Vietnam needs to prepare financing for just energy transition

For an economy like Vietnam, international financing will at most provide a supplemental source of capital. Most of the investment requirements will have to be met by domestic sources. As such, increasing the capacity of domestic financial institutions to mobilise long-term capital is at the core of the climate transition.

This was highlighted by the United Naitons Development Program (UNDP) resident representative Ramla Khalidi in her opening remarks at the workshop “Financing for development – the role of domestic financial institutions” organised in Hanoi by the Ministry of Planning and Investment (MPI) and the UNDP on December 8.

Vietnam's landmark commitment to net-zero carbon emissions by 2050 is bold and visionary. In making this public commitment, the government recognised that the conversion from fossil fuels can deliver tangible economic benefits. There is now evidence to suggest that the transition to renewable energy will create more jobs than it destroys.

However, the scale of the challenge facing Vietnam and other countries embarking on the journey to net-zero carbon emissions should not be underestimated. Reducing dependence on fossil fuels will affect every sector of the economy, from power generation to agriculture, construction, manufacturing, and transportation.

Much of the discussion focused on the financing requirements of achieving a just energy transition. Estimates of the costs vary depending on the assumptions used when making the calculations. Nevertheless, conservative estimates suggest that Vietnam will need to mobilise an additional $15-30 billion per year – that is, investment over and above the normal levels – to achieve the net-zero target and sustain rapid economic growth.

Although Vietnam’s financial system has become more developed and diverse, the absence of deep and liquid secondary markets constrains the availability of long-term financing. As recent events in the bond market have shown, governance, corporate disclosure, and accountability are key constraints on the development of active secondary markets.

Proactive policies are needed to remove these and other obstacles to increasing the supply of long-term domestic financing for the energy transition and other uses.

"Vietnam is currently included in the priority list for energy cooperation and is in discussions with countries around the world on various international climate finance mechanisms in support of the energy transition,” said Nguyen Thi Hoang Yen, deputy director general of the MPI's Department of Science, Education, Natural Resources, and Environment.

“However, the funds that countries donate to Vietnam will only be a small part of the path to economic growth and energy transition. We need to strengthen domestic financial institutions to ensure financing for businesses, investing in socioeconomic development projects as well as those for the energy transition in the medium and long term," she added.

The joint programme to assist Vietnam in developing an integrated national financing framework has the overarching goal of supporting the nation in its efforts to reform the mobilisation, usage, and management of development finance in order to realise its sustainable development goals by 2030.

Under the framework of this programme, the UNDP collaborated with the MPI's Department of Science, Education, Natural Resources, and Environment in conducting studies on Development Banking in Vietnam: Issues and Prospects and a review of the bottlenecks and recommendations for the development of domestic capital markets in the country.

The UNDP, in collaboration with the United Nations Conference on Trade and Development, also conducted the study titled A Vietnam Climate Bank for Green and Just Transitions.

These are initial studies to provide recommendations and policy discussions to develop capital markets for private enterprises, ensuring that public financial resources effectively contribute to the achievement of development goals. Most important are recommendations on how to mobilise resources and use investments effectively, thus bringing in sustainable results.

At the workshop, researchers from the Integrated National Financing Framework programme, economists from UNCTAD, SOAS, and the University of London, and experts with extensive experience in climate finance in different development settings shared global precedents and the potential contribution of development banking to Vietnam’s energy transition.

They proposed that a Vietnam climate bank be created to contribute to long-term energy financing by providing guarantees for commercial bank loans, organising structured finance for slow-gestating projects, and even taking equity stakes in projects that deliver important social benefits.

Thomas Marois, political economist and author of Public Banks at SOAS University of London, made the case for establishing a new Vietnam Climate bank to drive a green and just transition.

“A Vietnam Climate Bank could be a legacy institution. It could be a gift to the future by ensuring a green and just future,” he said. “There is a need to get the mandate right – a green and just mandate with a public purpose. To be credible and effective, a Vietnam Climate Bank needs a representative board of governors.”

Professor Uli Volz, director of the SOAS Centre for Sustainable Finance at SOAS University of London, highlighted how a public Vietnam climate bank could help tackle the problem of the high cost of capital that is holding back the low-carbon transition in Vietnam and other developing and emerging economies by working with international development finance institutions.

Nearly 40 local and foreign businesses that have supported Vietnam’s sustainable development and ESG/CSR initiatives over the past five years have been honoured by VIR within the framework of the conference "ESG: The key to sustainable development".

The mounting acceleration of sustainability and ESG-related criteria have been among the major concerns among financial markets, and Vietnamese organisations are allocating more resources towards improving their resilience.

While many businesses in Vietnam now consider environmental, social, and governance goals as crucial in the journey to sustainable development, lack of knowledge and resources will remain a barrier for some time.