ESG PROOF YOUR BUSINESS FOR EU EXPORTS

HOW AND WHEN TO GET “ESG COMPLIANT”?

Conducted by

Source of Asia

Ho Chi Minh City, Vietnam | November 2024

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How and when to get “ESG Compliant”?

How well prepared are companies

in Vietnam?

Awareness of the EU Green Deal

A survey conducted by VCCI at the end of 2023 showed that 88-93% of respondents (in Vietnam) did not know or had only briefly heard of the Green Deal or the EU's upcoming green policies related to Vietnam's exports.

Recent data highlights a significant gap in awareness and preparedness among Vietnamese businesses regarding green transition and compliance with EU green policies, including the Carbon Border Adjustment Mechanism (CBAM). This has crucial implications for Vietnam’s export-oriented industries.

Green Transition in the Textile and Garment Industry

An article in Vietnam Investment Review (June 2024) about companies in the textile and garment industry on green transition states that:

• Just 10% of the companies are doing it,
• 50% have made first actions, and
• About 40% are considering it.

Preparations for CBAM Compliance

The Hanoi Times of September 2024 states that while some companies directly affected by CBAM are seriously preparing, most businesses still do not fully understand the mechanism, leading to ineffective preparations.

Where did it start?

2015

2019

2021

The Paris Agreement, signed in 2016 by 196 parties at COP 21, addresses climate change mitigation, adaptation, and finance.

The 2020 European Green Deal aims for EU climate neutrality by 2050, aligning with the Paris Agreement, and focuses on reducing carbon emissions and sustainability.

The Conference of Parties (COP) 26 resulted in the completion of the Paris Agreement and will help deliver the Green Deal ambitions.

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Following the Green Deal, the EU approved the

EU Circular Economy Action Plan (CEAP), which:

• Announces initiatives along the entire life cycle of products;
• Targets how products are designed;
• Promotes circular economy processes;
• Encourages sustainable consumption;
• Aims to ensure that waste is prevented;
• Resources used are kept in the EU economy for as long as possible;

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Initiatives cover the climate, the environment, energy, transport, industry, agriculture, and sustainable finance.

Criteria for applicability

How and when to get “ESG Compliant”?

Green deal

Background and objectives

The Green Deal is a growth strategy to transform the EU into a climate-neutral and circular economy, preserve Europe's competitiveness and aims to make Europe the first climate-neutral continent by 2050.

Criteria to define a micro entity, SME or LE:

Ho Chi Minh City, Vietnam | November 2024

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Ho Chi Minh City, Vietnam | November 2024

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How and when to get “ESG Compliant”?

Impacted actors, sectors and products

Actors

• SMEs and LE (sometimes with additional requirements related to revenue, number of employees, profit or being listed)
• Non-EU and EU
• Exporter, importer, trader, producer, retailer, manufacturer

Sectors

• Electronics manufacturing
• Retail sector
• Trading (export and import)
• Textile and garment manufacturing
• Wood and furniture manufacturing
• Packaging manufacturing
• Financial sector
• Food and beverage sector
• Agricultural sector (farm-to-fork strategy)

*Note that the list is not exhaustive, and the various regulations/directives will apply to different products, actors and sectors. Requirements can vary depending on the type of actor or sector.

Products

• Iron and steel, aluminium
• Textiles (garments and footwear)
• Furniture (including mattresses)
• Tyres
• Detergents, paint, lubricants, chemicals
• ICT products and other electronics

Related products to coffee, cocoa, soya, rubber, wood, cattle, palm nuts such as leather, meat products, palm oil, soybean flower and oil, furniture, books, chocolate, tyres, shoes, packaging material, gloves, etc.

• Coffee, cocoa, soya, palm nuts
• Wood
• Rubber
• Cattle
• Electricity and hydrogen
• Cement

Overlap, complement and differences between various rules

• The CS3D requires companies to take environmental and social responsibility, while the CSRD ensures transparency about those responsibilities.
• The CS3D mandates human rights and environmental due diligence across supply chains.
• The CS3D and the EUDR are complementary and should be applied coherently, if there is conflict the EUDR prevails.
• The Draft Regulation on the Prohibition on the use of Forced Labour complements the CS3D on human rights.
• Non-compliance with CS3D can result in fines, but it doesn’t prohibit market access, unlike the draft regulation.

