Research indicates that achieving net-zero emissions will require an annual investment of over $3 trillion globally from now until the end of 2025. Emerging markets and developing economies (EMDEs) will play a critical role in the global transition to a sustainable, net zero future but face significant funding gaps. Green bonds represent a promising avenue for directing capital towards sustainable projects, although effective implementation requires stringent guidelines. Despite a growth in labelled bond issuances, EMDEs (excluding China) still hold a relatively small share of the global market compared to developed economies, underscoring significant untapped potential. Challenges persist in expanding the labelled bond market in EMDEs, with lessons from developed economies not always directly applicable due to differences in local contexts, including types of issuers, industries and market maturity levels.
Labelled bonds can be classified into two categories – first, use of proceeds bonds, which require the raised capital to be used only for specific and pre-defined projects, and, second, impact bonds that are tied to specific environmental, social and governance targets, although their proceeds can be used by the issuer for any purpose. In terms of cumulative issuance, the labelled bond market is dominated by green bonds, and although the other types of bonds are slowly gaining traction, in 2022, green bonds still accounted for 57 per cent of new issuance values globally. To support and scale a functioning labelled bond market in EMDEs, three critical elements must align: an enabling market environment, priorities of issuers and expectations of investors.
Current status of labelled bonds in Vietnam
The first labelled bonds in Vietnam were green bonds issued in 2016 by local government entities in Ho Chi Minh City and Ba Ria-Vung Tau provinces. Although Vietnam was among the first ASEAN countries to issue such labelled bonds (the Asian Development Bank, located in the Philippines, issued the first in 2010, and Ihsan Sukuk Bhd in Malaysia in 2015), it was not until 2020 that the labelled bond market in Vietnam really started to experience some momentum and a peak of 11 issuances was reached in 2021. Despite the recent uptake, Vietnam still has significant potential to expand its labelled bond market, especially when compared to other ASEAN countries.
Some recent key milestone issuances include the VND 1,725 billion (Vietnamese dollars) (approximately $75 million) green bond issued in June 2022 by EVNFinance, a domestic financial services company. This partially guaranteed (by GuarantCo) bond was the first internationally certified bond in the local currency. It adheres to both the ICMA’s Green Bond Principle 2021 as well as the ASEAN Green Bond Standards. EVNFinance was supported by GuarantCo, who partnered with the Global Green Growth Institute (GGGI) to assist in structuring and verifying this bond. This support was part of GGGI’s Vietnam Green Bond Readiness Programme, funded by the Ministry of Finance, the Government of Vietnam and the Government of Luxembourg.
The first senior, fully unsecured and unguaranteed green bond was then issued a year later in October 2023 by the Bank for Investment and Development of Vietnam (BIDV). This issuance (VND 2,500 billion, approximately $100 million) also adheres to ICMA Green Bond Principles. BIDV primarily received international backing, with the World Bank and the International Finance Corporation (IFC) providing technical and financial support through their Joint Capital Market Development Program (J-CAP). Finally, a third noteworthy issuance was the first local SLBs issued in August 2023 by the BIM Land Group, a leading Vietnamese tourism and property developer. IFC also supported this issuance by helping develop the sustainability-linked financing framework and tailor-made sustainability performance targets, and investing up to $150 million in the bonds.
Solutions not yet developed or implemented
Investment mandates: Although several governmental directives and decisions have promoted green credit and banking growth, no specific investment mandates had been implemented for local investors until March 2024. On the contrary, in 2022, the Law on Insurance Business was amended to introduce restrictions preventing insurance companies from investing in bonds used to refinance debt. Labelled bond issuances that are issued for the refinancing of sustainable projects are likely to be negatively impacted by such a regulation.
Capital requirements: No specific capital requirements relating to environmental or social risks have been incorporated yet in the Vietnamese banking sector.
Tax incentives: While certain tax incentives exist for income from producing renewable energy, no specific tax incentives have been implemented to finance such projects using labelled bonds. There are also no tax incentives for investments in such bonds.
Levels of “greenness”: So far, no specific levels of greenness have been developed in Vietnam or globally. The only perceived differences in the quality of bonds can be determined by their approved alignment to specific standards and certifications. However, uncertainty exists around such alignments, depending on different providers that check for such alignments.
Solutions partially developed or partially implemented
Close alignment with investors: In Vietnam, while issuers of larger financial offerings have generally worked closely with investors, this collaboration has primarily involved multilateral development banks. Thus, issuers should still work on getting closer to and aligning early with local investors.
Organisational preparedness: Vietnam has seen a strong ESG momentum, with many businesses incorporating ESG into their strategy and making, or planning to make, ESG commitments. However, experts think that issuers can do even more and will need to develop clear road maps and plans that state specific objectives and benefits and actively incorporate green bonds as part of their long-term ESG journey.
Early engagement: While some international investors (e.g. IFC) have been actively involved in local issuances of labelled bonds, less specific engagement from local investors has been identified. Accordingly, this measure still holds relevant potential in the Vietnam context.
Increased returns: Although Vietnam had previously implemented feed-in tariffs for renewable energy, these have been discontinued. This could introduce uncertainty that is not desirable for developing the labelled bond market. On the other hand, a carbon pricing mechanism is being implemented, and a pilot carbon trading platform is expected to launch in 2025. While this is a start, the effectiveness of such an emission trading scheme will depend largely on how well it is implemented, and clearly, there is significant additional potential for further measures aimed at increasing labelled bond returns.
Issuance grant scheme: So far, only some small financial benefits, like the 50 per cent reduction of certain service fees for the public issuance applied in stock exchanges and the Vietnam Securities Depository, have been proposed. Further, issuers deciding to issue a bond in the Singapore market can benefit from the grant scheme implemented there by the Ministry of Finance in Singapore. However, a similar scheme has not yet been implemented in Vietnam.
Credit rating: Some ESG elements have already been taken into consideration by credit rating institutes globally. For example, S&P takes ESG credit factors into account for credit rating analysis; however, this is done only when these are very clearly identifiable and material to the ability to pay. Accordingly, there is still considerable room to extend such risk considerations beyond the easiest quantifiable risks.
Post-issuance requirements: While post-issuance requirements are captured in the respective standards, additional measures could be taken to reduce uncertainty for issuers around future changes. This also includes clear penalty regulations in case of non-adherence.
Solutions fully developed with multiple elements implemented
Knowledge sharing: Several local knowledge sharing initiatives have previously been implemented. These include a handbook co-authored by the Climate Bonds Initiative (CBI) and the State Securities Commission of Vietnam, as well as roundtable conferences and forums organised by local entities. However, there is still considerable scope for knowledge-sharing, especially in learning from prior deals, as this has been insufficient so far.
Transition plans: A detailed Vietnam energy transition plan was published at the UN Climate Change Conference at the end of 2023 (COP28). A total spending of $15.5 billion is expected for this transition.
Direct issuance support: Several international institutions have previously been involved in direct issuance support in Vietnam. This includes the IFC/World Bank, ADB or GGGI. Ideally this support will continue, including for smaller issuances.
Educational support: Many international programmes that offer educational support for the labelled bond market in Vietnam are ongoing. With a vast offering, keeping a good overview and choosing which support scheme to use might be difficult.
Note: This is an extract from a recent paper titled “Labelled Bonds for the Net-Zero Transition in South-East Asia: The Way Forward” by the World Economic Forum. In this extract, we specifically focus on Vietnam’s case study.
