Concept
Green finance can be understood in its simplest form as a set of strategies and methods to achieve or mobilize and allocate funds (both private and public, as well as charitable contributions) to narrow the large investment gap in creating and maintaining new, climate-adaptive, and sustainable infrastructure. This will help countries address many social challenges, fulfill their climate action commitments, and contribute appropriately to the Paris Agreement, achieving the United Nations' seventeen sustainable development goals for the current decade from 2021 to 2030 (Nawaz et al., 2021).
Terminology related to green financial mechanisms
- Carbon finance: Financial instruments based on the economic value of carbon emissions that an organization cannot avoid but compensates for by funding projects elsewhere that contribute to carbon emission reduction.
- Green bonds: The proceeds are used solely to finance or refinance projects with clear environmental benefits.
- Green funds: Debt financing and equity provided to customers provide a foundation for long-term financing for environmentally friendly businesses and organizations.
- Green credit: Project loans (mainly mortgages) and industrial loans can be conditioned through green deposits.
- Climate finance: Finance that enhances the climate resilience of infrastructure, as well as social and economic assets.
Please note that the translation might not be perfect, as some terms might have nuanced meanings that are challenging to capture in a single translation.
The status of green finance in Vietnam
The Environmental Protection Law of 2020, effective from January 1, 2022, introduced numerous groundbreaking policies related to environmental criteria for investment projects, environmental permits, circular economy, and more, aimed at enhancing legal compliance in environmental protection. The law regulates the activities of banks in terms of sustainability and assigns environmental responsibilities to these institutions. It specifies 7 types of green finance and 10 types of green bonds in Articles 149 and 150, allowing credit organizations to promote new products, access new sectors, and tap into new funding sources at lower costs. Additionally, these instruments serve as lending tools for banks with the purpose of environmental protection.
Furthermore, to address issues of green growth, climate change, and sustainability, the Government of Vietnam has issued various documents, such as:
- Vietnam's Green Growth Strategy until 2020 (Decision No. 1393/QD-TTg, September 2012).
- Action Plan for Implementing the Paris Agreement (Decision No. 2053/QD-TTg, October 2016).
- National Action Plan for the Implementation of the 2030 Agenda for Sustainable Development (Decision No. 622/QD-TTg, May 2017) issued by the Prime Minister (Vietnam Trade Promotion Agency, 2022).
Figure: Green credit outstanding balance in Vietnam in the period of 2015 - 2022
Source: State Bank of Vietnam
During the period from 2015 to 2022, the outstanding balance of green credit increased. However, the proportion of green credit in the total credit outstanding in the economy remained modest.
International capital sources with lower interest rates, prioritized disbursement, and the allure of green credit have become attractive. Currently, an increasing number of banks are offering green loan packages. By the end of 2022, the outstanding balance of credit provided for 12 green projects established by the State Bank of Vietnam since 2015 reached nearly 500,000 billion VND (accounting for about 4.2% of the total credit outstanding in the economy).
At present, Vietnam has established basic regulations regarding green bonds. However, the legal framework still requires further refinement. In July 2022, EVNFinance became the first enterprise in the Vietnamese market to issue green bonds according to the international standards set by the International Capital Market Association (ICMA). Within the ASEAN region, Vietnam is the second-largest issuer of green bonds, reaching 1 billion USD, only behind Singapore.
Green finance in Vietnam is primarily focused on large credit institutions. There aren't many small credit organizations showing interest in this lending portfolio. The reason is that the long-term and substantial funding required for projects like renewable energy and clean energy isn't uniformly stable among small credit institutions. Additionally, large and complex projects demanding intricate assurance processes have yet to be implemented by smaller banks. According to Trung Nguyen (2023), credit institutions have actively sought opportunities to collaborate with various international organizations to implement green credit programs, such as the Low-Carbon Transition Project in energy-saving (GIF Project), the World Bank-funded Renewable Energy Development Project (REDP), the effective energy lending project for Vietnam's industries (World Bank-funded), and the refinancing of renewable energy projects through loans from the Japan International Cooperation Agency (JICA)...
On July 18, 2022, the Ho Chi Minh City Stock Exchange (HSX) announced the VNSI basket index (Vietnam Sustainability Index), comprising 20 stocks from the VN100 that exhibit the best sustainable development on the market. This indicates the potential for developing a green stock market in Vietnam in the future. With the trend toward sustainability, large investment funds prioritize investing in projects aligned with ESG (Environmental, Social, and Governance) goals. Hence, enterprises included in the VNSI index have greater opportunities to access significant foreign capital flows for sustainable development.
At the 26th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26), the Prime Minister committed Vietnam to achieving net-zero emissions by 2050. Consequently, developing green finance is an essential goal for Vietnam's efforts to reach this target.
Conclusion and Recommendations
The study has provided an overview of the concepts related to green finance, the current situation in the ASEAN region, and specifically in Vietnam. The global trend of green finance is growing, despite the challenges that need to be addressed for its development. The financial gap in green investment is a result of inconsistencies in financial policies and the environment. Therefore, appropriate policies and regulations are needed to address specific issues.
In order to promote the development of green finance in Vietnam, the following solutions are proposed:
Firstly, the Government should play a more significant role by implementing appropriate environmental policies that are mandatory for the financial sector. This will contribute to making the financial market more sustainable.
Secondly, diversify the channels of green finance and stabilize the infrastructure to facilitate financial transactions. With the applications of information technology, it is crucial to modernize transaction processes and establish transaction mechanisms that align with international standards.
Thirdly, enhances information transparency and minimizes information asymmetry in the financial market. This will attract the participation of various financial institutions, especially international investors, and increase the liquidity of green financial investment channels. Developing electronic bond trading platforms, as chosen by many countries, can improve liquidity, transparency, and market management.
Lastly, corporate financial reports should be transformed to incorporate Corporate Social Responsibility (CSR) information. Furthermore, promote environmentally friendly production technologies and disclose information about carbon emissions in their reports.
By implementing these recommendations, Vietnam can foster the growth of green finance and contribute to both its own sustainable development and the global efforts to address environmental challenges.
Source: Vietnam Trade and Industry Review