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MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

MASTER THESIS

GREEN FINANCE IN VIETNAM'S BANKING SECTOR:

LAW AND POLICY ASPECTS

Specialization: International Trade Policy and Law

Full name: Nguyen Thi Minh Thu Supervisor: Dr Ha Cong Anh Bao

Hanoi –2019

TABLE OF CONTENS

Statement of original authorship i

Acknowledgements ii

List of abbreviations iii

List of figures iv

Summary of thesis research results v

CHAPTER 1: INTRODUCTION 1

1.1 Introduction 1

1.2 Literature review 3

1.3 Objectives of the study 4

1.4 Significance of the study 4

1.5 Research methodology 4

1.6 Structure of thesis 6

CHAPTER 2: OVERVIEW OF GREEN FINANCE IN BANKING SECTOR 8

2.1 Overview of Green Finance 8

2.1.1 Development of Green Finance 8

2.1.2 Definition of Green Finance, Green Credit, Green Banking and Sustainable Banking 11

2.1.3 Main types of Green Credit 16

2.1.4 Importance of Green Finance in sustainable growth of Vietnam 17

2.2 Overview of Green Finance in banking sector 19

2.3 Green finance in banking sector – perspective from international organizations: 21

CHAPTER 3: LAW AND POLICY ON GREEN FINANCE IN BANKING SECTOR IN SOME COUNTRIES 28

3.1 G20 countries 28

3.2 China 33

3.3 Singapore 39

3.4 Experiences for Vietnam 41

Chapter 4: LAW AND POLICY ON GREEN FINANCE IN

VIETNAMESE BANKING SECTOR 43

4.1 Legal framework on green finance in Vietnamese banking sector 43

4.1.1 Agenda 21 (1992, 2002, 2015) 43

4.1.2 Constitution (1980, 1992, 2013) 46

4.1.3 Major relevant Laws 46

4.1.4 Government’s Strategies and Action Plan 48

4.1.5 State Bank’s Guidelines 54

4.2 Current situation of green finance in Vietnamese banking sector 62

4.3 Case study in BIDV 68

4.4 Assessment 70

Chapter 5: RECOMMENDATIONS 74

5.1 Completing legal framework 74

5.2 Signing of the Principles of Responsible Banking by Vietnamese banks 75 5.3 State management agencies on natural resources and environment 80

5.4 Associations, professional associations and civil society organizations 81

5.5 Incentives to banks 81

5.6 Dissemination of guidelines and data about green finance/green credit 82 Chapter 6: CONCLUSION 83

REFERENCES 85

Appendix 1 - Sustainable finance policies in other Asian countries 90

Appendix 2 - Interview Questionnaire 93

Statement of original authorship

The work contained in this thesis has not been previously submitted to meet requirements for an award at this or any other higher education institution I certify that this is my own work and that the use of material from other sources has been properly and fully acknowledged in the text

First of all, I owe my deepest gratitude to my supervisor, Dr Ha Cong Anh

Bao - Vice Dean of Faculty of Law, FTU, for his enthusiastic guidance and valuable comments during the process of my Master thesis This thesis would not have been possible unless he has very properly and promptly advices from making preliminary thesis plan to completion of the whole thesis

Secondly, I would like to show my gratitude to Ms Nguyen Thi Phuong -

Head of BIDV Legal Department, Mr Do Van Hai – Head of Trade Finance, BIDV SMEs Department and other experts from Vietnamese commercial banks as well as renewable projects for spending time and sharing precious experiences and ideas at

my in-depth interviews

Thirdly, I would like to send my thanks to leaders and colleagues at BIDV FDI

Banking Department for providing good conditions for me to complete my research

Fourthly, I would like to extend my appreciation to my classmates and friends

Thank you for sharing your knowledge, wisdom, and insight with me Specially, my thanks to Ms Mai Thi Lien for her supports during the course It has been a great pleasure to study with you

Finally, I would like to thank my family members for their love and

continuous supports to me

List of abbreviations

ADB Asian Development Bank

Agribank Vietnam Bank for Agriculture and Rural Development

BIDV Bank for Investment and Development of Vietnam JSC

CEO Chief Executive Officer

E&S risk Environmental and social risk

GDP Gross Domestic Product

GSO General Statistics Office of Viet Nam

GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH IFC International Finance Corporation

JICA Japan International Cooperation Agency

ODA Official Development Aids

OECD The Organization for Economic Co-operation and Development

SBV State Bank of Vietnam

SME Small and Medium Enterprise

UNDP United Nation Development Program

UNEP United Nation Environment Program

UNEPFI United Nations Environment Program Financial Initiative

UNESCAP United Nations Economic and Social Commission for Asia and the Pacific

List of figures

Figure 1: Data providers for the loan market, their data levels and indicators 24 Figure 2: Green credit outstanding loans vs Total outstanding loans 67

Summary of thesis research results

As part of green growth strategy, green finance is a topic of great interest in many countries including Vietnam Green finance is a broad concept, covering financial investment from both public and private sectors in projects relating to eco-friendly products, environmental damage mitigation and closely linked to sustainable development Green finance in banking sector or green banking is any form of banking that its core operations contribute towards the betterment of the environment This research has not mentioned to green finance in banking sector as

a whole, but has only focused on the aspect of law and policy framework of green finance in Vietnamese banking sector Because of the crucial role of the law and policy framework on green banking development, as long as the law and policy framework is incomplete, it is very difficult for commercial banks to operate towards sustainable development The thesis has studied on the stage of law and policy framework for green finance practices in Vietnamese banking sector, its practical impact on the economy in general and application in BIDV as a case study After assessing limitations, some recommendations are given to improve the law and policy framework and promote green banking practices in Vietnam

CHAPTER 1:

