Can Vietnamese banks seize the green-bond opportunity? (Part 2)

Source: IJGlobal

Based on market momentum and the renewables targets set in the latest draft of Vietnam’s Power Development Plan, demand for financing these projects should continue to grow exponentially. Furthermore, at the 2021 UN Climate Change Conference (COP26), the Vietnamese government pledged to reach net-zero CO2 emissions by 2050, and its targets for renewable-energy-generation capacity have grown consistently. Wind and solar assets will be commissioned to meet these targets—and these projects will need to be funded, creating more opportunity for a green-financing market to develop.

2. Benefits of ESG finance products for banks and investors

Banks and investors need to be confident they will not lose out by creating and investing in these products. First, banks will not lose fee income because they choose to issue green bonds—in fact, green bonds enjoy a slight premium (a “greenium”) compared with their conventional equivalents because of their “green” nature.2 Research also suggests green bonds slightly outperform their conventional peers (for both municipal and corporate bonds).3 This bullishness is worth caveating, however, by noting market volatility and investor sentiment affect the greenium. For instance, fund managers have warned that the war in Ukraine may reduce ESG-linked products’ outperformance. The quantity and cost of the resources deployed can also affect returns to the banks themselves. However, there remains a nonfinancial reputational benefit: banks offer green bonds because customers want to use the proceeds for green projects.

We estimate Vietnam’s banks could realize a total of $1.7 billion in revenue from ESG financing by 2025, with around 90 percent coming from transition finance and green bonds (Exhibit 3). This pool includes revenue from green-project financing (such as funding renewable-energy projects) and environmentally linked loans, with the balance largely concentrated across ESG-linked capital markets, M&A, and trade finance.

Source: Mc. Kinsey

Author: Lam Nguyen