We are living in a decade where science and technology have brought tangible changes to every aspect of our lives. It’s also in this decade when climate change has accelerated at an unprecedented rate. Such context poses a crucial challenge for businesses to shape and transform into more sustainable, comprehensive and flexible business models.
Never have the consumers been presented with such abundant choices, whereas sustainability-minded investors are urging enterprises to solve their business, social, and internal governance issues in a specific and transparent manner.
This is where environmental, social, and governance (ESG) criteria comes in. ESG describes a set of standards used to measure factors related to sustainable development and the impact of businesses on the community. Over the course of nearly two decades, ESG has evolved from a specialised reporting system for financial investors to a generic term for how businesses or brands weigh the impact of these factors on their products and staff.
While environmental factors consider aspects of climate change, energy, carbon emissions, conservation of natural resources, and animal welfare, among others, social aspects assess the business in terms of business relationships, stakeholder needs, and expectations in areas like health and safety. Governance, meanwhile, evaluates the accounting methods, transparency, and voting rights of shareholders on important issues, management of conflicts of interest, and more.
Meanwhile, comprehensive digital transformation not only allows a business to function faster and more efficiently, but it can also change the perception of how businesses solve problems. The same is true for ESG. Focusing on this will help businesses become more attractive and grow stronger.
Nowadays, digital transformation and sustainability are becoming the mainstreams in the modern economy. Digital transformation will support businesses in making sustainable investment decisions, building and developing ESG data sets in a methodical manner. And the disclosure of the company’s ESG data sets will yield superior results over its competitors in the long run.
The benefits of good ESG implementation include reducing cost of capital and business risk, enhancing shareholder position, and creating opportunities to access long-term capital while improving operational efficiency and corporate reputation. Additionally, this trend is also developing and becoming apparent among businesses in the financial sector and banks’ strategies in particular.
Digital transformation in the financial sector refers to the application of technologies, such as big data, AI, mobile platforms, blockchain, the Internet of Things, and many others, which are applied to provide financial services and to make financial and investment decisions. Sustainable finance refers to an investment decision-making process in which ESG factors are carefully evaluated with an orientation towards increasing long-term investment in sustainable economic projects and activities. Successful integration of these two segments also means that the business is implementing digital transformation in sustainable finance practice.
Willing to pay
In addition to providing the foundations for investment decisions, technology can also help boost consumer awareness of environmental and social implications through their consumption or investment decisions, thereby encouraging them to make more sustainable choices.
Currently, consumers are increasingly aware and have a more distinct shopping attitude towards green products and services. In the future, if technology is developed enough and the difference in features of the service or product is not too large between providers, then green brands will easily receive the sympathy and choice of consumers.
Therefore, businesses should also consider investing in green production as a strategy to create competitive advantages in the long term. Through fintech applications, financial institutions can provide consumers with a map of daily spending, and assist them in choosing products and services that match their personality and environmentally friendly taste.
According to research by EY teams, more than half of consumers are willing to pay more for sustainable products in Europe. In the US, where the majority of consumers are millennials, two-thirds say they are willing to spend money on a brand that is certified for sustainability. Three-quarters of them think that businesses need to bring value to the community instead of just chasing after profitability.
More specifically, economic hurdles induced by the pandemic have further supported the sustainable development trend. Investors now have also become more inclined to invest based on the evaluation of ESG criteria instead of traditional financial criteria.
Bloomberg Intelligence estimates that global ESG assets could surpass $41 trillion for the whole of 2022 and reach $50 trillion by 2025. Much of this growth is contributed by the United States, with a 40 per cent increase over the past two years. The Institute of International Finance indicates that 80 per cent of the stock indexes of ESG-compliant funds outperformed similar indexes of those that are non-compliant during the sell-off in the pandemic.
Across the globe, in 2021, more than $620 billion of green bonds were issued, the largest segment in the sustainable financial market, with major contributions from Southeast Asian countries such as Indonesia, Malaysia, and Thailand.
