Are Green Bonds The Answer To Vietnam’s Infrastructure Dilemma?

 

17 May, 2018

 

 

For many countries across Southeast Asia, including Vietnam, the rapid pace of growth has meant that finding stable sources of funding can be a struggle.

 

This is particularly true in the case of infrastructure. According to a report by the Asian Development Bank the region will need up to US$2.8 trillion worth of roads, bridges and railways by 2030 to keep up with economic growth.

 

Faced with an increasingly unstable political climate, Southeast Asian nations are looking at safer options to fund their infrastructure developments over the coming years. Over-reliance on China, which has already backed nearly US$1 trillion worth of projects under its ‘Belt and Road’ initiative, will likely be scaled back as economies turn to domestic solutions. Fears of China’s plan overstepping its stated bounds have caused countries around the region to rethink their embrace of the ‘belts and roads’, with instances of financial misuse and failed projects serving as cautionary tales.

 

Political tensions over territorial claims in the South China Sea and increasing international protectionism are also causing countries like Vietnam to seek self-sufficiency in future financing. State budgets across the region are coming under growing strain, so leaders are looking elsewhere to fund much-needed development over the coming years. One proposition is to promote the issuance of ‘green bonds’.

 

What you need to know about ‘green bonds’ 

 

A green bond is like any other bond, however the funds raised by the issuer are earmarked for ‘green’ projects, or in other words, those that are environmentally-friendly and take climate concerns into account. Particular sectors that stand to benefit most from the issuance of green bonds are renewable energy, infrastructure and construction.

 

Building roads, bridges, tunnels and tracks takes a huge toll on the climate, both locally and nationally, thus projects which seek to lessen their environmental footprint are a top priority.

 

On top of concentrating funding towards environmentally-friendly projects, green bonds also highlight the issuer’s commitment to sustainable development. Additionally, they provide issuers access to a specific set of global investors who invest only in green ventures. With the increasing focus of foreign players towards green investments, it could also help in reducing the cost of capital.

 

What does this mean for Vietnam?

 

According to German development agency GIZ, Vietnam will need roughly $30.7 billion by 2020 to move its current carbon-dependent development onto a more sustainable path, and towards its Intended Nationally Determined Contribution (INC).

 

Some 30 percent of the credit for green growth is expected to come from the state budget, consisting of central and provincial funds as well as official development assistance (ODA), whilst the remainder will be sourced from the private sector.

 

Under the Vietnam Green Growth Strategy (VGGS), approved by the government for the 2011-2020 period, the capital market will be key in achieving the country’s targets. It is here that green bonds will be vital – raising funds specifically for green projects and enterprises, creating a platform for green products’ derivatives trading, as well as tapping into private sector investment for sustainable development.

 

In terms of foreign interest, Vietnam’s issuance of green bonds is hoped to attract international investors with an orientation towards sustainable development, renewable energy and environmentally-friendly growth. Investors around the world are increasingly attuned to the challenges of climate change and the energy transition. More and more of them are clamoring for investment tools that take environmental issues into account, especially in the developing world.

 

Vietnam is not the only country in the region to see the promise of sustainable funding. With the ASEAN Green Bond Standards (AGBS) developed and launched in November 2017, common standards were laid down for the issuance of ASEAN green bonds. The AGBS label is to be used only for issuers and projects in the region and specifically excludes fossil fuel-related projects. Companies in Malaysia, Singapore and Indonesia have already issued bonds labelled as ASEAN Green Bonds.

 

Funds raised from these green bond issuances will be allocated to projects such as renewable energy, waste management, green buildings and infrastructure, which meet sustainability criteria and contribute to the common goals of integration, connectivity and overall ASEAN growth. Primarily, regional leaders are realising that growth cannot come at the expense of future generations. Initiatives like the AGBS will help in the allocation of resources towards climate friendly investments.

 

Stunted green growth

 

One of the milestones to be achieved by 2020 is to expand the green bond market to at least 1 percent of the global bond market, currently about US$90 trillion. For this to happen, sovereign issuers must be completely on board.

 

Asia’s local currency green bond market is still characterised by a lack of liquidity, limited diversification of bond structures, and the absence of a large regular stream of bankable projects.

 

Additionally, consistent demand from socially responsible investors is still limited, hampering the market’s growth potential.

 

There is, however, a lot of potential for growth in the local currency green bond market, as long as sovereign issuers establish an enabling environment and a strong framework is applied. The key constraint will be the number and size of bankable green investments.

 

If Vietnam fully embraces the ‘green bond’ movement, an injection of funds in this manner could prove a panacea – patching up the infrastructure funding gap, laying the foundations for more rapid expansion and ensuring the long-suffering climate gets a breather.