Ho Chi Minh City, Vietnam | November 2024

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Ho Chi Minh City, Vietnam | November 2024

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How and when to get “ESG Compliant”?

Examples

Ecodesign for Sustainable Products Regulation (ESPR)

Producers of iron and steel, aluminum, textiles (garments and footwear), furniture (including mattresses), tyres, detergents, paints, lubricants, chemicals, ICT products and other electronics:

• Have to prepare a digital product passport for their products.
• Need to disclose the following information which should be publicly available:
• The number of unsold consumer products that they throw away.
• The reason why these products were thrown away.
• How they disposed of them according to the principles of waste hierarchy, as set out in the framework directive.

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Starting in 2026 for large and 2030 for medium-sized enterprises it will be forbidden for producers of garments and footwear to destroy unsold garments and footwear. Micro and small companies will be exempted.

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Over the coming years, the number of products falling under the ESPR will increase.

Carbon Border Adjustment Mechanism (CBAM)

CBAM applies to products like cement, steel, aluminum, fertilizers, electricity, hydrogen (and more in the future, such as glass, packaging, ceramics, and textiles). Maritime transport joined as 2024 almost done, with building and transport sectors likely to follow.

It prevents "carbon leakage" by imposing carbon costs on imports from countries with weaker emissions rules, promoting sustainable practices and fair competition with EU producers.

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Impact:

• Higher costs for non-EU manufacturers, possibly raising consumer prices or reducing profits.
• Acceleration of sustainability efforts.
• Greater supply chain transparency and accountability.
• Competitive edge for sustainable brands.

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From now until 2026 just report not paying yet. Then from 2026 buy certificates unless reduction because paid already. Phase-out of free certificates by EU companies in leakage-risk sectors.

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EU Deforestation Regulation (EUDR)

The EUDR applies to EU-based and international companies that import to, place on, make available on, or export from the EU market specific commodities and relevant products, regardless of the EU or non-EU origins of the material.

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The EUDR requires products to be

• deforestation-free: production did not cause deforestation or forest degradation after 30/12/2020;
• legally produced: production took place per the relevant legislation of the country of production concerning the legal status of the area of production.

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Companies to perform due diligence: share information on products, suppliers, and geolocations in a statement. Depending on the size of the company and also their role (operator or trader), they need to perform the DD. Besides the DD, the companies also would have to perform a risk assessment and take measures to mitigate risks if required.

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The EUDR will apply to cocoa, coffee, palm nuts, wood, soya, cattle and rubber and derived products such as leather, meat products, palm oil, soybean flower and oil, furniture, paper, packaging, books, chocolate, tires, shoes, and gloves.

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Applies from 30 December 2024 for large enterprises and 30 June 2025 for SMEs. It is not clear yet if there will be a delay. It has not been decided yet.

Ho Chi Minh City, Vietnam | November 2024

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Ho Chi Minh City, Vietnam | November 2024

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How and when to get “ESG Compliant”?

Applicable regulations in general/per sector

Consequences of non-compliance

To continue exporting to the EU, be aware of regulations and directives that vary by company size and product type. These rules may affect your business operations but not product design, production, supply chain, or waste disposal. The following directives and regulations apply across all sectors:

​

• Corporate Sustainability Reporting Directive (CSRD)
• Corporate Sustainability Due Diligence Directive (CS3D)
• Unfair Commercial Practices Directive (UCPD)
• Green Claims Directive
• Greenwashing Directive
• Waste Framework Directive
• Waste Shipments Regulation
• Draft Regulation on Prohibition of the Use of Forced Labour

Consequences of non-compliance

​

Following is a list compiled of consequences of the various rules and could apply:

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• Fines with a maximum of at least 4% of EU turnover in the preceding year and it may be increased to exceed the potential economic benefit
• Confiscation of the covered products and these will be given away to charity or if no other option, destroyed
• Confiscation of the revenues gained from selling the items
• Temporary exclusion from public procurement processes and public funding
• In case of serious or repeated infringements temporary prohibition from dealing in the EU in those items or a prohibition from using the simplified due diligence process
• Start of a court case in case of non-compliance by civilians or relevant authorities
• Damage of reputation
• Companies may face litigation risks, leading to costly legal battles and potential settlements.
• Failure to adhere to certain rules may trigger regulatory scrutiny, resulting in stringent audits and investigation

Ho Chi Minh City, Vietnam | November 2024

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Ho Chi Minh City, Vietnam | November 2024

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How and when to get “ESG Compliant”?

