Enforcing ESG to require clear regulatory sanctions

November 01, 2024 | 10:00

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To enhance competitiveness, banks are being tasked to integrate environmental, social, and governance principles with clear awareness and regulatory frameworks that create compelling pressure for action across the banking and business sectors.

At a seminar on environmental, social, and governance (ESG) in banking hosted by VIR on November 19, experts unanimously emphasised the critical role of regulatory sanctions in enforcing ESG adoption. While a unified set of standards may not be required, inconsistent criteria and advisory approaches from banks have caused confusion and inefficiencies for borrowing enterprises, highlighting the need for streamlined and consistent guidelines.

Nguyen Ba Hung, chief economist of the Asian Development Bank in Vietnam, highlighted the importance of embedding ESG regulations into a broader legal framework governing economic activities nationwide, ensuring both banks and businesses operate within a unified legal foundation.

“ESG risks are not defined by specific regulations but by the broader legal framework governing business activities,” he said. “For domestic businesses, a common legal framework for environmental and social governance exists, but banks assess risks based on their individual risk appetite, with higher risks leading to higher interest rates.”

Hung also stressed that promoting ESG implementation requires both incentive mechanisms and regulatory sanctions to ensure effective outcomes. He warned of the growing trend of greenwashing, where companies claim sustainability credentials but fail to meet genuine standards.

“Some countries are exploring tools to combat greenwashing. Once commitments are made, mechanisms must verify if businesses are fulfilling their promises, with sanctions ensuring that green commitments are genuine and fully implemented,” he said.

Ly Thu Nga, team leader of the Green Financial Sector Reform component under the Green Growth Programme at the German Development Agency in Vietnam, pointed to Vietnam’s progress in integrating ESG risk management into existing banking regulations, and proposed consolidating the requirements into a unified document.

Drawing on Germany’s experience, she highlighted that the Federal Financial Supervisory Authority introduced mandatory sustainable risk guidelines in 2019, which became compulsory for all banks in 2023. This framework enables regulators to assess banks’ risk management practices and ensures mechanisms for effective oversight, including reporting, evaluation, and monitoring.

“In Germany, ESG risks are integrated within traditional risk factors such as credit, market, liquidity, and operational risks. In Vietnam, we have supported the State Bank of Vietnam in developing ESG-related risk management regulations, which are crucial for fostering the healthy development of banks,” she said.

Nguyen Thuy Duong, chairwoman of EY Consulting Vietnam, underscored the importance of aligning Vietnamese accounting standards with international ESG frameworks. She pointed out that international funding opportunities, such as Vietnam’s $15.5 billion Just Energy Transition Partnership, require banks to act as intermediaries while meeting international standards. “We cannot afford to wait passively; we are shooting at a moving goalpost. Banks must adapt rapidly to align with evolving requirements,” she said.

Duong suggested that independent audit firms could play a role in verifying compliance with ESG standards, provided clear regulations are established.

“If clear regulations are in place, it would simplify the process of determining compliance. However, no such framework currently exists, leaving questions about how audit findings can be utilised by regulatory authorities in their decision-making processes,” she added.

Ta Duc Binh, senior researcher at the Institute of Strategy and Policy on Natural Resources and Environment, highlighted the ongoing development of Vietnam’s green taxonomy, which will help banks assess the risks and benefits of green projects. However, Binh cautioned that while such taxonomies are useful for verifying project eligibility, they should not necessarily dictate financial incentives or support.

“In Vietnam, there is an expectation that green project lists should not only verify eligibility but also offer incentives or support, adding complexity to the process of finalising such a list,” he said.

From the perspective of small- and medium-sized enterprises, Bui Bich Lien, founder and CEO of EMcom, argued that societal contributions should be a key criterion for evaluating green investments. “Capital is critical for businesses. However, we do not necessarily need cheap capital but rather a partnership. Factors like green jobs and a clean environment are just the surface. Long-term solutions lie in clear, standardised criteria that identify the deeper societal problems businesses are addressing and how they are improving living environments,” Lien said.

Banks play a pivotal role as funding channels and partners in supporting businesses’ sustainability journeys. Le Mai, sustainable finance country lead at Standard Chartered Vietnam, emphasised the need for strategic awareness among both banks and businesses.

“Sustainable finance is a top priority for Standard Chartered Bank, and we follow global evaluation frameworks and standards. Green credit accounts for a significant share of our total lending, and we have committed $300 billion globally to sustainable financing by 2030, with $87.2 billion disbursed by 2023,” she said.

Dao Minh Tu, deputy Governor, State Bank of Vietnam

The State Bank of Vietnam (SBV) has introduced various policies, directives, and guidance related to ESG in banking activities focused on promoting green credit and managing environmental risks in credit activities, including the National Strategy on Green Growth for 2021–2030, and environmental risk management in credit activities.

