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Friday, July 1, 2022

Green bonds need support

By Luu Minh Sang (*)

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Green bonds are an effective channel for projects aimed at protecting the environment, combating climate change and rendering production as eco-friendly to obtain finance. Unfortunately, Vietnam has not yet taken advantage of this opportunity.

A global trend

Green bonds are debt securities used to raise capital for environmental protection activities and solutions to tackle climate change. Thus, the key difference between green bonds and ordinary bonds is the purpose of mobilised capital.

Green bonds may be issued by the central and local governments or businesses to raise funds for eco-friendly projects in various fields. This is also an effective tool to encourage investors to step up funding for a low-carbon economy to protect the environment.

Green bonds have become a global trend and have been gradually “taking root” in the financial systems of many countries. The cumulative issuance value of the global bond market (since 2007) reached the US$1 trillion milestone in 2020, according to the International Finance Corporation (IFC).

The healthy growth in emerging markets is noteworthy. Green bonds are present in 43 emerging economies with a total issuance value of US$226.4 billion in 2012-2020, as per data from IFC. China, as the nation with the third largest volume of green bonds globally (after the U.S. and France), leads the group of emerging markets.

In ASEAN, green bonds worth US$3.8 billion were launched in 2020, up 8.6% from 2019, mostly by renewable energy companies based in Indonesia, Malaysia, the Philippines and Thailand (1).

Green bonds are also an investment channel favored by international financial institutions and the community of international investors. This is partly because investment associated with social responsibility is gradually becoming a standard in international investment activities.

Major financial institutions such as the World Bank, the IFC, multinational banks, and international investment funds have all shaped clear policies on financing green growth targets.

During the United Nations Climate Change Conference 2021 (COP 26), the Glasgow Financial Alliance for Net Zero (GFANZ) (2) arrived at an important agreement on the committed conversion of their loan and investment portfolios toward the goal of net-zero by 2050, i.e. the opportunity to attract investment capital via green bonds or climate change financial instruments from the community of institutional investors around the world is marvelous.

The early steps

Since the 2010s, our country has been paying due attention to green growth, as seen in the release of the Green Growth Strategy for 2011-2020, with a vision to 2050. At COP 26, Vietnam pledged to develop and adopt more drastic measures to reduce greenhouse gas emissions to achieve net-zero emissions by 2050.

However, to fulfill this pledge, Vietnam needs an excellent source of investment capital to serve the process of economic transformation in most areas. Up to US$30 billion is required, according to calculations of the German Corporation for International Cooperation (GIZ) and the Ministry of Planning and Investment. Meanwhile, the reciprocal funding from the central budget is limited, at most only some 30%, meaning the remaining 70% must come from capital mobilization channels. Therefore, green bonds should be considered a tool to pave the way and open up a source of capital for the green growth strategy.

Vietnam is seen as a country with great potential in the development of green bonds, with a score of four out of five, according to the Sustainable Banking Network. Along with the Government’s strong commitment and a clear-cut strategy for green growth and sustainable development, Vietnam is facing a golden opportunity to build and develop a green financial market, with green bonds able to attract investment resources, especially from the green capital flow in line with the global commitments made at COP 26.

For green bonds, the institution and legal framework seems to have taken a step ahead. At present, the system of regulations on green bonds has basically taken shape in the Law on Environmental Protection 2020, Decree 08/2022/ND-CP and Decree 153/2020/ND-CP. The basic legal issues for the sale and management of green bonds have been brought forward in reference to international green bond standards, with the support and advice of international organizations such as the Climate Bonds Initiative or the IFC.

Also, the State Securities Commission of Vietnam has coordinated with some other units to publish the handbook on “How to Issue Guide for Green Bonds, Social Bonds and Sustainability Bonds” to improve the awareness of the relevant parties and assist them in each step of bond issuance.

Obstacles

That said, according to Fiin Group, the scale of green bond issuance in Vietnam was a mere US$284 million with four batches as of early 2021, including one launched by a government-guaranteed organization (US$23.4 million), one by a municipal government (US$3.6 million) and two green loans (US$71 million and US$186 million, respectively). In addition, BIM Land Joint Stock Company last year successfully sold US$200 million worth of international green bonds, as per a report by VCBS.

Statistically, the green bond market in Vietnam is in the early stages of formation and remains relatively modest compared to other countries in the region. Information and knowledge about green bonds have not been widely disseminated among the business community and investors.

The business and investment culture associated with social responsibility or the goal of protecting the environment and responding to climate change has not yet been formed. In general, listed companies have not taken the initiative to incorporate environmental, social and governance (ESG) factors into their business orientation and corporate governance.

Sustainable development reports are still not public and transparent. In other words, the awareness of sustainable development among the business community and investors remains limited.

Moreover, the infrastructure system serving the ecosystem of the green bond market has not fully developed. The number of truly experienced consultants and issuers of a “green” certification according to international standards leaves much to be desired. The level of information transparency has not been improved, entailing a potential risk of one taking advantage of green bonds just to boost their image, instead of actually acting for the sake of the environment (a phenomenon known as greenwashing).

A few suggestions

The formation and development of the green bond market cannot be separated from the corporate bond market, especially the financial market. Therefore, in the strategy for restructuring the financial market, it is necessary to create space for green bonds and green finance.

In the early stages of the market, preferential policies and support are needed to lay the foundation. The State should have coherent preferential policies for issuers and bondholders. The introduction of policies in favor of green and sustainable financial standards, data and reports will encourage more investors from the private sector to get involved, according to the IFC.

From the experience of India, tax incentives are probably another effective solution to promote the sale and purchase of green bonds.

Meanwhile, in Singapore, the market regulator once implemented the Green Bond Grant Scheme to help green bond issuers with the costs of appraising the plan for issuance. The program took place for three years from 2017 to 2020, during which enterprises participating in the issuance of green bonds were encouraged to undergo assessment in accordance with international green bond standards developed by an independent unit. All costs would be covered by the State once the green bond issuance plan was completed. This is considered the most remarkable move from a market governing body to promote the development of green bonds, which is also a good practice Vietnam may learn from.

(*) University of Economics and Law, Vietnam National University, HCMC

(1) See also: https://www.ifc.org/wps/wcm/connect/0fab2dcd-25c9-48cd-b9a8-d6cc4901066e/2021.04+-+Emerging+Market+Green+Bonds+Report+2020+-+ EN.pdf?MOD=AJPERES&CVID=nBW.6AT

(2) This alliance brings together 450 organizations, financial institutions and banks whose combined assets are worth up to VND130 trillion, equivalent to 40% of the total global financial assets.

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