02/03/2021
Climate change with major impacts such as droughts, floods, sea level rise... has seriously affected the global socio-economy. Therefore, countries around the world have now paid more attention to environmental factors, set out the Green Growth orientation and developed a circular economy.
To implement Green Growth, countries need a large capital source to implement green projects for the environment, to fight against and adapt to climate change. According to the International Energy Agency (IEA), to halve global gas emissions by 2050, the world will need 46 trillion USD, equivalent to 1 trillion USD/year. To meet that demand, the “GBs (GBs)” initiative was established, becoming one of the new and effective channels to attract capital to mobilize hundreds of billions of USD for green economic development in the world.
Opportunities, potentials
Việt Nam is one of the countries having great opportunities to develop the GB market. These opportunities stem from both international environmental conditions and its own internal conditions. Along with that, investors, especially those interested in environmental issues, have great demand for GBs. The GB market started to open from 2007 to 2008 with 2 major issues, including: Europe Development Bank with a volume of 600 million USD; World Bank (WB) with a volume of 300 million USD. In 2019, about 250 billion USD of GBs were issued. However, to achieve the goal of financing climate change solutions, on a worldwide scale, we will need trillions of USD. Thus, compared with the volume of 100 trillion USD, this is still a relatively modest number. This shows the great potential and space of GBs. In general, international investors have great demand for GBs and have not been fully met, so the market is waiting for next issues.
Meanwhile, the green financial market is increasingly completing and thus increasing liquidity for green instruments. The milestone driving the global GB market to develop is 2014, with a strong growth (nearly 80% compared to 2013), since then, the average growth rate of the international GB market has always been approximately at 50%. If in the early time, development assistance organizations such as the WB or regional development banks were the main issuers with the aim of promoting the market, in recent years, large organizations, banks and governments have also participated in issuing GBs, boosting the strong growth of the GB market. In Southeast Asia alone, the GB market has been developing strongly in recent years. Singapore is the lead, followed by the Philippines and Indonesia. Besides, Malaysia and Thailand are also two countries on a strong growth momentum.
Việt Nam is also receiving strong attention and support from international organizations. In its commitment to nationally determined contributions (NDCs) under the Paris Agreement, by 2030, Việt Nam has committed to reducing its greenhouse gas emissions by 8% or perhaps 25% with international assistance compared to the Business as Usual scenario (BAU). Việt Nam is one of the 10 countries most affected by climate change, so we have received and are receiving great attention from international development assistance organizations. For example, the WB has just granted a green credit to Vietnam Prosperity Joint Stock Commercial Bank (VPBank) worth 212 million USD to finance green projects. Or recently, the Asian Development Bank (ADB) supported with the first green certified loan to Việt Nam worth 186 million USD for the 257 MW solar power plant project invested by Phú Yên TTP Company (Phú Yên Province).
In addition, the driving force for the rapid development of the GB market comes from the need for capital from the issuers and the commitments of investors for climate finance, as well as the dual benefits that it brings to investors, issuers and, even more, the whole society. The consequences of climate change have not only increased pressure on governments, but also increased production costs of the private sector. Meanwhile, the resources of governments are not sufficient for environmental restoration and dealing with energy threats, and resource scarcity. In Việt Nam, every year, the Government allocates about 6% of GDP to necessary infrastructure development, and to meet 100% of the need for infrastructure, an additional 605 billion USD is required. With its transition to a green economy, Việt Nam will need about 31 billion USD more by the end of this year and 21.2 billion USD in the next 10 years.
Thus, if only depending on the state budget, these investments will pose a long-term fiscal challenge for the government. Therefore, the companionship of the private sector with the government in the fight against climate change is extremely important. GBs are considered as an effective instrument to attract green investment flows in the economy, through the financial market. GBs both bring financial resources to countries implementing clean energy projects, minimizing impacts and adapting to climate change, while providing investors with high quality credit, return on investments with positive environmental benefits. Besides, green technology and green productivity are also a trend chosen by investors due to concerns about climate change risks and environmental issues.
