GREEN FINANCE IN VIETNAM'S BANKING SECTOR: LAW AND POLICY ASPECTS

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MINISTRY OF EDUCATION AND TRAINING
FOREIGN TRADE UNIVERSITY
MASTER THESIS
GREEN FINANCE IN VIETNAM'S BANKING SECTOR:
LAW AND POLICY ASPECTS
Specialization: International Trade Policy and Law
Full name: Nguyen Thi Minh Thu
Supervisor: Dr. Ha Cong Anh Bao
Hanoi –2019

TABLE OF CONTENS
Statement of original authorship ............................................................................. i
Acknowledgements...................................................................................................ii
List of abbreviations................................................................................................iii
List of figures ........................................................................................................... iv
Summary of thesis research results........................................................................ v
CHAPTER 1: INTRODUCTION........................................................................... 1
1.1. Introduction.................................................................................................... 1
1.2. Literature review ........................................................................................... 3
1.3. Objectives of the study .................................................................................. 4
1.4. Significance of the study................................................................................ 4
1.5. Research methodology................................................................................... 4
1.6. Structure of thesis .......................................................................................... 6
CHAPTER 2: OVERVIEW OF GREEN FINANCE IN BANKING
SECTOR ................................................................................................................... 8
2.1. Overview of Green Finance .......................................................................... 8
2.1.1. Development of Green Finance................................................................. 8
2.1.2. Definition of Green Finance, Green Credit, Green Banking and
Sustainable Banking .......................................................................................... 11
2.1.3. Main types of Green Credit..................................................................... 16
2.1.4. Importance of Green Finance in sustainable growth of Vietnam............ 17
2.2. Overview of Green Finance in banking sector.......................................... 19
2.3. Green finance in banking sector – perspective from international
organizations:...................................................................................................... 21
CHAPTER 3: LAW AND POLICY ON GREEN FINANCE IN
BANKING SECTOR IN SOME COUNTRIES .................................................. 28
3.1. G20 countries................................................................................................ 28
3.2. China............................................................................................................. 33
3.3. Singapore ...................................................................................................... 39
3.4. Experiences for Vietnam............................................................................. 41

Chapter 4: LAW AND POLICY ON GREEN FINANCE IN
VIETNAMESE BANKING SECTOR ................................................................. 43
4.1. Legal framework on green finance in Vietnamese banking sector......... 43
4.1.1. Agenda 21 (1992, 2002, 2015)................................................................ 43
4.1.2. Constitution (1980, 1992, 2013).............................................................. 46
4.1.3. Major relevant Laws................................................................................ 46
4.1.4. Government’s Strategies and Action Plan............................................... 48
4.1.5. State Bank’s Guidelines .......................................................................... 54
4.2. Current situation of green finance in Vietnamese banking sector.......... 62
4.3. Case study in BIDV...................................................................................... 68
4.4. Assessment.................................................................................................... 70
Chapter 5: RECOMMENDATIONS ................................................................... 74
5.1. Completing legal framework ...................................................................... 74
5.2. Signing of the Principles of Responsible Banking by Vietnamese banks 75
5.3. State management agencies on natural resources and environment...... 80
5.4. Associations, professional associations and civil society organizations.. 81
5.5. Incentives to banks....................................................................................... 81
5.6. Dissemination of guidelines and data about green finance/green credit . 82
Chapter 6: CONCLUSION ................................................................................... 83
REFERENCES....................................................................................................... 85
Appendix 1 - Sustainable finance policies in other Asian countries.................. 90
Appendix 2 - Interview Questionnaire ................................................................. 93

Statement of original authorship
The work contained in this thesis has not been previously submitted to meet
requirements for an award at this or any other higher education institution. I certify
that this is my own work and that the use of material from other sources has been
properly and fully acknowledged in the text.
i

Acknowledgements
I would like to thank the Foreign Trade University (FTU), Vietnam and the
World Trade Institute (WTI) at the University of Bern, Switzerland in collaboration to
organize the course on Master of International Trade Policy and Law which is very
useful for my current work. Moreover, I would like to express my sincere thanks to
everyone who helped me during my study and support me to complete this thesis.
First of all, I owe my deepest gratitude to my supervisor, Dr. Ha Cong Anh
Bao - Vice Dean of Faculty of Law, FTU, for his enthusiastic guidance and valuable
comments during the process of my Master thesis. This thesis would not have been
possible unless he has very properly and promptly advices from making preliminary
thesis plan to completion of the whole thesis.
Secondly, I would like to show my gratitude to Ms. Nguyen Thi Phuong -
Head of BIDV Legal Department, Mr. Do Van Hai – Head of Trade Finance, BIDV
SMEs Department and other experts from Vietnamese commercial banks as well as
renewable projects for spending time and sharing precious experiences and ideas at
my in-depth interviews.
Thirdly, I would like to send my thanks to leaders and colleagues at BIDV FDI
Banking Department for providing good conditions for me to complete my research.
Fourthly, I would like to extend my appreciation to my classmates and friends.
Thank you for sharing your knowledge, wisdom, and insight with me. Specially, my
thanks to Ms. Mai Thi Lien for her supports during the course. It has been a great
pleasure to study with you.
Finally, I would like to thank my family members for their love and
continuous supports to me.
ii

List of abbreviations
ADB Asian Development Bank
Agribank Vietnam Bank for Agriculture and Rural Development
BIDV Bank for Investment and Development of Vietnam JSC.
CEO Chief Executive Officer
E&S risk Environmental and social risk
GDP Gross Domestic Product
GSO General Statistics Office of Viet Nam
GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
IFC International Finance Corporation
JICA Japan International Cooperation Agency
ODA Official Development Aids
OECD The Organization for Economic Co-operation and Development
SBV State Bank of Vietnam
SME Small and Medium Enterprise
UNDP United Nation Development Program
UNEP United Nation Environment Program
UNEPFI United Nations Environment Program Financial Initiative
UNESCAP United Nations Economic and Social Commission for Asia and the Pacific
WB World Bank
iii

List of figures
Figure 1: Data providers for the loan market, their data levels and indicators........ 24
Figure 2: Green credit outstanding loans vs Total outstanding loans...................... 67
iv

Summary of thesis research results
As part of green growth strategy, green finance is a topic of great interest in
many countries including Vietnam. Green finance is a broad concept, covering
financial investment from both public and private sectors in projects relating to eco-
friendly products, environmental damage mitigation and closely linked to
sustainable development. Green finance in banking sector or green banking is any
form of banking that its core operations contribute towards the betterment of the
environment. This research has not mentioned to green finance in banking sector as
a whole, but has only focused on the aspect of law and policy framework of green
finance in Vietnamese banking sector. Because of the crucial role of the law and
policy framework on green banking development, as long as the law and policy
framework is incomplete, it is very difficult for commercial banks to operate
towards sustainable development. The thesis has studied on the stage of law and
policy framework for green finance practices in Vietnamese banking sector, its
practical impact on the economy in general and application in BIDV as a case study.
After assessing limitations, some recommendations are given to improve the law
and policy framework and promote green banking practices in Vietnam.
v

CHAPTER 1:
INTRODUCTION
1.1. Introduction
Green finance is a proponent that combines money and business with
environmentally friendly behavior (Hasen et al, 2017, p.1). Contrary to traditional
financial activities, green economy emphasizes environmental benefits and provides
greater attention to the environmental protection industry (Wang and Zhi, 2016,
p.311). Green finance is to increase level of financial flows (from banking, micro-
credit, insurance and investment) from the public, private and not-for-profit sectors
to sustainable development priorities. A key part of this is to better manage E&S
risks, take up opportunities that bring both a decent rate of return and environmental
benefit and deliver greater accountability. According to UN Environment
Programme, green finance could be promoted through changes in countries’
regulatory frameworks, harmonizing public financial incentives, increases in green
financing from different sectors, alignment of public sector financing decision-
making with the environmental dimension of the Sustainable Development Goals,
increases in investment in clean and green technologies, financing for sustainable
natural resource-based green economics and climate smart blue economy, increase
use of green bonds, and so on. Green banking plays an important role in green
finance. Through banking industry is always considered as environment-friendly but
at present the substantial use of energy (lighting, air conditioning, computing), small
space, unplanned building, ignoring in-house greenness considerably increased the
carbon footprint of banks. Green banking avoids usage of paper as much as possible
and relies on online/electronic transactions for processing so that we can get green
credit cards and green mortgages.
According to Chen et al (2018, p.571), banking is the key sector that can play
an intermediary role between economic development and environmental protection.
Considering internal operations, banks do not affect the environment severely
through emission and pollution, but their external impact on the environment
through their customers’ activities is substantial. As the providers of finance, banks
1

