Law on bank lending activities and environmental issues

between IFC and other EP participating financial institutions who may be involved in financing the same project.

The Principles include working groups that help build knowledge and capacity to serve the Principles and develop resources to support all financial institutions participating in the EP. The Principles enable us and other financial institutions to manage social and environmental risks in an organized and consistent manner. Therefore, the EP is valuable because it allows the banking community to have a common interest in managing social and environmental risks and to share experiences and knowledge .”

The State Bank has issued Directive 03 to encourage banks to conduct environmental and social risk assessments in their credit activities. Therefore, considering participating in the Equator Principles will help Vietnamese banks manage social and environmental risks in an organized and consistent manner. It will help banks to effectively implement the State's directives and policies on green credit, demonstrate the banks' social responsibility in environmental issues, while still ensuring financial benefits for banks.

However, Vietnamese banks are currently only at the level of referring to this set of principles. Official participation in the Equator Principles will be very difficult for banks in Vietnam when they have to ensure capital requirements, publicity and transparency in information disclosure, ensure human rights, and avoid participating in projects that pose high risks to the environment, including energy projects. Meanwhile, the energy sector is still an industry that is encouraged to invest in Vietnam to serve the needs of economic development. The fact that Vietnamese banks are still struggling to fully participate in Basel II principles also makes it difficult for banks to simultaneously participate in the Equator Principles with requirements on environmental and social risk management.

However, with the urgent need to build a green credit system as it is today, when environmental and social risks are receiving more attention from state agencies, when Directive 03/2015/CT-NHNN was issued. Banks have

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have a basis for building their own environmental and social risk assessment system in their own internal regulations. The Equator Principles are a source of documents that banks can refer to.

2.3.2. Some other international experiences

In the current context of the Vietnamese banking industry with the requirements for reform, restructuring, and starting to think about a more sustainable future instead of just investing "quickly", the State Bank of Vietnam's issuance of a common regulation for the entire industry on environmental and social responsibility issues could be a stepping stone for large banks in Vietnam that want to pioneer in this field. According to PanNature's research, a barrier to implementing environmental and social responsibility in credit activities is that some large banks are still hesitant to pioneer alone. However, this approach of the Vietnamese banking industry, through a top-down regulation, inevitably has limitations that need to be considered. Lessons from the "Green Credit Policy" program that China has implemented since 2007 could also be valuable experience for Vietnam. This policy was issued in July 2007 to encourage Chinese banks to provide credit to projects that are less polluting, environmentally friendly or use renewable energy. However, it took China nearly five years from the beginning of the policy until it developed a relatively detailed guideline for implementing this policy (February 2012). Previously, a number of independent studies on the implementation of this policy all gave low ratings to its effectiveness in the practical operations of Chinese banks. One of the biggest difficulties in implementing this policy in China is the lack of a reliable assessment system for industries and facilities that cause environmental pollution to serve as a basis for banks to classify projects, especially when many polluting industries are also industries that bring high profits to many localities. According to this study, the number of polluting facilities

blacklisted (and unable to borrow from banks until they improve their pollution) is considered too small compared to the number of establishments fined by the Chinese Ministry of Environmental Protection for causing pollution (38 compared to 8,000 in 2007). If the Vietnamese banking industry follows this path, this will also be the biggest challenge, and can also become a reason for banks to delay and avoid cutting credit to industries and establishments that cause pollution and affect people's lives but bring high profits to businesses and banks [16]

The United States is one of the first countries in the world to have regulations on environmental responsibility not only for polluting enterprises but also for other related parties, including banks lending capital to polluting projects and works when passing the Comprehensive Environmental Compensation Act (CER-CLA) in 1980. Although this Act exempts the lender (usually credit institutions) from liability, in cases where the lender participates to a certain extent in ensuring environmental and social safety of polluting projects and works, they must also pay a significant fine.

In 1990, the financial group Fleet Factors was ruled by a US court to make environmental compensation for its investment and direct involvement in a polluting project. This was a classic case in the US financial industry, and although controversial, it still forced credit institutions to seriously consider environmental risks when lending. In addition, CERCLA's strict regulations on environmental compensation also indirectly affected banks because if environmental compensation was required, the project investor would lose the ability to repay the bank. The International Institute for Sustainable Development (IISD) cited the results of a survey by the American Bankers Association, stating that after the Fleet Factors case, 63% of US banks refused to finance projects that they considered to have environmental risks and 46% of these banks decided to stop financing certain industries that often pollute the environment [8,24]

In Europe, in 1989, the European Commission (EC) introduced a draft Directive on Civil Liability for Damage Caused by Waste. However, it was not until 2004 that the Directive was officially introduced after the EC narrowed the rules on who should be held responsible for polluting facilities due to concerns from European banks that it would become a second CERCLA. After the Directive came into effect (from April 2004), EC member states had three years to develop their own national legislation. However, this was not completed until July 2010, so the assessment of its effectiveness is still limited.

The policies and laws used by the above countries and organizations all have their own effectiveness and limitations. Consulting, screening and applying appropriately to the practical situation in Vietnam will bring better results. Mandatory or voluntary both have their advantages and disadvantages. It is necessary to classify mandatory or voluntary regulations into specific cases.

Chapter 3: Solutions to improve the law on bank lending activities and environmental issues

3.1. Develop and promulgate a system for assessing environmental and social risks in lending activities of banks.

Directive 03/2015 of the State Bank has brought a new wind to the green credit development activities in Vietnam. However, for the directive to be put into practice in the operations of banks, there needs to be detailed, clear and easy-to-apply regulations for banks. The World Bank has issued an environmental and social policy framework to help and guide countries and banks around the world to build a system of policies and laws to build a green credit system in accordance with international practices and national laws.

