THE ROLE OF MONETARY POLICY IN PROMOTING GREEN FINANCE IN VIET NAM

Abstract

In the context of increasing climate-related risks and the global transition toward low-carbon development, green finance plays a crucial role in directing capital flows toward sustainable sectors. In Viet Nam, achieving net-zero emissions by 2050 requires not only the expansion of green financial instruments but also the effective alignment of macroeconomic policies with long-term sustainability objectives. While existing studies primarily focus on fiscal policy and environmental regulation, the role of monetary policy in promoting green finance remains insufficiently explored, particularly in bank-based financial systems. This paper argues that the role of monetary policy in promoting green finance should be understood through its influence on the monetary transmission mechanism, especially its impact on credit allocation and risk pricing. The study develops a conceptual framework in which the degree of climate risk internalization determines how monetary policy affects the distribution of credit between green and carbon-intensive sectors. The analysis shows that when climate risk is not fully incorporated into financial decision-making, monetary transmission may reinforce distortions in credit allocation, thereby constraining the development of green finance. Conversely, stronger integration of climate risk activates the risk channel and supports a gradual reallocation of credit toward sustainable activities. Drawing on international experience and the case of Viet Nam, the paper highlights that the key challenge is not expanding the mandate of monetary policy, but restructuring the transmission mechanism to reflect long-term climate risks. This approach provides a mechanism-based perspective on how monetary policy can indirectly support the development of green finance in emerging, bank-dependent economies.