can be strict and impose restriction to the business initiators to adopt environment-
friendly projects and socially responsible investment to ensure the sustainable
environmental condition. Moreover, banks can provide loan at a lower rate and
other incentives to industries for adopting green technologies which will have a
lasting positive effect on the global environment.
According to Tran Thi Thanh Tu and Nguyen Thi Phuong Dung (2017), the
result of a survey that was undertaken in June 2012 by State Bank of Vietnam
(SBV) of 54 commercial banks, it was found that for 91% of them, there exists no
clear policy at the banking level on the green growth, whereas 35% do not gain
knowledge about the definitions of environment and social issues. In particular,
89% admitted that the SBV’s regulations still lack the management of social
environment in financial industry. Generally, among Vietnamese banks there is a
lack of experience of new technologies, which causes them to get into trouble with
new energy credit such as the bias about risk appraise on green projects.
In Vietnam, there is currently no bank which is genuinely considered as green
bank, however, there exist several green products for green investments in
Vietnamese commercial banks (Tran Thi Thanh Tu & Nguyen Thi Phuong Dung,
2017, p.11). One of the reasons is the limitation of law and policy framework.
Current law and policy on green finance includes National Green Growth Strategy,
Vietnam Sustainable Development Strategy in the period of 2011-2020; Clean
Technology Use Strategy; National Action Plan on Green Growth in the period of
2014-2020; Action Plan of the Banking Sector to implement the National Action
Plan On Green Growth towards 2020. These laws and policies are not enough to
guide specific rules and responsibilities for banks to implement green banking
practices. The law and policy framework need to supplement clear and specific
regulations and guidelines for banks especially about E&S risk when giving a loan.
Therefore, the research on the law and policy framework on green finance in
Vietnamese banking sector and giving some recommendation is necessary and
significant.
2

1.2. Literature review
There are many foreign researches on green growth in general and green
finance in particular. Among them, “Banking as a vehicle for socio-economic
development and change: Case studies of socially responsible and green banks” by
Katrin Kaeufer with the initiative about 5-level model of socially responsible and
green banking are referred much, even in the recent Scheme on Green Bank
Development (2018) by the Governor of the State Bank of Vietnam.
There are also plenty of studies and report published by international financial
organizations. The first one to be mentioned is “Green Finance – A Bottom-up
Approach to Track Existing Flows” by International Financial Corporation (IFC)
(2017), which provide a new approach to assess and track green finance at three
levels (project – industry – country levels). Interestingly, in that research, IFC gives
a definition of green finance which may be the simplest one in the world - “as
financing of investments that provide environmental benefits” (IFC, 2016, p.3).
Another one is “Principles for Responsible Banking – Our Future Shaping” by the
United Nations Environment Programme - Finance Initiative (UNEPFI) (2018)
introduces the principles developed by 28 global leading banks, which can be good
practices for Vietnam.
Despite abundant foreign researches on green finance, green credit and green
bank, there is not much attention to these issues in Vietnam. Prof. Dr. Tran Thi
Thanh Tu is one dedicated person, who had coordinated with her associates to
release several works on this area, including “Green bank: International
experiences and Vietnam perspectives” (2015), “Tài chính Ngân hàng Kế toán Xanh
– Kinh nghiệm quốc tế & Hàm ý cho Việt Nam” (2017), and “Factors affecting
green banking practices: Exploratory factor analysis on Vietnamese banks” (2017).
Those studies contain quite comprehensive description and analyses of green
banking in general; however, they are not keeping up with new regulations and
situation in Vietnam from 2018 up to now.
3

1.3. Objectives of the study
Main research objective: To analyze the law and policy framework for green
finance practices in Vietnamese banking sector and then assessing the limitation of
these problems in Vietnam. Some recommendations for law and policy framework
on green finance in Vietnamese banking sector are given to promote green banking
practices in Vietnam.
Specific objectives:
i) To assess the extent which the law and policy framework has facilitated the
green finance practices in Vietnamese banking sector;
ii) To assess the extent which green finance is practiced in Vietnamese banking
sector. Especially, BIDV is chosen to analysis as a case study; and
iii) To find out the roadmap for green finance in Vietnamese banking sector
through improving the law and policy framework.
1.4. Significance of the study
Green finance in banking sector is a very new issue in Vietnam. There are few
state-owned banks which supply green products and finance for green projects. One
of the reasons is the limitation of law and policy framework. According to Tran and
Tran (2015, p.188), there are few in-depth studies conducted in Vietnam on the
green banking. And there are also a few studies on the law and regulatory
framework about green banking in Vietnam. Therefore, this research is significant
for the authorities in promoting green banking practice in Vietnam.
1.5. Research methodology
In this study, the researcher coordinated case study method and qualitative
approach – in depth interview.
a) In-depth interview
The qualitative approaches were used to provide descriptive forms which
involved conducting interviews, observation and questionnaire with open-ended
4

questions. In particular, face to face in-depth interview was used to collecting
information from the experts. The choice for qualitative approach especially in-
depth interview was based on the fact that, in-depth interview enabled the
researcher to gather detailed information on the difficulties to which Vietnamese
commercial banks face in relation to law and regulatory framework for green
banking practice. On other hand, in-depth interview with the experts in green
projects enabled the researcher to find out the shortcomings of law and policy in the
eyes of the beneficiaries of green finance – the borrowers. Further, the findings of
this study were represented by descriptive forms.
The researcher conducted interviews with 08 relationship managers/credit
experts of 5 commercial banks including:
- BIDV: Ms. Nguyen Thi Phuong, Head of Legal Department, BIDV H.O;
Mr. Do Van Hai – Head of Trade Finance, SMEs Department, BIDV H.O.
- Sacombank: Ms. Nguyen Hai Thanh – Director of Hoan Kiem Transaction
Office, Thu Do Branch; Mr. Duong Hung Cuong – Relationship Manager, Hoan
Kiem Transaction Office, Thu Do Branch.
- Vietcombank: Mr. Tran Huu Nam – Credit Risk Manager, Credit
Approval Department, Vietcombank H.O.
- Techcombank: Ms. Pham Thi Quynh Mai – In-house lawyer, Legal &
Compliance Department, Techcombank H.O.
- Military Bank: Mr. Dang The Anh – Head of Corporate and Institution,
MB H.O; Ms. Nguyen Thi Thuy Linh – Relationship Manager, MB H.O Privilege
Banking, MB H.O.
The same interviews were conducted with 02 experts from renewable energy
projects, including:
- Mr. Hugo Virag – Managing Director of Astris Finance LLC. (France),
financial adviser for Dam Nai Wind Plant Project in Ninh Thuan Province and Cat
Hiep Solar Plant Project in Binh Dinh Province.
- Mr. Han The Phong – Chief of Executive of Binh Dinh TTP Energy
5

and High Technology JSC., the project company developing the Cat Hiep Solar
Plant Project in Binh Dinh Province.
The questionnaire (Appendix 2) used for the interviews includes 08 open-
ended questions aiming to observe the awareness of interviewees of green finance,
their comments on current status of and difficulties in implementing green finance
in Vietnam and recommendation thereof.
Among them, interviewees from Vietcombank, Techcombank, Military Bank
showed little awareness of green finance. The researcher found fruitful results from
interviews with experts from BIDV, Sacombank and project developers. Some of
their comments are integrated in Section 4.4 (Assessment) of Chapter 4 and Chapter
5 (Recommendations) of this thesis.
b) Case study
Case study method enables a researcher to closely examine the data within a
specific context. In most cases, a case study method selects a small geographical
area or a very limited number of individuals as the subjects of study. One of the
reasons for the recognition of case study as a research method is that researchers
were becoming more concerned about the limitations of quantitative methods in
providing holistic and in-depth explanations of the social and behavioural problems
in question. According to Zaidah Zainal (2007), past literature reveals the
application of the case study method in many areas and disciplines include natural
examples in the fields of Sociology, Law and Medicine.
This study is about the law and policy framework about green financing in
Vietnamese banking sector. The subject is Law – one of the fields that is mentioned
above. In addition, green banking is very new issue in Vietnam and BIDV is one of
the pioneering banks in Vietnam which supplies the green products and finances for
green projects. With these reasons, case study method is very suitable with this
research.
1.6. Structure of thesis
This thesis includes 6 chapters as following:
6

