As the European Chamber of Commerce prepares to host the Green Economy Forum and Exhibition this week, a key topic of discussion will be the implications of the European Green Deal on Vietnam.

Dženeta Mulabegović, private sector engagement specialist at the United Nations Development Program

The Green Deal consists of a comprehensive set of guidelines designed to complement each other, avoid gaps and ensure market participation in the sustainability trajectory. A key part of the package is the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D), two mandatory sustainability directives with global impact is expected on a large scale.

For Vietnamese companies deeply linked to global supply chains, aligning with these guidelines is not just about compliance: it is also about maintaining competitiveness in a rapidly changing global market, thereby contributing to carbon neutrality and just transition efforts.

But how prepared is Vietnam for the impact of these directives? And what is the link between this impact and its policy on environmental, social and governance (ESG) practices and responsible business practices?

Reporting beyond traditional frameworks

The CSRD, which came into force this year, requires relevant companies to establish ESG policies, integrate them into an overall business strategy and report to facilitate transparency and accountability. Companies must comply with closely related European sustainability reporting standards, including key ESG issues and cross-cutting topics such as strategy and materiality assessments.

The EU directive goes beyond traditional reporting frameworks, starting with its ambition to integrate companies’ sustainability efforts with their financial concerns. Therefore, the CSRD requires a fundamental shift for companies to apply a “dual materiality” approach, which requires reporting not only financial materiality (effect on company value), but also the materiality of the impact (effect on people and the environment). Likewise, companies are required to integrate sustainable development reporting into their management report, requiring them to treat it with the same importance, the same quality and the same control as financial reporting.

Another revolutionary feature is that the CSRD imposes a broader scope of sustainability reporting to include both direct and indirect performance in scopes 1 to 3 of the emissions inventory. The inclusion of mandatory reporting in Scope 3 (indirect emissions in the value chain, often covering more than 80 percent of total emissions) is particularly costly and difficult due to the complexity of tracking emissions in supply chains extents.

Acting through due diligence

Meanwhile, CS3D, which will come into force in 2027, requires affected companies to work closely with suppliers and stakeholders to identify and mitigate potential risks related to social and environmental standards. Companies are legally required to implement comprehensive due diligence policies that address these risks, monitor their implementation and do everything possible to remediate potential negative impacts.

A highly controversial change is that the directive also regulates the civil liability of companies for social or environmental violations in their supply chains, where those affected can seek compensation in civil proceedings.

CS3D focuses on the activities of the company and those of its direct upstream and downstream business partners. Due to its emphasis on due diligence, CS3D will likely impact corporate purchasing, thereby favoring more responsible suppliers.

Impact on Vietnam

Although aimed at the European market, both directives are expected to have considerable impact and influence beyond EU borders, including in Vietnam. The CSRD applies to a wide range of European companies and those listed on EU regulated markets, as well as a smaller number of non-EU companies with a high annual net turnover and a subsidiary in the European Union. The directive is estimated to apply to a staggering 50,000 companies across all sectors, including a considerable number of European subsidiaries based in Vietnam.

What makes the CSRD particularly extensive is its broad scope of application which covers the entire value chain of the companies concerned. This includes virtually every business relationship a company can have, all internal operations, upstream and downstream activities, from the extraction of raw materials to the end of a product’s life. This extensive data collection will impact all suppliers in European value chains, even if they do not fall under the CSRD themselves.

However, given the current level of ESG capability, Vietnamese companies will likely struggle to provide complex ESG data related to impact materiality and Scope 3 reporting.

In comparison, CS3D was designed to be applied on a global scale. The dual directive will directly affect up to 5,500 large European and non-EU companies, also indirectly covering their upstream and downstream actions, wherever they operate and source. Furthermore, the so-called Brussels effect is expected to be significant, impacting Vietnamese manufacturers as key global suppliers, whether or not they fall within the scope of the directive.

To meet the demands of relevant business partners, Vietnamese businesses will need to develop risk assessments and due diligence procedures far superior to current local responsible business compliance. The Brussels effect will likely be strengthened by financing, as the two EU directives are expected to impact the views of European investors and financial institutions when considering investing in Vietnamese companies. Although the ESG lens is already common ground among investors, EU directives will require a more robust process, better data, clarity and assurance.

For Vietnamese companies seeking foreign investment from the EU, the application of CSRD and even CS3D will be essential. This will require a big step forward in terms of local business capacity and enabling policies.

A crucial complementarity

While CSRD involves responsible business practices as a basis for reporting, CS3D seeks to legally ensure that affected companies will genuinely exercise due diligence to prevent and manage risks in operations and the supply chain. The twin guidelines are designed to reinforce each other and should be applied in tandem.

The relative importance of the CSRD impact can serve as a starting point for identifying risks that should be considered as part of the company’s due diligence as mandated by the CS3D. Conversely, the result of due diligence can provide strong evidence and data needed for reporting.

The European Union directives reflect the paradigm shift we face during this decade of action. For sustainability commitments to be realized, companies must focus on achieving real impact beyond ESG information.

Referring to an old English proverb, one should not put the cart before the horse. ESG goals are necessary, but they must be reinforced by responsible business practices integrated into business models and strategy, with tangible, evidence-based results.

Towards Vietnam’s Green Deal

In Vietnam, we have seen important sustainability policies and initiatives gaining traction, particularly around ESG and responsible business practices. On the one hand, we have the National Green Growth Strategy and the ESG Initiative led by the Ministry of Planning and Investment, as well as the Forum and Index on Sustainable Development of Vietnamese Enterprises organized by the Council Vietnamese business for sustainable development.

On the other hand, there is the National Action Plan for Responsible Business Practices, led by the Ministry of Justice, and the Responsible Business Assistance Service, implemented by the Chamber of Commerce and Industry of Vietnam. Here the horse and cart, i.e. responsible business practice and ESG, still need to be aligned with each other.

Taking a cue from the EU, Vietnam has much to gain by strengthening cooperation between relevant state agencies and aligning relevant policies with its own Green Deal.

Better alignment of ESG reporting and responsible business practices will enable Vietnam to maintain its share in European exports, supply chains and investments, and ensure market participation in its own climate ambitions. The imminent impact of CSRD and CS3D highlights the need for a comprehensive agenda on ESG and responsible business practices, to raise awareness, build business capacity, develop clear and consistent regulatory frameworks and unlock sustainable financing.

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