The right balance between ESG and profitability

Commitment to high ESG (Environment – Society – Governance) standards is indispensable for Vietnamese companies to participate in global value chains and international markets, where sustainability issues increasingly important to many stakeholders including consumers, investors, governments and NGOs.

Obstacles to be cleared

In addition, green financial instruments such as issuing green bonds have become popular among Vietnamese companies to finance renewable energy and biomass energy projects. As a result, ESG compliance is becoming a critical success factor for many business sectors and investment projects. The increasing global attention on ESG practices is also encouraging businesses to make a strong commitment to sustainable business values and strong ethical initiatives.

Companies are trying to strike a balance between generating profits and delivering on broader ESG goals. Photo: Quy Hoa

However, there are a number of obstacles on ESG practices that need to be addressed in Vietnam. According to PricewaterhouseCoopers’ report on the readiness to practice ESG in Vietnam in the period 2022-2023 based on a survey of 234 Vietnamese companies in which 55 of them are publicly listed companies, more than 56% of the companies have not yet implemented any ESG initiatives.

Reported barriers to ESG practices include lack of transparent regulation (67%), lack of clear active leadership in the ESG program (65%), and lack of an ESG leader within the organization (62 %). Therefore, more efforts are needed to raise awareness of Vietnamese businesses about ESG requirements and the promulgation of transparent ESG regulations by Vietnamese policymakers.

In the short term, companies embarking on an ESG roadmap may face operational challenges such as pressure from stakeholders, high implementation costs, implementation complexity and uncertainty about payouts makes it difficult for companies to demonstrate the value of ESG investments. One of the biggest objections to the ESG framework at this stage concerns the calculation of the single index.
There is no uniform standard for the information used in ESG ratings, and different assessment methods are applied by different rating agencies. This generates costs of information on companies that can be too expensive for all but the highest value organizations. Indeed, a review of ESG ratings typically emphasizes scores for the largest companies across economies, but for SMEs, the costs associated with providing ESG information can be very high, especially in the short term.

“The realization that businesses include not only owners and shareholders but also stakeholders has led to a rethinking of corporate goals” Dr. Stanley Yab- Faculty of Business, RMIT Vietnam

Rethinking of profitability

However, companies that are developing this ESG profile can gain a competitive business advantage in the long run, such as increased customer loyalty that enhances the branding of their products and services, growing significantly in sales and market share as well as expanding the global market.

Additionally, we have seen a trend in “Invesment on ESG” in recent years, where equity stocks are selected to build portfolios with a certain ESG profile, such as only companies with ESG score of 40 or higher. While the evidence on the performance of such censored investment vehicles is differenciated, it does suggest a desire among investors to combine profit maximization with the objective of sustainable goals in the investment decision-making process.

At a more specific level in Vietnam, business associations and government agencies can play a key role in promoting ESG practices by organizing campaigns to promote the formation of a joint venture or a consortium for Vietnamese companies to take joint action on ESG compliance in their business practices. In the long term, we can expect growing public awareness of ESG in Vietnam to increase demand for ESG-compliant products and services, and promote more ESG practices among companies in Vietnam.

However, it should be noted that sustainability is increasing the fundamental understanding of business goals. Traditionally, the concept of corporate purpose has focused on shareholders and owners, especially on optimizing value through profit maximization. The key argument for these viewpoints is that solving the shareholder wealth problem will bring long-term benefits to the economy and society as a whole. Although this viewpoint still dominates, the realization that business consists not only of owners and shareholders but also of stakeholders has led to a rethinking of the goals of business. To some extent, this more modern point supposed that the optimizing of corporate value is not only built on shareholders’ wealth but also meets the objectives of stakeholders presented in an ESG-like way.

The recent academic documents show that companies are trying to reach the balance between generating profits and realizing broader ESG goals. However, it should be noted that some ESG objectives may not be compatible. With the sustainability discussion now making its way into the renewable business sector, it will be interesting to distinguish firstly, how this is defined and secondly, what it means for the way we look at companies and their goals for the future.