How does the EU Sustainability Reporting Directive impact Vietnamese businesses?

PwC Vietnam has just released a report on the far-reaching impact of the Corporate Sustainability Reporting Directive (CSRD) on businesses in the Vietnamese market. According to PwC, with its extensive and comprehensive reporting requirements, the CSRD Directive will not only affect businesses within the European Union (EU) but also those participating in the value chains of European partners. This will bring many challenges but also opportunities for sustainable transformation for Vietnamese businesses.

Rather than being voluntary, the CSRD Directive is mandatory for businesses.

The CSRD Directive was issued by the EU in December 2022 and officially took effect for reports issued from fiscal year 2024 (except for some industries and businesses not headquartered in the EU that will need to comply from 2026). Accordingly, the CSRD Directive has received much attention in the global business community. One of the main reasons is that the CSRD Directive is mandatory instead of voluntary like current sustainability reporting standards and frameworks such as: Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Reporting (TCFD), Sustainability Accounting Standards Board (SASB)... More importantly, the CSRD Directive will affect businesses worldwide, not just within Europe.

According to PwC, one of the major advances of the CSRD Directive in promoting sustainable development practices is that instead of focusing only on the environmental footprint of the business itself, CSRD emphasizes the value chain of the business, which is the main factor contributing to the impact of the business on the environment and society.

In addition, the CSRD Directive promotes transparency in the disclosure of sustainability information. Specifically, the CSRD Directive requires the assurance of reported data by an independent third party at a limited level of assurance. In the future, the CSRD Directive will move towards requiring reasonable assurance, equivalent to the level of assurance for financial statements.

“Given the complexity and multidimensionality of topics related to sustainable development, this requirement helps improve the accuracy, completeness and objectivity of information included in corporate sustainability reports, avoiding cherry-picking, omission of information or overemphasis,” said PwC.

According to PwC, the introduction of the CSRD Directive also requires the attention of the tax department in the enterprise. With new and strict reporting requirements, the CSRD Directive will create pressure for the enterprise itself as well as the entire value chain to change the way it operates, leading to tax and legal impacts...

The CSRD Directive will bring many challenges but also bring sustainable transformation opportunities for Vietnamese enterprises (Illustration photo)

Impact on Vietnamese businesses

According to PwC, the CSRD Directive is having and will have a strong impact in Vietnam. Because in the current context, two-way trade turnover between the EU and Vietnam is increasingly changing positively. Since the EVFTA was signed, 25/27 EU member countries have invested more than 22 billion USD in more than 2,000 FDI projects in Vietnam. In the opposite direction, Vietnam is the 16th largest trading partner of the EU, and ranks 11th among the largest suppliers of goods to this market.

“With a large number of Vietnamese enterprises being in the value chain of enterprises operating in Europe, the introduction of the CSRD Directive will require these enterprises to step up the preparation of data and prepare sustainable development reports to provide to parent companies or partner enterprises in Europe upon request,” PwC’s report stated.

PwC also analyzed the impacts of the CSRD Directive on businesses in the value chain of European partners in Vietnam, and proposed steps for these businesses to prepare. Specifically, from PwC's perspective, based on current reporting requirements in Vietnam, Vietnamese businesses in the value chain of European partners should pay attention to three reporting requirements under the CSRD Directive:

First, the issue of greenhouse gas emissions: According to PwC, although they have grasped the importance of green transformation, in general, Vietnamese enterprises (including listed enterprises) are not ready to inventory and reduce greenhouse gas emissions. Among enterprises in the VN100 index basket, only 12 enterprises have conducted an inventory of scope 1 and 2 emissions, and only 7 enterprises have fully mentioned emissions of scope 1, 2 and 3.

“In cases where scope 3 GHG emissions are a material issue for European businesses that need to comply with the CSRD Directive, suppliers in Vietnam will be required to compile emissions data and make efforts to reduce GHG emissions within the business as well as its supply chain. In addition to the CSRD Reporting Directive, the EU has also implemented the Carbon Border Adjustment Mechanism to levy a carbon tax on imported goods into the EU market based on the GHG emission intensity of the production process in the host country. These two regulations will make inventory and reduction of GHG emissions a prerequisite for entering the EU market,” PwC stated in the report.

Regarding greenhouse gas emissions, PwC analyzed the proposed roadmaps for businesses. Specifically, businesses need to raise awareness and capacity on managing, accounting for and reducing greenhouse gas emissions for internal staff. At the same time, establish decarbonization policies and procedures, implement low-carbon production methods to reduce emissions during production, focusing on energy and transportation as these are the two sectors that cause the most greenhouse gas emissions in Vietnam.

