Mrs. Tran Thi May and many other poor residents of Ba Ria Vung Tau province’s Xuyen Moc district previously relied on contaminated water taken from nearby wells for their daily needs.

Her family and neighbors all suffered various skin, bowel and eye infections as a result, until in 2009 the Vietnam Bank for Social Policies (VBSP) granted them preferential loans to install hydraulic pipes to gain access to the district’s central water supply network. Since then their health has improved dramatically and their healthcare expenditure is much lower.

Preferential loans to businesses with green projects generate substantial value for the sustainable development of Vietnam’s economy and its society by alleviating social and environmental impacts.

Given such circumstances and the increasingly pressing matter of global climate change, the government has been passing a range of directives aimed at promoting and applying environmental-friendly measures.

According to Ms. Nguyen Le Hang, Coordinator of the Green Credit Trust Fund (GCTF), prior to 2007 domestic banks gave no priority at all to activities relating to environmental protection. The financial sector was clearly late to respond to the trend but has now emerged as an important driver in all sectors of the economy. 

Around the globe new standards and codes of conduct have been developed within banking sectors to promote corporate accountability and transparency and consideration of environmental and social impacts.

A clear example is the Equator Principles, a voluntary set of principles for environmental and social risk management in project finance adopted by an increasing number of leading banks operating in developing countries. 

Vietnam has not been applying the Equator Principles but like many other developing countries has been taking action to turn to commercial banks to address burning environmental and social issues.

In particular, the State Bank of Vietnam (SBV) issued Directive No. 03 on March 24, promoting green credit growth and managing environmental and social risks in extending credit. 

In regard to the objectives and overall tasks, the SBV Governor required the banking sector focus on protecting the environment, improving efficiency in the utilization of natural resources and energy, advancing environmental quality and human health, and ensuring sustainable development when providing loans.

The Governor also asked credit institutions to review, adjust, and complete institutional frameworks so they are in line with the objective of green growth - to provide funds for environmentally-friendly projects and plans for production and business, supporting enterprises to implement green growth and thereby fulfilling the objectives associated with green growth and sustainable development. There is still some distance, however, between strategy and reality.

Not enough done

A recent study conducted within the framework of the German-Vietnamese Macroeconomic Reforms/Green Growth Program, implemented by GIZ (German Corporation for International Cooperation in English) Vietnam on behalf of Germany’s Federal Ministry of Economic Cooperation and Development (BMZ), showed that awareness among all banks operating in Vietnam when it comes to green credit remains inadequate as State decrees and directives have largely been too vague and imprecise.   

The study showed that 62 per cent of surveyed banks claimed to be more than familiar with regulations on sustainable development and green growth and the commitments Vietnam must make when engaging with international associations regarding green credit, but none could specifically name those commitments when asked.

Moreover, 88 per cent said they believe green credit is a sector of potential but only 68 per cent have particular plans to promote activities in this regard in the short and medium terms. Fifty-nine per cent recommended the SBV adopt a more specific framework and directive than Directive No. 03 regarding environmental risk management in financial activities in the medium and long terms.

According to Mr. Pham Hoang Mai, Head of the Department of Science, Education, Natural Resources, and Environment under the Ministry of Planning and Investment (MPI), certified green projects can receive up to 50 per cent of their total capital requirements with remarkably favorable interest rates for the first ten years and a repayment term of up to 40 years. Despite such offers, though, the development of green credit remains in its infancy.

There are only a few donors involved in providing green credit in Vietnam, such as the World Bank, the Asian Development Bank (ADB), and the Japanese International Cooperation Agency (JICA), together with international funds for climate and environmental issues like the Green Climate Fund (GCF) and the Global Environment Facility (GEF), among others.

The products offered, however, are viewed by the business community in Vietnam as lacking diversity and current policies are yet to truly create favorable mechanisms for capital to flow into the market for access.

Recent figures from GCTF show that only 80 Vietnamese enterprises have applied for credit support under its green credit program. Of these, 40 passed the initial criteria, 30 were approved, and only 12 have received disbursed capital.

Other green credit funds are also operating effectively, such as the Vietnam Environment Protection Fund (VEPF), but by the end of 2014 it had only disbursed a modest VND566 billion ($24 million) to 113 projects.

Barriers to hurdle

According to Mr. Mai, Vietnam needs up to $30 billion to carry out its green growth strategy from now to 2020, of which 70 per cent will not come from the State budget but from the private sector.

Therefore, in order to achieve the proposed objectives, the role of the banking and finance sector is vital, as private enterprises must mobilize capital from banks when investing in green growth projects. 

