Vietnam Holding Co., Ltd (VNH) is a value investor, incorporating environmental, social and corporate governance (ESG) factors in its investment analysis and decision-making process. Reporter Dang Yen interviewed Mrs Min Hwa Hu Kupfer, Chairperson of Vietnam Holding on ESG issues related to VNH investment and Vietnam’s sustainable development.’s sustainable development.

                                                          

Like other emerging markets, the challenges for sustainable investment in Vietnam include: lower socio-economic development, developing infrastructure, lingering poverty, poorer health indicators, state influence on large enterprises of the economy, evolving regulation system, inconsistent enforcement of regulations, bribery and corruption, and fewer certification systems for quality and environment standards.   As an active and long term investor of Vietnam, we have also noted that better disclosure of material information in a timely manner, vigilance in safeguarding the interest of shareholders, large or small, and stronger independency of non-executive board members are examples of areas in which Vietnam companies can improve.  

 

Nonetheless, the government has made great strides, reducing poverty from 58 percent in 1993 to 10.6 percent in 2010, and recently strengthening regulations of listed companies’ disclosure of information.   Publication of violation cases on the media and significant involvement of large companies in social responsibility projects point to an emerging awareness of social and environment responsibility and a greater sense of corporate governance and transparency.   To that end, Vietnam Holding is doing its part, working with like-minded institutions, such as Vietnam Business Council for Sustainable Development (VBCSD), IFC and UNPRI, to promote sustainability investing among our portfolio companies and Vietnam business and investment community. 

 

For the past 5 years, Vietnam Holding has worked proactively and steadily for the sustainable development in Vietnam in three main areas.  

 

Since the inception of our Fund, we have held the view that companies which pay greater attention to environmental, social and governance (ESG) issues may be in a better position to achieve long term success. In order to engage our portfolio companies on ESG issues and to improve the sustainability of our portfolio, we cooperated with INRate, a Swiss sustainability rating agency, to rate 22 Vietnamese investee companies in our portfolio. Our task was very difficult initially because of the reluctance and refusal of Vietnamese companies to talk about issues of E, S, and G.   We were patient and maintained continuous communication with them to get them to understand our effort in raising awareness and capacity in sustainable development in Vietnam. The companies gradually become more open and they have taken ownership to make notable improvements in the last one and a half years. For example, establishing IR department and regularly updating investors on business results and business plan, preparing annual reports in more informative and effective ways, more distinctive segregation of duty between the Chairman and CEO, improving website and public information disclosure, and active attendance at conference on sustainable development.

 

We have worked with relevant government agencies such as State Securities Commission, Ministry of Natural Resources and Environment, and Ministry of Labour, Invalids and Social Affairs to gain their cooperation in raising awareness and building sustainability capacity for Vietnamese companies. We have enlisted their help to encourage sustainable development among our portfolio companies with whom they share good, long term relationships.   In that regard, we have been fortunate to work with State Capital Investment Corporation (SCIC) and VBCSD in sponsoring Vietnam Holding Forum, which I will explain later.  

 

We also welcome opportunities that will allow us to work with State Securities Commission, jointly with investment industry peers, in establishing more guidance and instructions on information disclosure, corporate governance and building sustainable indices in Vietnam.

 

With the support from SCIC and VBCSD, we have organized six VNH Forums in Ho Chi Minh City and Hanoi, covering topics from Strategic Management to Investor Relations.   Our target audience includes chairmen, CEOs, board members and mid-level management of our portfolio companies, representatives of local business community and relevant authorities.   One of our investee companies, Hau Giang Pharmaceutical JS Company actually established the Investor Relations (IR) department after its chairwoman attended our forum on Investor Relations. The IR department now is among the most active in the market and its Annual Report has for 2 consecutive years achieved the Best Annual Report in Vietnam prize. Another portfolio company, PetroVietnam Drilling, also shared that Vietnam Holding is the first investment fund in Vietnam to come and talk to them about ESG. This year the company joined Hau Giang Pharmaceutical, achieving the Special Prize for the Best Annual Report.

  

The social factor is the most advanced among the three as Vietnamese companies follow a strong tradition of active participation in community and philanthropic activities and contribution to society. Besides, Vietnamese Labour Law is considered rather close to the ILO’s (International Labor Organization) regulations in protecting the employees’ rights. In the past two years, many companies have included information of their employee pools by gender, education level and average salary in their annual reports.

 

Environment preservation is getting more attention, as it rightfully deserves. The Vedan case (Thi Vai river pollution) alerted Vietnamese companies to take care of their waste water treatment, which directly influence their reputation and even the survival and development of their business. The difficulty for environment solutions is mainly the concern over costs. Taking into consideration upfront investment expenditure, the tendency of focusing on short term operation efficiency may still prevent companies from applying the latest advanced waste water technology and from looking for recycling solutions. Most companies admit that they are aware of the seriousness of environment protection and their responsibilities. We think as companies learn more lessons on preserving the environment, they will be more inclined to pursue the sustainability path to success. 

 

Thus far, corporate governance has been most challenging. It is also the part where Vietnam Holding has devoted most of its energy and attention. While many large Vietnamese companies have been equitised, significant State holdings (from more than 20 percent to 50 percent on average) remain. Transparency, conflicts of interest, segregation of duty, nomination and strong influence from the parent company are common obstacles that may take some time to overcome.   Vietnam Holding and its investment manager have worked with our portfolio companies on a) investing in building their core competencies, b) focusing on long term sustainable profitability, rather than short term quick gains, and c) serving the interest of all, not merely the select few shareholders. We have learned in recent discussions with portfolio companies their intention to segregate the duty of Chairman and CEO and improve their internal control departments. 

 

Progress is also being made in the regulatory front, as evidenced by the recent issuance of Ministry of Finance regulations on information disclosure for companies listed on the stock exchange, and the Government’s decision on administrative sanctions against securities law violators.  

 

We believe this is an integral part of the move by the State Bank of Vietnam to curb inflation and to stabilize the macro-economy. It may be a painful but necessary step to secure long term prosperity for the securities and real estate sectors by correcting speculative players that are often over-extended and over-leveraged. As Vietnam Holding has primarily focused on growth sectors, such as agriculture and domestic consumption, outside of securities and real estate, our investment manager and portfolio companies are less impacted by the recent June 30 deadline.   In the near term, we see this may present some attractive buying opportunities given the downward market movements linked to tighter liquidity caused by the loan reduction. In the long run, as capital is directed to companies with productive activities that generate real economic benefits, it strengthens the entire stock market in Vietnam and ultimately boosts investor confidence. And THAT is good for everyone: corporations, employees, regulators, and investors.  

 

Once again, we also believe this is an essential, albeit painful, measure to strengthen the Vietnamese economy. In tightening monetary and fiscal policy, the economic cycle helps get rid of poorly performing companies. These companies are often restructured, consolidated, sold or liquidated. Competitive companies with good business models, strong balance sheets, healthy earnings and greater sensitivity to environmental, social and governance issues tend to rise to the top.  

 

Vietnam is not alone, as many countries are going through a challenging period. In this time of uncertainty, it is important for companies not to lose sight of their strategic objectives. For Vietnam Holding, we aim to build a diversified portfolio that generates a sustainable and long term risk-adjusted rate of return. At this moment of time, we confirm our investment policy and strategy as a “sustainable” and “value” investor; affirm our portfolio asset allocation by focusing on companies that are fundamental to Vietnam’s long term growth; and maintain rigorous analysis and active engagement with existing and prospective portfolio companies to identify sustainable and attractive investment opportunities.