Climate core of IFC investment in Vietnam

Alfonso Garcia Mora, International Finance Corporation’s vice president for Asia-Pacific

Vietnam is one of the most vulnerable countries to climate change. Do you think the country’s net-zero emission goal is achievable and what needs to be done to make it happen?

I think the prime minister made a historical commitment at COP26 because the international community was not convinced that a developing country like Vietnam was going to commit to this important goal. Some other countries have done the same thing, but it was important to see Asia-Pacific taking a step forward in this in this agenda.

Vietnam is not responsible for significant global greenhouse gas (GHG) emissions as it accounts for only 0.8 per cent. But for the country, it represents a lot, considering how relevant carbon is as a source of energy: 50 per cent of the total electricity in the country comes from carbon, while the energy sector represents 65 per cent of the total GHG emissions.

For a commitment that will take 30 years to materialise, I think it is achievable. Two years ago, I would have said no, but today, I can say yes. There is a clear commitment to bring in the private sector, and this is a huge difference from what we saw in Paris seven years ago.

Specifically for Vietnam, I think what is needed is a comprehensive plan, in which the government works on the necessary policy and regulatory reforms to create incentives for the private sector to decarbonise, and the private sector comes in with the investment and capital needed to achieve these environmental goals. If these two sides of the equation do not match, we won’t be able to close the gap. But I think that Vietnam is in a good position to make it happen.

For the private sector, what are some of the challenges in maintaining a high sustainability standard while ensuring profits, especially in resource-intensive industries?

Contrary to common belief, I think making money and being sustainable are not mutually exclusive. In fact, in the medium term, investments that are sustainable will generate money.

There are two challenges for the private sector. The first is the challenge of mitigation because the country needs to change its energy mix to reduce GHG emissions. This process takes time and, during the transition phase, there needs to be commitment and a very clear path to solutions.

There will be workers that need to be reskilled, factories that need to be moved, and many other trade-offs that companies need to manage. That’s also why it’s very important for policymakers to come up with a clear action plan for the mitigation.

Second is the challenge of cost, as investments are needed in this transition phase. But again, I am convinced that sustainability is not costly in the medium term.

A big difference between now and 10 years ago is that the consumers and investors now want assets that are sustainable and climate-friendly. From an economic perspective, it might even be profitable to tax your investment as green. So this change is not just an issue, it could present business opportunities if explored from the right angle.

Has there been sufficient cooperation between the government and the private sector in combating climate change, and what further actions are needed?

The change in the energy mix is a must, and Vietnam is perfectly prepared for that. The country has all three renewable energy sources of wind, solar and hydro. What is left is to incentivise and facilitate the investments needed. We need a public policy programme that is aligned with international standards, so investors can trust that this is the market where they will get the same type of legal and regulatory support as any G20 country. There is good communication and initial understanding between the public and private sectors, but there is more to be done. Given the constraints that the country has in terms of capital, skills, technology, and its heavy reliance on coal, the private sector needs a lot of preparation to shift to a clean energy mix. Vietnam’s green commitment comes almost at the same time as the commitment to become a high-income country by 2045. As I said, this is achievable, and it brings opportunities. Our study estimated there’s a $750 billion opportunity for climate-smart business investment in Vietnam.

The issue is how incentives can be created and how policies should be implemented, in a way that helps the government achieve twin goals. Firstly, it is necessary to have incentives for users to shift to clean energy, and for producers to move to renewable energy production. This means no subsidy for coal production and transmission. Secondly, it is needed to reskill the population. Especially for a country like Vietnam, moving to the next level of productivity will require reskilling of a significant part of the population. There is also incentivising tech use which requires significant funding.

That said, the transformation of the country’s energy mix is impossible to be done by the public sector alone because the amount of capital needed is huge. While the government can impose tariffs to make renewable energy attractive and upskill workers, it is more efficient to leave the production of this energy mix to the private sector.

Furthermore, it is important to involve the financial sector. If banks disclose the GHG emissions on their borrowers’ balance sheets and issue green bonds or instruments that are climate-friendly, deposits in the banking sector will be directed to invest in green products, and the effect on the green economy would be multiplied.

How has International Finance Corporation (IFC) supported Vietnam on its green energy path?

Asia-Pacific is where we will have to deliver the climate change agenda. At IFC we have committed that, by 2023, 85 per cent of our portfolio will be Paris-aligned and by 2025, the entire portfolio will be Paris-aligned, which means climate is the core in everything we do. Renewable energy and greening the financial sector are therefore our strategic engagements in the region to support energy transitions in countries that still rely heavily on coal like Vietnam.

IFC has been a pioneer in solar development in Vietnam, supporting the country’s first private grid-connected solar farm, the Phong Dien solar power plant, developed by Gia Lai Electricity JSC. Last year, we provided a $57 million financing package to support the development of two wind power projects in Central Vietnam.

We are also supporting four Vietnamese banks to expand their climate finance portfolios to $1.2 billion by 2025, funding renewable energy, green building, and resource efficiency projects. Other strategic objectives for us are digitalisation and the transformation of supply chains that we are seeing globally, which will also create significant green effects.