Having been cooperating with the SBV for a long time in promoting green credit, Mr. Lakhdeep Babra, International Finance Corporation (IFC) Manager, Environmental, Social and Governance in Asia, stressed that from its experience in other markets, banks will always face various challenges in implementing green credit and hence there is a huge workload for Vietnam in the future.

Commenting on the difficulties in implementing green credit, Mr. Nguyen Tri Hieu, a senior banking and finance expert in Vietnam, said that the model of green credit has been implemented in developed countries for a long time but very few domestic banks are fully aware of the matter.

Recent research by PanNature, a Vietnamese non-profit organization for environmental and sustainable development issues, proves Mr. Hieu’s point, as very few loan officers are concerned about the risks to the environment and society when evaluating projects.

When considering green projects, banks will certainly have to build a specific social and environmental risk management system and carry out green credit training for their staff, among other things, which will incur significant costs during a difficult economic period. 

Mr. Nguyen Viet Duc, Deputy Director of the Risk Management Department at ABBank, said the bank was interested in comprehensive, sustainable development. “So far, the bank has completed a system of social and environmental risk management that is integrated into the bank’s existing risk management,” he said.

To create a level playing field for all banks, however, Mr. Duc asked management agencies to issue more policies supporting sustainable growth as his bank cannot afford to play the green credit game alone.

In recent years, thanks to a government push for environmental protection and sustainable development together with improved awareness and financial support from international organizations such as Switzerland’s State Secretariat for Economic Affairs (SECO) and the World Bank, domestic banks in Vietnam have begun to give more regard to green projects.

Sources for green credit at domestic banks, however, still come from international donors and sponsors, as the banks remain concerned about the credit risks associated with projects of this type as high profits won’t come in the short term.

Although significant progress has been made, there is resistance among local governments to withdrawing from heavily-polluting but highly-profitable businesses, which are a key resource for local tax revenue, and the limited awareness among local government officials and small-scale bankers about environmental issues limits the breadth and depth of implementation of green credit programs.

The green credit policy is therefore an initiative that requires inter-agency coordination, and strong commitments by both central and local governments, the SBV, and ministries such as MPI, the Ministry of Industry and Trade (MoIT), the Ministry of Natural Resources and Environment (MoNRE), the Ministry of Science and Technology (MoST), the Ministry of Construction (MoC), and others are vital for success.

Only way ahead

Vietnam’s neighbor China has experienced decades of double-digit annual economic growth but at an enormous cost to the environment. Pollution and unsustainable energy consumption have come with its impressive economic growth, causing significant environmental degradation that now threatens economic and social development as well as China’s global standing.

Chinese banks have also learned the hard way how unsustainable economic development and severe environmental problems can lead to non-performing loans. Its government expected the country’s financial sector to play a central role in establishing and enforcing green credit policies.

So far, in response, various large State-owned banks as well as joint stock banks have studied, developed and implemented measures to ensure the success of its green credit policy and as a result China is currently seeing some positive achievements.

Lessons learned from China’s experience can serve as a valuable model for Vietnam as it joins free trade agreements (FTA) over the next few years such as its FTA with the European Union and the TPP, which will require strict enforcements of environmental standards.

“As the ASEAN Economic Community increasingly takes shape up to the end of this year, Vietnam’s banks will face competition from regional banks that follow international environmental and social standards,” Mr. Babra said.

Recent reports from the Ho Chi Minh City People’s Committee highlighted that over 100 enterprises in the city’s export processing zones and industrial parks do not have wastewater treatment systems and 70 enterprises were reported to be without waste gas treatment systems, which is clear evidence of the fact that Vietnam’s rapid growth is having a negative environmental impact.

Additionally, 22 of 106 central and private hospitals have not completed their wastewater treatment facilities. There are also a huge numbers of enterprises continuing to pollute the environment and dump toxic waste into rivers on a daily basis.

These cases should push the government to take measures for the more aggressive enforcement of environmental regulations, shutting down severely polluting production facilities and asking financial institutions to take into account the environmental risks when lending.

Vietnam’s financial institutions should initiate steps to adopt some of the green credit policy or even the Equator Principles as well as introduce preventative measures as a way to raise awareness.

Although green growth is a new direction, with a range of institutional and resource challenges, it is a clear path for Vietnam’s economy to take, and the prioritization of economic development should not be at the cost of the environment, Deputy Prime Minister Hoang Trung Hai told a recent government meeting. 

Most importantly, green credit growth should not be viewed as a superficial activity or one whose aim is to give sheen to the names of banks and businesses. For actual outcomes to result, the strong hand of the government needs to at least be in the background.