Vietnam’s efforts toward carbon neutrality and international institutions’ support for the transition offer various business opportunities, but challenges exist, writes Luong Phuong Mai from HSBC Vietnam's commercial real estate and wholesale banking division.
Since COP26, everyone has started to talk about JETP, making the acronym popular in news articles and social media. It stands for Just Energy Transition Partnership – a financing cooperation mechanism designed to help a selection of heavily coal-dependent emerging economies make a just energy transition.
The aims of such multilateral financial agreements are to support the phase-out of fossil fuels in a tailor-made and country-driven pathway that addresses the social consequences involved, such as training and reskilling affected workers and new economic opportunities for affected communities.
The first JETP - South Africa JETP - was announced at COP26 or the 26th UN Climate Change Conference of the Parties in Glasgow two years ago. Since then, a few additional countries have taken part in these mechanisms, with Vietnam becoming the third country to adopt a JETP with the International Partners Group (IPG) including the EU, UK, the U.S., France, Germany, Italy, Canada, Japan, Norway, and Denmark.
Opportunities and challenges
Under the terms of Vietnam JETP, IPG commits an initial $7.75 billion in public capital over a three-to-five-year period to support Vietnam achieve a number of energy transition targets. In support of these efforts, the Glasgow Financial Alliance for Net Zero (GFANZ) established a Working Group, of which HSBC Bank is a member, to help mobilize and facilitate a matching $7.75 billion of private capital.
In short, Vietnam JETP involves the mobilization of $15.5 billion of public and private financing to achieve net zero ambition. Following Vietnam's bold commitment at CO26 where Prime Minister Pham Minh Chinh put forward the ask that the country requires external support to achieve net zero transition, Vietnam JETP absolutely will be helpful for Vietnam to drive its climate agenda.
We see huge potential for shifting in energy and transportation, the top two emitting sectors in Vietnam, in implementing Vietnam JETP. Leapfrogging from coal straight to wind and solar would enable the country to make use of its own natural resources to provide its people with an economically secure source of energy given its considerable wind and solar potential.
Vietnam has exceptional natural endowments – wind speed and solar power potential - to generate renewable energy among Southeast Asian peers. However, key barriers to financing to flow into the energy transition is the bankability of power purchase agreements (PPA), and to transportation transition is the pace of the transition, which in turn is a result of an absence of any regulatory push and limited availability of charging infrastructure.
Unlocking possibilities
Vietnam JETP bears the potential to represent a turning point in the climate finance agenda. One of the three goals at its core is to mobilize private sector capital to finance decarbonization efforts.
Bankability and recovery in case of distress would be the first main aspects to present to lenders if businesses are to explore sustainable finance opportunities. They should be prudent with their business case, and better build in a buffer in their sensitivity analysis, for instance, curtailment, operational and maintenance cost, hike in interest rate, volatility in FX and so on.
Second, lenders like HSBC will pay much attention to greenwashing risk. Indeed, mitigating this risk is wired into our strategy. When providing green or sustainability-linked facilities, it’s important for us to “green proof” the investment or the use of proceeds by proper certification, monitoring and audit. We typically demand such certification/audit to come from a qualified third-party organization to obtain independent assessments, meet international standards and maintain consistency across markets.
Moreover, our green loans must comply with the Green Loan Principles issued by the Loan Market Association and our green bonds must comply with the International Capital Market Association’s Green Bond Principles.
A key benefit for Vietnam in a JETP is to attract greener FDI and to become a champion in clean energy. The Vietnamese government has been focusing on high-quality FDI, including green FDI. Like-minded partners attract each other, and therefore to attract investors who are serious about green development, the country needs to profile itself accordingly, from green policy, infrastructure to supply chain ecosystem. And JETP, backed by the G7 governments, is a very strong platform to make such aspirations of the country known to international communities.
As a bank supporting inbound FDI flows, we saw this with our own eyes. Right after Vietnam announced its net-zero commitment at COP26, Lego announced its plans to build the first carbon-neutral factory in Binh Duong province in the south, marking its second investment in Asia. HSBC is proud to support such flows and we believe that any member of JETP and GFANZ would be a champion echoing the “Vietnam green effects” to the international investor communities via our own network.
Finally, experts are looking into the possibility of applying the JETP model to other sectors beyond energy if Vietnam and other countries can prove JETP a successful approach for delivering climate finance. It, of course, will take time to see the results but it's an opportunity not to be wasted to make a leap forward for realizing decarbonization goals.