INTRODUCTION 1.1 Introduction

Green finance is a proponent that combines money and business with environmentally friendly behavior (Hasen et al, 2017, p.1) Contrary to traditional financial activities, green economy emphasizes environmental benefits and provides greater attention to the environmental protection industry (Wang and Zhi, 2016, p.311) Green finance is to increase level of financial flows (from banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors

to sustainable development priorities A key part of this is to better manage E&S risks, take up opportunities that bring both a decent rate of return and environmental benefit and deliver greater accountability According to UN Environment Programme, green finance could be promoted through changes in countries’ regulatory frameworks, harmonizing public financial incentives, increases in green financing from different sectors, alignment of public sector financing decision-making with the environmental dimension of the Sustainable Development Goals, increases in investment in clean and green technologies, financing for sustainable natural resource-based green economics and climate smart blue economy, increase use of green bonds, and so on Green banking plays an important role in green finance Through banking industry is always considered as environment-friendly but at present the substantial use of energy (lighting, air conditioning, computing), small space, unplanned building, ignoring in-house greenness considerably increased the carbon footprint of banks Green banking avoids usage of paper as much as possible and relies on online/electronic transactions for processing so that

we can get green credit cards and green mortgages

According to Chen et al (2018, p.571), banking is the key sector that can play

an intermediary role between economic development and environmental protection Considering internal operations, banks do not affect the environment severely through emission and pollution, but their external impact on the environment through their customers’ activities is substantial As the providers of finance, banks

can be strict and impose restriction to the business initiators to adopt friendly projects and socially responsible investment to ensure the sustainable environmental condition Moreover, banks can provide loan at a lower rate and other incentives to industries for adopting green technologies which will have a lasting positive effect on the global environment

environment-According to Tran Thi Thanh Tu and Nguyen Thi Phuong Dung (2017), the result of a survey that was undertaken in June 2012 by State Bank of Vietnam (SBV) of 54 commercial banks, it was found that for 91% of them, there exists no clear policy at the banking level on the green growth, whereas 35% do not gain knowledge about the definitions of environment and social issues In particular, 89% admitted that the SBV’s regulations still lack the management of social environment in financial industry Generally, among Vietnamese banks there is a lack of experience of new technologies, which causes them to get into trouble with new energy credit such as the bias about risk appraise on green projects

In Vietnam, there is currently no bank which is genuinely considered as green bank, however, there exist several green products for green investments in Vietnamese commercial banks (Tran Thi Thanh Tu & Nguyen Thi Phuong Dung,

2017, p.11) One of the reasons is the limitation of law and policy framework Current law and policy on green finance includes National Green Growth Strategy, Vietnam Sustainable Development Strategy in the period of 2011-2020; Clean Technology Use Strategy; National Action Plan on Green Growth in the period of 2014-2020; Action Plan of the Banking Sector to implement the National Action Plan On Green Growth towards 2020 These laws and policies are not enough to guide specific rules and responsibilities for banks to implement green banking practices The law and policy framework need to supplement clear and specific regulations and guidelines for banks especially about E&S risk when giving a loan Therefore, the research on the law and policy framework on green finance in Vietnamese banking sector and giving some recommendation is necessary and significant

1.2 Literature review

There are many foreign researches on green growth in general and green

finance in particular Among them, “Banking as a vehicle for socio-economic

development and change: Case studies of socially responsible and green banks” by

Katrin Kaeufer with the initiative about 5-level model of socially responsible and green banking are referred much, even in the recent Scheme on Green Bank Development (2018) by the Governor of the State Bank of Vietnam

There are also plenty of studies and report published by international financial

organizations The first one to be mentioned is “Green Finance – A Bottom-up

Approach to Track Existing Flows” by International Financial Corporation (IFC)

(2017), which provide a new approach to assess and track green finance at three levels (project – industry – country levels) Interestingly, in that research, IFC gives

a definition of green finance which may be the simplest one in the world - “as financing of investments that provide environmental benefits” (IFC, 2016, p.3)

Another one is “Principles for Responsible Banking – Our Future Shaping” by the

United Nations Environment Programme - Finance Initiative (UNEPFI) (2018) introduces the principles developed by 28 global leading banks, which can be good practices for Vietnam

Despite abundant foreign researches on green finance, green credit and green bank, there is not much attention to these issues in Vietnam Prof Dr Tran Thi Thanh Tu is one dedicated person, who had coordinated with her associates to

release several works on this area, including “Green bank: International

experiences and Vietnam perspectives” (2015), “Tài chính Ngân hàng Kế toán Xanh – Kinh nghiệm quốc tế & Hàm ý cho Việt Nam” (2017), and “Factors affecting green banking practices: Exploratory factor analysis on Vietnamese banks” (2017)

Those studies contain quite comprehensive description and analyses of green banking in general; however, they are not keeping up with new regulations and situation in Vietnam from 2018 up to now

1.3 Objectives of the study

Main research objective: To analyze the law and policy framework for green finance practices in Vietnamese banking sector and then assessing the limitation of these problems in Vietnam Some recommendations for law and policy framework

on green finance in Vietnamese banking sector are given to promote green banking practices in Vietnam

1.4 Significance of the study

Green finance in banking sector is a very new issue in Vietnam There are few state-owned banks which supply green products and finance for green projects One

of the reasons is the limitation of law and policy framework According to Tran and Tran (2015, p.188), there are few in-depth studies conducted in Vietnam on the green banking And there are also a few studies on the law and regulatory framework about green banking in Vietnam Therefore, this research is significant for the authorities in promoting green banking practice in Vietnam

questions In particular, face to face in-depth interview was used to collecting information from the experts The choice for qualitative approach especially in-depth interview was based on the fact that, in-depth interview enabled the researcher to gather detailed information on the difficulties to which Vietnamese commercial banks face in relation to law and regulatory framework for green banking practice On other hand, in-depth interview with the experts in green projects enabled the researcher to find out the shortcomings of law and policy in the eyes of the beneficiaries of green finance – the borrowers Further, the findings of this study were represented by descriptive forms

The researcher conducted interviews with 08 relationship managers/credit experts of 5 commercial banks including:

- BIDV: Ms Nguyen Thi Phuong, Head of Legal Department, BIDV H.O;

Mr Do Van Hai – Head of Trade Finance, SMEs Department, BIDV H.O

- Sacombank: Ms Nguyen Hai Thanh – Director of Hoan Kiem Transaction Office, Thu Do Branch; Mr Duong Hung Cuong – Relationship Manager, Hoan Kiem Transaction Office, Thu Do Branch

- Vietcombank: Mr Tran Huu Nam – Credit Risk Manager, Credit Approval Department, Vietcombank H.O

- Techcombank: Ms Pham Thi Quynh Mai – In-house lawyer, Legal & Compliance Department, Techcombank H.O

- Military Bank: Mr Dang The Anh – Head of Corporate and Institution,

MB H.O; Ms Nguyen Thi Thuy Linh – Relationship Manager, MB H.O Privilege Banking, MB H.O

The same interviews were conducted with 02 experts from renewable energy projects, including:

- Mr Hugo Virag – Managing Director of Astris Finance LLC (France), financial adviser for Dam Nai Wind Plant Project in Ninh Thuan Province and Cat Hiep Solar Plant Project in Binh Dinh Province

- Mr Han The Phong – Chief of Executive of Binh Dinh TTP Energy

and High Technology JSC., the project company developing the Cat Hiep Solar Plant Project in Binh Dinh Province.