Chapter 1: Introduction
Chapter 2: Overview of green finance in banking sector. In this chapter, the
author will demonstrate the definition of green finance in banking sector, main
types of green finance in banking sector and the role of green finance in banking
sector for sustainable growth. In addition, some perspectives from international
institutions about green finance are demonstrated.
Chapter 3: Law and policy on green finance in banking sector in some
countries. In this chapter, some countries or group of countries are chosen to
mention include G20, China, Asian countries, etc. After that, some experiences for
Vietnam are summarized.
Chapter 4: Law and policy on green finance in Vietnamese banking sector. In
this Chapter, the author reflects the stage of law and policy framework on green
finance in Vietnamese banking sector. A case study of BIDV and findings after in-
depth interviews are also included in this Chapter.
Chapter 5: Recommendations. After analyzing law and policy framework on
green finance in Vietnamese banking sector, the author implements the assessment.
Some recommendations are proposed to improve law and policy framework on
green finance in Vietnam.
Chapter 6: Conclusion.
7

CHAPTER 2:
OVERVIEW OF GREEN FINANCE IN BANKING SECTOR
2.1. Overview of Green Finance
2.1.1. Development of Green Finance
Green finance is initiated following change of economic models when
countries shift from the traditional “brown” economy to the eco-friendly economy
(Tran Thi Thanh Tu et al, p.13). Theories on economic development prove that
sustainable development of any country or territory is closely linked to
environmental stability and use of alternative raw materials. However, such a shift
in the economy requires a substantial amount of resources because application of
green technologies and renewable energy is often more expensive than normal
technologies in many cases. Therefore, mobilization of resources for green economy
development has become a topic of great interest when green economy was initiated
– supposedly starting in the 1970s after the energy crisis. Specifically, a number of
crises occurred following the energy crisis and dissolution of the socialist system in
the world. According to Jin (2010), around 90 economic crises occurred at an
increasingly serious level from the 1970s to early 2000s, resulting in the need for
economic model change: from the model heavily depending on natural resources to
the eco-friendly one. Moreover, environmental protection also became a big issue
when countries had to face adverse consequences of fast and furious economic
growth mostly based on exploitation of non-renewable or long-term-renewable raw
materials. As sustainable economic growth requires a great attention to
environmental protection in all countries including developing ones, it is important
to invest in green economy. Meanwhile, this closely relates to green finance, i.e.
source of funds and use of funds.
The history of green finance relates to public expenditure since investment in
green finance is not a preferred option by the private sector due to its long-term
tenure and high risks (Joseph, 1995, p.214). As a result, most of countries focus
8

their resources on development of alternative and supplementary products in the
early stage, mostly using the State budget. Financial resources are first directly
allocated to research funds of universities, then followed by the state capital re-
lending model to mobilize participation of stakeholders in the market at a later
stage. However, it is worth to keep in mind that while this model is considered a
special resource for green economy development, state capital is not enough to
cover all aspects of such development (Phan Thi Thu Ha, 2005, p.52). Main reasons
include: (1) State budget must be reserved for normal expenditure – the largest
proportion of the State budget expenses; (2) as eco-friendly projects are part of
investment expenditures, they are often listed and granted appropriate budget
allocations. At the same time, as these projects have low profitability in a long-term
investment period, they are considered unrealizable by investors with high influence
at parliaments (Jin, 2010) and thus subject to expenditure cut; and (3) As a large
proportion of public expenditure is for aid to developing countries (United Nations,
2014), funding for green economy is mobilized from the private sector due to
decreased allocation in State budget.
Green finance in the private sector mainly comes from corporations and
businesses and notably from banks. Specifically, in case there are not enough
resources for green growth or researches of green products, governments often
contract businesses for such researches or businesses will conduct researches first
and then sell results to governments (Xavier, 2010, p.11). In order to conduct
successful researches, businesses first have to spend their own funding for market
researches or mobilize from investment funds. However, as financial market
develops, these products are promptly listed in the stock market. When businesses
borrow from the banks or venture capital funds, loan contracts become goods for
free transaction in the market. At this time, banks and venture capital funds sell their
loans, investments and re-funding portfolios including securitizing loans for green
projects in the stock market (listed as green economy activities). Two main
purposes for selling the portfolios include (1) bridging gaps in the financial market
when businesses find that they are difficult to access to funding and small banks and
9

funds do not have enough funding; (2) turning of capital and gaining huge profit
from the market (Chris, 2009; Oseo, 2009). As a result, green finance products of
commercial banks in the market are very diverse – such as insurance, long-term
loans, debt finance, asset backed securities. These products are then restructured
into more sophisticated ones including venture loans, venture funds, partial risk
assurance mechanism, damage reserve and re-insurance. However, this also results
in a number of issues in the financial market (green finance market): (1) many
banks and venture funds go bankrupt following global financial crises after
maintaining high-risk investment portfolios based on confidence in “risk appetite”
under international standards (such as Basel II by that time) (Rudolf, 2010; Edward
& Javier, 2010); and (2) Businesses are not only subject to risks of market change
(i.e. risks with unexpected consequences) but also pressure of debt payment to
banks. Therefore, the public-private partnership (or PPP in short) becomes an
alternative source for green finance.
Joseph (1995) believes that PPP is an integral part of economic development
in any country in order to make use of cheap funding from the government to help
businesses implement green investment projects. In order to create green finance for
businesses to invest in environmental protection projects or new business
opportunities, the government would need to provide part of the funding and
establish certain mechanisms for capital development of business – for example,
commitments in land clearance or post-investment incentives. Nevertheless, this
source of green finance is facing challenges – especially in transitioning countries as
businesses are still facing a lot of obstacles by mechanisms issued by the
Government (Tran Thi Thanh Tu et al, 2018).
Development of green finance not only goes with growth of its funding source
but also promotes related issues, such as legal framework and business culture.
Specifically, in order to create green finance, governments have to ensure
sustainable development of this funding source through legal framework on
environmental protection and investor protection. At the same time, the
development of “corporate social responsibility” idea also increases support to
10

green investments and helps businesses access to credit for green investment – Oseo
(2009). Development of green finance also helps creating new credit tools in the
market and access to new credit management methodologies in the world.
Specifically, new credit tools are created by commercial banks such as bank
guarantee, long-term loan, asset backed securities, venture loan, start-up loan, etc.
These tools not only help businesses develop but also promote financial market
growth and effective operation of credit institutions (Edward & Javier, 2010, p.5).
In addition, it is important to understand relevant definitions when analysing
green finance development.
2.1.2. Definition of Green Finance, Green Credit, Green Banking and
Sustainable Banking
Paul (2000) believes that green growth goes with economic growth and
sustainable environment. This means GDP increase with ecosystem protection,
contributing to health protection and improvement of living standards. This
definition is initiated by UNESCAP (2012), emphasizing that green growth is an
ideal strategy for maximizing economic production while minimizing damages to
the environment. Green growth is a proper approach to economic growth, aiming to
reduce poverty and ensure sustainable environment. This methodology focuses on
substantial growth, mainstreaming environmental protection as an incentive for
economic growth. As part of green growth strategy, green finance is a topic of great
interest in many countries including Vietnam. In order to understand “green
finance”, it is worth to look into the concepts of green credit, green banking and
sustainable banking as well.
Definition of Green Finance
In the study “Mapping of Green Finance Delivered by IDFC Members in 2011”
of Hohne et al (2012), green finance is a broad concept, covering financial investment
in projects relating to eco-friendly products and policies on sustainable development.
Specifically, Lindenburg (2014) defines that green finance includes both public and
private finance, focusing on investing in green products and services such as protection
11

of landscape and biodiversity, etc., to minimize damages to the environment or
climate change risks. In addition, green finance might be understood as a finance
instrument to implement public policy, specifically, to encourage initiatives to
mitigate environmental pollution or support for relevant projects.
Similarly, Zadek & Flynn (2013, p.1) in their study “South-Originating Green
Finance: Exploring the Potential” reckon that green finance is often used for green
investment. However, they also agree that, in practice, scope of green finance is
more comprehensive, including green investment expenditure such as costs for
project preparation and land acquisition.
Jin (2010, p.2) looks at the definition of green finance by its components: (1)
support to green businesses and technologies; (2) development of green finance
products and investors; (3) considering environmental impacts during loan
assessment; (4) effectiveness of activities causing environmental wastes. Green
finance might apply to various products and areas, reflecting in 3 types, namely
green infrastructure, green industry and business, and green capital market. In these
cases, green business finance includes green projects, securities, venture funds,
investments in environmental protection technologies. Similarly, World Bank
(2010) defines that green finance relates to establishment, distribution and use of
funds for environmental protection, preventing climate change, reducing toxic
chemical emission, aiming to achieve social-economic sustainable development
without any damage to the environment.
For the purpose of analysing green finance in banking sector, Pricewaterhouse
Coopers Consultants (PwC) (2013, p.15) defined green finance as financial products
and services, under the consideration of environmental factors throughout the
lending decision making, ex-post monitoring and risk management, provided to
promote environmentally responsible investments, technologies, projects, industries
and business.
In a nutshell, it is possible to conclude that green finance means finance only
those projects and businesses which protect or less deteriorates the environment. In
12

