam at the 2021 United Nations Climate Change Conference (COP 26).

• Globally

Lenovo Group, a global corporation specializing in computer and electronic component manufacturing (Lenovo ESG FY 2021-2022 Report)

Lenovo began applying ESG standards in 2009. The company's ESG initiatives include direct and indirect activities supporting the UN Sustainable Development Goals (SDGs). In an interview between Forbes and the CEO of Lenovo Asia-Pacific, also the General Manager of Lenovo Central Asia (Forbes, 2022), it was stated:

Environmentally: Lenovo has prioritized implementing various policies to minimize environmental impact. Environmental protection efforts (using eco-friendly packaging materials, innovating low-temperature soldering processes in circuit board manufacturing, etc.) have been implemented over many years across the entire product life cycle from input materials, production to transportation, and end-of-life services. As a result, in 2021, Lenovo exceeded its target, reducing greenhouse gas emissions by 40% compared to 2010.

Socially:

Conducting numerous surveys on the company's direction: 83% of customers want suppliers to meet ESG standards. In another survey, 86% of employees said they prefer to work for a company with a clear ESG vision. (Forbes, 2022). Lenovo has successfully achieved its goal of supporting over 1 million people through global charitable and volunteer activities.

Lenovo is committed to ensuring that working conditions at its locations are safe; workers are treated with respect; operations are environmentally friendly; and business activities are conducted responsibly and ethically.

There are promotional campaigns to help the community understand more about ESG, encouraging businesses to focus on ESG strategies, not only in partnerships with Lenovo but also with many other partners who share the same concerns. (Forbes)

Governance: Lenovo is listed in the Corporate Knights Global 100 as one of the world's most sustainable corporations, while Gartner and CDP recognize its excellence and sustainability in the supply chain.

Potential of applying ESG:

Based on the achievements the company can attain through the application of ESG, MSCI upgraded Lenovo's ESG rating from A (2021) to AA (2022). As a leading company in the industry, the company will benefit from global investment flows into ESG investments.

Looking at Lenovo's market, legal requirements for transparent disclosure of ESG achievements are becoming more relevant to investors in the future. This will increase capital flows, especially into Chinese ESG stocks. Quoting Amar Gill, Head of Investment Management in Asia-Pacific at BlackRock, his clients plan to double their investments in ESG stocks. With the annual reports Lenovo has published, the company is in an attractive position to attract additional investments.

• Future goals:

Environmentally: In June 2020, the 2030 target was approved by the Science-Based Targets Initiative (SBTi) to achieve a 50% reduction in greenhouse gas emissions and carbon neutrality by 2050.

Socially: By 2025, volunteer programs will directly impact 15 million individuals worldwide.

Governance: By 2025, enhance operational oversight, understanding of risks and ESG programs, ethics and compliance training, as well as enhance management capabilities and responsibilities in private programs.

Overall, ESG investment is a form of investment choice based on a company's or organization's ESG criteria. This implies that investors need to consider these factors before making investment decisions. Currently, ESG has quickly become an important tool for socially responsible investors to identify potential investments and avoid financial losses when investing in companies engaged in unethical activities. However, ESG standards still pose some barriers, making some North American investors less confident in investing compared to other regions.

Moreover, investors can evaluate companies through regularly published ESG reports. ESG reports are public documents tracking organizations' progress in meeting goals and commitments regarding the environmental, social, and governance aspects of the business. These reports are usually conducted annually, providing detailed information on various ESG indices used to measure performance in these three areas both quantitatively and qualitatively. Currently, ESG reporting is widespread, with McKinsey & Company data indicating that, in 2021, over 90% of S&P 500 companies and about 70% of Russell 1000 companies are now publishing ESG reports in various forms. As there is no unified framework guiding ESG reporting, as each company has different contexts and characteristics. However, companies can explore some prominent ESG assessment frameworks, including:

SASB Standards: Developed by the Sustainability Accounting Standards Board and released in 2018. This system of standards provides clear guidelines to help companies assess and disclose sustainable ESG information across 77 industries.

CDSB Framework: Developed by the Climate Disclosure Standards Board to support the integration of ESG reporting into companies' mainstream reports. Initially focused on climate-related standards, additional social standards were updated by 2022.

IFRS Sustainability Disclosure Standards: The integration of SASB and CDSB. The IFRS standards aim to create a consistent disclosure standard that can be used globally to report ESG data to investors. This is considered the future tool of global ESG reporting.

According to Tạp chí Tài chính (Financial Magazine): https://tapchitaichinh.vn/bo-tieu-chuan-esg-ve-moi-truong-xa-hoi-quan-tri-doanh-nghiep-huong-di-ben-vung-cho-doanh-nghiep.html