The questionnaire (Appendix 2) used for the interviews includes 08 ended questions aiming to observe the awareness of interviewees of green finance, their comments on current status of and difficulties in implementing green finance

open-in Vietnam and recommendation thereof

Among them, interviewees from Vietcombank, Techcombank, Military Bank showed little awareness of green finance The researcher found fruitful results from interviews with experts from BIDV, Sacombank and project developers Some of their comments are integrated in Section 4.4 (Assessment) of Chapter 4 and Chapter

5 (Recommendations) of this thesis

b) Case study

Case study method enables a researcher to closely examine the data within a specific context In most cases, a case study method selects a small geographical area or a very limited number of individuals as the subjects of study One of the reasons for the recognition of case study as a research method is that researchers were becoming more concerned about the limitations of quantitative methods in providing holistic and in-depth explanations of the social and behavioural problems

in question According to Zaidah Zainal (2007), past literature reveals the application of the case study method in many areas and disciplines include natural examples in the fields of Sociology, Law and Medicine

This study is about the law and policy framework about green financing in Vietnamese banking sector The subject is Law – one of the fields that is mentioned above In addition, green banking is very new issue in Vietnam and BIDV is one of the pioneering banks in Vietnam which supplies the green products and finances for green projects With these reasons, case study method is very suitable with this research

1.6 Structure of thesis

This thesis includes 6 chapters as following:

Chapter 1: Introduction

Chapter 2: Overview of green finance in banking sector In this chapter, the author will demonstrate the definition of green finance in banking sector, main types of green finance in banking sector and the role of green finance in banking sector for sustainable growth In addition, some perspectives from international institutions about green finance are demonstrated

Chapter 3: Law and policy on green finance in banking sector in some countries In this chapter, some countries or group of countries are chosen to mention include G20, China, Asian countries, etc After that, some experiences for Vietnam are summarized

Chapter 4: Law and policy on green finance in Vietnamese banking sector In this Chapter, the author reflects the stage of law and policy framework on green finance in Vietnamese banking sector A case study of BIDV and findings after in-depth interviews are also included in this Chapter

Chapter 5: Recommendations After analyzing law and policy framework on green finance in Vietnamese banking sector, the author implements the assessment Some recommendations are proposed to improve law and policy framework on green finance in Vietnam

Chapter 6: Conclusion

CHAPTER 2:

OVERVIEW OF GREEN FINANCE IN BANKING SECTOR

2.1 Overview of Green Finance

2.1.1 Development of Green Finance

Green finance is initiated following change of economic models when countries shift from the traditional “brown” economy to the eco-friendly economy (Tran Thi Thanh Tu et al, p.13) Theories on economic development prove that sustainable development of any country or territory is closely linked to environmental stability and use of alternative raw materials However, such a shift

in the economy requires a substantial amount of resources because application of green technologies and renewable energy is often more expensive than normal technologies in many cases Therefore, mobilization of resources for green economy development has become a topic of great interest when green economy was initiated – supposedly starting in the 1970s after the energy crisis Specifically,

a number of crises occurred following the energy crisis and dissolution of the socialist system in the world According to Jin (2010), around 90 economic crises occurred at an increasingly serious level from the 1970s to early 2000s, resulting in the need for economic model change: from the model heavily depending on natural resources to the eco-friendly one Moreover, environmental protection also became

a big issue when countries had to face adverse consequences of fast and furious economic growth mostly based on exploitation of non-renewable or long-term-renewable raw materials As sustainable economic growth requires a great attention

to environmental protection in all countries including developing ones, it is important to invest in green economy Meanwhile, this closely relates to green finance, i.e source of funds and use of funds

The history of green finance relates to public expenditure since investment in green finance is not a preferred option by the private sector due to its long-term tenure and high risks (Joseph, 1995, p.214) As a result, most of countries focus

their resources on development of alternative and supplementary products in the early stage, mostly using the State budget Financial resources are first directly allocated to research funds of universities, then followed by the state capital re-lending model to mobilize participation of stakeholders in the market at a later stage However, it is worth to keep in mind that while this model is considered a special resource for green economy development, state capital is not enough to cover all aspects of such development (Phan Thi Thu Ha, 2005, p.52) Main reasons include: (1) State budget must be reserved for normal expenditure – the largest proportion of the State budget expenses; (2) as eco-friendly projects are part of investment expenditures, they are often listed and granted appropriate budget allocations At the same time, as these projects have low profitability in a long-term investment period, they are considered unrealizable by investors with high influence

at parliaments (Jin, 2010) and thus subject to expenditure cut; and (3) As a large proportion of public expenditure is for aid to developing countries (United Nations, 2014), funding for green economy is mobilized from the private sector due to decreased allocation in State budget

Green finance in the private sector mainly comes from corporations and businesses and notably from banks Specifically, in case there are not enough resources for green growth or researches of green products, governments often contract businesses for such researches or businesses will conduct researches first and then sell results to governments (Xavier, 2010, p.11) In order to conduct successful researches, businesses first have to spend their own funding for market researches or mobilize from investment funds However, as financial market develops, these products are promptly listed in the stock market When businesses borrow from the banks or venture capital funds, loan contracts become goods for free transaction in the market At this time, banks and venture capital funds sell their loans, investments and re-funding portfolios including securitizing loans for green projects in the stock market (listed as green economy activities) Two main purposes for selling the portfolios include (1) bridging gaps in the financial market when businesses find that they are difficult to access to funding and small banks and

funds do not have enough funding; (2) turning of capital and gaining huge profit from the market (Chris, 2009; Oseo, 2009) As a result, green finance products of commercial banks in the market are very diverse – such as insurance, long-term loans, debt finance, asset backed securities These products are then restructured into more sophisticated ones including venture loans, venture funds, partial risk assurance mechanism, damage reserve and re-insurance However, this also results

in a number of issues in the financial market (green finance market): (1) many banks and venture funds go bankrupt following global financial crises after maintaining high-risk investment portfolios based on confidence in “risk appetite” under international standards (such as Basel II by that time) (Rudolf, 2010; Edward

& Javier, 2010); and (2) Businesses are not only subject to risks of market change (i.e risks with unexpected consequences) but also pressure of debt payment to banks Therefore, the public-private partnership (or PPP in short) becomes an alternative source for green finance