a wider sense, whether its funding resource comes from the public or private sector,
green finance must support initiatives relating to (1) environmental protection, i.e.
environment improvement, creating new products or livelihood; (2) poverty
reduction; (3) improvement of infrastructure closely linked to environmental
protection and social security.
Definition of Green Credit and Green Banking
As green credit is a form of credit, it is worth to look at credit definition.
Rose (2013) defines that in a broad sense, credit includes activities relating to
debts and future debt payment of the principal and interests. Accordingly, credit
also includes deposits as they create future debts of receiving parties. However, this
definition is considered too broad and must be interpreted in a more succinct way.
Consequently, credit can be literally interpreted as a loan granted by an organization
to another organization upon commitments of repayment of the principal and
interests. Both Rose (2013) and Casu (2015) agree with this definition, considering
that credit is listed as asset of an organization. Furthermore, it is worth to consider
the definition of bank credit in which banks grant or commit to grant a loan to their
clients upon the latter’s commitments of repayment of the principal and interests. In
the Law on Credit Institutions of Vietnam 2010, credit is also interpreted in this
way.
In brief, definitions of credit (literally) include (1) granting or committing to grant
a loan by an organization; (2) to a certain client; (3) with commitments of repayment of
the principal and interests, i.e. such credit is granted not free of charge.
As part of credit, green credit is often looked as financial resources to support
activities relating to environmental protection or climate change. These financial
resources often go under governmental or environmental funds. However, as
financial resources from the State budget are disbursed in the form of credit, they
often go through commercial banks, i.e. from green banking to green finance.
Therefore, it is important to understand the definition of green banking. First
of all, Rose (2013) believes that banks meet requirements for deposit insurance.
13

