Global Supply Chain Sustainability: Impacts on Vietnam Enterprises

Global supply chain sustainability directives will impact Vietnam enterprises. In February 2022, the European Commission proposed a Corporate Sustainability Due Diligence Directive (CSDDD) in line with a series of regulations aimed at embedding sustainability in EU supply chains. Here’s how these regulations could impact foreign firms operating in Vietnam.

Understanding the European Push for Sustainability

In recent years, countries such as Germany, France, the UK, and the Netherlands have enacted laws mandating businesses of significant size to conduct regular supply chain risk analyses. This trend reflects a growing recognition that voluntary compliance has not sufficiently protected the environment or labor conditions in multi-tier supply chains.

The EU has implemented several policies to support sustainable trading activities, including the EU Action Plan for the Circular Economy, the EU Biodiversity Strategy for 2030, and the Carbon Border Adjustment Mechanism (CBAM). These policies create a structured framework for companies to follow and emphasize the importance of compliance in maintaining good standing within the EU market.

Legislative Underpinnings

The EU’s new regulations require companies with over 500 employees to develop effective measures aimed at mitigating environmental risks and human rights violations throughout their global supply chains. This includes evaluating region-specific and industry-specific risks and conducting comprehensive sustainability analyses. Foreign firms operating in Vietnam must adapt to accommodate these requirements, ensuring their suppliers comply with elevated standards.

EU Position on Sustainability Compliance

With countries in the EU enacting compulsory legislation on global supply chain sustainability, businesses are now urged to take substantial measures to ensure compliance throughout their supply chains. The EU’s directives are linked to the broader goals outlined in the European Green Deal, which aims for sustainable supply chains and the reduction of industrial emissions globally.

EU Due Diligence Directive

The proposed Corporate Sustainability Due Diligence Directive (CSDDD) seeks to assist companies in identifying and mitigating risks within their value chains. It’s rooted in the UN Guiding Principles on Business and Human Rights and the OECD Due Diligence Guidelines for Responsible Business Conduct. These documents set a foundation for appropriate corporate conduct in relation to human rights and environmental stewardship.

Carbon Border Adjustment Mechanism

With the transitional phase of the CBAM commencing on October 1, 2023, the directive is poised to significantly affect Vietnam’s exports, particularly in sectors like iron and steel, cement, fertilizer, and aluminum. By imposing a carbon tax on emissions associated with the production of carbon-intensive products, the EU aims to encourage cleaner industrial processes in non-EU countries, including Vietnam.

Action Plan for the Circular Economy

In March 2020, the EU introduced the Circular Economy Action Plan (CEAP), focused on reducing dependency on natural resources while promoting sustainable growth and employment. This plan stipulates that goods such as textiles and apparel must be produced using sustainable materials and processes, urging Vietnamese companies in these industries to adapt their practices and invest in new technology to remain competitive.

Challenges and Opportunities for Vietnamese Enterprises

The rising number of sustainability laws presents significant compliance challenges for businesses operating in Vietnam. Companies must ensure alignment not only with local regulations but also with international legal frameworks governing their supply chains. Despite potential hurdles, early compliance can position firms favorably in the global marketplace, reducing the risk of supply chain exclusion.

Vietnam is recognized as the EU’s largest trading partner among ASEAN member states, making the adoption of sustainable practices a strategic priority. Aligning with international corporate social responsibility and environmental protection standards can yield numerous opportunities for both foreign firms and Vietnamese exporters.

Attracting Investment

By embracing sustainability, Vietnamese suppliers can capitalize on the China Plus One strategy, appealing to companies looking for alternatives to traditional manufacturing hubs. Enhanced compliance with sustainability directives and robust monitoring practices can elevate Vietnam’s position as a competitive and sustainable choice for international businesses.

Enhancing Corporate Reputation

Investment in labor, social, and environmental management not only aids compliance but also contributes positively to corporate reputations. Firms that effectively demonstrate their commitment to sustainability can gain a competitive edge in sourcing markets, potentially opening doors to new partnerships.

Building Resilience

Firms with strong environmental and social credentials are more likely to attract investors and navigate challenges posed by evolving regulatory landscapes more effectively. By integrating sustainable practices, companies can boost their resilience against future crises.

Addressing Barriers

Despite the numerous benefits, companies face substantial challenges in achieving their sustainability goals, particularly concerning governance over lower-tier suppliers. These suppliers often present the highest risks but lack the resources or incentives necessary for compliance with stringent sustainability standards.

To overcome these challenges, multinational corporations (MNCs) should adopt a comprehensive approach toward supplier management. This includes regular data collection on supplier capabilities, sustainability performance metrics, and focused improvement plans for weaker links in their supply chains.

The Path Forward

In light of tightening regulations on global supply chains, foreign firms in Vietnam should prioritize routine audits of their sourcing and supply networks. Ensuring compliance with sustainable and ethical practices will enhance their Environmental Social Governance (ESG) scores and their overall viability in international markets.

It is imperative for firms to engage all levels of their supply chains in sustainability initiatives, enabling them to construct a holistic supply chain risk management strategy that meets the demands of an increasingly regulated environment.

For those navigating Vietnam’s regulatory landscape, consulting legal experts can provide the necessary insights to ensure compliance and foster sustainable practices.