In addition, Vietnamese businesses need to set emission reduction targets in line with climate science, that is, limiting global warming to 1.5°C. In addition, it is necessary to study the requirements for reporting greenhouse gas emissions, develop internal processes, emission inventory systems and systematic data management to ensure the data in the report.

“Businesses can refer to relevant laws in Vietnam, including Decree No. 06/2022/ND-CP regulating greenhouse gas emission reduction and ozone layer protection,” PwC pointed out.

Rather than being voluntary, the CSRD Directive is mandatory for businesses.

Second, the issue of biodiversity and ecosystems. According to PwC, although Vietnam has a number of businesses practicing biodiversity conservation and restoration in production and business, in general, the participation of businesses is still relatively limited, mainly on a voluntary basis and through the mobilization of resources by environmental organizations instead of businesses proactively assessing impacts and implementing them. Meanwhile, the report "Assessing biodiversity in Vietnam" by the World Wildlife Fund (WWF) shows that business economic activities have had and are having a great impact on biodiversity in Vietnam. In addition, Vietnam's current laws do not have many specific guidelines and clearly state the responsibilities of businesses in assessing impacts and minimizing impacts on biodiversity and ecosystems.

As required by the CSRD Directive, businesses or manufacturers in Vietnam will need to conduct an assessment of their impact on the ecosystem surrounding their operations and production areas, collect biodiversity-related information to support the assessment of dual materiality of their European business partners, and prepare a report on this topic if it is identified as one of the material topics of their partner businesses.

PwC suggests a roadmap for businesses to implement this criterion: Raising awareness and capacity on biodiversity conservation for internal staff; assessing the impact of businesses on the ecosystem surrounding the business's operating and production areas and the associated risks and opportunities; having a process for measuring, collecting data and a systematic data management system to ensure the data in the report. Vietnamese businesses can refer to relevant laws in Vietnam, including: Law on Biodiversity 2008; Decision No. 149/QD-TTg of the Prime Minister dated January 28, 2022 approving the National Strategy on Biodiversity to 2030, vision to 2050.

Third, social issues and human rights. PwC said that many Vietnamese enterprises have been conscious of respecting and protecting the rights of workers, the rights of customers and fulfilling their responsibilities to the community. However, human rights violations by enterprises in Vietnam are also increasing in number, severity and scope of influence. Some prominent violations include enterprises discriminating, using child labor, not ensuring safe working conditions, rest hours, minimum wages, social insurance, workers' rights to union activities, etc.

PwC cited data: The average monthly income of male workers is currently 1.35 times higher than the average monthly income of female workers (8.3 million VND compared to 6.1 million VND). Or in Vietnam, there are more than 1 million children aged 5-17 participating in labor, accounting for 5.4% of the total number of children in this age group.

“With the introduction of the CSRD Directive, businesses and manufacturers in Vietnam need to collect information related to ensuring human rights in production and business to support the assessment of the dual materiality of their European partners, as well as for those businesses to prepare reports on this topic if it is identified as one of the material topics,” the PwC report stated.

PwC also proposed an implementation roadmap for businesses: It is necessary to raise awareness and capacity on ensuring human rights for employees within the business; promote the assurance of labor standards and the production and business environment; at the same time, tighten the internal control system, establish a risk management system in business processes and comply with accountability requirements; establish partnerships and participate in support programs of international cooperation organizations such as ILO (International Labor Organization), UNDP (United Nations Development Program) ... on creating employee-friendly business activities; have a process of measuring, collecting data and a systematic data management system, serving the process of ensuring data in reports and assessing human rights issues. Vietnamese businesses can refer to relevant laws in Vietnam, including: Law on Enterprises 2020 (Article 8 on Obligations of enterprises); Labor Law 2019.

“The CSRD Directive has a profound impact on a global scale, requiring the participation of all links in the value chain of businesses operating in the European market. Vietnamese businesses involved therefore need to closely monitor and promptly grasp the requirements for compliance with the CSRD Directive to maintain competitiveness and develop partnerships with businesses in Europe, as well as have timely implementation plans. This is also an opportunity for Vietnamese businesses to consider transforming their production and business models towards a more sustainable direction and be ready to meet the increasingly stringent requirements for sustainable development practices from major markets such as the EU,” PwC affirmed.

Source: https://congthuong.vn/chi-thi-bao-cao-phat-trien-ben-vung-cua-eu-tac-dong-nhu-the-nao-den-doanh-nghiep-viet-311775.html