This view has been codified in the United States where all responsibilities belong to
deposit insurance. However, in Vietnam, it is interpreted that banks must provide all
banking services, namely 3 services relating to receiving deposits, granting credit
and payment (National Assembly, 2010). As a result, as part of banking system,
green banks must meet requirements for above-mentioned services and must have
legal status.
Two popular schools of thought on green banking include:
Firstly, green banking is understood as sustainable banking. Initiated by
Imenson & Sim (2010), this point of view believes that sustainable banking is only
achieved if investment decisions are made on a big picture, bringing benefits to
consumers, social and economic development and environmental protection. As a
result, there is a close link between banking and social, economic and
environmental issues. Sustainable banking is only achievable if banks’ interests are
closely related to social development and environmental. This school of thought is
supported by macroeconomists.
Secondly, green banking is interpreted as professional banking operations to
encourage environmental protection and low carbon emission such as encouraging
clients to use green products and services, applying environmental standards in
granting capital or preferential credit for projects in low CO2 emission, renewable
energy or granting funds to the poor, etc., (UNESCAP, 2012). Accordingly, banking
services are closely attached to commitments to environmental protection or loans
for green businesses. Nevertheless, SOGEISID (2012) believes that a green bank is
not purely a social enterprise but must act as a traditional bank with additional
services to investors and clients as well as services for the benefit of the community
and environmental protection. Consequently, this school of thought believes that
while operating as a normal commercial bank, a green bank must also meet
requirements on sustainable economic-social development and environmental
protection. Accordingly, if a bank provides credit services to clients to implement
projects relating to environmental protection (such as environmental improvement,
reduction of greenhouse gas emission, or poverty eradication, etc.), such services
are considered green credit.
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In brief, regardless of whether green credit is initiated by businesses, banks or
governments, it should not only follow the general rule of repaying of both principal
and interest but also aim to solve environmental or social issues.
Sustainable banking
Currently, there is no common conception of sustainable banking development
but common view on sustainable development only. This view, therefore, will be
approached in terms of sustainable development from different objects in the
economy.
Regarding the view of bank owner (such as an investor), sustainable banks are
those meeting the requirements of the investor and being directed to maximizing the
owners' interests (Rose, 2013; Casu, 2015). Such view makes the banks mainly aim
at profit when they develop sustainably, leading to the international views that
banking system shall be monitored, that is to comply with certain standards (for
example, Basel II, Basel III) to stabilize the entire system, avoid the breakdown
under the dominance effect in the industry. The view is highly appreciated by
financial researchers, but it is necessary to consider additional social responsibility
of enterprises.
Regarding the view of social responsibility, the bank not only acts as a normal
business but should be associated with the panorama also. From this point of view,
the bank should take common actions, towards the interests of the community, the
environment, the economy and the society. When the bank owner’s interests are
attached to other benefits such as the environment and society, in the future, the
finance users will have closer relationships with the bank (Imenson & Sim, 2010).
Before the global financial crisis, issues related to sustainable development in this
direction were not placed seriously (Tran Thi Thanh Tu et al., 2017), especially in
developing countries, because of trade-off between environmental protection and
economic growth goals. However, after 2008, most countries had to reconsider the
issue. Issues related to sustainable development, business responsibility, social
responsibility - ethics - environment were reviewed at a higher level. Therefore,
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green banking emerged as an ideal model for the bank in the future, and the
foundation for sustainable development.
In this thesis, the author will use the second perspective to approach bank
development in a sustainable way.
2.1.3. Main types of Green Credit
Basically, green credit must respond to all types of credit, so there are two
main types of green credit as follows:
First group - lending activities. This group basically consists of lending
activities related to environmental protection and poverty reduction.. Lending
activities related to environmental protection involve credit products such as solar
project financing program, working capital financing program to help develop green
products, loans for purchase of equipment for investment in manufacturing noise-
pollution control products, capital investment in financial assets. In addition, there
are a number of lending activities related to environmental protection such as loans
for the use of environment-friendly equipment, for building energy-saving houses,
for pollution control systems, for projects using renewable energy and for energy-
saving projects (Tran Thi Thanh Tu et al., 2017, p. 86).
Furthermore, in terms of loan products, it is necessary to pay attention to the
loans provided to people in rural areas. This group tends to target the poor.
Therefore, these credit products only focus on lending small amounts to women as
the main target object, and through groups - teams. Another part, under the
Government's orientation, is provided to farm households to develop their own
economy, mainly related to environment-friendly models such as VAC model or
recycling of garbage-related products. However, because the target object is the
poor, this product group is obviously not attached special importance in developed
countries, but only in developing and underdeveloped countries.
Second group - credit products excluding loans, namely guarantee, factoring,
discounting, financial leasing, or card-related activities. Basically, this product
group is given on the basis of loan product group, and develops similarly to loans.
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However, it is worth to overview the differences between loan and non-loan credit
products. Regarding bank guarantee, this is a credit activity that forms off-the-
balance-sheet items, banks can use their credibility to secure payment for their
clients’ debts (of course, these clients’ debts shall be listed in the green credit
portfolio - similar to loans). If a client fails to pay the debt, the bank will pay on
behalf of the client, then it is similar to bank loan. Regarding discounting and
factoring, banks buy debts and advance to the sellers – the beneficiaries of
receivables first, thus, the sellers will sooner have capital for business. Banks then
recover the debts from the buyers. Regarding financial leasing, banks buy fixed
assets forming their clients’ green investments, then the clients will pay gradually.
The second group also include card-related activities, which include two main
forms: debit and credit cards. These activities are promoted through spending and
use of cards, aimed at increasing access to financial services.
Nonetheless, not only the banks, but also the Government, investment funds or
other credit institutions may do the same activities mentioned above in accordance
with relevant laws.
2.1.4. Importance of Green Finance in sustainable growth of Vietnam
Sustainable development is an important goal that Vietnamese Government
aims for in the process of economic construction. During development, Vietnam has
experienced a rapid growth (the period of 2008-2012), with the rate at about 7% per
year, the environment-related issues were also trade-off (Ngo Thang Loi et al,
2012). In order to reduce the pressure of rapid development and turn to sustainable
development, the Prime Minister (2012) said: “Green growth must serve the interest
of the people... should be made by the people, for the people, contributing to
creating jobs, reducing poverty and improving people’s material and spiritual life”.
In order to grow green, green finance is an extremely important requirement in the
economy.
In terms of macro-economy, the role of green finance in Vietnam can be seen
in the opportunities it brings to the economy. Firstly, since a large part of green
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investments are for infrastructure development, by encouraging environment-friendly
technologies in infrastructure construction, green finance helps developing countries in
general and Vietnam in particular avoid the model “growing first, cleaning thereafter”
and reduce the expenditure for resolving environmental consequences of normal
technology. Secondly, low-carbon economic growth has become inevitable for more
and more countries under the pressure of climate change and other environmental and
economic crises, the countries with complete green finance system will have more
competitive advantages than the others because enterprises and organizations
participating in the green finance system become “greener” and thus, attracting more
investors. Thirdly, when encouraging all economic sectors to create and use of
alternative resources and technologies, governments increase their economic prospects
by facilitating new markets that have great potential for employment creation (Tran Thi
Thanh Tu et al., 2017, p. 44).
In a narrower sense, the role of green finance in sustainable growth of
Vietnam can be seen through that of green credit as follows:
Firstly, green credit promotes the implementation of environmental protection
measures, creates nature-friendly products and economic stability (SOGEISID,
2012). From 2012 to the end of 2017, the funding from the Government, banks and
private sector were used for most items relating to green growth and sustainable
growth (GSO, 2018). Thanks to the funding, the projects involving solar power,
wind power and tidal power are being completed, replacing hydropower and
thermal power. In addition, the programs and projects through ODA re-lending
(from governments as well as international financial institutions) have supported the
process of environmental rehabilitation in Vietnam, including the projects for
rehabilitation of river and lake environment of big cities, and projects for
construction of plants and factories developing environment-friendly fuel sources.
Also, these funding have helped localities build high-tech zones (i.e. information
technology, biotechnology, environmental technology) in Hanoi, Ho Chi Minh City,
Da Nang and Binh Duong, contributing to implementation of Vietnam’s
environmental protection strategies.
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Besides, the development of credits helps speeding up the consumption of
organic goods and clean food for people. Due to considerable number of products
created, it will inevitably accelerate the supply of food consumption chain stores as
well as environment-friendly goods, and reduce the pressure on the consumption of
goods relating to brown economy.
Secondly, green credit itself promotes the process of creating green credit
products (UNESCAP, 2012). When banks implement activities related to green
credit development, their client’s demand for capital also changes according to the
change of products or services. Therefore, traditional credit products can hardly
meet the different requirements of the market. Accordingly, it will form groups of
products and services that can cover green banks, i.e. new green credit products.
Thirdly, green credit contributes to reducing poverty and building new rural
areas in Vietnam (Le Thanh Tam, 2015, p.8). If we consider green credit as
financing for the poor sector, the banking system and the Government of Vietnam
have carried out many “green” activities for quite a long time. The Government has
had certain implications for bringing finance to the poor by establishing
microfinance institutions such as M7, TYM or CEP or separating the Bank for the
Poor from Agribank to support individuals and organizations to obtain loans in the
market. The Government also carries out activities to accelerate access to credit
services through various methods such as providing loans through groups – teams,
through organizations’ branches as well as providing flexible loans. This has
promoted Vietnam from the low-income group to the low-middle income group. In
addition, these loans do not require security assets, so it is possible to help
households in rural areas to develop appropriate economic models (typically VAC
model – Garden, Pond, Pigsty/Poultry Shed) associated with environmental
protection and creating livelihood for themselves.
2.2. Overview of Green Finance in banking sector
Green finance in banking sector has been studied in many respects, which are
often mentioned under the two main aspects of green banking levels and roles of
green finance.
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Firstly, green finance can be reflected in green banking levels. According to
Kaeufer (2010, p.5), basically, the operation of green banking is expressed through
the following levels which also reflect green finance’s roles accordingly.
- Level 1: Banks carry out extra operations, i.e. using their money to finance
public or the community activities or use money in the form of concessional loans
to finance programs related to environment, public health, education and support for
low-income people. In other words, at this level, banks do not consider green
banking/green finance as their main activities. Most banks are currently at this level.
- Level 2: Banks begin to separate their financing activities into two parts: the
first part is regular financial operations – i.e. profit-making activities; the second is
financial operations for the purpose of environmental and social improvement.
Usually, there are only a small proportion of banks that are at this level.
- Level 3: Banks start to combine two trends of the Level 2, under which most
banking procedures and products comply with the "green" principle, i.e. banks’
structures are formed to support green activities, as well as financial resources tend
to be shifted to "green" goals.
- Level 4: At this stage, banks balance their strategic ecosystem where green
finance activities are not limited to the scope of the banks but expand to their
networks, and they cooperate with other banks and interact with the community to
achieve sustainable goals of both profits as well as environmental and social issues.
- Level 5: Active ecosystem balancing initiative, in which banks performs
similarly to Level 4 but in a proactive perspective for their own goals, not only for
responding to external changes.
Secondly, there are several benefits of green finance in banking sector. When
implementing activities related to environmental protection as well as social
impacts, green finance in banking sector plays the following roles:
- First, creating conditions for economic sectors to save energy and natural
resources. With banks’ funding in projects (directly or indirectly through credit
operations), green finance will contribute to the creation of environment-friendly or
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energy-saving products. Thus, these activities can create stability for the economy
in long term.
- Second, creating interdisciplinary impacts. By effectively providing funding
to projects, green finance provided by banks will impact businesses in different
industries and indirectly impact the situation of that sector. On the other hand,
activities related to green economy will require a high level of technology, thus
affecting the development of different industries. In addition, when banks use their
resources to finance “green” activities, they will have to renovate their own working
environment, which means digitalization to save resources such as paper, ink and
electricity, as well as integrating many products in one transaction - for example,
developing applications for smart phones. Thus, green finance activities create
positive impacts on access to financial services - because nowadays most of
customers use smart phones. On the other hand, when green finance in banks
becomes popular, it will become the standard in business culture and will show the
responsibility of banks to social issues. The spillover effect of this issue will form
community responsibility as well as social responsibility for other organizations and
businesses. Thus, the community will benefit more.
- Finally, the effects are "cross-border". Since the bank's operations must first
invest in themselves, most operations must be digitized to trade with other banks
through online or electronic services. Thus, financial products will be provided to
more diverse audiences in the economy, and capital will be transferred between
banks in different countries. These activities also promote green projects and green
economy in the future.
2.3. Green finance in banking sector – perspective from international
organizations:
The World Bank Group – International Financial Corporation (IFC)
Various financial institutions, international initiatives, standard setters, and
regulatory bodies have developed their own approaches to green finance. Building
on the work of the Group of 20 (G20) Green Finance Study Group, the IFC Climate
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Policy team has developed a new approach to assess and track green finance,
focusing on the banking sector, to understand the current status of green lending and
provide recommendations on how to better align different approaches to measuring
green finance. This will allow for analysis on a broader scale, which could result in
better policies to mobilize additional green finance.
The IFC’s approach bases on the bottom-up methodology. This approach first
defines what is green at the project level, based on the intended use of the
investment in the real economy, through the application of estimates for the
respective green share per project. It then aggregates the numbers at the industry
and country level. These results can be compared to green finance needs to identify
gaps and action points.
Challenges lie in definitions, data, aggregation, and interpretation. Depending
on the financial instrument under consideration, pure amounts invested need to be
distinguished from the activities that are actually financed in the real economy. In
this context, “green activities” need to be defined, often through finding suitable
proxies, because definitions are either not available or inconsistently applied. The
data needs to be aggregated across sectors and financial instruments, connecting
different datasets. And finally, a valid benchmark needs to be applied (the demand
for green investment, in this case) to derive a sufficient level of green finance.
An example about the application of the methodology to the loan market
reveals some initial estimates:
- Define: The methodology is applied to a dataset on syndicated loans by
Thomson Reuters. Green project finance is defined based on the industry of the
borrower.
- Estimate: The green percentage of projects is applied to industry
classifications using existing research figures: 100% green: clean energy; 0% green:
oil and gas, petrochemicals, pipelines, coal power; 17% green: real estate; 13%
green: Food and beverages, paper and forest products, agriculture; 10% green:
Infrastructure and transport.
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- Aggregate: The results are aggregated per industry and country of the
borrower.
- Compare: 82% of all syndicated loans in 2014 financed projects in sectors
with some green activities; Considering the US dollar value of all loans in 2014,
almost 15% was green financing; Of all lending to projects with some green share,
41% of loans were for green real estate and 21% for infrastructure and transport
(potentially because other industries use less project finance through loans); The
United States has the largest share, with 35% of the total amount, followed by the
United Kingdom with 8%. China and India have a biggest share among emerging
markets, both with 4%.
Different datasets for the banking sector are accessible via international data
providers such as BIS, Bloomberg, Bureau van Dijk, IFC, the International
Monetary Fund, and Thomson Reuters. At the country level, aggregated data is
available on total loan granted, the share of non-performing loans, outstanding
debts, returns on assets, and so on. At the bank level, information on ownership
structures of individual banks, mergers and acquisitions, and total loans is provided.
The most relevant datasets contain the following data:
- Project-level information, which refers to the use of proceed or physical activity
being financed, including information about financial amount, time frame and
sometimes explicit details on that activity (production of X tons of steel, for example),
and selected impacts (carbon and water footprint, jobs provided, and so on).
- Company-level information regarding the creditor and borrower for each
loan, including their sector and location.
The figure below shows the different levels of available datasets and their
respective financial indicators as well as data providers offering such information. It
maps out how the approximation of green finance needs to happen at the project
levels, capturing what is effectively financed in the real economy. The
categorization into green and conventional finance per project can then be
summarized according to the lender’s (or borrower’s) country of headquarter, and
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sector. This aggregated data can then be integrated into datasets at country of
financial institution level:
Figure 1: Data providers for the loan market, their data levels and indicators
Source: IFC (2017, p.13)
IFC shows that, current data availability limits the rigor of the analysis of
existing green finance flows. Definitions and tracking are most advanced in the
bond market and could serve as an example for other areas. For banking, loan
tracking processes need to be improved and institutional investors need to
implement clear decision-making criteria. To get a full picture of green finance,
need to track “green” at the level of each project and cooperate between
multinational organizations, national regulators, private financial sector, data
providers and standard setters.
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OECD
The OECD’s approach focuses on the role of green investment banks (GIBs).
This approach has been showed in the report of OECD “Green Investment Banks:
Scaling up Private Investment in Low-carbon, Climate-resilient Infrastructure”.
According to OECD, Green investment banks are designed to address local
market and policy failures. Green investment banks as a means for governments to
achieve ambitious climate objectives. The creation of a GIB can send a signal to the
marketplace and other countries that a country or region is seeking to become a
leader in scaling up private, low-carbon investments. GIBs are relevant for both
developed countries and emerging economies as a tool in their domestic climate
policy framework to help meet emissions, technology and infrastructure deployment
and green investment targets. In addition, GIB experiences are also relevant for
international climate finance as the tools they use and innovative approaches to
mobilize private investment are often applicable or adaptable to various contexts. In
emerging economies, GIBs may be able to work alongside multilateral development
banks and other sources of public climate finance to de-risk infrastructure projects
to enable private investment capital to flow. GIBs in some jurisdictions have
mandates to deliver a positive financial return or achieve financial sustainability.
Achieving such goals can increase political support for dedicating public resources
to mobilize private investment in climate change mitigation, adaptation and
resilience.
The United Nations Environment Programme Inquiry
The United Nations Environment Programme (UNEP) Inquiry Into The
Design of a Sustainable Financial System was established in early 2014 to explore
how to align the finance system with sustainable development, with a focus on
environmental aspects.
UNEP has given five approaches to aligning the financial system (including
green banking) to sustainable development. These approaches which are
demonstrated in the UNEP Inquiry report, 2015 include Enhancing Market Practice,
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Harness Public Balance Sheet, Directing Finance through Policy and Upgrading
Governance. The improved functioning of capital markets themselves is a strategic
focus of policymakers. This is now extending to how capital markets can be
enhanced to mobilize capital for the green economy.
- Enhancing Market Practice: Enhanced market practice has proved the most
popular approach to internalizing sustainable development into financial decision-
making. Disclosure of sustainability performance by institutional investors has also
followed. In a large part, these measures to improve transparency in the financial
system are linked with wider measures to improve governance, both within
corporations and financial institutions.
- Harnessing the public balance sheet: Incentivizing sustainable finance
through the use of the public balance sheet has been a feature in every country
reviewed by the Inquiry. Most advanced in the use of fiscal instruments is probably
the US, with a range of federal and state-level incentives focused mainly on
encouraging investment in infrastructure. Tax relief on the income from municipal
bonds is a long-standing feature, designed to encourage lending for investment in
local infrastructure. Others are more specifically targeted at environmental finance,
including tax credits for renewable energy investments and the tax-advantaged
Clean Renewable Energy Bonds. Incentivizing private capital through the leveraged
use of public funds (i.e. guarantee facilities) and public sector balance sheets has
become core to the strategies of many development finance institutions and other
government and international financing vehicles.
- Policy – directed performance: Measures that change the legal requirements
facing financial institutions to meet policy goals are perhaps the most contentious,
but are widely used, particularly in developing countries and also less explicitly in
some developed economies. This cluster of approaches concerns policy measures
that go beyond improvements to market practice or providing public financing, and
introduces requirements, and in some instances prohibitions, that shift capital
allocation. Such measures in effect introduce new performance criteria into
financial decision-making, which might reduce or increase risk-adjusted returns.
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- Upgrading governance architecture: Governance architecture can promote
the development of a financial system that is sensitized to sustainable development.
Financial governance is a multi-faceted, complex topic. On the national level,
financial governance concerns the mandates, levels of autonomy and underlying
institutional arrangements of governing institutions, including central banks and
financial regulators. The Inquiry has examined the challenges of mandates, norms
and capabilities of relevant governing institutions in taking sustainable development
more centrally into account. Typically, particularly in developed economies,
mandates of central banks and financial regulators, and most financial standard-
setters, focus on financial and monetary stability, alongside varied aspects of market
conduct. On the international level, examples of governance architecture include the
governance arrangements of key international organizations and their process for
agreeing to and implementing international standards (i.e. the Basel Committee on
Banking Supervision). The Bank for International Settlements is typical in having to
serve central banks in their pursuit of monetary and financial stability, to foster
international cooperation in those areas and to act as a bank for central banks. The
International Organization of Securities Commissions, similarly, exists to advance
standards of regulation, oversight and enforcement in order to protect investors,
maintain fair, efficient and transparent markets, and seek to address systemic risks.
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CHAPTER 3:
LAW AND POLICY ON GREEN FINANCE IN BANKING SECTOR IN
SOME COUNTRIES
3.1. G20 countries
G20 countries are taking a number of banking policy measures to support the
greening of the banking sector. These measures fall into three categories: (1)
facilitating market reform; (2) public finance and government-supported
institutions, and (3) banking regulation.
Facilitating market reform:
Market reforms can involve regulatory measures to encourage banks to
internalize the negative environmental externalities of bank lending and savings
products so that the provision of unsustainable bank credit and investment is
efficiently priced with the result that the costs for society are mitigated. Also,
governmental subsidies that encourage excessive depletion of natural and energy
resources should be curbed. Together, such measures provide a foundation for
banks to develop a business strategy for providing an efficient level of green credit
and investment.
In addition, some countries facilitate market reforms by providing stable long-
term policy frameworks for important areas of the green banking system, such as
renewable energy and energy efficiency. Switzerland uses a policy framework that
aims to improve business conditions for the banking sector so that banks can
flexibly assess environmental and social risks and determine if they are material.
This policy was motivated in part by the experience of Credit Suisse involving
negative publicity in 2014 arising from its involvement in a large deforestation
project in Indonesia. This highlighted the importance for Swiss banks of conducting
due diligence in assessing whether bank lending projects are considered based on
sustainability criteria. Switzerland’s long-term policy approach was developed
further by the Swiss government’s proposal in 2015 for a national energy strategy
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that would be implemented over the next 30 years; it aims to incorporate
sustainability criteria into all areas of economic policy and regulation and to impose
taxes, and eliminate subsidies for unsustainable economic activities.
Public Finance/Government-supported Institutions
In several G20 countries, national development banks play an important role in
providing credit and long-term financing for large infrastructure projects for
renewable and clean energy. Kern Alexander (2016) gave some examples about the
stage of Turkey, Mexico, India and China. While Turkey and Mexico use national
development banks to deploy savings and capital towards green investment,
especially longer-term funding projects that do not receive adequate financial
support from private, India uses state-owned banks to provide long-term funding for
sustainable energy projects and to assist large-scale agricultural business in using
more sustainable practices. Beside that, the four largest banks in China are state-
owned and provide a substantial source of credit and long-term funding for large
sustainable energy infrastructure projects and for smaller businesses engaged in
sustainable economic activities. In these countries, national development banks and
state-owned banks use financing from public sources to promote the greening of the
banking system and to assist the development of new markets for green assets.
Publicly owned banks and development banks also support the provision of private
bank credit and investment for sustainable economic activity by leveraging private
bank capital through on-lending activities and providing credit guarantees.
Moreover, several developed countries, including the United Kingdom and the
United States, have established green investment banks for the purpose of providing
financing for renewable energy projects.
Banking Regulation
According to G20 Leaders Statement (2009), an important objective of the
banking policies of G20 member states has been to complete implementation of the
extensive financial sector reforms introduced following the global financial crisis.
The G20 Leaders’ Summit in Pittsburgh in 2009 identified the core aim of banking
29

