How to speed up sustainable finance

Nam A Bank signed an agreement with the Global Climate Cooperation Fund to deploy the Green Credit program to provide medium and long-term credit for projects to promote CO2 reduction.

Vietnam receives the most FDI in ASEAN as measured by the percentage of GDP. Given the increasing focus of global companies on ESG and sustainability, they are demanding more and better quality sustainable resources in the countries where they operate.

In particular, Vietnam has seen the highest level of investment in renewable energy across ASEAN and offers the best potential for renewable capacity addition across ASEAN, with foreign investments driving growth.

The SBV has been actively developing many initiatives to support green finance flows. In October, SBV started to ask financial institutions to comment on the Draft Circular which will serve as a guideline for the banking sector to set up and run an environmental and social risk management system in credit activities. The Circular will take effect from 1 Jan 2022 and require all banks to submit their internal regulation on E&S management to SBV, which could lay out a framework for green finance in Vietnam officially. By 2025, SBV plans to have at least 10-12 banks establish specialized units or departments for environmental and social risk management while 60% of banks have access to green capital and provide loans for green credit projects. SBV strongly encourages banks to develop green financing strategies independently or integrate such strategies into their annual business development plans.

This has been a crucial move to further promote Vietnam’s sustainable finance agenda. According to a survey by IFC & SBV, few Vietnamese banks have a formal policy, procedures, or system to manage the environmental and social risks faced by their clients. One of the key constraints hindering the banks is the lack of specific guidelines on identifying and managing environmental and social risks in project financing.

From our observation, there’re some more challenges for the market to overcome in the next few years, including the shortage of expertise and skill gaps, the lack of consistent market standard of “green” and taxonomy, the absence of strong and measurable commitment from major market players, the maturity mismatch between the long tenor of financing demand & short tenor of funding sources, and the lack of transparent ESG data.

Some actions we suggest SBV consider:

First, setting a clear requirement for each credit instrument so that banks can develop better green credit frameworks and progress plans for themselves.

Second, building a clear framework for capital market instruments. State Securities Commission of Vietnam’s handbook to guide the issuance of green bonds is not yet a regulation.

Third, setting clear targets on green credit performance for each bank, for example, outstanding green loan balances as a percentage of the total book.

Fourth, considering a higher credit growth cap towards green sectors or financial subsidies for green credits. Restrictions and/or caps on certain carbon-intensive industries/sectors over a certain timeframe.

Sixth, more rewards to motivate banks on their green journeys including higher general credit growth caps for those banks that comply with or overachieve their target. Lower growth cap for those that do not as a disincentive could be an option to put into consideration.

Seventh, no or lower Required Reserve Ratios for green loan outstandings.

Eighth, introducing climate risk stress testing of banking books, which could potentially lead to different capital requirement outcomes depending on the proportion of green lending that they undertake.

Ninth, introducing environmental disclosures into financial reporting to increase accountability of banks, and visibility to key stakeholders on how this financial risk is being managed.

Tenth, setting up a thought leadership forum that brings the public and private sectors together to collaborate towards effective green financing and climate change framework for Vietnam.