Joseph (1995) believes that PPP is an integral part of economic development

in any country in order to make use of cheap funding from the government to help businesses implement green investment projects In order to create green finance for businesses to invest in environmental protection projects or new business opportunities, the government would need to provide part of the funding and establish certain mechanisms for capital development of business – for example, commitments in land clearance or post-investment incentives Nevertheless, this source of green finance is facing challenges – especially in transitioning countries

as businesses are still facing a lot of obstacles by mechanisms issued by the Government (Tran Thi Thanh Tu et al, 2018)

Development of green finance not only goes with growth of its funding source but also promotes related issues, such as legal framework and business culture Specifically, in order to create green finance, governments have to ensure sustainable development of this funding source through legal framework on environmental protection and investor protection At the same time, the

development of “corporate social responsibility” idea also increases support to

green investments and helps businesses access to credit for green investment – Oseo (2009) Development of green finance also helps creating new credit tools in the market and access to new credit management methodologies in the world Specifically, new credit tools are created by commercial banks such as bank guarantee, long-term loan, asset backed securities, venture loan, start-up loan, etc These tools not only help businesses develop but also promote financial market growth and effective operation of credit institutions (Edward & Javier, 2010, p.5)

In addition, it is important to understand relevant definitions when analysing green finance development

2.1.2 Definition of Green Finance, Green Credit, Green Banking and Sustainable Banking

Paul (2000) believes that green growth goes with economic growth and sustainable environment This means GDP increase with ecosystem protection, contributing to health protection and improvement of living standards This definition is initiated by UNESCAP (2012), emphasizing that green growth is an ideal strategy for maximizing economic production while minimizing damages to the environment Green growth is a proper approach to economic growth, aiming to reduce poverty and ensure sustainable environment This methodology focuses on substantial growth, mainstreaming environmental protection as an incentive for economic growth As part of green growth strategy, green finance is a topic of great interest in many countries including Vietnam In order to understand “green finance”, it is worth to look into the concepts of green credit, green banking and sustainable banking as well

Definition of Green Finance

In the study “Mapping of Green Finance Delivered by IDFC Members in 2011”

of Hohne et al (2012), green finance is a broad concept, covering financial investment

in projects relating to eco-friendly products and policies on sustainable development Specifically, Lindenburg (2014) defines that green finance includes both public and private finance, focusing on investing in green products and services such as protection

of landscape and biodiversity, etc., to minimize damages to the environment or climate change risks In addition, green finance might be understood as a finance instrument to implement public policy, specifically, to encourage initiatives to mitigate environmental pollution or support for relevant projects

Similarly, Zadek & Flynn (2013, p.1) in their study “South-Originating Green Finance: Exploring the Potential” reckon that green finance is often used for green investment However, they also agree that, in practice, scope of green finance is more comprehensive, including green investment expenditure such as costs for project preparation and land acquisition

Jin (2010, p.2) looks at the definition of green finance by its components: (1) support to green businesses and technologies; (2) development of green finance products and investors; (3) considering environmental impacts during loan assessment; (4) effectiveness of activities causing environmental wastes Green finance might apply to various products and areas, reflecting in 3 types, namely green infrastructure, green industry and business, and green capital market In these cases, green business finance includes green projects, securities, venture funds, investments in environmental protection technologies Similarly, World Bank (2010) defines that green finance relates to establishment, distribution and use of funds for environmental protection, preventing climate change, reducing toxic chemical emission, aiming to achieve social-economic sustainable development without any damage to the environment

For the purpose of analysing green finance in banking sector, Pricewaterhouse Coopers Consultants (PwC) (2013, p.15) defined green finance as financial products and services, under the consideration of environmental factors throughout the lending decision making, ex-post monitoring and risk management, provided to promote environmentally responsible investments, technologies, projects, industries and business

In a nutshell, it is possible to conclude that green finance means finance only those projects and businesses which protect or less deteriorates the environment In

a wider sense, whether its funding resource comes from the public or private sector, green finance must support initiatives relating to (1) environmental protection, i.e environment improvement, creating new products or livelihood; (2) poverty reduction; (3) improvement of infrastructure closely linked to environmental protection and social security

Definition of Green Credit and Green Banking

As green credit is a form of credit, it is worth to look at credit definition

Rose (2013) defines that in a broad sense, credit includes activities relating

to debts and future debt payment of the principal and interests Accordingly, credit also includes deposits as they create future debts of receiving parties However, this definition is considered too broad and must be interpreted in a more succinct way Consequently, credit can be literally interpreted as a loan granted by an organization to another organization upon commitments of repayment of the principal and interests Both Rose (2013) and Casu (2015) agree with this definition, considering that credit is listed as asset of an organization Furthermore, it is worth to consider the definition of bank credit in which banks grant or commit to grant a loan to their clients upon the latter’s commitments of repayment of the principal and interests In the Law on Credit Institutions of Vietnam 2010, credit is also interpreted in this way

In brief, definitions of credit (literally) include (1) granting or committing to grant a loan by an organization; (2) to a certain client; (3) with commitments of repayment of the principal and interests, i.e such credit is granted not free of charge

As part of credit, green credit is often looked as financial resources to support activities relating to environmental protection or climate change These financial resources often go under governmental or environmental funds However, as financial resources from the State budget are disbursed in the form of credit, they often go through commercial banks, i.e from green banking to green finance Therefore, it is important to understand the definition of green banking First

of all, Rose (2013) believes that banks meet requirements for deposit insurance

This view has been codified in the United States where all responsibilities belong to deposit insurance However, in Vietnam, it is interpreted that banks must provide all banking services, namely 3 services relating to receiving deposits, granting credit and payment (National Assembly, 2010) As a result, as part of banking system, green banks must meet requirements for above-mentioned services and must have legal status

Two popular schools of thought on green banking include:

Firstly, green banking is understood as sustainable banking Initiated by Imenson & Sim (2010), this point of view believes that sustainable banking is only achieved if investment decisions are made on a big picture, bringing benefits to consumers, social and economic development and environmental protection As a result, there is a close link between banking and social, economic and environmental issues Sustainable banking is only achievable if banks’ interests are closely related to social development and environmental This school of thought is supported by macroeconomists

