The market for financing climate-related projects through green bonds is surging, but Vietnamese banks need to act quickly to reap the rewards.
Green bonds represent the largest segment of the sustainable finance market: global issuance of green bonds reached about $620 billion in 2021, double that of the previous year, and the market has grown at a compound annual rate of about 60 percent for the past five years (Exhibit 1). The Institute of International Finance forecasts that by 2025, annual issuance could be as high as $1.2 trillion.
Southeast Asia has been an active part of this growth, with banks in Indonesia, Malaysia, and Thailand collectively issuing more than $43 billion in green bonds in the past five years. Yet Vietnam seems to be an exception to this trend: its banks have issued only $216 million in green bonds in the past five years, despite environmental, social, and governance (ESG) projects seeking financing and investors looking for opportunities (see sidebar, “What makes a bond green?”).
We estimate Vietnam’s financial institutions could earn about $1.7 billion in revenue by 2025 from issuing bonds to finance ESG projects—with $1.5 billion coming from transition finance and green bonds, funding the shift from carbon-intensive to green industries. So what obstacles remain between Vietnamese banks and this prize? And how can banks move past them?
With renewed urgency and improved regulatory guidance, Vietnam’s banks can catch up to peers in the region. We know from regional examples that banks acting early have led their local ESG finance markets, which means those that do not act could soon be left behind. In this article, we detail four preconditions that can enable Vietnamese banks to make the shift toward green bonds, as well as six core areas of their business that Vietnamese banks may need to address.
Driving Vietnam’s development of the green-bond market:
Our observation is that four preconditions lead to the growth of green-bond markets: demand for the financing of projects with environmental benefits, such as renewable-energy and green infrastructure projects; ensuring ESG finance products benefit banks and investors; building a legal framework; and banks responding to the first three points proactively to creatively establish a market. While the first three preconditions already exist to a certain extent in Vietnam, banks have not yet fully created the capabilities to participate in the green-bond market.
1. Demand for financing of projects with environmental benefits
Governments, organizations, and individuals are increasingly prioritizing sustainability, spurred on by severe global weather events and the narrowing opportunity to limit the increase in global temperatures. This, in turn, fuels demand from borrowers seeking ESG and renewables finance to fund their projects. In a separate report, we estimated that a significant increase in capital expenditure on physical assets, in part through project financing, is required to reach net zero worldwide by 2050.
In Vietnam, project finance has grown year over year, from around $3 billion in 2018 to $38 billion in 2021, spanning energy, transport, telecommunications, and water projects (Exhibit 2). Demand for the financing of renewable-energy projects has led this growth, which totaled more than $10 billion annually from 2018 to 2020 and $21 billion in 2021. Offshore wind is the largest segment driving demand in this area, with photovoltaic solar also a large contributor.
Source: Mc. Kinsey