Profound implications of the Corporate Sustainability Reporting Directive (CSRD) for the businesses in Vietnam market

The Corporate Sustainability Reporting Directive (CSRD) was issued by the European Union (EU) in December 2022 and officially takes effect starting from fiscal year 2024 (except for a number of sectors and companies headquartered outside of the EU which will need to comply from 2026). In this article, we analyse and evaluate the implications of the CSRD for two key business groups in Vietnam market: Foreign Direct Investment (FDI) enterprises and enterprises in the value chain of European partners. An implementation roadmap is also proposed for such businesses to comply with the Directive in a timely manner.

Table 1. An overview of the CSRD

What CSRD stands for	Corporate Sustainability Reporting Directive
Issuing organisation	European Union (EU)
Purpose	Require companies to make extensive, detailed disclosures about sustainability performance and ultimately prompts businesses to transform their operations towards more sustainable practices
Number of businesses required to report under the CSRD	About 50,000 companies operating in the EU market
Integrated reporting standard under the CSRD	European Sustainability Reporting Standards (ESRS)
Effective date	Starting from fiscal year 2024 for companies listed in the EU market and having more than 500 employees (except for eight sectors and third-country companies)*. See further details here

(*) According to the European Council, on February 7, 2024, the European Parliament approved the two-year delay on the adoption of the CSRD (i.e. until June 2026) for non-EU companies and eight sectors including oil and gas, mining, road transport, food, cars, agriculture, energy production and textiles. These are high-impact sectors that have sector-agnostic standards in the ESRS.

1 Key insights on the CSRD

The CSRD/ ESRS have gained significant attention in the global business community. This Directive is mandatory, unlike the existing voluntary sustainability reporting standards and frameworks such as the Global Reporting Initiative (GRI), the Task Force on Climate-Related Financial Disclosures (TCFD), and the Sustainability Accounting Standards Board (SASB). More importantly, the CSRD will impact businesses globally, not just those within the European Union. As a major step forward in promoting sustainable practices, the CSRD goes beyond focusing solely on a company’s own environmental footprint. Instead, it emphasises a company’s value chain, which is the key contributor to its environmental and social impacts. In the consumer goods industry, for example, over 90% of the environmental impact lies within the business's supply chain¹. The CSRD will therefore have an indirect impact on many companies in the global value chains of businesses operating in Europe, as these companies will need to provide sustainability data to their European partners or parent companies to ensure compliance with the CSRD.

The CSRD emphasises transparency in the sustainability-related disclosures. Specifically, it requires limited assurance of reported data by an independent third party. In the future, the CSRD will move towards requiring reasonable assurance, which is equivalent to the level of assurance for financial reporting. Given the complexity and multi-dimensional nature of sustainability disclosures, this requirement will help improve the accuracy, completeness and objectivity of information included in sustainability reports by preventing cherry-picking, information omission, or overemphasis on certain aspects.

This Directive also requires companies’ tax departments to pay close attention. With new and stricter reporting requirements, the CSRD/ ESRS will place pressure on companies to transform their operation, leading to tax and legal implications. Several possible scenarios include:

Shifting from overseas to domestic suppliers (for example to reduce Scope 3 emissions and improve the efficiency of GHG data collection), leading to changes in corporate tax structure.
Making transfer pricing adjustments due to the need to close unsustainable infrastructure or changes in the business's value chain.
Transitions to new business models leading to changes in corporate tax obligations. Companies also need to ensure that the information disclosed in their CSRD-compliant sustainability reports is consistent with what is reported to tax or customs authorities.
Reporting financial risks resulting from carbon tax for exported goods under the EU’s CBAM (See more details in the section on "Implications of the CSRD in Vietnam and the proposed roadmap for relevant businesses” below).

Lastly, a number of CSRD requirements are the first of its kind, and the amount of information required is more detailed and comprehensive compared to current sustainability reporting frameworks/standards. These new requirements include but are not limited to:

In addition to Scope 1 and 2 emissions, which are direct and indirect sources of greenhouse gas (GHG) emissions resulting from a company’s operations, the CSRD also requires disclosure on Scope 3 emissions. These include all the remaining indirect GHG emissions arising from upstream and downstream activities in the company's value chain, making them the most difficult to manage while accounting for the highest proportion (65-95%) of a company’s carbon impact². Beyond GHG inventory, companies are also required to comprehensively disclose their emissions reduction targets, climate risks and opportunities, and GHG removals and mitigation projects financed through carbon credits.