Secondly, green banking is interpreted as professional banking operations to encourage environmental protection and low carbon emission such as encouraging clients to use green products and services, applying environmental standards in granting capital or preferential credit for projects in low CO2 emission, renewable energy or granting funds to the poor, etc., (UNESCAP, 2012) Accordingly, banking services are closely attached to commitments to environmental protection or loans for green businesses Nevertheless, SOGEISID (2012) believes that a green bank is not purely a social enterprise but must act as a traditional bank with additional services to investors and clients as well as services for the benefit of the community and environmental protection Consequently, this school of thought believes that while operating as a normal commercial bank, a green bank must also meet requirements on sustainable economic-social development and environmental protection Accordingly, if a bank provides credit services to clients to implement projects relating to environmental protection (such as environmental improvement, reduction of greenhouse gas emission, or poverty eradication, etc.), such services are considered green credit

In brief, regardless of whether green credit is initiated by businesses, banks or governments, it should not only follow the general rule of repaying of both principal and interest but also aim to solve environmental or social issues

Sustainable banking

Currently, there is no common conception of sustainable banking development but common view on sustainable development only This view, therefore, will be approached in terms of sustainable development from different objects in the economy

Regarding the view of bank owner (such as an investor), sustainable banks are those meeting the requirements of the investor and being directed to maximizing the owners' interests (Rose, 2013; Casu, 2015) Such view makes the banks mainly aim

at profit when they develop sustainably, leading to the international views that banking system shall be monitored, that is to comply with certain standards (for example, Basel II, Basel III) to stabilize the entire system, avoid the breakdown under the dominance effect in the industry The view is highly appreciated by financial researchers, but it is necessary to consider additional social responsibility

of enterprises

Regarding the view of social responsibility, the bank not only acts as a normal business but should be associated with the panorama also From this point of view, the bank should take common actions, towards the interests of the community, the environment, the economy and the society When the bank owner’s interests are attached to other benefits such as the environment and society, in the future, the finance users will have closer relationships with the bank (Imenson & Sim, 2010) Before the global financial crisis, issues related to sustainable development in this direction were not placed seriously (Tran Thi Thanh Tu et al., 2017), especially in developing countries, because of trade-off between environmental protection and economic growth goals However, after 2008, most countries had to reconsider the issue Issues related to sustainable development, business responsibility, social responsibility - ethics - environment were reviewed at a higher level Therefore,

green banking emerged as an ideal model for the bank in the future, and the foundation for sustainable development

In this thesis, the author will use the second perspective to approach bank development in a sustainable way

2.1.3 Main types of Green Credit

Basically, green credit must respond to all types of credit, so there are two main types of green credit as follows:

First group - lending activities This group basically consists of lending

activities related to environmental protection and poverty reduction Lending activities related to environmental protection involve credit products such as solar project financing program, working capital financing program to help develop green products, loans for purchase of equipment for investment in manufacturing noise- pollution control products, capital investment in financial assets In addition, there are a number of lending activities related to environmental protection such as loans for the use of environment-friendly equipment, for building energy-saving houses, for pollution control systems, for projects using renewable energy and for energy-saving projects (Tran Thi Thanh Tu et al., 2017, p 86)

Furthermore, in terms of loan products, it is necessary to pay attention to the loans provided to people in rural areas This group tends to target the poor Therefore, these credit products only focus on lending small amounts to women as the main target object, and through groups - teams Another part, under the Government's orientation, is provided to farm households to develop their own economy, mainly related to environment-friendly models such as VAC model or recycling of garbage-related products However, because the target object is the poor, this product group is obviously not attached special importance in developed countries, but only in developing and underdeveloped countries

Second group - credit products excluding loans, namely guarantee, factoring,

discounting, financial leasing, or card-related activities Basically, this product group is given on the basis of loan product group, and develops similarly to loans

However, it is worth to overview the differences between loan and non-loan credit products Regarding bank guarantee, this is a credit activity that forms off-the-balance-sheet items, banks can use their credibility to secure payment for their clients’ debts (of course, these clients’ debts shall be listed in the green credit portfolio - similar to loans) If a client fails to pay the debt, the bank will pay on behalf of the client, then it is similar to bank loan Regarding discounting and factoring, banks buy debts and advance to the sellers – the beneficiaries of receivables first, thus, the sellers will sooner have capital for business Banks then recover the debts from the buyers Regarding financial leasing, banks buy fixed assets forming their clients’ green investments, then the clients will pay gradually The second group also include card-related activities, which include two main forms: debit and credit cards These activities are promoted through spending and use of cards, aimed at increasing access to financial services

Nonetheless, not only the banks, but also the Government, investment funds or other credit institutions may do the same activities mentioned above in accordance with relevant laws

2.1.4 Importance of Green Finance in sustainable growth of Vietnam

Sustainable development is an important goal that Vietnamese Government aims for in the process of economic construction During development, Vietnam has experienced a rapid growth (the period of 2008-2012), with the rate at about 7% per year, the environment-related issues were also trade-off (Ngo Thang Loi et al, 2012) In order to reduce the pressure of rapid development and turn to sustainable development, the Prime Minister (2012) said: “Green growth must serve the interest

of the people should be made by the people, for the people, contributing to creating jobs, reducing poverty and improving people’s material and spiritual life”

In order to grow green, green finance is an extremely important requirement in the economy

In terms of macro-economy, the role of green finance in Vietnam can be seen in

the opportunities it brings to the economy Firstly, since a large part of green

investments are for infrastructure development, by encouraging environment-friendly

technologies in infrastructure construction, green finance helps developing countries

in general and Vietnam in particular avoid the model “growing first, cleaning thereafter” and reduce the expenditure for resolving environmental consequences of

normal technology Secondly, low-carbon economic growth has become inevitable

for more and more countries under the pressure of climate change and other environmental and economic crises, the countries with complete green finance system will have more competitive advantages than the others because enterprises and organizations participating in the green finance system become “greener” and thus,

attracting more investors Thirdly, when encouraging all economic sectors to create

and use of alternative resources and technologies, governments increase their economic prospects by facilitating new markets that have great potential for

employment creation (Tran Thi Thanh Tu et al., 2017, p 44)

In a narrower sense, the role of green finance in sustainable growth of Vietnam can be seen through that of green credit as follows:

Firstly, green credit promotes the implementation of environmental protection measures, creates nature-friendly products and economic stability (SOGEISID,

2012) From 2012 to the end of 2017, the funding from the Government, banks and private sector were used for most items relating to green growth and sustainable growth (GSO, 2018) Thanks to the funding, the projects involving solar power, wind power and tidal power are being completed, replacing hydropower and thermal power In addition, the programs and projects through ODA re-lending (from governments as well as international financial institutions) have supported the process of environmental rehabilitation in Vietnam, including the projects for rehabilitation of river and lake environment of big cities, and projects for construction of plants and factories developing environment-friendly fuel sources Also, these funding have helped localities build high-tech zones (i.e information technology, biotechnology, environmental technology) in Hanoi, Ho Chi Minh City,

