Returns and Rewards of a Climate-smart Future

November 9, 2021

A World Bank analysis estimates total costs associated with climate change in Vietnam already amounted to 3.2 percent of the country’s gross domestic product (GDP) in 2020 and could reach 4.8 percent of 2020 GDP in 2030 and possibly up to 5.9 percent – or $68 billion – by 2050.

Vietnam’s Paris commitment is to achieve a minimum 9 percent reduction in GHG emissions by 2030. At the United Nations Climate Change Summit COP26 taking place earlier November, it joined more than 40 countries to phase out power generation from coal - the single biggest contributor to climate change - by the 2040s. A study estimates a low-carbon development scenario requires $2 billion in climate investment per year on average between 2010 and 2030 – approximately 1 percent of the country’s GDP.

Against this backdrop, the World Bank Group’s new diagnostic - the Country Climate and Development Report (CCDR) - is being developed to help Vietnam identify risks and opportunities for climate action by the public and the private sectors. From an investor’s perspective, Dominic Scriven OBE*, chairman of the leading private equity fund manager Dragon Capital Group in Vietnam said, “to promote climate investment, funding from both public and private sources should be offered on a risk taking and first loss principle”. Having lived in Vietnam for 30 years, Dominic shared his observations on how climate change has increasingly become visible here and what more the country can do to mitigate its impact.

1. From a business perspective, how do you see climate change impacting Dragon Capital’s portfolio performance and on Vietnamese companies generally?

Climate vulnerability can clearly be felt all year round in Vietnam. Even as we speak, heavy rains and river flooding have been happening for weeks in the Central region. Climate change is the most immediate issue in Vietnam.

For the first time last year, we ran an in-depth analysis to evaluate climate impacts at the asset level as captured by environmental indicators on our portfolio of 30 investee companies in Vietnam. The result was quite striking: the weather-related physical risk   in dollar value of our portfolio for the period from 2030 to 2050 could increase by five times compared to the portfolio of 2000 to 2010. The increase in physical risk from climate events have been dramatic and that will cause a cost to businesses in terms of financing, insurance or risk mitigation and adaptation. 

Though Dragon Capital could be the first one in the local market to do such a research, I think it’s time every investor and company takes climate change seriously as it’s real, with physical damage and it has financially material implications

2.  Funding is needed for climate change mitigation and adaptation, both at country and company levels. By 2030 Vietnam may reduce 27 percent of its total GHG emissions compared to the Business-As-Usual Scenario (BAU) with the support of international partners. Do you think this is practical?

Tackling climate change must be a collective effort. Developed countries are more advanced when it comes to decarbonizing their economies and developing countries may get left behind. Foreign governments and international partners have provided much funding, but it can be difficult to disburse given the condition of paying back in full.

No one doubts the private sector will hold the key in the fight against climate change by investing in climate smart solutions and initiatives. But since this is a new area, developers in need of financing cannot guarantee that they will be successful and able to pay back in full the loans they borrow. So as long as foreign governments do not accept to lend on a first loss basis and instead, insist on being paid back in full, funding flows will be untapped. Hence the issue is not just availability of capital, but it’s the conditions that are applied. I think it’s a real shame that governments are not prepared to take risk when investing in new, opportunistic, and impactful but also risky areas such as climate change.

3. So what will the private sector’s climate change role look like?

For businesses, they could be aware of the whole issue of carbon and climate change personally, but I don’t think they consider it in their business practices. So, it’s time to push climate change to the top of the agenda and take concrete actions. 

4. Climate change presents a huge business opportunity. IFC estimates the climate investment potential in Vietnam could total $753 billion between 2016 and 2030. How do you see this opportunity and how have Vietnamese businesses taken it up so far? 

I would agree there are many investment opportunities. The past two to three years have seen a significant increase in the number of renewable energy projects thanks to the government’s Feed-in-Tariff (FIT) schemes applied for solar and wind power. These schemes have been very successful, not just in Vietnam, but when you compare Vietnam against other countries in Southeast Asia, they have been very, very successful. 

But more needs to be done. We really need to help Vietnamese businesses tackle the opportunities especially as they lack long-term capital. Though renewable energy developers, for example, have been able to borrow from banks but there are limits to the amount of debt they need. Banks normally do not do 20-year loans. And long-term equity debt is not available, either. Therefore, improvement of the corporate debt markets with various instruments such as sustainable-linked bonds or biodiversity credits is necessary to promote climate change investments. 

For example, within Dragon Capital Group, with IFC’s help, we hope to invest $100 million in the next 12 months in equity and debt to be issued by renewable energy and other nature-based solution developers. 

5. How do you see Vietnam’s low-carbon economic development between now and 2030?

For me, to tackle climate change and successfully transition to a low-carbon economic growth trajectory, the key is creating a carbon market, where the people who produce the most carbon pay the most. Vietnam’s government should engage with the dynamics of the carbon markets to study and prepare the right foundation for Vietnam to start its own carbon market as soon as possible. 

* Dominic Scriven is British, was educated at Winchester, and graduated from Exeter University in Law and Sociology. His 30 years of investing have ranged from London to Hong Kong, but have been concentrated in Vietnam. He founded Dragon Capital (DC) in 1994 with $16m and eight staff. An IFC’s long-time partner, Dragon Capital is now Vietnam’s longest established independent asset manager with $6 billion in listed equity, clean-tech and fixed income for international pension and sovereign wealth funds and endowments. A Vietnamese speaker, he is an active advocate of financial market development and governance, and is a director of various Vietnamese public companies. He was appointed OBE by the British Queen in 2006, and awarded the Labor Medal by the Vietnamese President in 2014.