Green financing involves directing financial resources towards environmentally sustainable projects. This mechanism has evolved alongside increasing awareness of environmental and climate issues. Though the origins go back to the 1990s with investment products focused on sustainability, it was the Kyoto Protocol that underscored the need for financing mechanisms to cut greenhouse gases, paving the way for the European Investment Bank (EIB) issuing the first Climate Awareness Bond in 2007. The Paris Agreement in 2015 further strengthened climate commitments, leading to growth in green bonds with institutions developing green loans, exchange-traded funds (ETFs) and indices. In recent years, green financing has become mainstream, with environmental, social and governance (ESG) criteria integrated into investments. Overall, green financing has shifted from niche initiatives to now being a major part of global financial markets, driven by the need to tackle environmental challenges and move towards a low-carbon economy.

Regulatory framework and select challenges for green finance in Vietnam

Vietnam’s regulatory framework for green finance is evolving positively, supported by government commitment and international collaboration, aiming to integrate green credit into the banking sector and promote sustainable economic growth. Key initiatives include the prime minister’s strategies to increase green credit to 10 per cent of total loans by 2025 and up to 25 per cent by 2030, alongside guidance from the State Securities Commission and the State Bank of Vietnam for green bonds and environmental risk management.

Despite these efforts, the country still faces challenges in defining what “green” truly means within its financial strategies. Risking ambiguities in defining “green projects”, not only hampers the effective implementation of green finance initiatives but also undermines investor confidence, which is crucial for attracting necessary capital. The lack of a comprehensive regulatory framework and standardised guidelines for green projects remains a significant barrier. Moreover, the absence of a clear green taxonomy and inconsistent ESG reporting can lead to greenwashing, ultimately undermining the credibility of green finance.

Vietnam’s struggle with accessing green finance is further complicated by its ongoing debate over Development for Finance or Finance for Development. On the one hand, the country aims to leverage financial tools to accelerate its development goals. On the other hand, there is a pressing need to ensure that financial growth does not come at the expense of environmental degradation. This dichotomy is particularly pronounced given Vietnam’s status as a developing nation, where immediate economic needs may often overshadow long-term sustainability concerns.

Limited awareness and technical knowledge among local businesses and financial institutions also hinders the adoption of green finance.

The need for clear definitions and strategic prioritisation is crucial to balance economic development with environmental sustainability, especially with Vietnam navigating the tension between immediate economic growth and long-term sustainability goals. To fully capitalise on its green finance potential, it must now enhance institutional capabilities and establish a clear taxonomy for sustainable activities.

Financial instruments

Margin-linked instruments focus on ESG categories with the adjustment of the margin or coupon rate based on the borrower’s ESG performance, aiming to incentivise improved sustainability practices.These instruments are underwritten to the borrower with specific targets set using internal metrics or external ESG ratings.

Vietnam employs a variety of financial instruments to support sustainable investments. Green bonds have become a popular tool for funding climate change projects, with participation from both the private and public sector. Green loans are another focus area, offering preferential rates for businesses with clear environmental benefits. The State Bank of Vietnam’s Green Credit Program encourages banks to provide low-interest loans for environmentally friendly projects, focusing on renewable energy, waste management and energy efficiency.

In Vietnam, as of March 31, 2024, green credit outstanding balance reached nearly VND 640,000 billion, accounting for 4.5 per cent of the total outstanding balance of the economy. These funds were primarily concentrated in renewable energy, clean energy (nearly 45 per cent) and green agriculture (over 30 per cent). Outstanding credit loans assessed for environmental and social risks by the credit institutional system have grown steadily over the years, now reaching about VND 2.9 quadrillion ($113.9 billion), making up more than 21 per cent of the total outstanding loans of the economy.

Compared to other markets, the spectrum of green and sustainable finance products and services in Vietnam is still at an early stage and use of green financial products such as social bonds, blue bonds, gender bonds, sovereign green bonds, etc. are yet to find a space in Vietnam’s green finance landscape.

Theory in practice and use cases

Vietcombank, one of Vietnam’s leading commercial banks, issued its first green bond in 2020, raising VND 3,000 billion (around $130 million) to finance projects in renewable energy and sustainable agriculture. As the country grapples with the impacts of climate change, such as rising sea levels and extreme weather events, green finance has become a crucial tool in supporting Vietnam’s transition to a low-carbon, climate-resilient economy.

Several notable projects highlight Vietnam’s progress in green finance. The Trung Nam Solar Power Project in Ninh Thuan province, one of Southeast Asia’s largest solar farms, exemplifies the potential of green finance in supporting large-scale renewable energy projects. The project, with a total installed capacity of 204 MW, received funding through a combination of equity and green loans, supported by the Vietnam Development Bank and the Green Climate Fund.

