Vietnam Enterprise Investments | ESG

As a long-term investor committed to sustainability, all investments made by Vietnam Enterprise Investments Limited (“VEIL”) are subjected to a rigorous environmental, social and governance (“ESG”) screening process adopted by Dragon Capital Group (“DCG”).

DCG recognises that ESG issues influence investment risk, and thus portfolio performance, and accordingly seeks to optimise risk-adjusted performance by integrating ESG factors throughout its investment process. Taking a strategic, long-term approach to responsible investment creates sustainable value for VEIL, its shareholders, and the wider community.

ESG Management System and Procedure

DCG developed its original ESG management framework in collaboration with IFC, specifically for public equity and fixed income investments. This system has been refined over time, with the key steps set out in the diagram below. 

This process is managed by a core team comprising a cross-section of investment analysts and senior management. In 2020, the team was expanded from three to seven members to ensure that emerging and evolving issues continue to be appropriately addressed through the ESG risk management framework.

At the same time, DCG enhanced the framework by developing an in-house knowledge base which helps efficiently track the ESG ratings of investee companies, and also facilitates the reliable monitoring of ESG incidents.

VEIL and DCG believe there are three main elements to an active ownership strategy: voting, engagement and advocacy. Each of these elements is also an effective tool within the ESG framework, and help VEIL to pursue its goals in the best interests of its shareholders.

Voting Rights

Voting is essential in order to promote good corporate governance. DCG ensures that VEIL votes in a diligent and prudent manner, based on its reasonable judgement of what will best serve the economic interests of its shareholders.

To the extent practicable, DCG votes on behalf of VEIL at all meetings called by the companies in which VEIL is invested. As part of this, DCG considers its stance on a variety of key corporate governance issues, including disclosure and transparency, board composition, committee structure, director independence, auditor rotation, and social and environmental issues. These guidelines form the basis for voting decisions, although each vote ultimately turns on the particular circumstances of the relevant investee company.

Engagement

DCG maintains regular dialogue with the management of all investee companies of VEIL in order drive continuous improvement to corporate governance, including ESG practices and disclosure. This engagement helps protect and increase the economic value of those companies.

For serious incidents which require more detailed engagement, DCG may engage specialist service providers to contribute their expertise. In such cases, DCG sets engagement objectives based on the issues and circumstances of the investee company, and where such companies fail to meet the appropriate standard (and/or represent a risk to shareholder value), DCG works to encourage and guide improvement.

Advocacy

Policy advocacy is essential for responsible investors, and a key to strengthening the stability and integrity of the financial sector and delivering wider economic benefits. DCG has been at the forefront of investor initiatives to encourage corporate sustainability, transparency and accountability, and is involved in dialogue with policy makers on legislation for capital markets, renewable energy and ESG practices.

For example, in 2020, DCG produced a submission on the need for mandatory disclosure of greenhouse gas emissions for public companies in Vietnam, and has made progress engaging with the Ho Chi Minh Stock Exchange and the State Securities Commission (the capital markets authority of Vietnam) on this topic. In particular, the Minister of Finance issued Circular No. 96/2020/TT-BTC in November 2020, which introduced new obligations for listed companies to disclose their direct and indirect emissions in their annual reports.

Governance and Strategy

As noted above, climate change is viewed by the Directors as a serious challenge to Vietnam as a country and an economy, and a threat to its businesses and communities. In recognition of this, the Board now includes one member with specialist climate change credentials (Entela Benz-Saliasi).

Amid a bewildering variety of climate initiatives, the Board has chosen to follow guidance laid down by the Task Force for Climate Financial Disclosures (“TCFD”), noting that TCFD appears to enjoy regulatory support in the UK (in which VEIL is listed), and Hong Kong (in which the Investment Manager is based).

From the financial year 2021, Board meetings will table ESG (to include climate change) as a regular agenda item. Meanwhile, the day-to-day business of climate risk assessment and mitigation is seen as the responsibility of DCG, as part of its mandate.

Given the growing focus on the topic, and the challenges highlighted above, in mid-2020 DCG engaged a third-party specialist to conduct a preliminary analysis of the impact of climate change on the portfolio of VEIL.  Some of the key findings (and the assumptions underlying them) are discussed below.

Climate Assumptions

There remains obvious debate as to projected climate change paths, and the varying assumptions underlying the various outcomes. For the purposes of this initial analysis, DCG assumed a ‘business as usual’ (“BAU”) approach, i.e. continuation of current behaviours. This adopts a pessimistic case, assuming that no country meets its Nationally Determined Contributions (“NDC”), as presented in Paris in 2016, and effectively provides a ‘worst case scenario’ based on current information. The so-called BAU approach is consistent with global temperature rise of 4.1-4.8 degrees by 2100.

Risk Management

TCFD advises that the two principal climate related risks are Physical Risk (extreme weather) and Transition Risk (regulatory and carbon). Vietnam exposed to both, although is more highly exposed to physical than transition risks, as a low-lying developing country. TCFD suggests that reporting entities should follow at least one of three sets of metrics: implied temperature rise; climate value at risk; and weighted average carbon intensity.

Physical Risk

It is well known that Vietnam has a long coastline and large deltas housing rapidly growing urban populations. The analysis obtained by DCG shows that the country faces challenges in all five major physical risk categories, being river and rainfall floods, storm surges, typhoons, and extreme heat. 

For the purposes of preliminary analysis, DCG considered those physical assets which, via portfolio weightings and market capitalisation, are most significant to the value of VEIL.  For VEIL, the significance is not the current value at risk itself, but rather the likely projected increase in value at risk until the targeted period 2030-2050, under the given assumptions.