Việt Nam is in the period of a forced green transition and also possesses a lot of potentials to develop green energy resources for that transition. Việt Nam has a fossil fuel-intensive economy, with nearly two-thirds of its energy supplied from coal, oil and gas. The increasing demand for energy in recent years has made the country a coal importer since 2015. However, Việt Nam is a potential country with abundant renewable energy sources, especially solar energy and wind energy. Excessive reliance on fossil fuels is threatening energy security as well as environmental issues related to climate change and environmental pollution. Research by international organizations shows that climate change can cost Việt Nam 15 billion USD/year, equivalent to 5% of GDP. All of these problems require Việt Nam to gradually replace fossil fuels with environmentally friendly energy sources. As such, the country needs to establish a green policy framework and create green financial instruments to mobilize funding for sustainable development, promote green energy and implement solutions to adapt and mitigate the impacts of climate change in Việt Nam.
Recognizing the significance of green growth, the Government has issued many guiding policy mechanisms to issue the green capital market in general and the green capital mobilization instrument in particular. At present, the legal framework of green finance in Việt Nam is quite complete, allowing different types of GBs, issued by the Government, local Governments, enterprises (including financial institutions).
Development status
Legal framework
The Prime Minister has issued the National Strategy on Green Growth and the National Action Plan on Green Growth. The Ministry of Finance also issued the Action Plan of the Finance sector to implement the National Strategy on Green Growth. By 2017, the Prime Minister has approved the Bond Market Development Roadmap for the 2017 -2020 period, with a vision towards 2030, which deals with green capital market development and capital mobilization for green projects through issuing GBs. This is considered an important legal basis for the GB market development in Việt Nam.
ADB has just supported with the first green certified loan to enter Việt Nam for a solar power plant project in Phú Yên Province
Corporate GBs, on 4th December 2018, the Government issued Decree No. 163/2018/ND-CP on issuance of corporate bonds. This is the first legal framework on corporate GBs, which stipulates the issuance of corporate GBs, including principles for issuing, using capital and disclosing information. The organization for issuing, registering, depositing, listing and trading corporate GBs is the same as that of ordinary corporate bonds. Next, on 9th July 2020, the Government issued Decree No. 81/2020/ND-CP amending Decree No. 163/2018/ND-CP, in which the new Decree stipulates that the issuers of corporate GBs must disclose information on the process of management and disbursement of capital issued from GBs and must have a report on the use of capital from the source of GBs, with opinions from review of the audit organization and the environmental impact report.
Local Government GBs, on 30th June 2018, the Prime Minister issued Decree No. 93/ND-CP, which stipulates that local governments can issue local government GBs and must comply with the same regulations as for ordinary local government bond issuance and the provincial People's Committees must report on the catalogue of projects using capital sources of green local Government bonds under the guidance of the Ministry of Finance.
Government GBs, the Government issued Decree No. 95/ND-CP on Government bonds, which stipulates that GBs are a type of Government bonds issued to invest in projects related to environmental protection activities in accordance the Law on Environmental Protection (green projects) and in the catalogue of projects with public investment capital allocation in accordance with the Law on Public Investment and the Law on State Budget.
In addition, the Government also assigned the Ministry of Finance, in coordination with the Ministry of Planning and Investment, the Ministry of Natural Resources and Environment to develop a Government GB issuance scheme to report to the Prime Minister for approval. If this scheme is approved, there will be 500 million USD of Government GBs expected to be issued in the near future.
