Supply Chain Sustainability in Vietnam: Responding to Labor and Environmental Regulations

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.

Recent years have seen a number of countries around the globe, including Germany, France, the UK, and the Netherlands, pass new laws on corporate sustainability due diligence. These laws mandate that businesses of a certain size conduct regular supply chain risk analyses.

At present, the EU has issued several policies to ensure sustainable trading activities within the European market, including the EU Action Plan for the Circular Economy, the EU Biodiversity Strategy for 2030, and the Carbon Border Adjustment Mechanism (CBAM).

In the EU, under this legislation, companies with over 500 employees are required to put in place proper and effective measures to mitigate environmental risks and human rights violations in their global supply chains.

Businesses are now required to evaluate region and industry-specific risks and conduct sustainability analyses. Foreign firms in Vietnam may also need to conduct due diligence and compliance checks to ensure their suppliers meet these new standards.

In this article, Vietnam Briefing addresses what this might look like for foreign firms.

EU position on sustainability compliance

While firms globally have been encouraged to take social and environmental responsibility measures across their supply chains, a policy of voluntary compliance has thus far been insufficient to safeguard the environment and working environments in multi-tier supply chains.

Therefore, an increasing number of countries in the EU have been enacting obligatory legislation on global supply chain sustainability. This is to ensure that all suppliers are abiding by the environmental and ethical standards set out by their respective governments.

These due diligence laws are part of the European Green Deal, mandating businesses around the world to take initiatives to create sustainable supply chains and reduce industrial emissions.

EU due diligence directive

The European Commission has proposed a Directive on Corporate Sustainability Due Diligence (CSDDD) to help identify and mitigate risks in EU companies’ value chains. The UN Guiding Principles on Business and Human Rights and the OECD Due Diligence Guidelines for Responsible Business Conduct serve as the foundation for this directive.

See also: EU Due Diligence Directive and Supply Chains in Vietnam

EU Carbon Border Adjustment Mechanism

The EU’s CBAM, which entered its transitional phase on October 1 this year, is set to impact Vietnam’s exports, particularly in the iron and steel, cement, fertilizer, and aluminum industries. This carbon tax regime will place a price on carbon emissions from the production of carbon-intensive commodities entering the EU and promote cleaner industrial output in non-EU countries.

See also: How the EU Carbon Border Adjustment Mechanism Impacts Vietnam

EU Action Plan for the Circular Economy

The EU Circular Economy Action Plan (CEAP) is a set of initiatives adopted by the European Commission in March 2020 to help the EU transition to a circular economy. The objectives of the CEAP are to reduce reliance on natural resources, provide employment, create sustainable growth, and meet the EU’s 2050 climate neutrality target.

Furthermore, the CEAP mandates textile and apparel goods to be made using eco-friendly materials and procedures, follow stringent eco-labeling guidelines, and meet sustainability criteria. Thus, Vietnamese companies in this industry may need to make changes to their production procedures and make investments in new technology to stay competitive in the global supply chains.

See also: Impact of the EU Strategy for Sustainable and Circular Textiles on Vietnam

Adopting sustainable practices in Vietnam

With the number of laws on supply chain sustainability increasing rapidly in recent years, companies doing business in Vietnam must ensure compliance with the legal frameworks for their operations, their subsidiaries, and their suppliers along the entire value chain.

Although the due diligence laws pose many challenges with respect to incurred costs and complex implementation, early compliance can help firms avoid the risk of supply chain exclusion.

Vietnam is the EU’s biggest trading partner among all ASEAN member states, and businesses looking to attract foreign capital and expertise will find themselves more appealing by embracing sustainable practices.

Meeting international standards related to corporate social responsibility and environmental protection may also bring unprecedented opportunities for both foreign firms and Vietnamese exporters. These include:

• Positioning as an attractive alternative to China: By complying with the provisions of the abovementioned due diligence laws, suppliers in Vietnam can leverage the China Plus One paradigm to their advantage and position themselves as a sustainable alternative.
• Boost to reputation: From a risk management perspective, firms must make investments in monitoring and enacting labor, social, and environmental requirements. This may give them a competitive advantage and boost their reputation in non-EU supply chains as well.
• Building resilience: Socially and environmentally responsible businesses are more attractive to investors, will be more resilient in case of global regulatory developments, and can respond to crises more effectively.

Key barriers

All of that said, certain supply chain management challenges hinder sustainability and compliance goals.

It is important to note that companies are having difficulties in governing lower-tier suppliers due to a lack of direct contractual relationships. While lower-tier suppliers are important components for the successful implementation of supply chain sustainability measures, multinational corporations (MNCs) often struggle with enforcing sustainability standards among these smaller players.

This can be attributed to the lack of resources and inadequate incentives. Lower-tier suppliers often pose the highest risks to supply networks. To tackle this challenge, MNCs should take a holistic approach in collecting data about their supplier’s capabilities, keep track of sustainability performance metrics, and focus on isolating and improving their weakest supply chain links.

Moving forward

With governments and international bodies putting stricter laws on supply chain sustainability into place, foreign firms are advised to conduct routine audits of their sourcing vendors and supply networks, monitoring the implementation of sustainable and ethical practices, which in turn will affect their Environmental Social Governance scorecards.

Firms need to ensure they include manufacturers of all levels in their sustainability programs to develop holistic supply chain risk management strategies moving forward.

For support with legal and regulatory requirements in Vietnam, contact the legal experts at Dezan Shira and Associates.

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