regulation to be “to generate strong, sustainable and balanced global growth”. The
Basel Committee revised the Core Principles for Effective Banking Supervision in
2012 to enhance the capacity of bank supervisors to monitor individual banking
institutions and to take into account risks that threaten banking system stability.
Although the Core Principles do not explicitly address the financial stability risks
associated with environmental sustainability, they provide a flexible and voluntary
framework for bank regulators to identify, assess, and manage the potential
systemic risks for the banking sector that are related to sustainability challenges.
Moreover, the Basel Committee published in 2016 a range of good practices by
banks and bank regulators about how to increase financial inclusion for
economically and socially disadvantaged groups.
The following areas of banking regulation are relevant for policymakers to
consider in addressing environmental sustainability challenges.
Disclosure
Bank disclosure of risks to investors is an important regulatory tool to support
market discipline that can encourage banks to mainstream economically relevant
environmental sustainability criteria into their business practices and to reallocate
capital to more sustainable sectors of the economy. In G20 countries, banks and
other listed companies are already required to disclose to investors all material
financial risks regarding their economic performance.
Globally, over four hundred initiatives and voluntary disclosure frameworks
across countries encourage companies and financial institutions to report E&S risk
factors. G20 countries already use the Basel III pillar 3 market discipline disclosure
regime that entails extensive disclosure obligations for banks covering quantitative
and qualitative aspects of overall capital adequacy and capital allocation, as well as
risk exposure and assessments. EU policymakers adopted the Disclosure Directive
in 2014 that requires member states to require listed companies, banks and certain
financial groups to disclose to the market non-financial information, including
environmental sustainability risks and environmental sustainability information
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related to renewable and non-renewable energy, land use, water use, air pollution,
greenhouse gas emissions and the use of hazardous materials.
Some countries have implemented the minimum requirements, but others have
included a number of other entities such as investment companies, large non-listed
companies according to precise size criteria, state-owned companies, pension funds,
etc. For instance, France has adopted disclosure requirements that all listed
companies (including listed banking companies) should disclose their carbon
exposure as part of broader climate change reporting requirements.
While disclosure is an important regulatory tool to inform the market about
the financial stability risks associated with climate change, other policy instruments
to assess the risks associated with environmental sustainability challenges should be
considered as well.
Bank Management
Most G20 bank supervisors use the Basel III pillar 2 Internal Capital
Adequacy Assessment Process (ICAAP) as part of the Supervisory Review
Evaluation Process (SREP) to assess the risk management and governance of banks.
Under pillar 2, banks are required to identify material risks that affect the bank’s
stability and describe their risk management controls in addressing material risks. In
Brazil, the Brazilian Banking Association has adopted voluntary standards based on
the pillar 2 framework to enhance bank assessment of environment risks. Base on
this, the Brazilian Central Bank published a mandatory Resolution 4327 in 2014 on
the Social and Environmental Responsibility for Financial Institutions that requires
banks to incorporate socio-economic factors into their risk governance frameworks.
In doing so, each bank is required to do an assessment of its environmental risk
exposure. Similarly, the China Banking Regulatory Commission (CBRC) adopted
the “Green Credit Guidelines” in 2012 to encourage banks to conduct E&S risk
assessments and to originate more green loans. France adopted legislation in 2015
that requires financial institutions to incorporate environmental sustainability risks
into the institution’s risk management strategy (Energy Transition Act, 2015).
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Indonesia has taken a step in this direction with its regulatory body – the Financial
Services Authority – announcing a Sustainable Finance Roadmap in 2014 that
would require all financial firms and banking in institutions to develop business
plans and risk management strategies to offer green financial products and lending
guidelines.
Governance
Enhanced corporate governance mechanisms are necessary to reduce the
incentives for banks to take on excessive risks that can threaten the stability of the
banking sector. In Russia, under Article 69 of the Russian Code of Corporate
Governance, the board of directors of joint stock companies is required to assess the
financial and non-financial risks that relate to environmental risks, as well as social,
ethical, operational and other risks.
The EU Disclosure Directive can play a role in improving bank governance by
improving bank transparency for investors regarding its involvement in
unsustainable economic activity. Institutional investors are already beginning to ask
banks about their efforts to mainstream sustainability challenges into their business
models and their strategies to mobilize capital for sustainable economic activity.
The Basel Committee’s revised Corporate Governance Guidelines for Banks
adopted in 2015 include a number of key concepts that are directly aligned with the
consideration and management of environmental and social issues, including:
- A recognition of the impact of banks on the broader setting in which they
operate;
- A recognition of banks’ accountability to a broad array of stakeholders;
- An emphasis on the need for an enhanced risk culture; and
- The call for ethical and responsible behavior.
The revised guidelines provide a set of principles for banks to incorporate
environmental sustainability objectives into their management strategies and risk
frameworks.
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3.2. China
According to UN Environment report (2018, p.14), the development of green
finance in China includes the following three stages:
The initial Stage (2007-2010): The policies on green finance (green credit,
green securities and green insurance) were released. These policies focus on
encouraging green credit, carrying out environment reviews for listed companies
and piloting environmental pollution liability insurance.
The Consolidation Stage (2011-2014): Carbon emission allowance trading was
piloted. Besides, the guidelines and the statistics system for green credit were
issued. In addition, the authorities also try to promote an environmental pollution
liability insurance pilot. In this stage, the role of some international organizations
such as the International Institute for Sustainable Development (IISD), the Climate
Bond Initiative (CBI), etc. were very important. They encouraged, promoted and
coordinated with Chinese institutions to research about green finance. The Green
Finance Task Force, which was initiated by the Research Bureau of the People's
Bank of China and the UN Environment Inquiry in July 2014, released 14
Recommendations on Establishing China’s Green Financial System.
The Implementation Stage (2015 till now): Most of the proposals made by the
Green Finance Task Force were approved by the Central Committee of the
Communist Party of China and the State Council and included in the “Integrated
Reform Plan for Promoting Ecological Progress”. These documents are considered
as the strategy to establish the green finance system. After that, seven ministerial
agencies including the People's Bank of China implemented the Guidelines for
Establishing the Green Financial System, the world’s first systematic green finance
policy framework. At the domestic level, the green bonds market experienced rapid
development and new breakthroughs were made in the innovation of various green
financial products. The Green Finance Committee of the China Society for Finance
and Banking (GFC) was formed along with other competent institutions to promote
green finance, marked progress was made in the R&D of green finance standards,
33

