“ESG”, which stands for Environmental, Social and Governance, is refers to a set of standards introduced in 2004 with the purpose of measuring factors to determine indicators related to the impact on the community as well as the sustainable development in businesses. Currently, in Vietnam, ESG is a relatively essential factor in the Industrial Real Estate sector for attracting foreign investors. Hence, entrepreneurs will deal with these challenges.
Challenge on environmental issues
Not long ago, all nations worldwide have been prioritizing and stipulating legislation related to the development of new renewable energy sources to replace traditional power sources. However, Vietnam has yet to address this issue adequately. In May 2023, the Prime Minister finally issued Decision No. 500/QD-TTg, approving the National Power Development Plan for the period 2021-2030, with a vision to 2050 (Power Plan VIII) by the Ministry of Industry and Trade. Unfortunately, from September 2023, the Deputy Prime Minister has returned the decision due to the failure to meet detailed requirements, lack of feasibility and adjusting procedures or processes.
This results in companies having troubles in meeting the criteria of clean energy in industrial zones, as the Government regulations still remain unclear. Additionally, the European Union, with its Carbon Border Adjustment Mechanism (CBAM), which is set to take effect on October 1, 2023, will enter into force in its transition phase. It would lead to increased import costs on certain materials that are carbon intensive or leakage such as Iron and Steel, aluminum, and Cement, thus, affecting businesses in Vietnam.
![](http://hmlf.vn/wp-content/uploads/2023/08/Thiet-ke-chua-co-ten-10-1024x682.png)
Challenge on social element
This is one of the evaluation criteria that not only attracts value investors but also appeals to workers in Vietnam: favorable policies and support for labor. According to a ranking chart of 100 pension funds in 2021 by the Thinking Ahead Institute, Vietnam ranks 98th with a value of $55.7 billion. While this places Vietnam among countries with favorable assessments, compared to large pension funds in other countries that adhere to ESG standards, Viet Nam Corporations may deal with significant pressure when it truly comes to draw other foreign investors attention.
Furthermore, the construction of social house in industrial zones for workers is still heavily a persistent problem. Despite the government’s efforts to introduce credit programs to support buyers and renters in social house, as well as exercise the implementation of the “Investment in the Construction of at Least 1 Million Social Housing Units for Low-Income Earners and Industrial Zone Workers for the 2021-2030 Period”, in practical, it is not possible to execute. Some difficulties include unsuitable land fund policy, cumbersome administrative procedures, such as the land usage fee exemption process for social house project developers, and complicated conditions in selecting subjects for social house project developers. The obstacles within state policies have led industrial zone real estate investors to struggle with a lack of policy coherence in their incentive programs.
![](http://hmlf.vn/wp-content/uploads/2023/06/Thiet-ke-chua-co-ten-4-1024x679.png)
Challenge on Governance aspect
According to the Vietnam ESG Readiness Report 2022 of PricewaterhouseCoopers (PcW), in Section 3, which focuses on promoting ESG practices, up to 60% of businesses in Vietnam (including small and medium-sized enterprises) have not made any ESG commitments. These businesses in Vietnam lack knowledge (61%) and transparency in ESG data (28%), which are among the notable reasons. Regarding the lack of specialized knowledge to develop ESG practices, with half of small and medium-sized businesses in Vietnam operating in a “family” model, managers face considerable challenges in establishing appropriate strategies, along with monitoring and maintaining business operations, as well as learning about ESG.
Regarding the lack of transparency in ESG reporting. Although recognizing that “Vietnam has the potential for economic development and plays a crucial role in the global supply chain,” John Ditty, a sponsor of ESG services at KPMG in Vietnam, added that Vietnam still ” lack of a mandatory reporting regime means that the quality of disclosure and analysis varies among companies.” (KPMG’s Asia Pacific report). Even large foreign-invested enterprises will encounter challenges in demonstrating the quality of their reports to investors since there is no officially established system for reviewing these reports in Vietnam.
Solution
Looking at the bright side, nowadays, numerous countries are highly evaluating Viet Nam as a potential country in Asia Pacific aiming for ESG and sustainable development in multi-area. For specific, also in Vietnam ESG Readiness Report 2022 of PricewaterhouseCoopers (PwC) indicated that 80% Enterprises Have made ESG commitments or plan to do so in the next 2-4 years, or the annual KPMG’s Asia Pacific report about the rates of sustainability information in annual financial reports (2020-2022) from approximately 0% in 2020 to 79% in 2020 showing how Viet Nam corporations are much in consider to ESG.
Besides, Viet Nam government, even though all entanglements in regulations, are trying to resolve the problem by commitment to cutting emissions to net zero by 2050 announced at the 26th UN Climate Change Conference (COP26) as well as propose amendments to the law and implement all the unsold social house projects in 2023
Ultimately, evaluated by experts, depending on each industrial real estate enterprise trying to follow ESG. Theoretically, Viet Nam real estate companies can still achieve the ESG criteria by focusing on relevant quantitative variables for each company while analyzing the quantitative costs of social impacts and overall interactions with the quality of the local community. In reality, perhaps the biggest barrier is still the time with effort the developers have to exert to establish an ESG-compliant design from the get-go and waiting for the government to stipulate regulations more accurately
![](http://hmlf.vn/wp-content/uploads/2023/06/Thiet-ke-chua-co-ten-1-1-1024x676.png)
Conclusion
ESG will be a crucial standard in the future and there is no denying that Viet Nam Industrial real estate business has great potential in this field. So far, there are difficult challenges to persist in three aspects of its standards. With great strategies and government support, overcoming these difficulties will drive ESG investment forward.
HMLF is always available to offer assistance in understanding the procedures with authorities.
![HMLF legal services](http://hmlf.vn/wp-content/uploads/2023/04/NAM_3428-1024x682.png)
Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
Phone number: +84 937215585
Website: hmlf.vn Email: miller@hmlf.vn