ESG investing: The world is buzzing, but how much do Vietnamese investors really understand?

What is ESG that's causing global investors to flock to it?

ESG is an acronym for E-Environmental, S-Social, and G-Governance, a set of standards used to measure factors related to sustainable development and a company's impact on the community. A higher ESG score indicates better ESG practices.

In fact, the term ESG has been around for a long time, but investing in ESG-compliant businesses has always received mixed opinions over the years. Economic benefits are weighed against environmental, social, and governance benefits, leading to ESG investments – a valuable investment standard – not being highly regarded in the past. It wasn't until the COVID-19 pandemic in late 2019 that developing sustainable businesses according to ESG criteria ceased to be an option and became a matter of survival for businesses.

Since 2019, the topic of ESG has been mentioned more frequently in earnings calls of businesses. Source: Pimco

The two-year Covid-19 pandemic even accelerated this trend, shifting investment strategies toward ESG factors more than traditional financial indicators. According to the Financial Times, despite lingering skepticism about ESG, the flow of money into ESG-compliant businesses has been stronger than ever. Carsten Stendevad, Head of Sustainable Development Investments at Bridgewater Associates, also stated in the Financial Times: "For Europe in particular, green ambitions are now aligned with national security ambitions and the assurance of energy sovereignty, and this momentum will drive the transition to renewable energy as countries do not want to be dependent on another country for energy."

Assets held by ESG investment funds globally have increased. Source: Morningstar

According to CME Group, as the ESG ecosystem develops and the number of investors increases, investments in ESG must keep pace. Although the S&P 500 ESG index is only over two years old, it has outperformed the "base" S&P 500 index. This shows that companies that prioritize ESG standards as core values ​​in their operations are receiving significant investment, driving their stock prices up faster than other companies.

According to CME Group statistics, the average daily trading volume in the E-mini S&P 500 ESG futures contract in the first quarter of 2022 increased by more than 100% year-on-year and has steadily increased since the contract launched in November 2019.

The number of open contracts and trading volume of ESG futures contracts have increased rapidly in recent years. Source: CME Group

How do Vietnamese investors identify ESG investments?A shift in ESG investment strategy.

In Vietnam, since 2017, the Ho Chi Minh City Stock Exchange (HoSE) has launched the Vietnam Sustainable Development Index (VNSI), comprising 20 companies with the highest sustainability scores listed on the HoSE. However, both the VNSI index and the concept of ESG (Economic Sustainable Development) are still relatively unfamiliar to Vietnamese investors.

In a conversation with us, Mr. Nguyen Van Dung, an investor and broker with 16 years of experience, said that he believes most investors haven't yet seen the opportunities. In reality, many Vietnamese businesses have done very well in meeting ESG standards, but the capital seems preoccupied with short-term "games." He cited the example of VNM (Vinamilk) stock.

Vinamilk is one of the very few Vietnamese businesses that have shown interest in and invested in ESG for many years. Since 2012, the company has published annual sustainability reports, transparently presenting the ESG standards it applies and measures results according to the United Nations Sustainable Development Goals model and reporting according to GRI - the Global Standard for Sustainable Development Reporting. Since 2017, VNM has consistently been ranked among the top 20 green stocks in the VNSI index, with a total ESG score of 90%.

Vinamilk was awarded First Prize for Sustainable Development Report – Listed Company Selection Program 2021.

Vinamilk is now beginning to reap the rewards of its continuous ESG investment. Years ago, Vinamilk invested in farms adhering to high international standards such as European Organic and GlobalG.AP (Global Good Agricultural Practices). These standards typically require significant capital investment, systematic implementation, and a long-term commitment; however, the resulting green and sustainable values ​​are substantial. To date, Vinamilk has hundreds of hectares of land certified under European Organic standards. This farming method helps protect soil resources, which are the most valuable resource in agriculture. Furthermore, the application of modern production technologies, combined with green energy sources such as solar, biomass, and CNG, in its farms and factories significantly reduces fuel costs.

Vinamilk's integration of ESG into its strategic plan also helps improve risk management. The G factor (Governance) is considered very strong, and Vinamilk's three-line defense model, based on its Risk Management and Internal Control practices, ensures objectivity and independence in evaluating governance processes. The company also continuously updates its corporate governance regulations to protect shareholder rights and establish operational standards for the Board of Directors and the Executive Board. A prime example is maintaining a minimum of three independent members on the Board of Directors to ensure objectivity in important decisions.

Sharing more insights on the ESG investment trend in the stock market, Ms. An Nguyen - an analyst at Rong Viet Securities Company (VDSC)"The ESG (Engineering, Procurement, and Trade) aspects of a company are increasingly being considered in investment analysis decisions in the Vietnamese market, aiming to provide a broader perspective on the risks and opportunities of investing in a company's stock. Furthermore, practicing ESG is a positive factor that gives a company an advantage in attracting significant foreign investment with favorable interest rates and other terms, such as loans from the Asian Development Bank (ADB) or the issuance of green bonds."

Ms. An Nguyen stated that, in the current context of inflationary tensions, attracting access to cheap capital is an advantage that helps businesses expand production and operations.

The current volatile stock market has led many investors to re-evaluate their investment strategies. The trend of investing in companies with strong governance, environmental and social responsibility, and a focus on sustainable development is predicted to become more pronounced in the near future.