What are ESG Standards? Why Businesses Need to Invest in ESG

Adhering to ESG standards not only helps mitigate risks but also opens up opportunities to access green capital and international markets...

I. What are ESG Standards?

ESG standards are a set of indicators used to assess a company's sustainable development activities, based on three main factors: Environment, Social, and Governance. ESG helps businesses identify risks, opportunities, and measure impact when integrating these factors into their operational strategy. A higher ESG score indicates that a company is performing well in its responsibility to the environment, community, and internal governance.

ESG standards are built upon international legal frameworks, local laws, and global agreements. To meet ESG requirements, businesses need to ensure three main pillars accompanied by various specific criteria related to emissions, social welfare, and management transparency. The ESG concept originated from CSR (Corporate Social Responsibility) in the 1950s and was officially articulated by the United Nations in the "Who Cares Wins" report in 2004.

II. Key Components of ESG Standards

The components of ESG standards are divided into three main pillars: Environmental, Social, and Governance. Each pillar reflects a critical aspect of a company's sustainable development strategy.

1. Environmental (E)

E - Environmental is one of the three main pillars of ESG standards, reflecting the extent to which a company impacts the natural environment during its production and operations. To meet this standard, businesses need to focus on the following factors:

• Climate Change: Businesses must identify and control their impact on the climate, especially greenhouse gas emissions. In Vietnam, the government has committed to reducing total national emissions by 43.5% by 2030 and achieving net-zero emissions by 2050. These commitments provide a clear basis for businesses to pursue sustainable development.

• Energy Use: ESG standards encourage businesses to use energy efficiently and prioritize renewable energy sources like solar and wind power. Transitioning to clean energy not only reduces reliance on fossil fuels but also optimizes long-term operating costs.

• Natural Resource Exploitation: Businesses must ensure that the use of land, water, air, and minerals has valid permits and complies with environmental protection regulations. Additionally, restoring used resources or investing in eco-friendly technologies to regenerate resources are also positive points in ESG evaluation.

• Waste Management and Recycling: Waste classification, storage, and treatment must comply with regulations to limit pollution. Businesses can adopt recycling technologies or cooperate with third parties to reduce waste sent to landfills and maximize material utilization.

• Environmental Opportunities: Activities such as developing green buildings, renewable energy, circular economy models, or carbon offsetting not only help businesses improve their ESG score but also open up new business opportunities in the sustainable sector.

2. Social (S)

The second aspect of ESG is S - Social, which focuses on evaluating a company's relationship with customers, partners, and employee working conditions in accordance with Vietnamese Labor Law.

• Privacy and Security: Businesses must collect and use personal data with consent, must not disclose information, and must ensure data protection measures comply with the Civil Code, Cybersecurity Law, and Information Technology Law.

• Diversity, Equity, and Inclusion: Labor Law prohibits discrimination based on gender, race, religion, or social class. Men and women must be treated equally in terms of work, promotion opportunities, and compensation. Businesses need to build a non-discriminatory work environment and encourage diversity.

• Safe Working Environment: Businesses must ensure occupational safety and employee health, absolutely no forced labor, abuse, or harassment. Compliance with regulations on employing labor under 18 years old and adherence to working hours and job nature as per law are also critical.

• Working Conditions: ESG evaluates salary levels, working hours, health check-ups, and insurance policies as required by law. Good working conditions contribute to improving the quality of life and job satisfaction of employees.

• Community Investment: Businesses actively participate in social activities, contributing to improving community life and enhancing their image in the eyes of customers and partners. This creates a responsible work environment, helping employees develop and feel more connected to the organization.

3. Governance (G)

The final aspect of ESG is G - Governance, which focuses on ensuring effective, transparent organizational operations that comply with laws and business ethics.

• Corporate Governance Structure: Businesses need to establish a clear governance structure, including an independent board of directors and effective oversight policies. Clearly defining responsibilities among departments and leadership helps ensure fair decision-making, avoid conflicts of interest, and enhance operational efficiency.

• Transparency and Information Disclosure: Businesses must disclose financial information, strategies, and management activities truthfully and timely. This not only meets legal requirements but also builds trust from shareholders, customers, and partners, while mitigating risks related to misinformation.

• Legal Compliance and Business Ethics: Adhering to legal regulations, anti-corruption measures, and maintaining ethical business standards are core elements. Businesses need to implement clear codes of conduct and internal control mechanisms to prevent violations, thereby strengthening reputation and market position.

• Risk Management: Businesses need to establish a comprehensive risk management system, including financial, operational, and reputational risks. Regularly assessing and controlling risks helps businesses respond effectively to fluctuations, ensuring stability and long-term development.

• Stakeholder Relations: Businesses need to maintain positive relationships with shareholders, employees, customers, and the community. Listening to feedback and addressing concerns fairly not only enhances the company's image but also lays the foundation for sustainable development.

III. Why Investing in ESG is Crucial

ESG standards are increasingly becoming a core element in the development strategy of modern businesses. Integrating ESG not only demonstrates social responsibility but also brings numerous strategic benefits, helping businesses achieve sustainable growth and solidify their market position.

• Promotes Sustainable Investment: Businesses adopting ESG standards are more likely to attract long-term investors, especially those investment funds that prioritize sustainable projects. Studies show that ESG-compliant companies often achieve better financial performance by optimizing operational processes, reducing energy costs, and enhancing reputation. This helps businesses not only ensure stable profits but also increase stock value in the long run.

• Effective Risk Control: Adhering to ESG standards helps businesses identify and manage risks related to environment, social, and governance aspects. For example, reducing greenhouse gas emissions or ensuring legal compliance helps businesses avoid penalties or reputational losses. A transparent and efficient governance system also helps businesses respond promptly to market fluctuations, thereby maintaining operational stability.