With the goal of recycling and reusing resources, the circular economy is expected to be a viable solution to the current linear economy, which follows the “take-make-waste” approach, causing resource depletion and environmental degradation. The CSRD is the first sustainability reporting legislation to include resource use and circular economy performance in its requirements, demonstrating the EU's strong determination to encourage business transformation towards more sustainable practices.

Biodiversity loss is occurring worldwide and is being worsened due to the impacts of climate change. The CSRD/ ESRS therefore requires businesses to comprehensively report the impact of their business activities on the natural environment. Compared to the Taskforce on Nature-related Financial Disclosures (TNFD), which is a reporting framework that also requires disclosure on biodiversity, the CSRD requires businesses to disclose more detailed information, including biodiversity indicators, policies and targets. In late January 2024, the GRI, one of the most widely used sustainability reporting standards worldwide, also published its revised biodiversity standard with more detailed reporting requirements (GRI 101: Biodiversity 2024⁾³. This shows that biodiversity is gradually becoming an important stakeholder interest, as well as one of the most crucial sustainability reporting topics.

According to Anti-Slavery International and the European Coalition for Corporate Justice, European companies have been involved in many cases of poor working conditions, worker discrimination, forced labour and child labour in the past decades⁴. The EU is therefore making efforts to strengthen the requirements and regulations on human rights in the value chain. Among these, the CSRD stands out as a regulation requiring disclosures on human rights practices, and is complementary to the Corporate Sustainability Due Diligence Directive (CSDDD) proposal, which aims to oblige businesses to undertake due diligence across the value chain, including due diligence on human rights and environmental issues.

2 Implications of the CSRD in Vietnam and the proposed roadmap for relevant businesses

The CSRD is expected to have a strong impact in Vietnam since in recent years, the bilateral trade turnover between the EU and Vietnam has seen positive developments. Since the Vietnam-EU Free Trade Agreement (EVFTA) was signed, 25/27 EU member countries have invested more than US$22 billion in more than 2,000 FDI projects in Vietnam⁵. Correspondingly, Vietnam is the EU’s 16th largest trading partner and the EU's largest trading partner among countries in the Association of Southeast Asian Nations (ASEAN). Vietnam is also the 11th largest exporter to the EU⁶. Such developments have resulted in a large number of Vietnamese companies being in the value chain of businesses operating in Europe. The introduction of the CSRD/ ESRS will require these companies to initiate data collection and sustainability report compilation to provide to their European partner or parent companies upon request.

This section analyses the impact of the CSRD on two key business groups in the Vietnam market, including European FDI companies and companies in the value chain of European partners, based on the aforementioned reporting requirements.

European FDI companies in Vietnam

The key strengths of FDI enterprises are available resources and a sustainability strategy that has been cascaded from the parent company. The entities in the value chain of FDI enterprises are therefore closely accompanied by a partner with knowledge of both sustainability and the domestic business environment, thereby having the opportunity for capacity building in the cooperation process. Since the parent companies of FDI enterprises are often large corporations, they have the potential of having to start reporting under the CSRD from fiscal year 2024. FDI enterprises thus will need to collect data timely to meet this deadline**. These enterprises should also proactively update with their parent company on the CSRD adoption timeline for effective planning.

(**) For detailed information on the effective date of the CSRD, please see Table 1. An overview of the CSRD

In our opinion, based on existing sustainability reporting regulations and frameworks or standards in Europe and around the world, European FDI enterprises in Vietnam should pay attention to the following three reporting requirements under the CSRD/ ESRS.

With the available capital and knowledge base for technology investment, human resource training, and the application of advanced production processes, European FDI enterprises in Vietnam are taking bold action to apply a circular economy in the production model. A number of European FDI companies operating within the manufacturing sector in Vietnam, such as Heineken, Nestlé and Tetra Pak, have implemented circular economy initiatives including packaging recycling, wastewater recycling, and renewable energy adoption, as well as publishing information about such initiatives in their sustainability reports and on their corporate websites.