In Vietnam, the government has implemented institutional and policy reforms, including the development of a national strategy on climate change mitigation and adaptation, green growth, low carbon economy, environmental protection, and social responsibility. With the same mindset, the State Security Commission of Vietnam (SSC) issued Circular No.155/TT-BTC, requiring listed companies to disclose information on sustainable development goals and report on impacts related to social environment.
Moreover, under the impact of digital technology on the economy, digital transformation in the economy, society, governance, and environment is indispensable for comprehensive sustainable development. However, a survey by the Vietnam Chamber of Commerce and Industry shows that about 80 per cent of Vietnamese businesses are not properly aware of digital transformation. The term ESG is even newer and more unfamiliar to Vietnamese businesses.
However, now there are also leading Vietnamese enterprises that have demonstrated unexpected success when investing in ESG. One leading dairy manufacturer in Vietnam, for example,is integrating ESG standards into strategic goals for long-term business development. The company invested in farms that meet high international standards such as Organic Europe and Global G.A.P. certification. It also applies modern production technologies, combined with green energy such as solar energy and biomass in its farm systems and factories, significantly saving fuel costs.
As a result, since 2017, that dairy company has been continuously listed in the top 20 VNSI green stocks, with a total ESG rating of 90 per cent. Elsewhere, towards the goal of net-zero carbon emissions, one foreign-owned brewery in Vietnam has achieved the goal of having no more landfill waste in its six factories. All of the waste and by-products at the company’s breweries are now recycled and reused, and 52 per cent of the energy used to create the firm’s beer products is renewable.
Meanwhile, ESG factors are and will continue to be the key trends to help shape the digitalisation of banking operations in the next decade.
To strongly promote the National Green Growth Action Plan, the State Bank of Vietnam has also issued directives and decisions to promote the country’s sustainable development goals. They involve promoting green credit and managing environmental and social risks in credit granting activities, and an action plan for the banking sector to implement the National Strategy on Green Growth.
It also includes approval of a Green Banking Development project to increase awareness and social responsibility for the banking system and environmental protection, combating climate change, gradually making banking operations greener, and directing credit flows into environmentally friendly finance projects.
In April 2021, the SSC, in collaboration with several international financial institutions, introduced a handbook on issuing guidelines for green, social, and sustainable bonds to raise capital from the private sector for eco-projects.
In August the following year, EY Consulting Vietnam JSC conducted a survey of 13 banks in Vietnam. More than half have ESG portfolios and are expected to increase their level of investment in such categories in 2023. By doing so, they can mobilise capital through the issuance of green bonds.
One of the biggest banks in Vietnam implements comprehensive digital transformation and a series of important cooperation agreements with large and prestigious financial institutions to further promote programmes to combat climate change and to fund projects that meet ESG standards.
Another top local bank, in its annual report for 2021, announced the effective implementation of the allocation of credit capital to serve the requirements of socioeconomic development; the promotion of the development of green credit and green banking; and the increase in the proportion of bank credit to invest in clean and renewable energy. Its M-Office electronic office system is a typical example of using ESG to design the bank’s digital transformation system, hence simplifying the process while reducing paper waste.
In addition to banks, this transformation has also been strongly implemented in other finance-based companies. In the sustainable development report from a top 3 consumer finance company in Vietnam in 2021, ESG principles have been applied in strategic and product management of the company. At the same time, the company is also working with Deutshe Bank to build an ESG lending facility, with key performance indicators related to financial inclusion, digital empowerment, and data protection.
Lastly, credit institutions play an important role in leading the economy while providing and coordinating capital sources based on a rigorous risk assessment process. Therefore, in their own digital transformation process, the pioneering role of financial institutions in ESG implementation will provide a strong impetus for businesses in general to set new standards for sustainable development.
Disclaimer: The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.
Source: Vietnam Investment review, 27 December 2022