Real Clear Insight is a series articles written by EGP experts to support our clients and partners update professional knowledge and the latest information in the fields of Internal Audit, Risk Management and ESG.
Stephen Coates - stephen.coates@egp.vn
Stephen Coates is an independent professional who provides real clear insight on matters affecting governance, risk, and compliance professionals, and internal auditors.
What is ESG?
ESG is an acronym for Environmental, Social, and Governance. In the context of business reporting it is a framework used to evaluate a company's sustainability and ethical impact. ESG has become more important recently because socially conscious investors now include ESG criteria when screening potential investments.
Tracking and collecting disparate data across diverse systems, frameworks, regimes, and applications can be complex and resource intensive. Sometimes relevant ESG data might be hard to come by or it may be proprietary, confidential, or difficult to access. This is often the case when it comes to supply chain information or indirect environmental and social impacts.
ESG Standards
ESG Standards are the regulator’s response to stakeholder calls for consistency and comparability. This has seen different jurisdictions moving forward at different maturity levels across different timeframes. There is no single global standard for ESG reporting, and companies tend to choose frameworks which meet their own specific goals. Across Asia Pacific, sustainability reporting has gained traction among regulators, spurred by the rising importance of responsible business practices, notably, the Task Force on Climate-Related Financial Disclosures (TCFD).
Vietnam 2024 Landscape
In Vietnam, the government promotes ESG related practices, and there is also a growing demand from investors for more sustainable investments. Also, a transition to carbon neutrality in Vietnam is well underway with goals set; 2030 – stop deforestation and reduce greenhouse gasses; 2040 – phase out coal fuelled power generation; 2050 – net zero carbon emission target. The government is taking the lead by providing relevant ESG policies and regulations, which will help commit organisations into playing a greater role in achieving ESG objectives. Since 2016 ESG reporting has been mandatory for listed companies, and since 2021, sustainability reports are required to be submitted by Vietnamese publicly listed companies.
What can you do?
Separate to regulatory non-compliance, companies that fail to take ESG into account are at risk of experiencing a significant financial impact. Better ESG scores often translates to a lower cost of capital, and often correlates to lower regulatory, environmental, and litigation risks. One reason ESG investments are viewed so positively is due to how well they align with long-term thinking, and potential risk reduction. Companies who have good ESG management tend to be better equipped for sudden crises due to this emphasis on sustainability.
A three-step process can help start the ESG journey in your organisation.
1. Sustainability Report
Organisations need to consider drafting a Sustainability Report. This includes things like:
- Identifying material ESG factors and describing the reasons for them and their selection process.
- Climate-related disclosures consistent with the recommendations of the TCFD that are likely to impact future financial position and performance.
- Policies, practices, and performance relating to the material ESG factors identified.
- Targets for each material ESG factor.
- Details of the sustainability reporting framework.
- A Board statement detailing the governance structure for identifying and reporting on material sustainability practices.
2. Board Responsibility
Directors are responsible for the Sustainability Report and as such must satisfy themselves as to its veracity.
- How do the Directors ensure the reliability and integrity of financial and operational information contained in ESG public reporting?
- What are the controls that ensure information is complete and accurate and can be relied upon?
- How does the Board know it can be confident ESG is effectively managed and there is compliance with legal and regulatory obligations?
3. Use technology to improve ESG data collection & management
Software that consolidates enterprise ESG data for analysis and reporting increases reliability in data collection and improves auditability. Efficiencies are gained by simplifying the capture, consolidation, management, analysis and reporting of environmental, social and governance data. It is imperative to build a strong data foundation and integrated system of record that delivers auditable, finance-grade ESG and sustainability data. A technology solution streamlines reporting to meet internal and external ESG and sustainability reporting requirements. It helps integrate internal and external stakeholders, process, and technology to embed sustainability into daily operations.
Greenwashing
Some companies are reporting that they are making more progress on their ESG goals than they are achieving. This is termed greenwashing. Stakeholders are holding organisations accountable for misleading claims about their ESG activities, and regulators are becoming more interested in the actual claims made. In some jurisdictions regulators are clamping down on such erroneous claims increasing both compliance and reputational risk for unsupported ESG claims.
Internal Review of Sustainability Claims
Organisations should consider an internal review of their public ESG claims including any Sustainability Statement. Better practice indicates any internal review should apply the seven guiding principles (P1-P7 below) of the Task Force on Climate-Related Financial Disclosures (TCFD).
- P1 – Disclosures should present relevant information. Information provided should support the actual and potential ESG impact claimed, and the impact on value creation.
- P2 – Disclosures should be specific and complete. The information should conform to the jurisdictions expectations and include an assessment of upstream and downstream third-party impacts.
- P3 – Disclosures should be clear balanced and understandable. Information should be free from bias, and supported by necessary text, numbers, and graphical representations.
- P4 – Disclosures should be consistent over time. Disclosures should be presented using consistent formats, language, and metrics, with reference to adopted reporting frameworks from period to period to allow for inter-period comparisons.
- P5 – Disclosures should be comparable among a sector industry or portfolio. This allows for meaningful comparison of strategies, business activities, risks, and performance.
- P6 – Disclosures should be reliable, verifiable, and objective. Checks should be performed to provide assurance on accuracy and verifiability.
- P7 – Disclosures should be provided on a timely basis. Most jurisdictions provide for annual reporting.
It would be prudent for an organisation to undertake an internal review of sustainability claims before they are subject to external review and reporting to a regulator.
In addition the auditability of any ESG sustainability reporting claims needs to be considered at the outset. Incorrect and unsupported claims increase both compliance and reputational risk.
Key benefits of using a technology approach
To make all this easier a technological approach streamlines data capture and provides easier auditability and traceability. Key benefits of using a technological approach include.
- Automatic data capture.
- Connectivity to operational systems.
- Data normalisation and harmonisation
- Data structuring and hierarchy management.
- Support for data audits and health checks with data able to be easily traced back to source files.
Next Steps
To move forward with TeamMate, Envizi or our Fraud Box schedule a briefing from Enterprise Governance Platform – Vietnam at here.
Stephen Coates CIA CISA CGAP CRMA PFIIA FGIA is known globally for his work with the internal audit profession, and lives with his family in Vietnam and Australia. In 2022 Stephen was awarded the Bob McDonald Award from the Institute of Internal Auditors - Australia for his outstanding service to the internal audit profession. He provides real clear insight on matters affecting governance, risk, and compliance; and internal audit. Stephen is available to speak live at your event from small boardroom events to jam-packed conference arenas. He is available to travel anywhere in the world in person or to participate virtually.