Transition Risk

As a developing country, Vietnam’s NDCs in Paris are not legally binding. Even if they were, the headroom permitted over the current ‘business as usual’ scenario means that Vietnam is under little threat of exceeding its disclosed NDCs. Like many countries, Vietnam has offered to tighten its NDCs on the basis of receiving financial and other assistance from the world’s bigger emitters.

Gas Emissions, Rainfall, Typhoon-driven Flood, Storm Surge and Extreme Temperature, Carbon Tracker charts could be found in VEIL’s annual report in the above link “Full disclosure of VEIL’s ESG and Climate Change Report”.

Metrics

TCFD requires reporting entities to establish management metrics and also forward-looking targets. In the case of Vietnam, this is an enormous challenge owing to the almost total absence of detailed climate data and the complete absence of any form of carbon reporting by listed companies. In addition to the absence of data, models and modeling techniques are new and relatively untested, and the experience set within boards and investment managers is narrow.

The climate specialist engaged by DCG focused its work on aspects of climate change mitigation. Through detailed analysis of NASA and GPS data on evolving weather patterns, it is possible to estimate a theoretical Value at Risk due to river floods, storm surge and typhoons. This would more than double from a historical expectation of US$26.5 million to US$55.0 million within the period 2030-2050.

In respect of Transition Risk, DCG has been able to estimate carbon outputs by benchmarking with reporting companies in other jurisdictions. These suggest that annual greenhouse gas emissions from the VEIL portfolio may have reached some 190,000 tonnes of carbon dioxide equivalent in 2020. This number will of course change over time, given portfolio evolution, as well as moves to decarbonise within portfolio companies themselves. The EU cap and trade system prices carbon at around US$52 per tonne (April 2021), thereby ascribing an annual offset cost of US$9.95 million for VEIL.

Weighted Average Carbon Intensity (“WACI”)

Vietnamese companies do not report carbon metrics. However, on the basis of benchmark comparisons drawn from similar companies in other jurisdictions, it is possible to estimate a WACI for VEIL of 97 t CO2e/$M. The table in Chart 7 on page 20 shows that this puts VEIL very much at the lower range of carbon intensity.

Forward-looking Targets

Vietnam legislated a new Law on the Protection of the Environment in 2020. This law introduces the concepts of emissions trading and carbon taxes, as well as payments for ecosystem services. 

Separately, and following submissions by DCG, the State Securities Commission issued regulations calling for listed companies to report their climate and carbon profiles.

These two moves will frame the ongoing climate engagement of VEIL with a particular focus on encouraging widespread climate and carbon disclosures.

Carbon Neutrality of Investment Manager

DCG has been carbon neutral for scope one and two activities, since 2005. This is achieved through biogas offset programmes established by the Netherlands Development Organisation and Vietnam’s Ministry of Agriculture and Rural Development. 179,00 biogas plants were built in 55 provinces, benefiting 850,000 Vietnamese users over the lifespan of the project and approximately 485,000 tonnes of CO2 are reduced annually. The programme is certified to the Gold Standard of Voluntary Carbon Emission Reductions.

Note on Data Sources and Climate Modeling

Climate and carbon risk assessment is a rapidly changing discipline, starting from a low base. Vietnam is engaged in the Conference of The Parties process, but detailed climate data are largely unavailable at national, regional, or corporate levels. This lends a degree of speculation to the above assessments, but they are a good starting point.

The study of potential physical and transitional risks from climate change to the VEIL portfolio was performed by Intensel Limited (“Intensel”). Intensel is a Climatech intelligence firm based in Hong Kong, and specialising in the assessment of physical and related financial risks of climate change. The company provides physical climate risk assessments, using terabytes of climate and socioeconomic data, and a system of authoritative climate models, to assess climate change impacts at asset level.

Biodiversity

While ESG generally, and climate change specifically, are headline concepts for today’s financial institutions, DCG has committed to a further important branch of impact analysis. Without question, the COVID-19 disaster of 2020-21 has underlined the fragility of human relationships with biodiversity, and the urgent need to expand human awareness of natural planetary capital.

VEIL’s Exposure to Carbon Intensive Companies is well below the EM MSCI Index

VEIL Portfolio's Exposure to Carbon

(Source: Intensel)

VEIL continues to encounter significant challenges with ESG risk management in Vietnam. The key challenges are set out below:

Lack of Awareness From Local Companies and Regulators on ESG Risks

Although global awareness of ESG is rising, it remains a relatively unfamiliar topic to public and private sector businesses in Vietnam, and even with the local regulatory authorities. As a developing nation, the focus in Vietnam, at both a state and corporate level, has primarily been on economic growth. Whilst increased advocacy has seen a growth in awareness of ESG risks, it remains relatively low overall, and there is a corresponding deficiency in effective policies to manage those risks at a micro and macro level.

ESG Standards

Stemming in part from the lack of awareness, the adoption of international standards in Vietnam is generally lagging. Whilst almost all public companies in Vietnam now perform an E&S impact assessment when investing in a new project, many see this exercise as merely procedural. To date, little progress has been made in raising the local standards used in these assessments to international standards.

Access to Information

As a frontier market, access to information in Vietnam is always a difficulty for international investors, and this is particularly the case with ESG information. There are currently few mandatory disclosure obligations, and a strong corporate culture of voluntary disclosure has not yet developed.

ESG in Public Investment

Whilst there are many guidelines and examples of effective application of ESG standards for private investments, there is a distinctively different dynamic lack for investment in public equities. Unlike investors in private equity, VEIL has limited leverage to require public companies to disclose ESG data.

Despite this, DCG has made some remarkable progress in this area due to its team on the ground in Vietnam, although it remains a challenge, particularly in relation to State-Owned Enterprises.