This is an extract from a recent paper “A Climate Bank For Viet Nam To Catalyse Green And Just Transitions” by the United Nations Development Programme.

Introduction

A new public climate bank with a focused policy mandate on climate action supported by international development finance institutions could help Viet Nam achieve a just transition to a low-carbon and climate resilient economy. Given the enormous and front-loaded capital needs of economic transformation, its long maturities, and the specialist technical knowledge and skills required, there is an evolving argument in the development community for creating new, specialist institutions focused directly on this task or for strengthening existing ones. This paper contributes to that debate by exploring the potential for a new climate bank in Viet Nam that works alongside existing financial institutions. It concludes that the government of Viet Nam may wish to explore the interest of international development finance institutions to support the establishment of a Climate Bank for Viet Nam by providing capital or guarantees to help it become a catalyst to mobilise public and private capital at cheap rates and become a driving force for financing a clean and just transition in Viet Nam. The legacy of the new climate bank will rest on it becoming a public policy-maximising institution.

At COP 26 Prime Minister Phạm Minh Chính announced Viet Nam’s commitment to achieve net zero by 2050, transition to a green energy future, and phase out coal power in the 2040s. At COP28 on 1 December 2023 in Dubai, Prime Minister Phạm Minh Chính presented the Resource Mobilisation Plan as a next step building on Viet Nam’s December 2022 Just Energy Transition Partnership (JETP) (SRV 2023). To make this green transition happen, Viet Nam needs to invest heavily in renewable energy, with estimates of required annual spending of around $11 billion to $14 billion (Lambert 2022). The World Bank therefore proposes that Viet Nam shift its development paradigm by incorporating two critical pathways – a resilient pathway and a decarbonising pathway – that will help the country balance its development goals with increasing climate risks. This paper launches from these two objectives by exploring one important way that these two pathways can potentially be financed – a new public climate bank.

High capital costs and long maturities pose serious challenges to the financing of low carbon and climate-resilient infrastructure, especially for developing economies like Viet Nam with shallow capital markets. A new public climate bank with a focused policy mandate on climate action supported by international development finance institutions (DFIs) could support Viet Nam to achieve a just transition to a low-carbon, climate-resilient economy. A new public climate bank could be the institutional innovation capable of using ‘public sector finance catalytically’, as called for in the 2023 Resource Mobilisation Plan. Viet Nam can build and benefit from a new public climate bank that is mandated to advance a green and just transition. The Climate Bank for Viet Nam (CBV) proposed in this paper would be a publicly owned and publicly governed development bank that acquires specialist expertise and financial capacity to finance an energy transition based on socio-economic justice. To build a CBV is to create a new public purpose legacy institution meant to provide for the future of Vietnamese society. The CBV should aim to be a public policy-maximising entity, not profit-maximising. There are good, evidence based reasons to build a new CBV. This paper makes the case for establishing such a new institution and discusses key considerations.

Creating a new CBV with a focused mandate on accelerating the just energy transition could help to leverage public and private finance equitably. The CBV could overcome investment barriers by using targeted approaches and tailored financial structuring to address the lack of suitable low-carbon climate resilient investments with attributes sought by private investors, for instance through aggregation of small-scale investments. The CBV could also address a shortage of objective information, market data and skills to assess transactions and underlying risks. A CBV could work with state and market participants to increase the supply of and demand for profitable low-carbon investments by decreasing risks, increasing market transparency and improving investors’ (including lenders’) understanding of low carbon investments. The CBV could lend private money to public purpose green transitions. Different forms of governance are possible for a CBV. Importantly, a new CBV should be accountable, with its performance being transparently measured against clearly specified key performance indicators. Because a CBV would be guided by policy objectives rather than commercial profit, its public shareholders can mandate the bank to align itself with the Paris Agreement and the UN 2030 Sustainable Development Goals (SDGs).

The Case for a Climate Bank for Viet Nam

To enter on a net-zero pathway and reach climate neutrality by 2050, Vietnam will need to make significant investments in its main emitting sectors, namely energy, transport, agriculture, and industry/trade. The World Bank (2022) estimates that Viet Nam will need to spend $31.8 billion in net present value terms over the period 2022-2030 and $49.5 billion over the period 2031-2040. The World Bank considers the energy transition as the “backbone” of Vietnam’s net-zero transition. To build a green, low carbon economy, large upfront investment is needed. This constitutes a significant problem for developing economies given that they face much higher costs of capital, a problem that is further aggravated by their climate vulnerability (Buhr et al. 2018, Kling et al. 2018, Beirne et al. 2022). Moreover, Viet Nam faces enormous investment needs in climate adaptation and resilience. Viet Nam is one of the most climate vulnerable countries in the world.

The World Bank estimates that climate catastrophes and the gradual destruction of physical, productive, and human assets could cost Viet Nam between 12.0 and 14.5 percent of GDP annually – costs that would add up to $400 to $523 billion by 2050. The World Bank estimates that Viet Nam needs to spend an additional $342 to $411 billion over the period 2022–2050 in net present value – about 4.5 to 5.4 percent of GDP annually – to upgrade its assets, retrofit and upgrade existing public infrastructure, and finance social assistance. These are enormous financing needs for both adaptation and mitigation.

