ESG in corporate governance: the board of directors’ responsibilities and legal risks

1. ESG – From peripheral factor to core corporate governance standard

In the era of green transition and sustainable development, ESG (Environmental, Social, and Governance) is no longer merely a “preferred option” but is evolving into an inherent obligation within corporate governance structures. Crucially, the Governance (G) pillar serves as the “backbone” enabling enterprises to actualize their environmental and social commitments. 

In Vietnam, although no standalone ESG legislation exists, extant legal regulations concerning corporate governance already encompass fundamental ESG elements, albeit dispersed across multiple legal instruments.

See more: Legal framework for ESG assessment and sustainable business practices in Vietnam

2. Legal responsibilities of the Board of Directors in ESG Integration

From a legal perspective, the Board of Directors (“BoD”) holds a central role in formulating and overseeing ESG-related strategies. 

• Ensuring ESG management mechanisms and implementation procedures: The Governance (G) pillar encompasses the organizational management framework and operational procedures implemented within the enterprise to ensure compliance with legal mandates and stakeholder-defined standards. This implies the BoD bears the responsibility for establishing and supervising these mechanisms and processes to realize the company’s ESG objectives. 

• Ensuring ESG transparency and disclosure: Circular No. 96/2020/TT-BTC mandates public and listed companies to disclose ESG information. The State Securities Commission (SSC) requires all listed companies to publish sustainability-related information in accordance with this Circular. Consequently, the BoD of listed companies is legally obligated to ensure the preparation and publication of annual sustainability/ESG reports as stipulated. 

• Promoting equitable and transparent management practices: The Governance pillar includes measures promoting fairness, transparency, information disclosure, anti-corruption, diversity, equal opportunity within the organizational structure, data security, and privacy protection. The BoD plays a pivotal role in instituting and overseeing adherence to these standards throughout the organization. 

• Overseeing governance activities and risk mitigation: While the source material explicitly attributes this oversight function to the “Supervisory Board” of joint-stock companies rather than the “BoD”, the monitoring of governance activities, business operations, accounting, internal controls, and risk prevention constitutes a vital element of corporate governance. The BoD inherently possesses a general oversight mandate to ensure operational efficacy and ESG compliance. 

In summary, the BoD holds a pivotal role in directing, supervising, and ensuring the integration of ESG principles across all corporate activities, particularly concerning transparent information disclosure for listed companies. 

3. Legal risks of BoD neglect of ESG

BoD’s disregard for Environmental, Social, and Governance (ESG) factors can precipitate significant legal risks for the enterprise. Specifically: 

• Violation of mandatory domestic legal regulations: Domestic law imposes mandatory requirements concerning Environmental (E), Social (S), and Governance (G) aspects. Non-compliance can trigger sanctions including fines, operational suspension, or other penalties. 

• Environment (E): Mandatory regulations cover climate change response (greenhouse gas emission reporting), waste management (mandatory recycling, solid waste, plastic waste, wastewater treatment), resource utilization (energy efficiency), environmental protection (air/soil pollution mitigation, natural heritage protection), and environmental licensing. BoD failure to oversee compliance invites substantial penalties. 

• Social (S): Mandatory regulations encompass labor relations (lawful labor contracts, lawful termination), remuneration (ensuring worker rights), human resource management (labor data updates, workforce reporting), diversity, equality, and inclusion (treatment of female workers, protection of vulnerable groups), occupational safety and health (ensuring safe workplaces), lawful employment of elderly and juvenile labor, and obligations concerning worker representative organizations. The BoD must ensure compliance to avoid labor disputes, complaints, denunciations, and sanctions under labor law.

• Governance (G): Mandatory regulations include organizational structure (establishing leadership per company model), organizational management, company charter, risk oversight and governance (involving the Supervisory Board for joint-stock companies), asset ownership, information transparency (record keeping, disclosure requirements for listed/credit-rated firms), business ethics (anti-corruption, anti-money laundering), and tax/accounting obligations (timely declaration and payment). The BoD must ensure the governance system complies to mitigate corporate, financial, and criminal risks (e.g., misrepresentation can lead to business suspension). 