Under the CSRD, if the parent companies identify circular economy as one of their material topics, FDI enterprises in Vietnam will need to collect data to report on their circular economy practices. This will be a challenge for businesses as reporting on this topic is not yet widely practised, leading to a lack of business readiness. According to a survey by the World Benchmarking Alliance on European companies, only 22% of them currently report on their circular economy performance using the quantitative indicators included in the CSRD⁷.

Recommended roadmap for businesses:

Increase awareness and capacity regarding circular economy practices among internal personnel;
Strengthen the circular economy strategy in line with that of the parent company. With the EU Circular Economy Action Plan (CEAP) adopted in 2020, the circular economy will be one of the key trends in European businesses in the near future;
Measure circular economy performance indicators, as well as qualitative and quantitative reporting on circular economy practices using tools such as the Circular Transition Indicators (CTI);
Require and support partners in the supply chain to develop a circular economy strategy and roadmap, for example by performing the Life Cycle Assessment (LCA). In Vietnam, circular economy practices are still in their early stage. Data from the 2022 survey by the Central Institute for Economic Management (CIEM) on 500 Vietnamese businesses shows that the level of circular economy adoption remains relatively low, both in terms of innovation and the application of circular business models⁸. Some of the difficulties Vietnamese businesses often encounter in implementing circular practices include limitations in the legal framework, the linear economic system, infrastructure and planning, and appropriate incentive policies.
Refer to relevant laws and legislations in Vietnam, including:
- Decision No. 687/QD-TTg of the Prime Minister approving the Scheme for "Circular economy development in Vietnam"
- Extended Producer Responsibility (EPR) – Law on Environmental Protection (2005) and Decree No. 08/2022/ND-CP elaborating on several articles of the Law on Environmental Protection
- Section 3 (Criteria, roadmap, and mechanisms for encouraging development of circular economy), Chapter X, Decree No. 08/2022/ND-CP
- Article 142 (Circular Economy), Section 2, Chapter XI, Law on Environmental Protection (2020)
- Decree 155/2016/ND-CP on penalties for administrative violations against regulations on environmental protection
- Decree 38/2015/ND-CP on management of waste and discarded materials.

Biodiversity is one of the environmental protection commitments under the EVFTA, therefore European FDI enterprises in Vietnam have a responsibility to take action in conserving the ecosystem and reducing the pressure on biodiversity. A number of European FDI enterprises in Vietnam, including Heineken, Nestlé, and Tetra Pak, have implemented and publicised information on ecosystem conservation initiatives such as regenerative agriculture or water conservation.

Under the CSRD, if the parent companies identify biodiversity as a material topic, FDI enterprises in Vietnam need to collect reporting data and set targets for ecosystem conservation and biodiversity loss prevention. According to the "Nature-related Reporting in Asia-Pacific Corporations" survey by the National University of Singapore, while 68% of the surveyed companies disclose information on nature and biodiversity, a mere 6% set targets and commitments on biodiversity conservation for their operations⁹. Therefore, collecting robust reporting information in line with the requirements of the CSRD will pose a challenge for FDI enterprises in Vietnam.

Recommended roadmap for businesses:

Increase awareness and capacity on biodiversity and ecosystem conservation among internal personnel.
Assess the company’s impact on the ecosystem and strengthen the biodiversity conservation strategy based on the type of product or service offering, the implementation rate in Vietnam, the direction from the parent company, as well as relevant European regulations such as the EU Biodiversity Strategy for 2030 and the EU Deforestation Regulation.
Establish a systematic data collection process and data management system, which facilitates the external assurance on report disclosure.

In terms of human rights practices, with the level of awareness and experience cascaded from the parent companies, many FDI enterprises in Vietnam have complied with human rights protection standards, and voluntarily developed the criteria for a safe working environment according to the laws of the country where the parent company holds its nationality¹⁰. With the recent development of human rights regulations in Europe, FDI enterprises are likely to have to collect reporting data on human rights protection (to support the parent company in complying with the CSRD) and conduct supply chain due diligence on human rights issues (to support the parent company in complying with the CSDDD in the future).

Recommended roadmap for businesses:

Enhance awareness and capacity on human rights protection among internal personnel;
Integrate due diligence processes into the corporate policy to identify, minimise and prevent negative impacts on workers’ rights, not only within the business's own activities but also the activities of partners in the value chain;
Support business partners in the value chain to ensure adherence to human rights regulations, for example by providing training on human rights protection and risk management;
Establish a systematic data collection process and data management system, which facilitates the external assurance on reported indicators. In general, it is relatively difficult to measure and collect social, human rights and labour data (such as work-life balance or other human resource indicators throughout the value chain), necessitating significant efforts to ensure the comprehensiveness and transparency of such disclosures.

