With COP27 in Sharm El-Sheik, Egypt, held just recently, the question of how to practically implement measures leading to net-zero is even more heightened. Indeed, journeys towards net-zero were brought to the forefront, including Vietnam’s pledge to achieve a 43.5 percent emissions-reduction target by 2030 and net-zero by 2050. At the Vietnam Innovators Summit on November 18, 2022, organized by digital media platform Vietcetera, McKinsey Vietnam Managing Partner Bruce Delteil reflected on where the country stands in its sustainability goals. Referring to Charting a Path for Vietnam to Achieve Its Net-zero Goals, Bruce spoke about both the path and the financing that is needed to close the gap between where the country is and its net-zero targets.
First of all, in Vietnam the need to reach net-zero is imperative as it is one of the country's most vulnerable to global warming, with Ho Chi Minh City’s flood depth possibly tripling between now and 2050 for instance. More organizations are recognizing how critical it is to be sustainable and are pro-actively building sustainability plans and setting targets, looking at their own carbon footprint and considering less carbon intensive ways of operating and producing, including those not just in the cities but also in the provinces of Vietnam, highlighted Bruce.
But achieving net-zero can be costly. In Vietnam this could require around $30 billion per year from the private and public sectors, and it is estimated that these investments will come over the next decade or so. Some projects could require a large injection of capital, such as the emblematic example of the much needed high-speed train between Ho Chi Minh City and Hanoi that will require around $55 billion. Organizations need to be convinced of the importance of making these investments. Fortunately, they can also be confident of potential returns, as these high costs can be neutralized over time or even lead to future profitability.
As a consequence, the journey to net-zero has to be financed and funded. A large opportunity lies in green bonds, an area that has grown exponentially in recent years and one that McKinsey recognized in Can Vietnamese banks seize the green-bond opportunity? Bruce said at the Vietnam Innovators Summit, “However, the level of issuance of green bonds in Vietnam is still limited, with only $216 million worth of green bonds issued over the past 5 years, while other countries in the region have been very proactive in developing those project financial instruments.”
This room to grow is primed by factors in its favor, such as there being enough projects that warrant green financing, the premium between corporate bonds and green bonds not being negative though there is a “greenium”, and Vietnam already having a legal framework in place that ensures banks start to take sustainability into account in their overall assessment of risks. This framework is an initial one however and needs to be both much further defined and deepened. “In five years,” Bruce pointed out, “banks in Vietnam could be looking at earning from $1.3 to $1.5 billion in revenue from green financing which encompasses all financial instruments related to ESG, going beyond financing per se, if they put in place the right strategy and operating model, and proactively identify suitable projects. Through the growth of green financing, there is something for banks to gain, for net-zero to gain and for Vietnam to gain.” This, he concluded, is the last part of the sustainability transformation equation that needs to fall in place.