Another significant development is the issuance of green bonds by Vietnam Electricity (EVN) in 2021, raising $500 million to fund renewable energy projects and infrastructure upgrades.

Opportunities for green finance in Vietnam

Making “power surge” a test bed for Vietnam’s green finance revolution

The opportunities for growth in Vietnam’s green finance market are vast.Vietnam’s energy sector is at a crossroads with the current dependency on coal and other nonrenewable sources. The country’s carbon emissions are a growing concern; however, the Power Development Plan 8 aims for a pivotal shift to renewable sources. The country’s commitment to reducing carbon emissions and promoting renewable energy, backed by favourable government policies, creates a conducive environment for the deployment of green finance.

Green finance emerges as a pivotal enabler in this energy transition

By attracting investments specifically earmarked for environmentally sustainable projects, green finance can facilitate the development of renewable energy infrastructure, such as solar, wind and hydroelectric power. The deployment of financial products like green bonds, concessional loans and grants can bridge the funding gap in the energy sector, accelerating Vietnam’s shift towards a sustainable energy economy.

State-owned enterprises (SOEs) as accelerators for green finance

SOEs dominate Vietnam’s energy landscape, making them essential players in the country’s green transition. More recently, they have been tasked to drive the mega projects in Vietnam’s energy transition, in particular offshore wind and other emerging technologies. Herein lies the opportunity for green finance to make a significant impact. By channelling green finance through SOEs, Vietnam can ensure that these enterprises have the resources and incentives to adopt clean technologies and improve energy efficiency.

  • Scale and reach: SOEs, given their size and influence, have the capacity to implement large-scale renewable energy projects that private players may find challenging. Green finance can empower SOEs to undertake transformative projects with far-reaching impacts.
  • Risk mitigation: Financial products such as credit enhancements can reduce investment risks associated with large infrastructure projects, making it easier for SOEs to attract both domestic and international investors.
  • Regulatory leverage: As government-affiliated entities, SOEs are well positioned to lead the implementation of national energy policies. By aligning green finance initiatives with governmental objectives, SOEs can act as catalysts for policy-driven energy transitions.
  • Innovation and modernisation: Access to green finance can enable SOEs to invest in research and development, fostering innovation in renewable technologies and energy efficiency solutions.

Green financial products to the rescue of SOEs for energy transition in Vietnam

Vietnam, and SOEs in particular, needs a comprehensive approach to financing the energy transition, leveraging a mix of traditional and innovative financing sources. A careful balance/syndication between multiple sources of financing may be required such as finance from development financial institutions (DFIs), commercial bank loans, climate finance and corporate bonds in meeting the substantial investment requirements. All of this would require careful consideration of regulatory factors, borrowing limits and the potential impact of different financing scenarios on transition costs. By exploring a diverse range of financing options, SOEs can effectively navigate the challenges and opportunities associated with their energy transition goals.

Overall, by leveraging green finance, particularly through SOEs as accelerators for green finance, Vietnam can forge a sustainable path forward. This approach aligns with the country’s economic goals while ensuring that its energy consumption remains environmentally responsible. With the right mix of financial products and strategic focus, combined with a careful evaluation on restrictions under the regulatory framework (such as single borrowing limits, use of proceeds, channelling of official development assistance, etc.), cost of funds and its impact on the end services/service tariffs and development orientation towards clean greener businesses, SOEs could possibly accelerate Vietnam’s green finance revolution and set the tone for a brighter, cleaner future. Of course, several other policy actions and reforms would need to be in place for any of this to take off.

The road ahead

Vietnam’s green finance market, though nascent compared to global markets, shows significant growth potential. To fully realise the potential of green finance, Vietnam needs to address the core challenges of regulatory gaps, data transparency and market liquidity. Developing a comprehensive green taxonomy, strengthening ESG data and reporting, and enhancing policy consistency will be crucial steps in this journey.

As Vietnam continues to build its green finance ecosystem, the involvement of international financial institutions and development banks will play a vital role. Their expertise and capital, and commitment to sustainable development can help bridge the funding gap and support Vietnam’s ambitious climate targets. While Vietnam’s green finance sector is still in its initial stages, the country’s strong renewable energy resources, manufacturing capability and government commitment, and rising interest from investors make it an attractive market for green finance. With continued development and international collaboration, Vietnam is well positioned to become a regional leader in green finance, paving the way for a sustainable future.

(Excerpts from the blog sourced from the official website of PwC.)