evaluation mechanisms and environmental risk analysis, and capacity-building and
training on green finance were carried out extensively. At the international level, as
G20 president, China included green finance into the G20 agenda in 2016, an
agenda that was retained and further explored by Germany in 2017, gradually
forming the global consensus on developing green finance. Backed by concrete top-
down policy measures and proactive market actions, China was able to implement
the notion of green finance in all aspects of the industry with remarkable efficiency
and became the leading force in green finance across the globe.
As noted in the G20 Green Finance Synthesis Report 2016, the development
of green finance requires clear policy signals. China has developed a sound top-
level design for green finance that will encourage market stakeholders to “green”
the financial system and advance the transition towards a green economy. This top-
level design encompasses national strategic documents, special policies and
implementing rules. The latest progress and characteristics of China’s green
financial system are:
- Established strategic framework and policy guidelines for the green financial
system:
+ Comprehensive plan for the top-level design: seven ministerial agencies
jointly released the Guidelines.
+ Green finance reform and innovation pilot zones: Zhejiang, Jiangxi,
Guangdong, Guizhou and Xinjiang.
+ Implementing rules for different sectors: Seven ministerial agencies will
release specific implementing rules for different sectors.
- Included the theme of ecological civilization in the 13th
Five-Year plan and
clarified green investment and financing needs.
- Publicized green investment and financing concepts extensively in China.
Digital finance has further promoted green finance among the general public.
34

- The Green Finance Committee (GFC) of the China Society of Finance and
Banking has played a crucial role. Since its inception in April 2015, all major banks
and many large and medium-sized funds, insurance and securities companies joined
the GFC. Currently, GFC members are managing two thirds of all financial assets in
China and are playing a key role in facilitating the release of new policies,
promoting the notion of green finance, product innovation and capacity-building.
Green finance pilot zones: Implementation with differentiated local
practices.
On 14 June 2017, the State Council decided to set up pilot zones for green
finance reform and innovation in Zhejiang, Jangxi, Guangdong, Guizhou and
Xinjiang, followed by overall plans for each pilot zone jointly released by seven
ministerial agencies. By establishing these five distinct pilot zones, China aims to
explore different development models for the local green financial system against
different backgrounds, thus offering diverse practical samples for promoting green
finance across the country.
The five pilot zones achieved initial progress. At present, all pilot zones have
made progress in supporting policies, organizational structures, products and
services innovation, market construction and institutional development. Besides,
other provinces/regions released policies on green finance. In response to the
national top-level design for green finance, over 10 provinces and autonomous
regions not covered by the pilot programme have released policy frameworks on
green finance (UN Environment Report, 2018). Local GFCs played an active role in
resource integration and coordination. Supported by national regulatory authorities,
research institutes, medium and large financial institutions, the GFC has called on
local financial institutions to carry out relevant training, exchange and cooperation,
and has promoted best practices, exemplary cases and experiences in developing
green finance. Currently, Xinjiang, Guangdong, Zhejiang and Gansu have all set up
their own local green finance committees.
35