Vietnamese businesses and manufacturers within the direct value chain of European businesses

Unlike the FDI enterprise group, this group will need to carry out more preparatory work to meet requirements from their European partners to comply with the CSRD. It is mainly because of the lack of direct guidance from partners, who are knowledgeable about the business environment and sustainability practices in Vietnam. Given this limitation, businesses in this group should discuss with their European partners about whether these companies need to comply with the CSRD or not, and if so, when the anticipated adoption date is, so that they can plan accordingly. While the collection of reporting data for this group is not as urgent as for FDI enterprises, this should still be considered and invested in, especially if businesses want to participate in the supply chain of European enterprises from 2024 onward.

In our opinion, based on current reporting requirements in Vietnam, Vietnamese businesses in the value chain of European partners should pay attention to the following three reporting requirements under the CSRD/ ESRS.

Despite having grasped the importance of green transformation, Vietnamese businesses (including listed companies) in general are not considered ready for GHG emissions inventory and reduction. Among businesses in the VN100 index basket, only 12 have compiled GHG inventories for Scope 1 and 2 emissions, and only seven have fully disclosed Scope 1, 2 and 3 emissions¹¹.

If Scope 3 emissions are a key issue for European businesses within the scope of the CSRD, their suppliers in Vietnam will have to compile emissions data and make efforts to reduce emission within the business, as well as throughout its supply chain. In addition to the CSRD, the EU has also implemented the Carbon Border Adjustment Mechanism (CBAM), which aims to impose an importation levy on the GHG emissions embedded in the production process. These two regulations will render GHG emission inventory and reduction an indispensable condition for entering the EU market.

Recommended roadmap for businesses:

Enhance awareness and capacity in GHG emissions management, inventory and reduction among internal personnel;
Establish decarbonisation policies, processes, and implement low-carbon manufacturing, with a focus on energy and transportation since these are the two most carbon-intensive sectors in Vietnam¹²;
Set appropriate emissions reduction targets in line with climate science (i.e. limit global temperature rise to 1.5°C), such as science-based targets (SBTi);
Study the requirements on GHG emissions reporting and establish internal processes, emission inventory and data management systems to facilitate the external assurance on report disclosure. It should be noted that the carbon tax disclosures in the CSRD-compliant report need to be consistent with those in the CBAM report;
Refer to relevant laws and regulations in Vietnam, including Decree No. 06/2022/ND-CP on the mitigation of GHG emissions and protection of the ozone layer.

While a number of Vietnamese businesses have been practising biodiversity conservation or restoration activities, business participation remains relatively limited, voluntary in nature and is mobilised by environmental organisations instead of companies proactively conducting impact assessments and taking action. Meanwhile, the report "Assessing biodiversity in Vietnam" by the World Wide Fund for Nature (WWF) shows that businesses’ economic activities have been greatly affecting biodiversity in Vietnam¹³. In addition, Vietnam's laws and legislations currently lack specific guidelines that clearly state businesses’ responsibilities in assessing and minimising their impacts on biodiversity and ecosystems.

According to the requirements of the CSRD, businesses or manufacturers in Vietnam will need to assess the impact of their business on the ecosystem in which they operate, collect biodiversity-related data to facilitate the double materiality assessment by their European partners, and to inform their report on biodiversity if this is identified as one of their material topics.

Recommended roadmap for businesses:

Enhance awareness and capacity in biodiversity conservation among internal personnel.
Assess the impact of the business on the ecosystem in which it operates and the associated risks and opportunities.
Establish a systematic data collection process and a centralised data management system, which facilitates the external assurance on reported indicators.
Refer to relevant laws and regulations in Vietnam, including:
- Law on Biodiversity (2008)
- Decision No. 149/QD-TTg of the Prime Minister dated January 28, 2022 approving the national strategy for biodiversity until 2030, with a vision to 2050.

