Foreign direct investment has helped transform the Vietnamese economy over the last 15 years. Foreign companies have brought in more efficient and cleaner technologies, safer workplaces, international standard management practices, and links to global supply chains. Indeed, the arrival of foreign companies and the huge increase in exports has been the basis of Vietnam’s high growth rates and rapid poverty reduction.
Why do foreign companies insist on high social and environmental standards? Why don’t they demonstrate the “race to the bottom” behavior in pursuit of cheap labor and lax environmental regulation that some commentators fear? Some answers emerged from a meeting I attended that was organized by Holcim, one of the world’s largest cement company. The purpose of the meeting was update company staff on environmental issues in the Asia-Pacific Region. It included discussions of Holcim’s quarries and cement plants in India, China, Indonesia, Bangladesh, Philippines, Malaysia, Thailand, and India. The meeting was held in Bangkok in late August 2010.
At this meeting, senior Holcim staff made it clear that they want the company to remain in the World Index in the Dow Jones Sustainability Index (DJSI). Launched in 1999, the DJSI is a stock market index composed of companies that meet strict social and environmental standards. As well as Holcim, it includes many of the world’s largest and most profitable companies such as General Electric, Intel, and Microsoft. Companies are evaluated every year and every year there are additions and deletions. (BP was removed from the DJSI after the huge oil spill in the Gulf of Mexico in April 2010.)
Companies want to join the DJSI because good social and environmental performance translates into lower risks and reduced costs of doing business, including borrowing costs. Good performance also builds brand recognition and consumer loyalty, and reduces the likelihood of conflicts with governments and communities, thus increasing the company’s license to operate. Finally, it helps to attract, motivate, and retain high-performance staff, which translates into higher productivity. So there are strong financial reasons why companies like Holcim work hard to stay in the DJSI.
Holcim aims to continuously improve its environmental performance through a system of corporate directives, monitoring, and reporting. It is in the process of installing sensors in all of its cement plants around the world to continuously monitor NOx, SOx, dust, and other pollutants. These performance data are posted on Holcim’s website and published in its annual report every two years (http://www.holcim.com...).
As well as emissions, cement plants have direct physical impacts through quarrying and plant construction. Holcim has been working with IUCN to develop a Biodiversity Management System (BMS) that encompasses the entire site lifecycle and identifies risks and opportunities for biodiversity at its extraction sites. This will include the preparation of a Biodiversity Action Plan (BAP) where needed. Guidelines for developing the BMS and BAP were produced by an independent panel of experts.
But good performance by international companies isn’t enough. We also need to improve the performance of state-owned enterprises, which are typically inefficient operators with very poor environmental performance, particularly for waste water management. They have not been inclined to invest in pollution control. Many of the worst polluters in the country are in fact owned by government. This makes reforming these companies difficult because government faces a conflict of interest between its role as owner and regulator. This conflict is particularly acute at the provincial level where political leaders, responding to centrally set economic targets, are reluctant to enforce regulations that might increase costs or result in job loses.
Because of this conflict of interest, international and state-owned companies do not operate on an even playing field. This is problematic for international companies, which are competing against companies that can cut costs by not investing in (or as is sometimes the case installing but not operating) modern technology. It also represents a huge lost opportunity for Vietnam, which should be taking advantage of international companies to leverage improved environmental performance in the state-owned sector by providing incentives and regulations that encourage efficiency and innovation.
What should the government do to create a more level playing field? The most important task is to strengthen the capacity of the Departments of Natural Resources and Environment (DONREs), which are responsible for enforcing environmental regulations at the provincial level, and give them the political backing they need to do their job. This means addressing the fact that they report to the provincial people’s committees, which prioritize economic growth over environmental protection. Generally speaking, Vietnam’s environmental laws and regulations are adequate. If Vietnam is to take full advantage of the “race to the top” that international companies can inspire, it needs to focus attention on the implementation of these laws and regulations.