However, local green financial systems are faced with some problems as
followings: (i) the definition for “green” is not clear, so it is difficult for
government, organizations and investors to identify green projects. In addition,
because the development of green finance is separated, the majority of local
financial regulators are inadequately informed of the latest development in green
finance. Besides, local capital-building has been limited due to a shortage of
institutions and professionals surrender to green finance.
Green credit: Solid foundation and sound development
Credit is at the core of financial resources allocation in China’s financial
system. So, green credit also serves as the foundation of China’s green financial
system. Currently, China’s green credit has made the following progress:
- The policy system for green credit has been established. At the national
level, an institutional framework consisting of guidelines, statistical system and
evaluation system. Green credit performance evaluation is included into the Macro
Prudential Assessment (MPA) system. In addition, green economy sectors have
embraced various incentive policies to guide the investment of credit funds. At the
local level, several pilot zones and some other provinces/autonomous regions have
suggested the use of monetary policy instruments including re-lending and re-
discount to encourage green credit.
- Banks have been active in promoting green transformation and products
innovation. Since the signing of the Joint Undertaking of the Chinese Banking
Industry Regarding Green Credit by 29 major banks in 2014, financial institutions
in the banking industry have been active in offering green credit services and
formulating their own policy framework. Under such a framework, they have
developed over 50 green credit products, covering services such as accepting green
assets as collateral or pledges, and financing energy efficiency, emission reductions
and new-energy projects. Meanwhile, China Industrial Bank and the Bank of
Jiangsu successively adopted the Equator Principles, helping them align with
international standards on green credit.
36

Although initial progress, China also has faced the following challenges: (i)
Insufficient use of interest discount, guarantees and other incentives with maturity
mismatch to be solved; (ii) Underdeveloped capacity to identify and evaluate
environmental risks, environment information disclosure and sharing mechanism
are not good; (iii) there is a mismatch between green credit definitions and other
green standards.
Green Securities
Establishing a green securities market is a major step in the transition towards
a green economy. Up to now, China’s green securities market has significant
development as the followings:
- China has become a new growth driver in the global green bonds market and
has become one of the world’s largest green bonds markets. In 2016, China issued a
total of RMB230 billion worth of green bonds in both the domestic and overseas
market, accounting for 39% of global green bond issuance. In the first half of 2017,
China issued 36 green bonds worth RMB77.67 billion (UN, 2018, p.18).
Third-party verification and rating market grow rapidly with increasing market
credibility. Third-party verification agencies include accounting firms, credit rate
agencies and consulting companies.
Environmental information disclosure has progressed steadily. Following the
release of the Guidelines, the Ministry of Environmental Protection along with the
China Securities Regulatory Commission and other competent authorities, have
jointly facilitated environmental information disclosure for listed companies, and
signed official cooperative agreements to promote mandatory environmental
information disclosure, incorporating green securities into the institutional and
legislative structure.
- Green enterprises are enthusiastic about Initial Public Offering (IPO)
financing and follow – on offerings. With increasing policy support for the listing of
environmental enterprises, in the first half of 2017, China has a significant increase
in the number of green enterprises engaging in IPO financing, particularly in the
field of pollution control.
37

In spite of the great growth potential, China’s green securities market faced to
some problems: (i) difficulties in the implementation of green bond incentives,
especially preferential measures; (ii) Lack of a unified green bond standard under
the supervision of multiple regulators; (iii) without a specified and binding
framework for environmental information disclosure, the majority of listed
companies have yet to fully disclose their key information.
Green Insurance
In the narrow sense, green insurance usually refers to environmental pollution
liability insurance, while in the wider sense, it can be extended to cover a variety of
insurance schemes related to environmental risk management, including climate
insurance that highlights environmental risk resilience and innovative insurance
products that provide safeguards for low-carbon solutions. Green insurance is
intended to help address environmental degradation and ecological protection,
reduce the socioeconomic consequences of natural disasters, as well as support
green investments through its insurance credit enhancement and financing
functions. As a long-term mechanism to address environmental risks, China’s green
insurance system has seen constant improvement:
- The mandatory pollution liability insurance system continues to make steady
progress. At the national level, the Measures for the Administration of Mandatory
Pollution Liability Insurance, jointly released by the Ministry of Environmental
Protection and China Insurance Regulatory Commission are undergoing public
consultation and will soon be promulgated as China’s first systematic regulations on
mandatory pollution liability insurance, with many localities introducing guidelines
or piloting implementation schemes.
- Catastrophe insurance starts to play an important role in the disaster relief
system and Product and service innovation increasingly drive the green economy
(UN, 2018, p.21). Product innovation is reflected in the innovative extension of the
insurance coverage of environmental risk (such index-based climate insurance,
technology insurance and solar radiation index insurance) and the established
38

linkage between green insurance and other green-related qualifications so as to
fulfill credit enhancement functions for green products (such as green building
insurance, “government-bank-insurer) cooperative agricultural loans and guarantee
insurance for patent pledge financing).
- The environmental risk management capacity of the insurance sector
continues to improve. The application of new technology has allowed insurers to
develop an environmental risk assessment model for quantitative analysis based on
historical claims data, as well as employ real-time risk monitoring and control
technologies.
3.3. Singapore
Singapore, a well-established financial hub in Asia, aims to be a hub for green
finance in Asia (Chang, 2019, p.1). Singapore focuses on three key areas with
respect to green finance: the deeper integration of environmental, social and
governance (ESG) issues into financial institutions in Singapore, more R&D in ESG
products and the expansion of available green finance products and growth of the
asset class in the region (Tan, 2017, p.3). The Singapore government pushes ESG
integration in the financial sector (Tay and Sim, 2017, p.14). The Singapore
Exchange (SGX) has also mandated strict compliance with the ESG principles for
all listed companies starting in 2018.
The Association of Banks in Singapore (ABS) published the ABS Guidelines
on Responsible Financing on October 8, 2015 and revised the guidelines on June 1,
2018. Responding to a call for promoting a low-carbon future following the
Nationally Determined Contribution by individual countries to the Paris Agreement
2015, the ABS published the guidelines to support more transparent
“Environmental, Social and Governance (ESG) disclosures”. The disclosure adopts
a comply or explain basis in reporting.
The Scope of responsible financing considers the ESG criteria more explicitly
and includes the industries with elevated risks to which the banks should pay
attention and take account. The environmental criterion includes “greenhouse gas
39

emissions, deforestation and forest degradation, loss of biodiversity and critical
ecosystem services, water, air and soil pollution and contamination, and resource
efficiency. The social criterion covers “labor standards, community relations and
stakeholder engagement, human rights, health and safety, food security, other
necessities of local communities and indigenous people. The governance criterion
handles corporate ethics and integrity, reputation, management effectiveness, risk
management and reporting. The industries with elevated risks are agriculture,
chemicals, defense, energy from fossil fuels, forestry, infrastructure, mining and
metals, and waste management. These industries have a higher priority when
responsible financing policies are formed with respect to their business models and
the level of exposure to the risks.
Following the scope of responsible financing, there are three principles on
responsible financing: disclosure of senior management’s commitment to
responsible financing, governance on responsible financing and capacity building
on responsible financing.
The first principle has four specific rules, according to which banks are to: (1)
publish their management position and organization support on responsible
financing together with their strategies; (2) publish their Chairman’s or CEO’s
commitment to support and implement responsible financing; (3) publish their
responsible financing policy framework; (4) publish the above information in their
Sustainability/Annual Reports and make them available on their websites.
The second principle of governance on responsible financing has two specific
rules, according to which banks: (1) are to allocate resources with clear roles and
responsibilities to support the implementation of responsible financing; (2) must
ensure governance and internal controls that support responsible financing are
implemented by either having a separate set of responsible financing policies and
procedures or embedding responsible financing practices into their existing policies
and procedures.
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GREEN FINANCE IN VIETNAM'S BANKING SECTOR: LAW AND POLICY ASPECTS

GREEN FINANCE IN VIETNAM'S BANKING SECTOR: LAW AND POLICY ASPECTS

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