Questions and Answers

1. Do the Green Deal and other ESG regulations apply if you do not export to the EU?

→ Yes, if you are part of the value chain of an exporting company.

​

2. Do the Green Deal and other ESG regulations apply only to companies in Vietnam?

→ No, they apply to every country and every company exporting to or from the EU.

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3. Why did the EU put the Green Deal and other ESG regulations in place?

→ To meet the Paris Agreement goals of being carbon neutral by 2050.

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4. Will other countries set similar requirements?

→ For some regulations similar requirements already exist (UK, US, Australia, Japan: modern slavery, illegal logging, wildlife trafficking, illegal, unreported, and unregulated fishing, and illegal mining). More will probably follow as every country has to be carbon neutral by 2050.

5. Do you consider the Green Deal and other ESG regulations a threat or an opportunity?

• Meeting all the ESG requirements will indeed cost money. It should not be seen as costs, consider it as investments.
• The company’s reputation will improve, and it will be easier to attract investors and employees.
• It will help to retain your employees, and it will increase their satisfaction.
• You will also strengthen customer loyalty.

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Millennials and Gen Z show a changing pattern in their lifestyles and find it important that a company is making investments to become sustainable.

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• Furthermore, sustainability promotes and encourages innovation.
• You do not only have to invest money, but you will also reduce costs due to energy savings (and other such as water) and reuse of waste.
• By becoming sustainable you gain a competitive advantage, it increases operational efficiency and reduces compliance risk.

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It seems there are more opportunities than threats.

Ho Chi Minh City, Vietnam | November 2024

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Ho Chi Minh City, Vietnam | November 2024

www.sourceofasia.com

How and when to get “ESG Compliant”?

Don’t miss business opportunities

What if you lose the opportunity…

• to export to the EU and other countries such as the US, the UK, Australia, South Korea, and Japan with similar existing requirements or soon to be introduced ones.
• to be part of a supply or value chain of a company exporting to the EU or a company importing into the EU.

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If you do not comply with ESG-rules, it might be more difficult…

• to attract investors as they will look at how you perform as a business on ESG.
• to find and retain happy and satisfied employees.
• to reach certain customers who find it important that products they buy are sustainable or recyclable.

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Investors believe that companies that perform well on ESG are less risky, better positioned for the long term, and better prepared for uncertainty. Investors focus on financially material ESG factors because it impacts portfolio returns and shareholders value in a positive way.

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Gen Z values companies that invest to make their business sustainable. There are currently around 14.4 million Gen Zs in Vietnam who will form about a third of the Vietnamese workforce by 2025 with a spending power of at least 2.5 mio VND or 100 USD per month.

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Furthermore, you might lose out on saving money and be more profitable because you don’t…

• innovate to meet the new requirements.
• recycle products and material.
• save energy (costs).

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Become (more) sustainable, gain that competitive advantage and be(come) part of the circular economy.

​

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Ho Chi Minh City, Vietnam | November 2024

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Ho Chi Minh City, Vietnam | November 2024

www.sourceofasia.com

Your Questions

Do you know if and which EU ESG-rules apply to you, for which products and what you need to do, if

• you export to the EU
• you are part of a supply-chain of a company exporting to the EU, and we can support with:
• your EU-entity imports into the EU

Our Solutions

We can support you and provide the following services:

• ESG diagnosis: analyze which EU ESG-rules apply to you, with potential impacts and challenges.
• Supply chain audit: audit your current process(es) and advise improvements & future steps.
• Factory audit: audit your factory in light of ESG-rules.
• ESG implementation:
• implement compliance on your behalf and support you with collecting and providing the information requested by the importer or exporter.
• amend your product and process to make it more circular and sustainable.
• train your team members to implement regulations in operations.

How can we support?

Representative office in South Korea

AN INTERNATIONAL BUSINESS ACCELERATOR

ABOUT SOURCE OF ASIA

IN SOUTHEAST ASIA, SOUTH KOREA, AND BEYOND

Source of Asia is an International Business Accelerator in Vietnam and Southeast Asia.

​

Over the past 20 years, we've been guiding global enterprises to successfully penetrate, operate, and flourish in this vibrant region through tailored solutions in Market Expansion, Sourcing & Supply Chain, Corporate & HR Solutions, and M&A Services.​

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years of

experience in Asia

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multi-sectors experts

happy

customers

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networks and institutions

that SOA is a member of

or accredited by

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OUR NETWORKS

AND MANY MORE...

