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Banks Required to Assess Environmental, Social Goals in Vietnam

Vietnamese banks are now considering the environmental and social impact of their lending decisions, in addition to traditional credit risk factors. VOA/Ha Nguyen)
Vietnamese banks are now considering the environmental and social impact of their lending decisions, in addition to traditional credit risk factors. VOA/Ha Nguyen)

From 2008 on, Vietnam was mostly protected from the global financial crisis, not because its banks were stronger than the U.S. banks that created the crisis, but because it was less integrated into global trade back then. More than a decade later, Vietnam does far more trade with foreign countries today, making its banks far more susceptible to global trends. The government has taken steps to strengthen domestic banks.

In particular Vietnam is transforming banks to require that, when doing credit risk analyses, they take into account environmental, social, and governance risks, known as ESG. The State Bank of Vietnam has set a goal that by 2025, each bank will have created its own department dedicated solely to ESG analysis, and it will incorporate ESG factors into its overall risk analyses.

The central bank says it is making progress, noting that 17 banks in Vietnam have set up these mandatory departments to analyze the environmental and social impact of their lending, and that 25 banks have conducted such analyses so far, based on a survey in early 2019.

“Vietnamese banks have shown their readiness in pursuing a sustainable finance agenda, which is essential for capturing new business opportunities,” Nguyen Quoc Hung, director of the department of credit policies for economic sectors at the State Bank of Vietnam, said.

The push for banks and other businesses to consider their impact on the environment has given birth to buzz words like “green finance” and “green bonds” -- but what do they actually mean? An important example would be for a bank to provide a loan to a small business that produces wind turbines. The development of wind power would be considered an environmental benefit in the bank’s credit risk analysis, in addition to the social benefit of supporting a small business rather than just working with major corporations.

The example matters particularly to Vietnam because it considers green finance one strategy in its fight to mitigate and adapt to climate change, and it considers itself one of the countries most susceptible to the threat of a changing climate.

The government is moving to strengthen domestic banks as part of its membership in the Sustainable Banking Network, a network of 38 developing countries pushing ESG factors and supported by the World Bank’s International Finance Corporation.
A benefit of the network is for countries to share best practices, according to Imansyah, who is a co-chair of an SBN working group and who like many Indonesians goes by one name.

“Sharing lessons and knowledge among members has been an important catalyst to drive finance reforms,” Imansyah said.

His country, along with China, is leading the pack of 38 countries, having already implemented many of its planned ESG policies, such as government incentives for environmentally friendly investments.

However Vietnam is catching up. For instance an October IFC report noted, “Vietnam is one of the few SBN members to require CIs [credit institutions] to report the quantities and values of their green loans.”

Besides the environment, Vietnamese officials are concerned about ensuring social and governance standards at its banks, given the banks’ history of complex cross-ownership and corporate board arrangements that create possible conflicts of interest and that the government aims to clean up. It has also been cleaning up the burden of bad debt, or bank loans that have gone unpaid for a certain period of time, which could threaten the stability of the banking sector.

Social impact is harder to measure at Vietnamese banks. They might look to their U.S. counterparts, which did not fully analyze the social risks of giving out too many subprime mortgages, to be packaged into financial products for investors before 2008. The defaults on those mortgages, leading up to the global financial crisis, are the kind of social impact Vietnam’s banks wish to avoid.