There have been improvements within Vietnamese businesses in terms of protecting workers' rights, customers' rights and embracing corporate social responsibility. However, human rights violations by businesses in Vietnam are also increasing in number, severity and scope of impact. Examples include worker discrimination, the use of child labour, or not ensuring safe working conditions, rest time, minimum wage, social insurance, and trade union membership rights¹⁴. Below are some specific figures:

The average monthly income of male workers is currently 1.35 times higher than that of female workers (8.3 million VND compared to 6.1 million VND)¹⁵.
In Vietnam, there are more than 1 million children aged 5-17 participating in labour, accounting for 5.4% of the population in this age group¹⁶.

With the advent of the CSRD, businesses or manufacturers in Vietnam may need to collect data on human rights protection to facilitate the double materiality assessment of their European business partners, and to inform their report on human rights if this is identified as one of their material topics.

Recommended roadmap for businesses:

Enhance awareness and capacity on human rights protection among internal personnel.
Promote the compliance to standards on labour and working conditions.
Strengthen the internal control system, establish a risk management system for business processes and comply with accountability requirements.
Establish partnerships and participate in support programmes by international cooperation organisations such as the International Labor Organisation (ILO) and the United Nations Development Programme (UNDP) on creating worker-friendly business processes.
Establish a systematic data collection process and data management system, which facilitates the external assurance on reported indicators and human rights due diligence.
Refer to relevant laws and regulations in Vietnam, including:
- Law on Enterprises 2020 (Article 8 on Obligations of Enterprises)
- Labor Code 2019.

The CSRD has far-reaching effects on a global scale, requiring the participation of all links in the value chain of companies operating in the European market. Relevant Vietnamese businesses therefore need to closely monitor and quickly grasp compliance requirements under the CSRD to maintain their competitiveness, develop partnerships with European partners, as well as establish timely implementation plans. This is also an opportunity for Vietnamese businesses to consider transforming their production and business models towards more sustainable practices, thereby bracing themselves to meet increasingly stringent sustainability requirements from large markets such as the EU.

¹ Starting at the source: Sustainability in supply chains | McKinsey (2016)

² Tackling the Scope 3 challenge | PwC (2022)

³ Topic Standard Project for Biodiversity | GRI (2024)

⁴ Case Studies of Human Rights Abuses and Environmental Harm linked to EU Companies | Anti-Slavery International & European Coalition for Corporate Justice (2020)

⁵ Two years of EVFTA implementation: Results of attracting foreign investment from the EU to Vietnam | TTWTO VCCI (2023)

⁶ Vietnam - EU Trade Forum: Opportunities to expand supply chains with European partners | Vietnam Economic News (2023)

⁷ Nature Benchmark | World Benchmarking Alliance (2023)

⁸ The level of circular economy adoption among Vietnamese businesses is still low | Finance Magazine (2022)

⁹ Nature-related Reporting in Asia-Pacific Corporations: State of Readiness | National University of Singapore (2022). The survey was conducted on 650 businesses in Asia-Pacific (aggregated from the top 50 listed companies across 13 jurisdictions in the region). Information was collected from their latest sustainability reports published in 2021 and 2022.

¹⁰ Business and human rights: Some basic issues | Intellectual Publishing House (2017)

¹¹ Businesses not prepared for greenhouse gas emissions inventory | Saigon Economy (2023)

¹² The carbon market: Greenhouse gas inventory - the foundation for an emissions reduction roadmap | Journal of Construction (2023)

¹³ Assessing the biodiversity in Vietnam: Analysis of impacts from economic sectors | WWF Vietnam (2021)

¹⁴ Business and human rights: Fundamental issues | Tri Thuc Publishing House (2017)

¹⁵ Press release on population, labor and employment situation in the fourth quarter and 2023 | General Statistics Office (2023)

¹⁶ Child Labour | UNICEF Vietnam

Authors

Nguyen Hoang Nam

Environmental, Social & Governance (ESG) Leader and Partner, Assurance Services, PwC Vietnam

+84 28 3823 0796

Email

Luong The Cuong

Manager, Risk Assurance - ESG, PwC Vietnam

+84 28 3823 0796

Email

Nguyen Ngoc Linh Thao

Senior Associate, Risk Assurance - ESG, PwC Vietnam

+84 24 3946 2246

Email

Tran Thu Huong

Associate, Risk Assurance - ESG, PwC Vietnam

+84 24 3946 2246

Email

PwC would be happy to discuss the impacts of the CSRD in more detail with your business. If interested, please contact us here.

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