Impacts of global ESG regulations on Vietnam's manufacturing

The global shift towards sustainability has transformed Vietnam's manufacturing sector and related real estate industry.

June 11, 2024

Increased awareness and regulatory requirements are driving a global shift towards sustainability, necessitating eco-friendly practices by manufacturers. This trend has significant implications for Vietnam's manufacturing and real estate sectors.

The introduction of the Corporate Sustainability Reporting Directive (CSRD) by the European Union (EU) in 2023 now requires companies to disclose their Environmental, Social, and Governance (ESG) information. It replaced the old regulation, named non-financial reporting (NFRD) and has quickly expanded the coverage from 11,000 businesses in 2023 (under NFRD) to around 50,000 in the EU as of early 2024. This is particularly relevant for Vietnam due to its strong economic ties with the EU.

Vietnam was the sixteenth largest trading partner and eleventh largest exporter for the EU countries in 2022. The country received a total of over 2,000 projects and investments totalling USD 22 billion as of 3Q 2023. Furthermore, the EU's Carbon Border Adjustment Mechanism (CBAM), imposes a carbon tax on imports based on their emissions intensity, which will affect Vietnam's exports of iron, steel, aluminium, cement and fertiliser. This mechanism will be effective from 2026.

With these sustainability-driven developments and regulations, Vietnam must proactively adopt sustainable practices. This will help the nation integrate into the value chain and maintain business relationships with international partners, especially its EU partners.

Transformations in the manufacturing sector

Data on LEED-certified projects in Vietnam showed that manufacturers lead the sustainable journey, with more than 50% of certified projects being industrial factories.

Figure 1: LEED-certified projects by real estate sectors

Source: Project directory of LEED certification, US Green Building Council, 2022

A wave of Foreign Direct Investment (FDI) firms from the EU, such as Heineken, Nestlé, and Tetra Pak, have embraced circular economy principles in Vietnam in order to reduce waste and pollution. These companies have taken steps to showcase their sustainability commitment through their public reports, highlighting initiatives such as packaging recycling, wastewater treatment, and utilising renewable energy sources.

Notably, Vietnamese companies like Hoa Phat Steel and Duy Tan Plastics have also made significant changes to their production processes. They’re adopting environmentally friendly production practices by transitioning to sustainable energy sources, optimising their operations to reduce CO2 emissions, and implementing efficient water usage cycles.

Implications for real estate developers

The rising demand and implications of ESG norms are prompting real estate developers in Vietnam to invest in green assets. For example, LOGOS, SLP, Emergent, Frasers and other ready-built facilities developers are increasingly incorporating energy-saving measures such as proof lighting, solar energy, and other features to make their buildings greener. Most of these developers are also obtaining green certifications like LEED, Lotus and Edge for their facilities.

Simply being ‘green’ is not enough for most industrial park developers. They want to build sustainable ecosystems. DeepC and VSIP lead in sustainability by incorporating a range of eco-friendly practices, such as renewable energy, land for plantations, and water conservation (rainwater harvesting, water recycling, advanced irrigation systems, and more).

Regulatory requirements, such as the CSRD and CBAM, are driving manufacturers to adopt sustainable practices to maintain business relationships with international partners. Embracing ESG practices benefits manufacturers and developers by boosting market appeal, reducing costs, and avoiding potential penalties. Increased focus on sustainability helps manufacturers and developers to stay relevant and position themselves for success in an increasingly sustainability-driven world.