• Risks related to international regulations and trade agreements: Vietnam has ratified numerous Free Trade Agreements (FTAs) incorporating increasingly stringent ESG standards. BoD neglect of ESG may render the company non-compliant, resulting in lost international market access or trade barriers.  

Examples: EU Deforestation Regulation (EUDR) impacting timber, rubber, and coffee exports; the European Green Deal imposing “green, sustainable” standards on EU imports; the Carbon Border Adjustment Mechanism (CBAM); CPTPP promoting robust environmental and labor standards; evolving US market demands (e.g., SEC climate disclosure rules – currently paused, FSMA) emphasizing ESG in supply chains.   

• Reputational damage and stakeholder relationship impact: While not strictly a legal risk, ESG neglect can erode corporate reputation among investors, business partners, customers, and the community. This may lead to adverse stakeholder decisions, impacting operations, and long-term value. Given rising investor ESG focus, BoD disregard can diminish capital attraction.

In conclusion, BoD neglect of ESG constitutes not merely a lack of responsibility but harbors serious legal risks, including domestic non-compliance penalties, failure to meet international standards, and impaired global competitiveness and market access. Consequently, the BoD must fully recognize ESG’s criticality and ensure sustainable, legally compliant operations. 

4. Solutions for corporate BoDs: Restructuring for “ESG-Ready’’ status

• Integrate ESG into core business strategy and vision: The BoD must recognize ESG implementation not merely as compliance, but as a core value and long-term success imperative. ESG metrics must inform vision and strategy development, fostering sustainable growth and competitive advantage. Proactive ESG integration attracts investors, partners, and builds consumer/community trust.

• Establish clear ESG management structure and accountability within BoD and management: 

• • The BoD is responsible for establishing and overseeing enterprise-wide ESG mechanisms. This may involve appointing an ESG-dedicated BoD member or committee for focused accountability. 

• • Clearly define management roles and responsibilities for implementing specific ESG activities (E, S, G). 

• Prioritize ESG transparency and disclosure:

• • For public/listed companies, the BoD must ensure preparation and publication of annual sustainability/ESG reports per Circular 96/2020/TT-BTC. 

• • The BoD should champion comprehensive, transparent ESG disclosure to all stakeholders (investors, customers, partners, community), enhancing both compliance and reputation/investment appeal. 

• Consider and adopt international ESG standards and frameworks:

• • To meet international market and investor demands, the BoD should explore adopting prevalent standards like GRI Sustainability Standards, IFC Toolkit for Disclosure and Transparency, SASB Standards, IFRS Sustainability Disclosure Standards, and ESRS. 

• • Adoption enhances global market access and international standing. 

• Focus on ESG-Related risk management: 

• • The BoD must identify and assess legal risks arising from ESG neglect, encompassing domestic/international non-compliance and reputational/stakeholder relationship risks. 

• • Develop and implement effective risk mitigation strategies for environmental, social, and governance issues.

• Invest in ESG capacity building and awareness:

• • The BoD must ensure management and staff receive training on ESG importance and requirements. 

• • Foster a corporate culture prioritizing ESG in all activities. 

• Concrete BoD actions:

• • Formally issue an “ESG Policy” at BoD level:

• • • Enshrined in BoD Resolution, linked to long-term strategy.

• • • Aligned with the UN Sustainable Development Goals (SDGs).

• • • Assign specific responsibilities to CEO, ESG Director, or Legal Department. 

• Amend Company Charter and BoD Operating Regulations:

• • Incorporate ESG as an operating principle. 

• • Add requirement for periodic ESG risk assessment and reporting to the General Meeting of Shareholders (GMS). 

• Establish an ESG Committee or Integrate into Audit Committee: 

• • Potentially as an ESG Sub-Committee. 

• • Operate with processes for regular ESG metric evaluation and measurement. 

• Embed ESG into Internal Audit and Risk Management Systems: 

• • Utilize ESG KPIs within management performance evaluation. 

• • Integrate findings into reports for the BoD and GMS. 

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