Market
The GB market in Việt Nam is in the forming stage. Up to now, it has witnessed 2 issues of local Government GBs by 2 provinces and cities, which are Hồ Chí Minh City and Bà Rịa - Vũng Tàu. These issues are in the framework of the Scheme of pilot issuance of local government GBs of the Ministry of Finance. Accordingly, in 2016 - 2017, Hồ Chí Minh City issued 5,000 billion VND, a 15-year term for 34 projects related to sustainable water management and climate change adaptation, of which 17 green projects were approved based on the “Green project catalogue” of the State Bank, with a total amount of about 500 billion VND. In 2016, Bà Rịa - Vũng Tàu issued 500 billion VND, 5-year term, of which 80 billion was allocated to a green project related to sustainable water management. The success of these 2 pilot issues also showed positive signs in the market. However, the Government has only issued guiding and general development documents for the green capital market but there are still no specific legal documents to guide the GB market.
Currently, the Climate Bonds Initiative is also coordinating with IFC and the State Securities Commission of Việt Nam, under the funding of the Swedish Government, to study and release a manual to issue GBs with orientation towards corporate issuers that helps provide clear and detailed information about the GB issuance process and some experiences in GB issuance of some countries in the region.
Difficulties, challenges
Currently, the bond market of Việt Nam in general is not really developed. The economy still has a long-term challenge with the imbalance between the capital market and the currency market. By 2018, the credit system is estimated to still have to “carry” up to 86% of the capital supplied to the economy, while the bond has not yet performed its best role as a capital mobilization channel. Besides, the basic foundations for issuing GBs such as the size of the bond market are small (accounting for about 25% of GDP, corporate bonds only account for about 9% of GDP); organizations providing intermediary services such as credit rating agencies, independent evaluation organizations are few; the diversity of investors in the market is very limited, mainly commercial banks ... also significantly affects the development of the GB market.
On the other hand, there are still 3 challenges from important markets that affect the development of GBs in developing countries, which is the minimum scale issue, in which many small-scale projects do not satisfy major banks, financial institutions in the world; the currency issued, which is a non-convertible currency, leads to the possibility of issuing foreign currency bonds if a large volume is to be issued; Issuance costs are high, as issuers incur additional costs to obtain GB certification from an independent evaluation agencies, information disclosure and reporting activities on the distribution of proceeds from GBs throughout the project life cycle. Meanwhile, the Government and relevant ministries, agencies and sectors have not yet had a written regulation to create a mechanism for the development of the GB market, nor have a special incentive mechanism for GBs to attract issuers.
Recommendations to develop GB market in Việt Nam
For the Government, it is necessary to consistently implement solutions, bring green finance, especially GBs into the overall development strategy of the country in the direction of transforming to a low-carbon green economy model and being agreed to implement from central to local levels. In the early stage of developing the GB market, the Government needs to implement incentive measures to attract GBs for the economy.
The Government needs to cooperate with foreign organizations such as WB, United Nations Environment Program (UNEP), German Agency for International Cooperation (GIZ)... for advice and guidance in GB issuance and development in the market. These institutions’ knowledge and experience in developing green capital markets over the years will be useful for Việt Nam in the process of building and developing this type of financial asset. In particular, the Government needs more incentive policies to encourage GB issuers and attract investors interested in this type of asset. The State should offer tax, fee and other incentives for issuers, as well as domestic and foreign investors.
For the Ministry of Finance, the State Securities Commission and the finance sector need to soon complete the financial policy framework to develop the GB market and other green financial products for all social stakeholders in a practical, effective and broad manner. Also, efforts to attract social capital for green development are made through the GB market.
The Ministry of Finance and the State Securities Commission have specific guidance on 4 international standards on GB principles (GBPs) in Việt Nam.
The Ministry of Finance should allow a number of large localities to issue project GBs and guaranteed GBs, this will create opportunities to mobilize greater capital for green projects, promoting a stronger GB market in Việt Nam.
For the State Bank, to increase liquidity for GBs, the State Bank can develop a mechanism to accept the use of some types of GBs as compulsory reserve. This will create a good impact on encouraging banks to own GBs in their asset portfolios, contributing to promoting the development of the GB market. Some procedures related to project implementation also need to be shortened for the process of project appraisal as well as project financing to be quick.
Phí Thị Minh Nguyệt
Climate Bonds Initiative
Đỗ Thị Hồng Nhung
Academy of Finance