In Vietnam, the State Bank has also cooperated with the IFC Financial Institution to build a system for assessing environmental and social risks in banks' credit activities.

According to the IFC guidelines (2010) [7,19-28], the experience of environmental risk management for credit activities of financial institutions has certain similarities. Environmental risk management can be divided into 4 main stages:

(i) Environmental screening, (ii) Environmental risk assessment, (iii) Environmental risk control and (iv) Environmental risk monitoring and reporting.

Environmental screening: This is done immediately after the financial institutions receive the credit application. The main objective of this content is to determine the level of risk for the bank. Based on the list of risky business activities and related guidelines, the project will be classified according to the level of risk (high, medium or low).

Environmental assessment : This is based on specific guidelines for each industry, general information about the project's environment and information collected from field surveys. The purpose of this content is to collect enough information to understand all risks, awareness levels, commitment and resources of the project owner to manage environmental issues. In case the risk is low, the bank can proceed to provide credit to the project owner. In case some risks are identified, it is necessary to identify and agree with the project owner on risk control mechanisms before granting credit. In case serious risks are identified, the bank can consider refusing to grant credit.

Environmental Risk Control : This is done to ensure that the project owner fully implements the agreed risk control solutions. During this process, the bank and the project owner need to agree and sign a contract on the environmental management responsibilities as well as the reporting regime of the project owner.

Environmental monitoring : Conducted with the aim of monitoring the implementation of commitments and reporting regime of the project owner.

In addition to IFC guidelines, banks in Vietnam can refer to the regulations on environmental and social risk assessment in the Chain Principles.

guidelines, or the World Bank's Environmental and Social Framework. These guidelines are issued generally for the world's banking system, and are often used by large banks, banks that have a fairly complete banking governance system as well as ensuring capital requirements, transparency and publicity. While banks in Vietnam are still making efforts to fully participate in Basel II standards, aiming towards a banking system with effective governance, increasing transparency and ensuring capital for use in risky situations. However, environmental and social risks are also one of the credit risks that banks may encounter in their operations. Having a suitable and effective environmental and social risk assessment system not only demonstrates the role of banks in environmental issues but also ensures the safety of the banks' own credit activities.

Legal regulations need to be put into practice, and banks need to be self-aware and aware. Therefore, promoting and raising banks’ awareness of environmental protection is a practical supplementary measure to bring legal regulations into banks’ lending activities.

3.2. Propaganda and raising awareness of banks on environmental protection issues

Raising awareness of bank leaders

This is the first and most feasible thing to do, when most bank leaders have experience in modern, multi-functional banking management, but their awareness of environmental risks in credit activities is not really complete. It is also possible that in the recent period of strong banking restructuring, banks focused on handling bad debts, ensuring liquidity for stable development, so they have not really paid full attention to the role of green credit in the sustainable development of the economy.

Promote, educate and educate bank customers about the benefits of green credit

One of the greatest benefits that green credit brings is contributing to adjusting the economic structure, promoting the development of green production and business sectors, supporting the implementation of the green growth target of the economy. No one else, except for businesses, bank customers are the bridge to bring green credit to the economy through their green investment activities. Therefore, promoting, propagating, and even educating businesses about the long-term impacts of green production and green investment have a direct impact, solving the output for green credit of banks. Banks are ready to provide green credit services but without businesses - borrowers absorbing capital, green credit is just policies and plans on paper.

In addition, banks should consider the following aspects when lending to a project:

- Analyze projects on the basis of the scale, nature and intensity of environmental impacts. Projects can be evaluated on the basis of potential positive and negative effects and then compared with a hypothetical situation without the project.

- During the investment or project fundraising process, banks should approach sensitive issues such as vulnerable groups; involuntary migration and projects should be assessed in important environmental areas such as wetlands, forests, grasslands and other biomes.

- Banks need to monitor transactions for environmental risk management programs throughout the project implementation and implementation. In addition, on-site inspections of production processes, resources, training and support, environmental liability, audit programs, etc. are also necessary. The next part of the assessment process includes credit structure, loan approval, credit overview and finally credit management from an environmental perspective.

- In addition, banks can introduce green loans and similar products: (i) investing in environmental projects (reuse, agriculture, technology, waste, ...) for example, reducing loan interest rates for borrowers to install solar panels; (ii) providing customers with the right to invest in the bank's environmentally friendly products; and

(iii) investing in resources that combine biological and social

3.3. Building an environmental management system and the role of government

With the advent of ISO 14000 and the development of information systems, it is now easy for credit officers to compare companies and pay attention to pollution management and measure the relationship between environmental responsibility and risks surrounding it. Although commercial banks pay more attention to investment activities than to environmental issues, environmental responsibilities can be built into environmental regulations and directly affect their investment decisions in the near future. In addition, it is necessary to build a separate environmental management and auditing system for the country based on ISO 14000 standards, because environmental auditing is necessary to move towards an environment that is easy to do business and towards sustainable development forms. In addition, past and present problems or potential environmental risks as well as environmental responsibilities need to be tied to the appraisal of investment projects.

But to ensure all of the above, we certainly need a strong legal framework on the responsibilities of stakeholders and especially the banking system. The government can issue regulations to direct banks to produce with a consistent environmental policy and make it public. Although Schimidheiny and Zoraquyn (1996) concluded from their studies that banks will have less incentive to finance environmentally friendly projects because: (1) They prefer projects with a faster payback period; and (2) Investments that come with environmental management costs usually yield lower rates of return. Therefore, sustainable investments seem to be difficult to find.

Law on bank lending activities and environmental issues - 5

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