International-standard green bond certification crucial for Vietnam: FiinRatings expert

Application of international certification standards is necessary to ensure the transparency and effectiveness of green bonds in Vietnam, wrote Nguyen Tung Anh, head of sustainable finance service at domestic credit ratings agency FiinRatings.

The green taxonomy is the first step to opening up a range of government support policies to encourage green bond issuance and investment. However, completing this goal will not be simple as it must be accessible and internationally suitable.

Green bonds are gradually proving their role as an effective financial tool to mobilize capital for environmentally friendly projects, contributing to promoting sustainable development. In Vietnam, only two packages of international standard green corporate bonds have been issued on the domestic market, but many credit institutions and businesses have begun to pay attention and reserve resources to attract potential green capital flows.

One issue is ensuring the effectiveness of green bonds as well as building a transparent image for the international market that meets certification standards.

Green bonds in the labeled bond ecosystem

There has been strong development of green bonds and also other labeled bonds, known as green, social, and sustainable bonds (GSS+).

Worldwide, 2023 was a record year for green bond issuance when it reached $575 billion, accounting for 59% of the total value of GSS+ bonds, showed data from Germany’s DZ Bank. According to the Global Green Growth Institute (GGGI) in Vietnam, GSS+ has shown to be an effective tool to direct capital channels to climate change businesses.

Regarding the purpose of capital use, green bonds or other tools such as carbon credits play an important role in sustainable development. Green assets and projects in the fields of renewable energy, afforestation, and waste treatment are long-term in nature and require the participation of the private sector to ease the burden on public investment. This is also a characteristic of bonds.

Therefore, when combined with impact investment factors from domestic and foreign investment funds and institutions, the above projects and assets can receive stable investment capital at a reasonable cost, reducing credit risks and ultimately leading to increased possibility of project success.

Besides, some types of projects can utilize different tools to increase profits, such as the model of issuing green bonds for wind and solar power projects towards selling carbon credits, helping businesses gain more value and increasing the feasibility of financial projections.

Green bonds from credit institutions also create momentum for businesses, especially small and medium-sized enterprises, to meet environmental standards for green loans. Therefore, it can be said that green bonds have multifaceted impacts on the debt market and green practices of businesses.

International standards for green bond certification

Around the world, green bond issuers implement principles according to two main standards: the Climate Bonds Standard (CBS) of the Climate Bonds Initiative (CBI) and the Green Bond Principles (GBP) developed by the International Capital Markets Association (ICMA).

Currently, the CBS is considered the most prestigious and popular standard for certifying green bonds. This standard has been applied in more than 30 countries, creating a trusted platform for investors and issuers.

According to the CBI, to be certified as a green bond, issuers need to meet strict requirements on transparency in the use of capital, project evaluation and selection, capital management, and periodic reporting. At the same time, projects financed by green bonds must contribute to at least one of the five core environmental goals, including climate change mitigation, climate change adaptation, natural resources conservation, biodiversity conservation, and preventing pollution.

The GBP is an important set of voluntary guidelines for the green bond market, including four main pillars: use of capital, project evaluation and selection process, capital management, and reporting. These principles encourage external review and certification to ensure compliance with the above pillars.

They have been widely adopted by issuers, investors and other stakeholders. GBP compliance enhances the transparency, accountability, and integrity of the green bond market, thus promoting investment flows into environmentally friendly projects and activities.

In short, the CBS provides a more stringent certification program with clear eligibility criteria for green projects, mandatory reporting, and third-party verification.

Meanwhile, the GBP provides voluntary best practice guidelines that promote transparency and disclosure but give issuers greater flexibility in determining what is considered "green" based on voluntary reporting. The principles are there to encourage but do not require external certification.

Both aim to promote the integrity and development of the green bond market, but the CBS sets higher standards in terms of definition, requirements, and guarantees to provide greater confidence for investors. However, compliance with the GBP remains the more common approach in the market today.

Green bond certification in Vietnam

Green bonds in Vietnam are counted as bond lots issued in VND in the domestic market. There are pioneering businesses issuing green bonds and obtaining green loans overseas, but domestically, so far, only VND3,650 billion ($145.53 million) of green bonds have been issued, coming from EVN Finance and BIDV bank.

Currently, banks have gradually followed the trend of green finance and sustainable finance with moves to build a sustainable financial framework and prepare for the next batches of GSS+ bonds. However, Vietnam's green bond market is still facing many challenges.

According to experts, the main barriers include lack of a legal framework, limited information and data, and insufficient understanding of stakeholders about green bonds.