Vietnam’s banking system is dominated by state-owned commercial banks (SOCBs) and joint-stock commercial banks (JSCBs), some of which have public ownership (often through state-owned enterprises) . As commercial banks, SOCBs and JSCBs do not currently have specific mandates to finance climate action, and their lending to climate-related areas has been limited. Viet Nam also has two state-owned policy banks, the Vietnam Development Bank (VDB), which has functioned primarily as an on-lending vehicle for overseas development assistance (ODA) funds, and the Vietnam Bank for Social Policy (VBSP), which provides microcredit to poor households and finances employment generation schemes. Given their institutional mandates and target areas, the VDB and the VBSP have not acquired the capacity to finance projects related to a just transition. Since the approval of the Green Growth Strategy 2011-2020, the Government of Viet Nam has introduced policies to mobilise financing for renewable energy and other environmentally sustainable investments. 

The Ministry of Finance sponsored a pilot project 2016-2017 for green bond issuance by the governments of Ho Chi Minh City and Ba Ria Vung Tau. In the banking sector, State Bank of Viet Nam (SBV) Decision No. 1604/QD-NHNN in 2018 requires banks to conduct environmental and social risk assessments by 2025 and to increase lending earmarked for green projects (OECD 2022). This year, the SBV approved the Banking Sector Action Plan for the implementation of the National Green Growth Strategy for 2021-2030, calling for the development of the legal framework for green credit.

The discussion around green finance in Viet Nam has been heavily dominated by commercial bank credit and bonds, the mainstays of the financial system. However, neither the commercial banks nor the corporate bond markets are able to mobilise resources on the scale required to achieve the energy transition and other sustainability goals. Vietnamese banks are undercapitalised relative to regional peers, with too high levels of nonperforming loans, which restricts their capacity to sustain credit growth. Public development banks are not necessarily superior to commercial banks. However, public development banks, equipped with a clear mandate and strong governance, have the potential to be highly effective and catalytic financiers of decarbonisation.

Four Pillars of a Green and Just Climate Bank for Vietnam

(i) Good Governance: The mandate sets the direction of the institution and frames the parameters within which it functions and can be held to account. Based on the mandate, institutions establish more concrete missions or goals to be achieved in its operations. A climate and just transition-focused mandate can enable the CBV to align with international agreements, like the Paris Agreement, and national strategies. Based on a clear mandate, the objectives and missions of the CBV can prioritise and enable green and just transitions in ways that position the CBV at the forefront of innovative change and transitions. The mandate and missions should allow for the adoption of international standards for green lending, sustainability and risk management. The mandate is vital to enabling innovative public climate financing and the build-up of in-house dynamic capabilities specifically oriented towards solving the green and just transition challenge.

(ii) Securing affordable sources of capital and ensuring targeted ways of lending: For the CBV to assume a catalytic role in financing just transitions and to leverage its capital effectively, it needs to be able to obtain cheap refinancing. However, Viet Nam, like other developing economies, faces a serious obstacle: the funding costs of financial institutions are constrained by a sovereign ceiling effect which has a direct impact on their cost of capital (Almeida et al. 2017). The refinancing conditions of the CBV would be effectively determined by the sovereign credit rating of the Vietnam government.

(iii) A whole of government approach: One effective way to accelerate Viet Nam’s capacity to meet its climate ambitions is to do so as a matter of public policy. This means mobilising and aligning public actors and institutions to achieve substantive green and just transitions. Public banks worldwide are taking a lead role in financing green transitions and in the greening of existing public institutions and infrastructure. Public-public collaborations within the financial sector can form the foundation of the CBV. Private finance can be leveraged only to the extent that it advances public purpose green and just transitions in ways that align with the policy framework and that can be reliably and transparently confirmed and reported on. Adopting a strategy of public-public collaboration is distinct from the conventional climate finance strategies being advocated by consultancies and certain multilateral agencies.

(iv) Turning the CBV into a knowledge hub: The CBV can aspire to be the hub of specialist climate finance knowledge and expertise geared towards energy transitions based on socio-economic justice in Viet Nam, and even the region. Positioning the CBV as a knowledge and expertise hub is not an exceptional feature of public development banks. To this end, the CBV should be designed and allocated sufficient resources to be the premier national knowledge hub of climate finance. CBV capacity, expertise, and knowledge is best conceived as being a permanent and in-house feature of the institution – not as functions farmed out through contracts to private consultants. Vietnam is unlikely to benefit from having to outsource policy advice on financing green and just transitions. In turn, the CBV could take a leading role in climate capacity and expertise building across the financial sector.

Next Steps for Establishing a Climate Bank for Vietnam

This study has made the case for the establishment of a new CBV as a new legacy public financial institution that can help Vietnam achieve its ambitious climate goals and just transition commitments as noted in the country’s JETP and Resource Mobilisation Plan (SRV 2023). As a publicly owned and publicly governed development bank, the CBV could build specialist expertise and financial capacity to finance an energy transition based on socio-economic justice and climate-resilient public infrastructure. As an institution with a clear public purpose mission, the CBV can focus on financing activities that generate positive externalities. In establishing the CBV, lessons – both positive and negative – can be learned from a large number of public development banks in both the Global North and South.

The CBV could adopt an initial on-lending strategy for its promotional lending business with corporations and households and work with existing financial institutions. This will help it to scale up its lending portfolio rapidly. Direct lending to municipalities, public entities, and other public banks can accelerate the CBV’s catalytic potential. The CBV could become a key vehicle to mobilise capital as envisaged through the JETP. Viet Nam has committed to ramping up investment in climate action. Building on best international practices, Viet Nam may benefit significantly from the creation of a new public purpose legacy financial institution. The CBV could showcase how a well governed public bank can be a driver of good for people and the planet by ensuring social equity and prosperity in response to climate change.

Access the complete paper here