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PACIFIC OCEAN

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EUROPE

Representative office in France

Headquarter

in Vietnam

SOUTH KOREA

• Philippines
• Indonesia
• Malaysia
• Singapore
• Thailand
• Cambodia

Covering:

MARKET EXPANSION

Formulating and implementing tailored growth strategies to successfully transition into your targeted countries.

SOURCING & SUPPLY CHAIN

Optimizing your production, organization and outsourcing your whole supply chain management into experts’ hands.

CORPORATE & HR SOLUTIONS

Helping you optimize your foothold in Vietnam and other ASEAN countries, and managing your setup on your behalf.

M&A SERVICES

Accompanying and advising in each step of your business expansion strategy through M&A transactions.

Ho Chi Minh City, Vietnam | November 2024

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Ho Chi Minh City, Vietnam | November 2024

www.sourceofasia.com

CASE STUDY

FURNITURE

ESG REGULATIONS

IMPACT, SOLUTIONS, COSTS…

Case 1

Customer

A German E-commerce of elegant and designs furniture and accessories. They have been present in the market for more than 10 years. SOA is the Buying office for them to find new suppliers of garden and indoor furniture in Vietnam.

100

Containers were shipped for the 2024 summer season

12

Active suppliers to manage

EUDR new regulations

The customer requires EUDR compliance for all their wooden products.

Which impact?

• Vendors are expected to follow the entire procedure.
• Any delays or missing regulatory documents for shipments will result in penalties. Additionally, items that do not meet the required regulations will be discontinued, leading to potential revenue loss.

​

Which resources?

• Training for all vendors to ensure they understand and process for data submission and compliance.
• Shortlisting only the qualified vendors that meet the customer’s regulatory standards for proposal.

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Which costs?

The customer will need to establish a new regulatory team to manage the process and train agents and vendors, but the associated costs remain uncertain.

Case 2

Customer

Danish furniture company - their collections are rooted in Danish design traditions with a focus on simple, accessories for children and adults.

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Our support

SOA supports the customer’s project since 2017, in sourcing, product development, order management, quality management, logistics, and after-sales service in Vietnam, China, and Indonesia.

Eco-packing new regulations

Switch from styrofoam packaging to eco-friendly alternatives, such as honeycomb paper and PE/EVA foam.

​

Which impact?

Process of adjusting all packaging to this new eco-friendly solution, which will take 4 months to finalize.

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Which resources?

• To expedite the process, we are connecting our vendors with packaging suppliers.
• The new packaging will not only be environmentally sustainable but also ensure the safe delivery of fragile products.

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Which costs?

This transition will result in a 15% increase in packaging costs.

30+

Best selling items from 2 to 5 years

600K

Turnover in USD per year

Ho Chi Minh City, Vietnam | November 2024

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CASE STUDY

FURNITURE

ESG REGULATIONS

IMPACT, SOLUTIONS, COSTS…

Case 3

EUDR new regulations

The customer requires EUDR compliance for all their wooden product shipments as per December 2024.

​

Which impact?

Training with all vendors. It takes 2 months for them to be familiar to declare on the new EUDR template.

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Which resources? To comply with the new regulation, we remodified our sourcing process:

• Source and prioritize qualified vendors who comply with the new regulation.
• Replace existing items from unqualified vendors with those from compliant vendors.

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Which costs?

The transition to items that meet the new regulatory standards will result in a cost increase of 15–30% compared to those previously without regulation.

Customer

Nordic/Scandinavian furniture and home decoration wholesale brand in Denmark since 2000, with their 4 own brands.

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Our support

After successfully proving the potential of the Vietnamese market from the trading stage, SOA became their official Buying office in Vietnam in 2018 and has remained so to date.

5+

Years of Buying office

10+

Collections are developed

3

Millions of Turnover per year

RECAP

What is at stake?

What are the challenges?

• Pro-active
• Training

• Adaptability
• Price & timing

What are the opportunities?

• Pass on the price increase to the customer, who is willing to pay more for a sustainable and compliant product
• Competitive advantage (access to EU market, reputation, long-term vision)
• Be ready for other markets

Ho Chi Minh City, Vietnam | November 2024

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Ho Chi Minh City, Vietnam | November 2024

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