FiinRatings in 2022 became the first Vietnamese organization authorized by the CBI to certify green bonds according to international standards. This event marked an important milestone, opening up opportunities for Vietnamese businesses to access green capital from domestic and foreign investors.

To promote the development of the green bond market in Vietnam, raising awareness and understanding of the CBS or GBP in the business and investor communities is essential. In addition, the government and management agencies need to build a clear and consistent legal corridor, facilitating the application of international standards in Vietnam.

Policy recommendations to promote green bond market development

Businesses in Vietnam still prefer to wait for the government's direction and recommendations so they do not face obstacles related to regulations. Many potential green bond issuers say they wish to participate in the green financial market, but still want to wait for green taxonomy issuance to be truly confident. They can also mobilize money from other sources.

Therefore, one of the recommendations receiving the most attention is completing the legal framework on green bonds, which should clarify the concepts, criteria and green bond certification process in accordance with international practices and domestic conditions. This is not a simple task as regulations must be tight enough to avoid “greenwashing” but also accessible and clear so that businesses are not hesitant to increasing resources for preparatory work, especially in establishing a Green/Sustainable Finance Framework compliant with CBS or GBP.

Vietnam needs to develop a list of green projects eligible for bond issuance following environmental criteria in accordance with international standards and the country's reality. This list will be an important basis for issuers, investors and regulators to identify, evaluate and monitor projects funded by green bonds, ensuring greenness and a positive impact on the environment.

As the green financial market has just emerged with the engagement of financial institutions and large enterprises, it is necessary to strengthen information work to raise awareness of all parties concerned, especially businesses and investors, about the benefits of green bonds and the importance of green certification.

After taking initial steps such as the green taxonomy, the government may need to offer tax and fee incentives for green bond issuance and investment activities, creating motivation for market development. Incentives may include corporate income tax reduction, exemption of listing and transaction fees for green bonds, or interest subsidies for green projects financed by bonds.

However, this issue needs to be carefully scrutinized because the certifying party will play an important role in determining whether businesses issuing green financial instruments can access incentives or not. For regional markets such as Singapore or Thailand, these regulatory agencies have developed technical and certification cost subsidy programs for issuers that meet international standards and deliver transactions in the domestic market.

For example, Singapore sponsors up to SGD125,000 ($92,096) for each business, including foreign ones, as long as consulting activities regarding green bond issuance, development of a green/sustainable financial framework, and framework validation, are made in this country.

Finally, to tap the above experiences, Vietnam also needs to promote international cooperation, learn from previous countries in developing the green bond market, and take advantage of support from prestigious financial institutions and green investment funds. It should actively participate in regional and global initiatives and forums on green finance to share and learn from experiences, and attract resources for the domestic market.

Orientations and solutions for building green financial system

To support the development of the green bond market, Vietnam needs to build a strong green financial system. During this process, orientations that can be considered include:

- Developing a green classification framework in accordance with ASEAN and EU standards and international practices, creating consistency in evaluating and classifying green projects.

- Developing green bond issuance conditions on the principles of simplification and risk management, and towards convenience and feasibility, to encourage businesses to research and participate.

- Developing strict regulations and sanctions for "greenwashing" behavior to ensure investors' confidence in the transparency and efficiency of the green bond market.

- Identifying bonds that comply with international standards for financial and non-financial incentives and support, creating incentives for issuers towards compliance with best practices.

Solutions and recommendations to promote green bond market

Bonds that comply with international standards will need support and encouragement to create a premise for developing the green bond market in Vietnam, with financial and non-financial solutions.

Financial solutions:

- Tax and fee incentives for issuing and investing in green bonds such as corporate income tax reduction and exemption of listing and transaction fees.

- Supporting the costs of developing the Green Finance Framework and the costs of certifying green bonds according to international standards.

- Requiring/encouraging banks to allocate part of their credit quotas to fund green projects and buy green bonds to boost supply.

- Interest subsidies for green projects financed by green bonds.

Non-financial solutions:

- Honoring pioneering businesses and financial institutions in the field of green finance and green bond issuance.

- Recognizing and encouraging green bond packages that comply with regional and international standards and principles such as the Climate Bonds Standard (CBS) of the Climate Bonds Initiative (CBI) and the Green Bond Principles (GBP) developed by the International Capital Markets Association (ICMA).

- Improving transparency in information disclosure, clearly distinguishing green bond packages with those of conventional bonds on portals.

In the current period, recognizing and encouraging green bonds that meet international standards to be considered a feasible and effective solution to promote the market. This would not incur extra costs but brings reputational value and demonstrates regulators’ efforts to encourage the development of the green financial market.