• Access to Sustainable Investment Capital: Financial institutions and investment funds increasingly prioritize injecting capital into businesses with strong ESG commitments. Businesses meeting these criteria often find it easier to access preferential loans or capital from green investment funds. This not only reduces the cost of capital but also opens up opportunities to expand operations without financial pressure.

• Enhances Brand Value: Committing to ESG values helps businesses build a positive, transparent, and responsible image in the eyes of customers, partners, and the community. A brand associated with environmental protection, community support, or fair governance will attract customer loyalty and create a competitive advantage in the market.

• Expands Market Access: ESG-compliant businesses can easily meet the stringent requirements of international markets, especially in developed countries where sustainability standards are paramount. Adopting ESG criteria also helps businesses build partnerships with global companies, thereby expanding business opportunities and entering new markets.

• Increases Contribution to Society and Environment: ESG encourages businesses to engage in activities such as emission reduction, improving working conditions for employees, or supporting local communities. These efforts not only bring practical benefits to society and the environment but also help businesses build strong relationships with stakeholders, thereby creating long-term shared value.

IV. Challenges in Implementing ESG

Integrating ESG standards into business operations brings many strategic benefits, but it also poses numerous challenges. Businesses need to identify and overcome these obstacles to ensure the effective and sustainable implementation of ESG.

• Significant Initial Investment Costs: Transitioning to sustainable processes and technologies often requires businesses to make substantial initial capital investments. For example, implementing renewable energy systems, upgrading infrastructure, or adopting emission reduction technologies demands significant financial resources. This can create financial pressure, especially for small and medium-sized enterprises (SMEs), making them carefully weigh long-term benefits against short-term costs.

• Complexity in ESG Data Collection and Measurement: Accurately and comprehensively collecting, tracking, and measuring ESG indicators is a complex process. Businesses face challenges in gathering data from various sources, ensuring the consistency and reliability of information. Furthermore, analyzing and reporting these indicators requires highly specialized personnel and appropriate technological tools, which can increase costs and extend implementation time.

• Lack of Standardization in ESG Frameworks and Regulations: Although ESG reporting frameworks such as GRI, SASB, and TCFD are becoming more popular, the lack of uniformity among these standards creates difficulties for businesses in selecting and applying them. Each standard framework may require different indicators and reporting methods, leading to complexity in comparing ESG performance between businesses or complying with stakeholder requirements. This demands that businesses invest time and resources to adapt their strategies accordingly.

• Difficulty in Changing Corporate Culture: Integrating ESG into a company's culture and daily operations requires comprehensive changes from leadership to employees. Businesses need to build strong awareness and commitment at all levels of the organization, which can face obstacles if employees or leaders do not fully understand the value of ESG or are unwilling to change traditional working methods. This process requires training programs, internal communication, and decisive leadership to drive sustainable change.

V. 7 Steps to Implement ESG for Businesses

To effectively integrate ESG (Environmental, Social, Governance) standards into business operations, companies need to follow these steps. Each step is designed to ensure professionalism, consistency, and alignment with sustainable development goals.

• Step 1: Secure Commitment from All Levels of the Organization: Businesses need to build consensus from senior leadership to employees about the importance of ESG. Leadership plays a pivotal role in inspiring and guiding, so businesses should organize communication sessions to clearly explain the meaning and benefits of ESG, such as improving business performance and enhancing reputation. Unified commitment from the entire organization forms a solid foundation for successful ESG strategy implementation.

• Step 2: Select a Suitable ESG Reporting Framework: Businesses need to choose an ESG framework that aligns with their industry, such as GRI Standards, SASB Standards, or TCFD, to assess risks and report ESG progress to stakeholders. Collaborating with professional consulting firms can help businesses identify the appropriate framework, ensuring transparency and compliance with international standards.

• Step 3: Assess the Company's Current ESG Status: Businesses need to collect and analyze data related to ESG aspects based on international standards like GRI, SASB, or GHG Protocol. This process helps determine the current level of compliance and areas for improvement. Technological solutions like FPT IS's VertZéro can support digitizing data collection, calculating emissions, and generating reports, ensuring integration with global green business trends.

• Step 4: Identify and Evaluate ESG Improvement Opportunities: Businesses need to analyze the materiality of ESG improvement opportunities for their business operations and stakeholders by developing a materiality matrix. This matrix provides a visual overview for prioritizing initiatives, helping businesses make informed decisions based on existing budget and resources.

• Step 5: Set Specific and Achievable ESG Goals: Businesses need to establish ESG goals following the SMART model (Specific, Measurable, Achievable, Relevant, and Time-bound) to guide their activities. Simultaneously, building a long-term ESG vision helps businesses maintain focus and consistency, creating sustainable value for both the organization and the community.

• Step 6: Develop a Detailed Strategic Plan: Businesses need to define specific initiatives, clearly allocate responsibilities and resources for each ESG activity. The strategic plan should include timelines and projected budgets to ensure timely implementation, optimize efficiency, and avoid resource waste.

• Step 7: Implement, Monitor, and Improve the ESG Strategy: Businesses need to implement ESG initiatives according to the plan and monitor progress by collecting data regularly. Performance reports should be disclosed transparently to demonstrate commitment to stakeholders. At the same time, businesses need to periodically evaluate their ESG strategy, identify areas for improvement, and adjust the plan to adapt to changes in the business environment or stakeholder requirements.

VI. Conclusion

Adopting ESG standards is not merely an ethical choice; it's becoming a core element in the sustainable development strategy of modern businesses. Companies that correctly understand and act early on ESG standards will gain a significant competitive advantage, increasing trust from investors, partners, and consumers. This is the moment for organizations to reshape their management mindset, moving towards a more responsible, transparent, and sustainable growth model.