Green Credit: Potent Fundraising Channel for Sustainable Enterprises

The emergence of green credit in Vietnam in recent years has yielded commendable results across various sectors, notably in energy conservation, renewable energy, clean agriculture, and high-tech agriculture. Despite the promising strides, the implementation of this innovative growth model encounters several obstacles and challenges.

BIDV introduces a range of green credit packages, supporting industries such as renewable energy, low-carbon production and climate change adaptation

Banks join the green credit movement

In response to the government's call for environmental stewardship, commercial banks have proactively initiated green credit and financial packages, actively supporting companies in their investments in renewable energy and eco-friendly sustainable development projects.

A report by the State Bank of Vietnam (SBV) revealed that, as of the end of 2022, credit institutions had been instrumental in financing green projects across various sectors, including textile and garment, clean agriculture, renewable energy, and environmental hygiene. By the end of 2022, the outstanding credit for green projects, as defined by the 12 green projects established and issued by the SBV since 2015, amounted to nearly VND 500,000 billion, representing approximately 4.2% of the total outstanding loans for the economy. Notably, the majority of this financing focused on renewable energy and clean energy, accounting for 47%, followed by green agriculture at over 30%. Credit institutions actively assessed environmental and social risks in their lending practices, managing outstanding loans of more than VND 2.2 trillion through over 1.1 million loans.

Despite remarkable growth, with outstanding green credit loans expanding by more than 25% annually on average from 2017 to 2021 - surpassing the median credit growth of the economy - green credit's share remained modest, constituting only 4.32% of the total outstanding loans in the economy. This lower percentage is attributed to the relatively recent inception of green credit initiatives, with certain critical areas such as waste management, transportation, and sustainable construction remaining underdeveloped.

Several Vietnamese commercial banks stand out for their substantial contribution to green credit. Agribank, for instance, boasts a significant share in green credit, particularly through preferential credit programs for agricultural projects, emphasizing clean agriculture. Notably, their "Clean Agriculture" Credit Program, featuring unlimited funding, has proven instrumental in expanding the scale of production and business for many companies, cooperatives, and farm owners.

Other banks, including Vietinbank, BIDV, HDBank, ACB, Sacombank, and Nam A Bank, have also made notable strides in supporting environmental initiatives. Vietinbank directs funds toward energy-saving and efficiency projects, while BIDV finances hydroelectric and eco-tourism projects. HDBank has taken the lead in green credit programs, significantly contributing to the development of renewable energy and high-tech agricultural projects. ACB focuses on Rural Development Financing Project and loans guaranteed by the Green Credit Fund for small and medium-sized enterprises (SMEs). Sacombank supports rural and forestry loan projects and funds waste recycling and renewable energy projects. Nam A Bank collaborates with the Global Climate Partnership Fund (GCPF) to provide medium and long-term green credit for projects that promote CO2 emissions reduction and energy efficiency.

These collective efforts have positioned Vietnam as the second-ranked country for significant progress in sustainable development, according to the Global and Country Progress Reports in 2020-2021 by the Sustainable Banking and Finance Network (SBFN).

Insufficient information and legal regulations hinder green funding

The pursuit of sustainable development through green credit is no longer a trend but a compelling necessity. Many banks stand prepared to allocate green capital to businesses; however, the efficient and convenient access to such funds poses a considerable challenge. The current predicament arises from insufficient transparency in crucial factors such as market presence, development strategies, and financial statements when businesses seek green credit. This opacity, prevalent among small and medium-sized enterprises (SMEs), raises concerns among banks regarding potential risks.

Mr. Vu Chi Cong, Director of the Environmental, Social, and Corporate Governance (ESG) Department at Vinacapital Group, highlighted the abundance of green capital yet emphasized the scarcity of investment opportunities in Vietnam. He attributed this scarcity to businesses' failure to provide essential information and data on sustainable development, such as transparent disclosures of input sources on product labels. The absence of this critical information leaves investment funds without a basis to discern whether a business aligns with green investment criteria. Mr. Cong emphasized the importance of businesses evaluating their impact on sustainable development and implementing effective solutions to mitigate negative impacts.

Ms. Pham Thi Thanh Tung, Deputy Director of the Credit Department for Economic Sectors at the State Bank of Vietnam, acknowledged the challenging landscape for the banking industry in fundraising and credit allocation for green economic projects. A notable concern is the absence of national regulations establishing criteria and lists of green projects. This lack impedes credit institutions from determining eligibility for green credit allocation. Additionally, the absence of standardized criteria for assessing environmental impacts complicates the evaluation process for credit officers.

Furthermore, Ms. Tung highlighted the risk associated with term mismatches. Green industries, particularly in renewable energy and green construction, often entail extended payback periods and substantial investment costs. However, credit institutions primarily rely on short-term deposits, creating a challenge in balancing capital and adhering to regulations governing the ratio of short-term to medium and long-term loans.

Ms. Tung underscored a prevailing lack of environmental awareness among businesses, leading to projects facing sanctions for environmental law violations. This lack of awareness further exposes credit institutions to potential risks during debt recovery.

To address these challenges, the Ministry of Natural Resources and Environment has submitted a draft decision to the Prime Minister. The proposed decision aims to establish environmental criteria and confirmation standards for projects eligible for green credit and green bonds. Aligned with international green classification standards, including those of Europe, the International Finance Corporation (IFC), and other financial organizations, this initiative seeks to enhance transparency and standardization in the green funding landscape.

By Anh Mai, Vietnam Business Forum