Da Nang and Binh Duong, contributing to implementation of Vietnam’s environmental protection strategies

Besides, the development of credits helps speeding up the consumption of organic goods and clean food for people Due to considerable number of products created, it will inevitably accelerate the supply of food consumption chain stores as well as environment-friendly goods, and reduce the pressure on the consumption of goods relating to brown economy

Secondly, green credit itself promotes the process of creating green credit products (UNESCAP, 2012) When banks implement activities related to green

credit development, their client’s demand for capital also changes according to the change of products or services Therefore, traditional credit products can hardly meet the different requirements of the market Accordingly, it will form groups of products and services that can cover green banks, i.e new green credit products

Thirdly, green credit contributes to reducing poverty and building new rural areas in Vietnam (Le Thanh Tam, 2015, p.8) If we consider green credit as

financing for the poor sector, the banking system and the Government of Vietnam have carried out many “green” activities for quite a long time The Government has had certain implications for bringing finance to the poor by establishing microfinance institutions such as M7, TYM or CEP or separating the Bank for the Poor from Agribank to support individuals and organizations to obtain loans in the market The Government also carries out activities to accelerate access to credit services through various methods such as providing loans through groups – teams, through organizations’ branches as well as providing flexible loans This has promoted Vietnam from the low-income group to the low-middle income group In addition, these loans do not require security assets, so it is possible to help households in rural areas to develop appropriate economic models (typically VAC model – Garden, Pond, Pigsty/Poultry Shed) associated with environmental protection and creating livelihood for themselves

2.2 Overview of Green Finance in banking sector

Green finance in banking sector has been studied in many respects, which are often mentioned under the two main aspects of green banking levels and roles of green finance

Firstly, green finance can be reflected in green banking levels According to

Kaeufer (2010, p.5), basically, the operation of green banking is expressed through the following levels which also reflect green finance’s roles accordingly

- Level 1: Banks carry out extra operations, i.e using their money to finance public or the community activities or use money in the form of concessional loans

to finance programs related to environment, public health, education and support for low-income people In other words, at this level, banks do not consider green banking/green finance as their main activities Most banks are currently at this level

- Level 2: Banks begin to separate their financing activities into two parts: the first part is regular financial operations – i.e profit-making activities; the second is financial operations for the purpose of environmental and social improvement Usually, there are only a small proportion of banks that are at this level

- Level 3: Banks start to combine two trends of the Level 2, under which most banking procedures and products comply with the "green" principle, i.e banks’ structures are formed to support green activities, as well as financial resources tend

to be shifted to "green" goals

- Level 4: At this stage, banks balance their strategic ecosystem where green finance activities are not limited to the scope of the banks but expand to their networks, and they cooperate with other banks and interact with the community to achieve sustainable goals of both profits as well as environmental and social issues

- Level 5: Active ecosystem balancing initiative, in which banks performs similarly to Level 4 but in a proactive perspective for their own goals, not only for responding to external changes

Secondly, there are several benefits of green finance in banking sector When

implementing activities related to environmental protection as well as social impacts, green finance in banking sector plays the following roles:

- First, creating conditions for economic sectors to save energy and natural resources With banks’ funding in projects (directly or indirectly through credit operations), green finance will contribute to the creation of environment-friendly or

energy-saving products Thus, these activities can create stability for the economy

in long term

- Second, creating interdisciplinary impacts By effectively providing funding

to projects, green finance provided by banks will impact businesses in different industries and indirectly impact the situation of that sector On the other hand, activities related to green economy will require a high level of technology, thus affecting the development of different industries In addition, when banks use their resources to finance “green” activities, they will have to renovate their own working environment, which means digitalization to save resources such as paper, ink and electricity, as well as integrating many products in one transaction - for example, developing applications for smart phones Thus, green finance activities create positive impacts on access to financial services - because nowadays most of customers use smart phones On the other hand, when green finance in banks becomes popular, it will become the standard in business culture and will show the responsibility of banks to social issues The spillover effect of this issue will form community responsibility as well as social responsibility for other organizations and businesses Thus, the community will benefit more

- Finally, the effects are "cross-border" Since the bank's operations must first invest in themselves, most operations must be digitized to trade with other banks through online or electronic services Thus, financial products will be provided to more diverse audiences in the economy, and capital will be transferred between banks in different countries These activities also promote green projects and green economy in the future

2.3 Green finance in banking sector – perspective from international organizations:

The World Bank Group – International Financial Corporation (IFC)

Various financial institutions, international initiatives, standard setters, and regulatory bodies have developed their own approaches to green finance Building

on the work of the Group of 20 (G20) Green Finance Study Group, the IFC Climate

Policy team has developed a new approach to assess and track green finance, focusing on the banking sector, to understand the current status of green lending and provide recommendations on how to better align different approaches to measuring green finance This will allow for analysis on a broader scale, which could result in better policies to mobilize additional green finance

The IFC’s approach bases on the bottom-up methodology This approach first defines what is green at the project level, based on the intended use of the investment in the real economy, through the application of estimates for the respective green share per project It then aggregates the numbers at the industry and country level These results can be compared to green finance needs to identify gaps and action points

Challenges lie in definitions, data, aggregation, and interpretation Depending

on the financial instrument under consideration, pure amounts invested need to be distinguished from the activities that are actually financed in the real economy In this context, “green activities” need to be defined, often through finding suitable proxies, because definitions are either not available or inconsistently applied The data needs to be aggregated across sectors and financial instruments, connecting different datasets And finally, a valid benchmark needs to be applied (the demand for green investment, in this case) to derive a sufficient level of green finance

An example about the application of the methodology to the loan market reveals some initial estimates:

- Define: The methodology is applied to a dataset on syndicated loans by Thomson Reuters Green project finance is defined based on the industry of the borrower

- Estimate: The green percentage of projects is applied to industry classifications using existing research figures: 100% green: clean energy; 0% green: oil and gas, petrochemicals, pipelines, coal power; 17% green: real estate; 13% green: Food and beverages, paper and forest products, agriculture; 10% green: Infrastructure and transport

