The twin transition and key impacts on the financial sector

May 23, 2024 | 10:54
(0) user say
The financial sector finds itself in the midst of two transitions – a green and a digital transition. These transitions can clash, but also reinforce each other, and are shaping Vietnam’s financial regulation landscape.

Vietnam’s financial institutions are increasingly feeling the impact of environmental, social, and governance (ESG) factors on their risk assessment, capital allocation, and governance structures. To realise Vietnam’s long-term green commitments, Vietnam needs swift and robust actions, including necessary amendments and supplements to relevant legal regulations.

The twin transition and key impacts on the financial sector
Le Net (left) and Vu Thanh Minh, LNT & Partners

Hence, there is a clear urgency for these institutions to incorporate ESG considerations into their strategies and operations. This includes assessing and managing ESG risks, enhancing board members’ knowledge, and integrating the criteria into capital management.

Transparency obligations worldwide, such as the Sustainable Finance Disclosure Regulation and Taxonomy Regulation by US and EU standards, are pushing Vietnamese financial institutions that want to join global financial market to disclose more information regarding sustainable investments. Hence, forthcoming regulations may further shape reporting standards.

Legislative changes in Vietnam are integrating sustainability considerations into financial services through the duty of care. This requires financial institutions to incorporate ESG factors throughout the customer journey, from product approval to contract stages. Regulations such as Securities Law provides detailed provisions regarding the disclosure of ESG-related indices. However, aligning regulatory duty of care with sustainability goals poses challenges and requires careful navigation by financial institutions.

Legal frameworks for issuing green government bonds, green municipal bonds, and green corporate bonds have been defined in legislative documents. Meanwhile, the issuance of municipal bonds must comply with regulations on municipal bond issuance, and provincial people’s committees must report the project portfolio using proceeds from the issuance of green municipal bonds according to the guidance of the Ministry of Finance.

As for green corporate bonds, they are regulated by Decree No.153/2020/ND-CP. The organisation of issuance, registration, depository, listing, and trading of such bonds is similar to that of regular corporate bonds.

Vietnam has experienced several green bond issuances domestically and internationally in recent years, indicating significant potential for development in this area. Such policy directions as outlined in decisions like the Green Growth Strategy, the National Action Plan on Green Growth, and plans to implement the Paris Agreement.

Financial institutions must navigate this changing landscape, considering factors like alignment with regulatory standards and external reviewer requirements.

Companies such as Bamboo Capital and Trung Nam have issued green bond to domestic markets. Meanwhile, Vingroup pioneered the issuance of sustainable bonds with the option to receive shares worth $425 million. However, the current situation of green bond issuance in Vietnam still faces challenges.

Several factors contribute to this, including a lack of specific regulations on the green concept and green bonds, difficulties in accessing relevant data, and a lack of policies to encourage businesses and investors to participate in the green bond market.

Vietnamese financial supervisors are increasingly relying on data-driven approaches for supervision. However, concerns arise regarding the legal basis for data requests and compliance with data protection regulations. Balancing the need for data collection with privacy considerations poses a significant challenge for financial institutions.

Vietnamese financial institutions must prepare for compliance with internal and external requirements, particularly concerning ICT service provider contracts. In addition to personal data protection, Vietnamese financial institutions may need to comply with the EU’s General Data Protection Regulation if they collect information from EU citizens, such as tourists or trading partners.

Meanwhile, Vietnam does not have regulation on cryptocurrency, although Vietnamese citizens are among the top three cryptocurrency owners in the world. Under current rules, illegal means of payment are those not included in the payment services recognised by law. Therefore, cryptocurrency is not considered legal tender and cannot be used to replace cash for buying, selling, or making payments.

Upcoming regulations will establish a new regulatory regime for crypto-asset service providers in Vietnam. Financial institutions need to assess their involvement in crypto-related services and prepare for compliance with such requirements. Already in Europe, the EU Commission set a new EU-wide regulatory regime for crypto-asset service providers, to become applicable from 2025.

AI is gaining prominence in Vietnam’s financial sector, prompting regulators to consider new frameworks to ensure ethical and sound AI use. Vietnam already aims to accelerate research, development, and application of AI, making it a pivotal technology field within the country’s Fourth Industrial Revolution.

By 2030, Vietnam endeavours to become a hub for innovation, developing AI solutions and applications within the ASEAN region and globally. Specifically, it aims to be among the top three countries in ASEAN and the top 50 globally for AI research, development, and application, with two national innovation centres for AI.

AI is already booming in many sectors such as healthcare, marketing, legaltech, and fintech. And so, financial institutions must adapt to evolving AI regulations, which may impact their governance and distribution practices.

Overall, Vietnam’s financial sector faces unprecedented opportunities and a complex landscape of regulatory changes and technological advancements, requiring proactive adaptation by financial institutions to navigate the twin transition effectively.

Groundwork laid for the dual transition Groundwork laid for the dual transition

Vietnam’s strategic focus on attracting high-quality foreign investment is being demonstrated through its emphasis on green and digital transformation projects, supported by robust legal frameworks and a strong commitment to sustainability and technological innovation.

VIR talkshow on the green-digital dual transition VIR talkshow on the green-digital dual transition

At the VIR talkshow “Enticing FDI for Dual Transformation,” speakers discussed the factors needed to create a stable and effective FDI environment.

By Le Net and Vu Thanh Minh

What the stars mean:

★ Poor ★ ★ Promising ★★★ Good ★★★★ Very good ★★★★★ Exceptional