Unleashing the Potential of Ho Chi Minh City's Green Financial Center

(SGI) - Ho Chi Minh City, presently emitting approximately 38.5 million tons of carbon annually, experiences a division of 20 million tons from the industrial production sector and 13 million tons from transportation.
Unleashing the Potential of Ho Chi Minh City's Green Financial Center

Through Decision No. 3273/QD-UBND, Ho Chi Minh City aspires to cut emissions by 10% by 2030, and a potential 30% reduction with international assistance, equating to around 4-12 million tons of carbon over the next 7 years. This is an ambitious yet crucial endeavor.

Ambitious Aims of HCMC

Responding to this, numerous enterprises have begun to take measures. In addition to expediting progress in emissions inventories, businesses can embrace sustainability by implementing a series of actions that reduce environmental impact while creating enduring value. Green transformation initiatives encompass a broad spectrum, ranging from employing renewable energy and optimizing energy efficiency to substituting eco-friendly materials, refining production processes, developing environmentally conscious products, promoting clean technology, streamlining waste management, integrating environmental strategies into business models, and more.

These endeavors are not solely aligned with the Environmental Protection Law and the city's agenda; they also empower businesses to mitigate climate-related risks while seizing the opportunities that green transformation presents. Pioneering businesses, while preparing to partake in the mandatory carbon market, have even declared more ambitious commitments, such as striving for carbon neutrality or net-zero emissions.

In line with this trend, the volume and quality of green projects in the years ahead will surge considerably, necessitating the concurrent development of a green capital market. Directing financial resources towards emission reduction and facilitating access to opportunities through green bonds, green loans, and both domestic and international carbon markets assume paramount importance.

The Role of Green Credit

Green credit offers preferential interest rates for debt instruments geared towards environmentally beneficial projects, encompassing green loans, green bonds, and sustainable linked bonds. By employing green credit effectively, capital can be channeled into projects that directly contribute to the industry's and Ho Chi Minh City's emissions reduction objectives.

Green loans entail borrowers committing to allocate capital towards environmentally advantageous projects, like enhancing energy efficiency or constructing green infrastructure. Incorporating more green loans into portfolios can alleviate banks' bad debt concerns. Borrowers with strong environmental track records are perceived to bear lower climate risks, reducing default risk and consequently receiving lower interest rates.

Green bonds, issued by the government, local authorities, or businesses, raise funds for green initiatives. They are accompanied by distinct clauses governing debt repayment mechanisms, recourse, or issuer exemption from recourse. To ensure proper utilization of funds garnered from green bonds, reliable third-party inspection and supervision of projects are required. The coupon rates on green bonds can be pegged to inflation or a green index. Research indicates that green bonds pose lower liquidity risks and their issuance positively influences stock prices and liquidity.

In a context where costly low-emission technologies are being developed, green transition projects harbor elevated risks due to extended payback periods and uncertainties surrounding future revenue generation. Paradoxically, encouraging development mandates maintaining low capital costs for these projects. This divergence is substantial, making banks hesitant to lend for high-risk projects with prolonged payback periods, while they rely on short and medium-term capital mobilization. Consequently, banks must uphold risk management and ensure economic financial stability. Renewable energy projects have left substantial outstanding capital and bad debt risk in recent periods. This situation narrows green credit, encompassing even projects deviating from standard norms, to a mere 4% of total bank loans.

Challenges in the green bond arena revolve around cost barriers, involving significant consultancy, credit rating, and green project certification expenses that diminish incentive for issuance. Structural market deficiencies, including inadequate credit rating services, underdeveloped trading platforms, a dearth of legal frameworks, and limited involvement from institutional investors, compel most issuances to look abroad or rely on support from foreign entities.

The Carbon Market and Its Implications

Regarding compliant carbon markets, attention is drawn to the Carbon Border Adjustment Mechanism (CBAM), anticipated to be implemented by the EU from 2026—two years prior to Vietnam's official ETS exchange. CBAM's impact is predicted to exert more pronounced influence on enterprises exporting to the EU market, particularly those in industries such as aluminum, steel, cement, and fertilizers. These exporters will encounter elevated export costs and reduced competitive advantages in markets with well-defined carbon pricing policies.

