How Vietnam’s finance sector is critical in enabling the sustainability pathway

Funding and supporting the transition to a green economy will require major changes for banks, insurers and asset managers.

At COP26, Vietnam made clear its determination to respond to climate change, committing to a 2050 net-zero carbon emissions target. As one of Asia’s most carbon-intensive economies, Vietnam is under pressure to rapidly transition out of high-carbon activities, including transitioning to a low-carbon energy system.

This is particularly critical given the country’s economic dependence on foreign investment from export-linked manufacturing industries. As brands seek to build carbon-neutral supply chains, Vietnam must be able to offer global manufacturers green energy. Its exposure to western investors and consumer markets makes this non negotiable.

Some early signs suggest the country is heading in the right direction. Lego’s choice of Vietnam for its first ever carbon neutral factory is a vote of confidence in the country’s ability to deliver. The success of the factory, a USD 1 billion greenfield investment, will be watched carefully by other multinationals urgently moving to green manufacturing.

But if Vietnam is to rise up as the leading factory of the world, it must get right two critical aspects:

1. A rapid pathway to green energy adoption – In the two years to 2021, Vietnam delivered an impressive 100-fold increase in solar power. However, clean energy advocates see its proposed update of the PDP8 power development policy, which proposes to raise coal-fired capacity, as a backward step.1
   
2. A sound green finance framework for bankable projects – The Vietnamese government has made some progress toward sustainable finance regulation. In 2018, the regulator set two 2025 targets, the setting up of: an environmental and social (E&S) management system in all financial institutions, and banking measures to integrate environmental and social risk assessment into credit risk assessment. In April 2021, the State Securities Commission, in collaboration with the International Finance Corporation, introduced a handbook on “How-to Issue Guide for Green Bonds, Social Bonds and Sustainability Bonds” to raise private sector finance for projects with environmental and social Benefits.2 The State Bank of Vietnam (SBV) has also set out general action plans for green credit growth and developing green banks in the Country.3 However, more detail is required to give local institutions and international lenders certainty about the direction of Vietnam’s green financing portfolio.
   

There’s no doubt that, if Vietnam is to achieve its ambitious decarbonization path, its finance sector will play a significant role in providing climate finance and institutions must also go on their own carbon transition journey.

To date, domestic banks have been the main source of finance for solar and wind power projects, accounting for $3.6 billion in investments between 2018 and 2020.4 Over the next 10 years, the United Nations Development Programme estimates that continued expansion of solar and offshore wind, and the development of regional micro-grids and utility-scale battery storage, will require a further $33 billion.5

According to EY NextWave Global Consumer Banking Survey, Vietnam’s local institutions are the country’s most trusted financial services brands. Consumers will expect the institutions they trust to step up and help support Vietnam’s transition to a green economy.

Develop transition finance tools

In the next 12 months, we expect new finance instruments designed to accelerate climate transition to emerge at pace. Rather than waiting for detailed guidance around asset reallocation, institutions should forge ahead and get ready for the green finance agenda that is certain to come.

Vietnam’s banks, insurers and asset managers will all face distinct concerns and differing practical challenges when it comes to financing transitioning projects and companies, but for all of them there are some common themes. Designing a well-structured product or service that can best facilitate and incentivize the transition means thinking across the lifecycle of an investment or loan, or underwriting process to identify where these incentivizing drivers can be inserted.

Institutions will also need to uplift their governance, policies and procedures to comply with the sustainability requirements of international lenders, who may also require an external audit of these provisions before allocating green investment.

Prepare for ESG reporting

The SBV is yet to set a clear target on green credit performance for each bank, but it is only a matter of time before consumer or regulatory pressure require disclosure of this and other environmental, social and governance (ESG) metrics.

Emerging practices include:

• Non-financial value – Increasingly, corporate and financial reporting will be required to consider the non-financial value an institution creates for its stakeholders and how it measures that value.
• Integrated reporting – As regulations push institutions to consider the non-financial risk implications on enterprise value and future revenue flows, some are starting to produce integrated sustainability and financial reporting. Eventually, we expect to see climate change featured directly in financial statements.
• Assurance – Around the region, ahead of regulatory mandates, we are seeing a significant jump in institutions using sustainability reporting assurance. There are currently no assurance requirements for sustainability information. This is happening in anticipation of future compliance requirements and also to differentiate reporting to investors.

Begin portfolio transition

To play their own part in decarbonization, institutions will also need to assess the transition potential of their portfolios, with a view to understanding:

• Which sectors are already transitioning due to sector-wide emissions reductions targets set by government, policy and regulators?
• Which businesses have transition plans in place?
• Which businesses will require further support to reach a credible transition pathway?

This information will help institutions to pursue an active transition strategy for their own portfolios, choosing to focus on clients and counterparties who are already committed to decarbonization and have transition plans in place, supporting those who need assistance with transition and divesting from companies that are unable or unwilling to transition at pace.

Move early. Get ahead.

Vietnam’s legal framework has yet to catch up with its carbon ambitions or the demands of its foreign investors for green energy. But it is only a matter of time before it does. Financial institutions can get out in front of rivals by putting in place the foundations required to participate in the US$50 trillion investment opportunity afforded by the transition to an environmentally stable global economy.6