ESG rules must be tightened to unlock green capital flows: HSBC exec

Lam Thuy Nga, country head of large corporate, wholesale banking at HSBC Vietnam, shares her thoughts from the Vietnam Connect Forum 2024.

Finance took center stage at the 28th Conference of the Parties of the UNFCCC (COP28), and as host of the climate summit, the United Arab Emirates (UAE) announced that the amount of climate finance mobilized during the first five days of the event reached more than $83 billion.

It came from pledges by various countries, development institutions, and businesses who have committed to funding numerous projects, from energy transition to healthcare initiatives, technology investments, and disaster relief. It's encouragingly high but seems like a drop in the bucket against the global vast investment of $3 trillion needed each year to limit global warming to 2 degrees Celsius according to the estimation of the Inter-governmental Panel on Climate Change (IPCC).

The number further highlighted finance as the key enabler in mankind's fight against climate change. Banks, therefore, play a central role in mobilizing and channelling the green funding required to achieve the global net-zero target.

In fact, the finance sector has set ambitious net-zero targets and committed trillions of dollars toward the transition. HSBC Group, which has been leading the global sustainability agenda for a long time, declared its intention to make its entire customer portfolio carbon-neutral by 2050 by committing $750 billion up to $1 trillion in financing to support this goal. Specifically, in Vietnam, HSBC commits to arrange direct and indirect sustainable financing for Vietnam and the corporate sector, supporting the country to realise its net-zero commitment made at COP26.

Accompanying Vietnam in its net-zero transition

One of the largest banking and financial services institutions in the world, HSBC is fully aware of our role and focused on helping to deliver a net-zero global economy. It’s a pillar of our strategy as a business.

We aim to achieve net-zero in our operations and supply chain by 2030 and in our financing portfolio by 2050. Between now and then, we’re working with our clients to help them reduce their emissions and scale up low-carbon solutions, as we work to reduce our own by lowering our greenhouse gas (GHG) emissions, utility consumption, and waste management.

This will be a change over a long time, as businesses and economies progressively move away from high-carbon activities. We call this the transition to net-zero. We can have the biggest impact by working with our clients to help them achieve it. Our core action remains to accompany our clients, especially ones in high-emitting sectors, on their journey to grow sustainably.

At group level, HSBC has recently launched its Net Zero Transition Plan, reconfirming our strategic approach and targets to reduce financed emissions in carbon intensive sectors. Locally, HSBC Vietnam owns a diverse portfolio of sustainable finance products that can satisfy client’s needs, including green loans and social loans. We can support new technologies/green projects for the transition, as well as sustainability-linked loans aligning financing to our client’s overall environmental, social, and governance (ESG) strategy. This product aims to encourage the client to achieve predefined sustainability performance targets (SPTs) by providing interest reductions for each KPI passed.

In 2023, we arranged our first sustainability-linked loan in textile and garments for a major name to support them in enhancing sustainability for their business operation. The SPTs under this sustainability-linked loan facility are linked to the client’s key focus on the reduction of GHG emissions (Scope 1 and 2), industrial water consumption, and domestic water consumption. We are also in the final stages of closing our first social loan which will be another important milestone in our ESG journey.

HSBC offers not only financing but also its services, insights, and tools that clients need for their transition. In particular, we supported Vingroup on its sustainable finance framework, which received a positive second-party-opinion from Sustainalytics, a leading independent ESG rating agency. Aligned with this framework, HSBC helped to arrange the world’s first $425 million exchangeable sustainable bond and a $500 million syndicated green term loan for Vingroup and its subsidiaries, including VinFast.

HSBC sets strict standards for credit approval for green and sustainable projects, which are aligned with international principles of the Asia Pacific Loan Market Association. We've seen more and more businesses reaching out to third-party consultants with the aim to meet investors' strict standards.

Apart from supporting corporate clients, banks like us can also offer solutions to help retail customers on the journey to net-zero, especially young consumers. That can be through green loans for purchasing and assembling rooftop solar energy systems for their homes or green home loans with preferential interest rates. By accepting less profitability, banks can enable more people to adopt a green lifestyle that will collectively contribute to common sustainable goals.

Moreover, producing cards using recycled materials is another way to help our sustainability efforts become more visible to consumers. In 2022, HSBC introduced the trend in Vietnam, rolling out the market’s first rPVC cards. Every new card is made from 85% recycled plastic originating from industrial waste, helping to reduce 7g of carbon in addition to saving 3.18g of plastic.

At a macro level, HSBC is actively engaging with governmental agencies and key bodies to share thought leadership, including via our MoU with the Ministry of Natural Resources and Environment to build a practical approach and framework to realize Vietnam’s transition targets. At the same time, we are a member of the Glasgow Financial Alliance for Net Zero (GFANZ), which will help to arrange $7.75 billion from the private sector for Vietnam’s Just Energy Transition Partnership (JETP).

Unlocking green flows

Certainly, there will be numerous roadblocks along the way. One of the main challenges for sustainable development and financing is the lack of a detailed taxonomy, especially to define "sustainable" and "green." Even though the Vietnamese government is working on its legal framework, the banking sector still mainly relies on each bank’s internal system with constant monitoring. The lack of clear regulations also leads to hesitation to proceed with large sustainability projects that require a complex financing process.

Another key challenge is data and disclosure. Investors, consumers, and employees see ESG reports as a window into important indicators of a company's overall health and its impacts on the world. That said, most companies have none or very limited ESG reporting. They lack understanding or are just starting to understand the ESG data requirements for reporting. Moving forward, I think that regulators have a very significant role in guiding businesses as well as requirements to push them to pay more attention to collecting and analysing data for better reports.

Over 90% of Vietnamese companies are small and medium enterprises, however, only listed companies are required to provide ESG performance and strategy in their annual reports. Even so, most of the provided information is basic without third-party verification, except for a modest number of companies with international certificates. Investors might not be able to rely on this to rate the ESG level of a company, and consequently delay their investment decisions.

At the same time, the current general sustainability standards for Vietnamese corporates also create challenges for financing. Since the country’s official standards are not available yet or set for future implementation, financial institutions like HSBC have to follow international standards with adaptations to suit the market. Still, these standards might be too advanced for most firms, which prevent them from accessing sustainable financing.

All in all, to help shift green capital flows and support sustainable development in Vietnam, the government needs to increase transparency, tighten regulations related to ESG, and limit information asymmetry between investors and corporates. In recent years, a small group of companies has applied voluntary ESG disclosure to attract foreign investors as well as to satisfy the strict conditions of certain export markets such as Europe, however, in order to see large-scale positive results, robust ESG disclosures need to be regulated by law.