Recent research suggests that aluminum and steel companies could witness a decline of up to 4% in exports, ultimately contributing to an output reduction of about 0.4-0.8%. Alternatively, should Vietnam institute carbon pricing regulations, a portion of the export tax due to the EU could be retained domestically.

Another dimension of the carbon market pertains to the domestic and international voluntary market, which boasts an estimated value of USD 700 - 1,400 billion according to World Bank calculations. As more domestic and FDI enterprises commit to carbon neutrality or net-zero emissions, the demand for the carbon offsetting and carbon credit market burgeons. The absence of a domestic carbon market has steered domestic capital flows towards regional markets in Singapore, Thailand, Hong Kong, and Malaysia.

Perspective for Ho Chi Minh City's International Financial Center

Singapore, as per the Global Green Finance Index, has ascended to the top spot in the region and 11th globally among 86 international financial centers within a mere 3 years. Since 2019, Singapore's Central Bank (MAS) initiated the Green Finance Action Plan, guiding the development of a green financial ecosystem. MAS also established the Green Financial Industry Committee (GFIT), aimed at positioning Singapore as a premier green finance hub in Asia, leveraging green and sustainable finance to fulfill emissions reduction commitments.

Shanghai, a vital player in China's green bond market, underscores China's financial connectivity with the world. This market has expanded significantly in recent years, securing a spot in the top 20 of international financial centers, as indicated by the Global Green Finance Index ranking.

For Ho Chi Minh City, Resolution No. 98 (NQ98), effective from August 1, 2023, ushers in numerous opportunities, including novel regulations governing state budget management and the piloting of a carbon market. Leveraging the political standing and momentum in the forthcoming 5 years, what steps should Ho Chi Minh City, businesses, and the capital market undertake to capitalize on opportunities and advance green transformation?

Foremost, a coherent emission reduction roadmap for Ho Chi Minh City is imperative to synchronize objectives and encourage the participation of all stakeholders. To meet the commitment of greenhouse gas emission reduction on a citywide scale, Ho Chi Minh City must expedite the process of determining and allocating emission quotas for key industry companies, thereby elucidating objectives and enabling these entities to strategize near-term emissions reduction efforts.

Integration of precise emission reduction targets into all forthcoming public investment projects, especially infrastructure initiatives, coupled with prioritized use of clean, low-emission technologies, is crucial. Due to their extended lifespan, choosing obsolete technologies would subject the city to prolonged high emissions, impeding emission reduction initiatives.

As a financial center, Ho Chi Minh City should forge policy incentives that lower barriers to entry for green credit. This can be achieved by offering subsidies to compensate for risks and guarantee funding, along with supporting transaction costs related to green bond issuance for issuers. Further, Ho Chi Minh City should leverage incentives from NQ98 to channel international capital inflows into Vietnam, while fostering solutions to enhance market structure and link the green bond market and domestic voluntary carbon market with the region. Viewing this task as vital for a next-generation international financial center, the city must prioritize both greening and digitization.

Regarding its role as a distribution center and export gateway, the establishment of a carbon credit exchange in the form of an ETS requires prompt action, aiming for pilot implementation by 2025. Exporting enterprises within affected industry clusters due to CBAM must take precedence in participating in the market, commencing from the pilot stage. This strategy serves to mitigate increased costs imposed by the EU, thereby offering not only Ho Chi Minh City-based exporters but also neighboring provinces an opportunity to exchange experiences and lessons, given the anticipated implementation and expansion of similar CBAM mechanisms by export markets in the years ahead.

For businesses, the immediate task involves ensuring accurate, comprehensive, and honest emissions inventories. Enterprises operating within potentially precarious sectors such as steel, aluminum, oil refining, cement, paper, glass, fertilizers, and energy must research and adopt early strategies to curtail emissions during production processes. This approach is crucial to prevent exceeding the threshold stipulated by export markets, particularly the EU, and sustain profit margins.

In Closing

As Ho Chi Minh City gears up to become a vibrant international financial center, these strategies and measures pave the way for a prosperous future. By focusing on green credit, carbon markets, and aligning strategies with global best practices, the city has the potential to establish itself as a formidable player in the realm of sustainable finance and environmental responsibility.

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