- Aggregate: The results are aggregated per industry and country of the borrower

- Compare: 82% of all syndicated loans in 2014 financed projects in sectors with some green activities; Considering the US dollar value of all loans in 2014, almost 15% was green financing; Of all lending to projects with some green share, 41% of loans were for green real estate and 21% for infrastructure and transport (potentially because other industries use less project finance through loans); The United States has the largest share, with 35% of the total amount, followed by the United Kingdom with 8% China and India have a biggest share among emerging markets, both with 4%

Different datasets for the banking sector are accessible via international data providers such as BIS, Bloomberg, Bureau van Dijk, IFC, the International Monetary Fund, and Thomson Reuters At the country level, aggregated data is available on total loan granted, the share of non-performing loans, outstanding debts, returns on assets, and so on At the bank level, information on ownership structures of individual banks, mergers and acquisitions, and total loans is provided The most relevant datasets contain the following data:

- Project-level information, which refers to the use of proceed or physical activity being financed, including information about financial amount, time frame and sometimes explicit details on that activity (production of X tons of steel, for example), and selected impacts (carbon and water footprint, jobs provided, and so on)

- Company-level information regarding the creditor and borrower for each loan, including their sector and location

The figure below shows the different levels of available datasets and their respective financial indicators as well as data providers offering such information It maps out how the approximation of green finance needs to happen at the project levels, capturing what is effectively financed in the real economy The categorization into green and conventional finance per project can then be summarized according to the lender’s (or borrower’s) country of headquarter, and

sector This aggregated data can then be integrated into datasets at country of financial institution level:

Figure 1: Data providers for the loan market, their data levels and indicators

Source: IFC (2017, p.13)

IFC shows that, current data availability limits the rigor of the analysis of existing green finance flows Definitions and tracking are most advanced in the bond market and could serve as an example for other areas For banking, loan tracking processes need to be improved and institutional investors need to implement clear decision-making criteria To get a full picture of green finance, need to track “green” at the level of each project and cooperate between multinational organizations, national regulators, private financial sector, data providers and standard setters

OECD

The OECD’s approach focuses on the role of green investment banks (GIBs) This approach has been showed in the report of OECD “Green Investment Banks: Scaling up Private Investment in Low-carbon, Climate-resilient Infrastructure” According to OECD, Green investment banks are designed to address local market and policy failures Green investment banks as a means for governments to achieve ambitious climate objectives The creation of a GIB can send a signal to the marketplace and other countries that a country or region is seeking to become a leader in scaling up private, low-carbon investments GIBs are relevant for both developed countries and emerging economies as a tool in their domestic climate policy framework to help meet emissions, technology and infrastructure deployment and green investment targets In addition, GIB experiences are also relevant for international climate finance as the tools they use and innovative approaches to mobilize private investment are often applicable or adaptable to various contexts In emerging economies, GIBs may be able to work alongside multilateral development banks and other sources of public climate finance to de-risk infrastructure projects

to enable private investment capital to flow GIBs in some jurisdictions have mandates to deliver a positive financial return or achieve financial sustainability Achieving such goals can increase political support for dedicating public resources

to mobilize private investment in climate change mitigation, adaptation and resilience

The United Nations Environment Programme Inquiry

The United Nations Environment Programme (UNEP) Inquiry Into The Design of a Sustainable Financial System was established in early 2014 to explore how to align the finance system with sustainable development, with a focus on environmental aspects

UNEP has given five approaches to aligning the financial system (including green banking) to sustainable development These approaches which are demonstrated in the UNEP Inquiry report, 2015 include Enhancing Market Practice,

Harness Public Balance Sheet, Directing Finance through Policy and Upgrading Governance The improved functioning of capital markets themselves is a strategic focus of policymakers This is now extending to how capital markets can be enhanced to mobilize capital for the green economy

- Enhancing Market Practice: Enhanced market practice has proved the most popular approach to internalizing sustainable development into financial decision-making Disclosure of sustainability performance by institutional investors has also followed In a large part, these measures to improve transparency in the financial system are linked with wider measures to improve governance, both within corporations and financial institutions

- Harnessing the public balance sheet: Incentivizing sustainable finance through the use of the public balance sheet has been a feature in every country reviewed by the Inquiry Most advanced in the use of fiscal instruments is probably the US, with a range of federal and state-level incentives focused mainly on encouraging investment in infrastructure Tax relief on the income from municipal bonds is a long-standing feature, designed to encourage lending for investment in local infrastructure Others are more specifically targeted at environmental finance, including tax credits for renewable energy investments and the tax-advantaged Clean Renewable Energy Bonds Incentivizing private capital through the leveraged use of public funds (i.e guarantee facilities) and public sector balance sheets has become core to the strategies of many development finance institutions and other government and international financing vehicles

- Policy – directed performance: Measures that change the legal requirements facing financial institutions to meet policy goals are perhaps the most contentious, but are widely used, particularly in developing countries and also less explicitly in some developed economies This cluster of approaches concerns policy measures that go beyond improvements to market practice or providing public financing, and introduces requirements, and in some instances prohibitions, that shift capital allocation Such measures in effect introduce new performance criteria into financial decision-making, which might reduce or increase risk-adjusted returns

- Upgrading governance architecture: Governance architecture can promote the development of a financial system that is sensitized to sustainable development Financial governance is a multi-faceted, complex topic On the national level, financial governance concerns the mandates, levels of autonomy and underlying institutional arrangements of governing institutions, including central banks and financial regulators The Inquiry has examined the challenges of mandates, norms and capabilities of relevant governing institutions in taking sustainable development more centrally into account Typically, particularly in developed economies, mandates of central banks and financial regulators, and most financial standard-setters, focus on financial and monetary stability, alongside varied aspects of market conduct On the international level, examples of governance architecture include the governance arrangements of key international organizations and their process for agreeing to and implementing international standards (i.e the Basel Committee on Banking Supervision) The Bank for International Settlements is typical in having to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks The International Organization of Securities Commissions, similarly, exists to advance standards of regulation, oversight and enforcement in order to protect investors, maintain fair, efficient and transparent markets, and seek to address systemic risks

Facilitating market reform:

Market reforms can involve regulatory measures to encourage banks to internalize the negative environmental externalities of bank lending and savings products so that the provision of unsustainable bank credit and investment is efficiently priced with the result that the costs for society are mitigated Also, governmental subsidies that encourage excessive depletion of natural and energy resources should be curbed Together, such measures provide a foundation for banks to develop a business strategy for providing an efficient level of green credit and investment

