Embolden by a growing concern about global warming in the last decade, the international green bond market has become a very viable channel through which investors can both profit and help out in the fight against climate change, while environmental-friendly projects gain access to an enormous source of funding once thought impossible. In consideration of Vietnam’s shift into a more sustainable economy, green bonds can surely find a large demand in this country.
However, until now Vietnam has not been able to participate in the international green bond market like other South East Asian countries such as Singapore, the Philippines, and Indonesia. Vietnam still has many questions to answer and obstacle to overcome concerning this.
Reatimes has had the pleasure to interview Mr. Giles T. Cooper and answer questions from investors and financial institutes regarding the current state and prospect of green bonds in Vietnam. Mr. Cooper is Co-Director at Duane Morris Vietnam. He has over a decade’s experience helping foreign investors in Vietnam, as well as having written extensively on the topic of renewable energy and sustainable investing.
Mr. Giles T. Cooper.
(In Vietnam and other developing countries, there are companies who do not comply with the environmental standards, yet the local government cannot effectively settle these cases because of the legal barriers and the possibility of losing investors. Green bonds can however apply pressure on the borrowers for them to commit to environmental protection.)
Reatimes: Is there any entity that enforces the fund user's obligation to the environment? Could bond buyers take legal actions if these obligations are unsatisfied?
Mr. Cooper: Fund users will have obligations towards the environment arising from generally applicable Vietnam law and the terms of their legal agreements with bond issuers.
On the former, Vietnam has quite extensive and comprehensive regulations on violations on environmental matters and applicable penalties including financial, remedial and forced suspension of operations. These are administered primarily by the Ministry of Natural Resources and Environment (MONRE). In practice, enforcement may not be as robust as it should be though there are signs of this improving and the Government is currently working on amendments to the regulations that will hopefully give more teeth to the enforcement agencies.
On the second point, projects will be subjected to careful monitoring and supervision to ensure they are complying with their commitments made as part of the borrowing package. The underlying contractual documents will regulate the procedures and consequences of breaches. The focus will be on remedial works to address any breaches.
(The idea of sustainable investing started to appear in the 1990s, but after international organizations created standards and frameworks, such as the World Bank’s 2008 Development and Climate Change: A strategic framework, more and more investors turned to funding environmental-friendly projects. Green bonds alone have reached a global volume of USD 167.3 billion. This is a testament to the importance of having a standard to sustainable investing; however, Vietnam has to do more than just forming a legal framework from a standard.)
In your opinion, which green bond standard should Vietnam abide? Singapore, Philippines, and Indonesia go by the ASEAN Green Bond Standards, but what about the Green Bond Principles & Climate Bonds Standard?
The ASEAN Green Bonds Standards (GBS) are tailored specifically for ASEAN issuers and are based on the International Capital Market Association (ICMA) Green Bond Principles & Climate Bonds Standard (GBP and CBS), so they can be viewed as a local subcategory of the GBP and CBS.
ASEAN GBS have already been adopted in ASEAN and the ASEAN GBS initiative is supported by the World Bank and the SEC.
Thus, the ASEAN GBS promote the development of a regional green bond market while mitigating the risk of diverging from the standards which international issuers and investors are accustomed to. I believe the ASEAN standards are more appropriate for Vietnam’s current situation.
Do you expect the State Bank of Vietnam to issue a framework for green bond in Vietnam in the foreseeable future? In that case, would there be any other legal barriers that prevent Vietnamese banks to enter this market segment?
The SBV may well be considering a specific framework for green bonds though I don’t think it is essential and it may not be the bank’s top priority. I do not see any legal barrier or restriction to prevent banks from entering this area should they deem it commercially worthwhile. Considering it is estimated that as much as USD $50 billion could be spent on green investments in Vietnam up to 2030, the market is likely to create itself. Practical feasibility is a bigger barrier than legal feasibility at this stage. While renewable energy projects are poster children for green investment and, generally speaking, have high practical feasibility to finance, many other areas of need are less practically feasible, for example forestry projects.
It is well known that the SBV is actively exploring the potential to establish a Vietnamese Green Finance Institution (GFI) whose specific purpose would be to promote and facilitate green investment. I think that sort of ‘soft’ regulation that will facilitate the opportunities and address practical feasibility is more valuable in the short term than a hard specific legal framework for green bonds.
(Vietnam’s burgeoning economic development demands an enormous amount of energy; foreign investors hold renewable energy projects in construction or operation across the countries as very attractive venues.
Vietnam applies a tariff on solar power price. The tariff rates differ between three geological groups: Group 1 (28 Northern provinces), Group 2 (6 Central provinces), and Group 3 (29 Central Highlands and Southern provinces). The government has just adjusted the tariff, which implies changes to the market.)
With the Vietnamese government having just passed new tariff rates on solar power, do you think that foreign investors would look at this action and increase their trust on investing in the Vietnamese renewable energy market?
The new solar tariff’s post June 2019 is not final yet though draft proposals have been made public. The draft proposed rates are lower than the current rate so from a purely financial point of view, the environment is likely to be less attractive than it is today. However, the tariffs can’t be seen entirely in isolation.
The sector as a whole needs a consistent and cogent policy and legal environment to enable and facilitate it. From a policy perspective, there are indications that the renewable energy will be taken seriously as a major component of Vietnam’s energy mix going forward.
From a legal perspective, the current PPA for solar projects is not sufficiently bankable to give the sector the spur it needs. Risks need to be more appropriately allocated and doing that will attract more capital and more serious players to the market, a pre-requisite to developing and funding true utility-scale solutions.
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Green bonds are not the answer to every problem; however, it can be an important stepping-stone for sustainable initiatives and solutions to be put to practice. With green bonds, the government may not have to go through the painstaking process of balancing economic growth and environment protection; companies can fulfill obligations to both shareholders and the society; and local communities will find themselves now a part of the cycle. These are all Vietnam’s aspirations and eventual goals.