These measures demonstrate the sector’s commitment to ESG practices, contributing to green growth goals while raising awareness and enhancing the capacity of businesses that rely on banking resources to comply with environmental and social responsibilities.

Under the SBV’s guidance, the implementation of ESG has seen tangible improvements, from awareness to action. Financial institutions have proactively integrated environmental and social factors into their development strategies and business models, improved organisational structures, managed environmental and social risks in credit activities, advanced digital transformation efforts, and actively sought international partnerships for technical and financial support.

Ha Thu Giang, director general Department of Credit for Economic Sector State Bank of Vietnam

To promote ESG practices, green banking operations, and move towards sustainable development goals, the SBV will continue to implement tasks like continuing to monitor, guide, and promptly remove difficulties in the implementation of government guidelines. The bank will also guide credit institutions to issue green credit and report on its implementation after the prime minister issues the National Green Taxonomy.

The SBV will support and facilitate credit institutions to participate in international cooperation activities, thereby enhancing resource mobilisation, contributing to the implementation of the National Strategy on Green Growth and promoting ESG practices in Vietnam.

For the banking sector’s policies to be truly effective, besides the sector’s efforts in promoting ESG practices, directing credit capital to environmentally friendly projects, and expanding credit access for green sectors, collaboration among various ministries, agencies, and related entities is crucial.

Developing an updated and easily accessible database on the environmental and social aspects of projects is crucial, as it would provide credit institutions with a reliable source for assessing project impacts. Supporting training and capacity building for enterprises is necessary to help them align with international standards.

The proposal to the Prime Minister on environmental criteria for projects eligible for green credit and bonds should be expedited, guiding credit institutions in selection and monitoring. A comprehensive roadmap for supportive policies, including tax incentives, funding, and technical assistance, would strengthen ESG practices and optimise green credit resources.

To Quoc Hung, country manager, ACCA Vietnam

This year marks a breakthrough for ESG practices in Vietnam’s banking sector, with five out of 10 financial service enterprises publishing independent sustainability reports for the first time. This milestone highlights growing efforts to integrate ESG principles. Many banks have also launched green initiatives, such as green bonds and green credit products. However, the journey towards fully embedding sustainability into banking operations is still ongoing.

Several Vietnamese banks have committed to green credit and provided specific figures, but setting concrete targets as a percentage of total outstanding loans would enhance accountability and strategic planning. A key challenge is the regulatory framework, which remains underdeveloped. Efforts are underway, with international organisations providing technical support to build comprehensive legal structures. Simultaneously, banks should establish their own green credit criteria and promote them to enterprises.

Another significant challenge is the shortage of skilled personnel in sustainable development, particularly in the Asia-Pacific region. Although the topic is not new, it remains a pressing issue. Specialised training and capacity building are crucial to addressing this gap.

From a broader perspective, frameworks governing green projects, green credit, and the harmonisation of domestic and international standards are still evolving. Stakeholders are making strides to finalise these frameworks, but progress must accelerate to align with global developments. International organisations are also updating their standards to adapt to rapid changes.

Addressing these challenges and accelerating the regulatory process will enable Vietnam’s banking sector to strengthen its ESG commitments and contribute significantly to sustainable development in the region.

Bui Bich Lien, founder and CEO, EMcom JSC

Businesses with a green and sustainable development orientation require long-term investment across all types of capital. That is because adopting a sustainable path means embarking on a long journey. Without the support and collaboration of banks and financial institutions, businesses’ resources remain limited, making it challenging for them to endure on this prolonged path.

There is a desire for banks and financial institutions to establish policies and criteria to identify what constitutes green or sustainable projects. This would not only help banks manage risks and mitigate the possibility of non-recovery of funds but also allow businesses to grow steadily and manage their risks effectively. Thus, a strong partnership between the two sides is essential.

Currently, providing capital, especially green financing for businesses, appears to be in its early stages. Many firms can’t access these sources of funding, partly because the communication surrounding such projects is not sufficiently clear. As a result, businesses may not even know whether they meet the requirements or not.

In cases where businesses believe they are eligible for green financing, there is no standard framework or criteria to help both sides evaluate, compare, and later measure the effectiveness of the projects. The role of banks in communicating about green financing to businesses remains weak. Many businesses have no idea where to access green funding, or whether they stand a realistic chance of succeeding once they do.

If a clear set of criteria, standards, and commitments from both sides were established, it would strengthen the determination of businesses and their advisors, making these efforts more practical. This would enable us to deliver measurable value and assess whether the impact of the products created by businesses aligns with the policies pursued by banks, businesses, and the government.

ESG represents a shift towards sustainability for banks

At a seminar on environmental, social, and governance (ESG) factors in the banking sector hosted by VIR on November 19, industry experts assessed that banks have performed exceptionally well in governance, while the environmental and social aspects remain challenging.

By Vy Vy

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