In addition, some countries facilitate market reforms by providing stable term policy frameworks for important areas of the green banking system, such as renewable energy and energy efficiency Switzerland uses a policy framework that aims to improve business conditions for the banking sector so that banks can flexibly assess environmental and social risks and determine if they are material This policy was motivated in part by the experience of Credit Suisse involving negative publicity in 2014 arising from its involvement in a large deforestation project in Indonesia This highlighted the importance for Swiss banks of conducting due diligence in assessing whether bank lending projects are considered based on sustainability criteria Switzerland’s long-term policy approach was developed further by the Swiss government’s proposal in 2015 for a national energy strategy

long-that would be implemented over the next 30 years; it aims to incorporate sustainability criteria into all areas of economic policy and regulation and to impose taxes, and eliminate subsidies for unsustainable economic activities

Public Finance/Government-supported Institutions

In several G20 countries, national development banks play an important role

in providing credit and long-term financing for large infrastructure projects for renewable and clean energy Kern Alexander (2016) gave some examples about the stage of Turkey, Mexico, India and China While Turkey and Mexico use national development banks to deploy savings and capital towards green investment, especially longer-term funding projects that do not receive adequate financial support from private, India uses state-owned banks to provide long-term funding for sustainable energy projects and to assist large-scale agricultural business in using more sustainable practices Beside that, the four largest banks in China are state-owned and provide a substantial source of credit and long-term funding for large sustainable energy infrastructure projects and for smaller businesses engaged in sustainable economic activities In these countries, national development banks and state-owned banks use financing from public sources to promote the greening of the banking system and to assist the development of new markets for green assets Publicly owned banks and development banks also support the provision of private bank credit and investment for sustainable economic activity by leveraging private bank capital through on-lending activities and providing credit guarantees Moreover, several developed countries, including the United Kingdom and the United States, have established green investment banks for the purpose of providing financing for renewable energy projects

Banking Regulation

According to G20 Leaders Statement (2009), an important objective of the banking policies of G20 member states has been to complete implementation of the extensive financial sector reforms introduced following the global financial crisis The G20 Leaders’ Summit in Pittsburgh in 2009 identified the core aim of banking

regulation to be “to generate strong, sustainable and balanced global growth” The Basel Committee revised the Core Principles for Effective Banking Supervision in

2012 to enhance the capacity of bank supervisors to monitor individual banking institutions and to take into account risks that threaten banking system stability Although the Core Principles do not explicitly address the financial stability risks associated with environmental sustainability, they provide a flexible and voluntary framework for bank regulators to identify, assess, and manage the potential systemic risks for the banking sector that are related to sustainability challenges Moreover, the Basel Committee published in 2016 a range of good practices by banks and bank regulators about how to increase financial inclusion for economically and socially disadvantaged groups

The following areas of banking regulation are relevant for policymakers to consider in addressing environmental sustainability challenges

Disclosure

Bank disclosure of risks to investors is an important regulatory tool to support market discipline that can encourage banks to mainstream economically relevant environmental sustainability criteria into their business practices and to reallocate capital to more sustainable sectors of the economy In G20 countries, banks and other listed companies are already required to disclose to investors all material financial risks regarding their economic performance

Globally, over four hundred initiatives and voluntary disclosure frameworks across countries encourage companies and financial institutions to report E&S risk factors G20 countries already use the Basel III pillar 3 market discipline disclosure regime that entails extensive disclosure obligations for banks covering quantitative and qualitative aspects of overall capital adequacy and capital allocation, as well as risk exposure and assessments EU policymakers adopted the Disclosure Directive

in 2014 that requires member states to require listed companies, banks and certain financial groups to disclose to the market non-financial information, including environmental sustainability risks and environmental sustainability information

related to renewable and non-renewable energy, land use, water use, air pollution, greenhouse gas emissions and the use of hazardous materials

Some countries have implemented the minimum requirements, but others have included a number of other entities such as investment companies, large non-listed companies according to precise size criteria, state-owned companies, pension funds, etc For instance, France has adopted disclosure requirements that all listed companies (including listed banking companies) should disclose their carbon exposure as part of broader climate change reporting requirements

While disclosure is an important regulatory tool to inform the market about the financial stability risks associated with climate change, other policy instruments to assess the risks associated with environmental sustainability challenges should be considered as well

Bank Management

Most G20 bank supervisors use the Basel III pillar 2 Internal Capital Adequacy Assessment Process (ICAAP) as part of the Supervisory Review Evaluation Process (SREP) to assess the risk management and governance of banks Under pillar 2, banks are required to identify material risks that affect the bank’s stability and describe their risk management controls in addressing material risks In Brazil, the Brazilian Banking Association has adopted voluntary standards based on the pillar 2 framework to enhance bank assessment of environment risks Base on this, the Brazilian Central Bank published a mandatory Resolution 4327 in 2014 on the Social and Environmental Responsibility for Financial Institutions that requires banks to incorporate socio-economic factors into their risk governance frameworks

In doing so, each bank is required to do an assessment of its environmental risk exposure Similarly, the China Banking Regulatory Commission (CBRC) adopted the “Green Credit Guidelines” in 2012 to encourage banks to conduct E&S risk assessments and to originate more green loans France adopted legislation in 2015 that requires financial institutions to incorporate environmental sustainability risks into the institution’s risk management strategy (Energy Transition Act, 2015)

Indonesia has taken a step in this direction with its regulatory body – the Financial Services Authority – announcing a Sustainable Finance Roadmap in 2014 that would require all financial firms and banking in institutions to develop business plans and risk management strategies to offer green financial products and lending guidelines

Governance

Enhanced corporate governance mechanisms are necessary to reduce the incentives for banks to take on excessive risks that can threaten the stability of the banking sector In Russia, under Article 69 of the Russian Code of Corporate Governance, the board of directors of joint stock companies is required to assess the financial and non-financial risks that relate to environmental risks, as well as social, ethical, operational and other risks

The EU Disclosure Directive can play a role in improving bank governance by improving bank transparency for investors regarding its involvement in unsustainable economic activity Institutional investors are already beginning to ask banks about their efforts to mainstream sustainability challenges into their business models and their strategies to mobilize capital for sustainable economic activity The Basel Committee’s revised Corporate Governance Guidelines for Banks adopted in 2015 include a number of key concepts that are directly aligned with the consideration and management of environmental and social issues, including:

- A recognition of the impact of banks on the broader setting in which they operate;

- A recognition of banks’ accountability to a broad array of stakeholders;

- An emphasis on the need for an enhanced risk culture; and

- The call for ethical and responsible behavior

The revised guidelines provide a set of principles for banks to incorporate environmental sustainability objectives into their management strategies and risk frameworks