Azerbaijan joins green finance movement Bold steps towards sustainability

In recent years, Azerbaijan has actively engaged with mainstream global trends, positioning itself as a regional leader in alternative energy development. The country is implementing projects aimed at decarbonizing its industries and enhancing energy efficiency in the public sector.

Additionally, the long-term priorities of the Central Bank of Azerbaijan (CBA) include the "green" transformation of the financial sector, guided by ESG criteria (environment, social, governance). In the lead-up to the 29th session of the Conference of the Parties to the UN Framework Convention on Climate Change (COP29), Azerbaijan is hosting a series of specialized events, including a forum on "Green Finance and Sustainable Development," which began in Baku on October 18.

Emerging about a decade ago primarily within the corporate sector of European nations, the trends in "green" finance have now gained widespread traction across various regions, becoming a pivotal aspect of the global financial system's evolution. These trends are known as ESG criteria (environmental, social, and governance) and prioritize corporate and social responsibility, whereby companies and financial market participants contribute to public welfare, address climate change issues, and promote environmental sustainability.

Today, a sustainable concept called responsible investing has emerged, which involves economic development and profit generation while strictly adhering to ESG criteria. When assessing environmental performance, investors and banks primarily focus on whether a company aims to minimize its negative impact on the environment. This includes efforts to reduce waste, promote biodiversity conservation, and combat the effects of climate change.

Moreover, to effectively finance "green" initiatives, it is crucial to encourage banks and other market participants to offer preferential loans in key areas that support environmental protection.

The prospects for implementing ESG criteria in Azerbaijan’s financial sector were discussed at the "Green Finance and Sustainable Development" forum held in Baku yesterday. The event featured representatives from the Central Bank, the Ministry of Ecology and Natural Resources, the UN country office, and various domestic associations, including banks, microfinance institutions, stock market participants, insurers, and fintech companies.

"Global climate change is affecting Azerbaijan's economy, which is why investments in green finance are essential—not only for achieving environmental benefits but also for building a sustainable economy," said Taleh Kazimov, Chairman of the Central Bank of Azerbaijan (CBA), during his speech at the forum. "In this context, we have identified priorities and developed a strategic agenda for the medium term. This includes important tasks such as improving the regulatory framework and stimulating green investments. Our primary objective is to ensure that financial institutions' portfolios align with sustainability goals and to develop the necessary tools for effective engagement in this area," he added.

As part of the ongoing transformations in this sector, the banking industry is closely collaborating with the Central Bank of Azerbaijan (CBA) to integrate sustainable financing principles into risk management and lending practices, according to Kazimov. He noted that the insurance sector, with the support of the regulator, is also actively participating in the implementation of sustainability initiatives.

Special attention is being paid to developing areas such as renewable energy insurance, climate risk coverage, eco-friendly auto insurance, and agricultural insurance. In line with these efforts, the domestic banking sector plans to take on financial commitments and allocate resources to projects aimed at combating climate change. These initiatives will be timed to coincide with the "Finance Day" organized during the COP29 climate conference.

"According to a World Bank (WB) report on climate and development, Azerbaijan will need approximately $44 billion in investments to significantly reduce carbon emissions by 2060. A substantial portion of this will come from the government and public organizations, with around 40% potentially financed by banks. To achieve this, Azerbaijani banks must allocate about $17.6 billion to green financing over the next 36 years. This means our banking sector needs to direct funds equivalent to the current size of its loan portfolio exclusively toward green projects, which is a significant challenge," stated Zakir Nuriyev, president of the Azerbaijan Banks Association (ABA), during the forum.

In Nuriyev's view, enhancing cooperation with international financial organizations and investors is essential to address contemporary challenges related to climate change and to facilitate access to green financing and other climate financing tools. He also suggested that a new fund could be established in Azerbaijan to support green financing, or this responsibility could be assigned to one of the existing funds in the country.

It is noteworthy that "green" bonds are considered another effective tool for ESG investing. Companies issue these securities to raise funds for projects related to renewable energy, waste management, biodiversity conservation, eco-friendly transportation, green construction, and more. Azerbaijan also plans to issue green bonds; currently, specialists from the Asian Development Bank are in discussions with 3-4 private companies with Azerbaijani capital regarding this initiative.

"After studying best international practices in the field of green bonds, specialists from the CBA have developed a legal framework that ensures compliance with globally recognized standards and principles. This legislation is currently awaiting approval from the government," emphasized Kazimov.

At the beginning of last year, the Central Bank also approved a Roadmap for the Development of Sustainable Financing for the years 2023–2026. This document aims to ensure the resilience of domestic financial institutions to risks arising from climate change and to align them with other ESG criteria—social and governance—while also helping to realize opportunities associated with the transition to a sustainable economy.

"By the end of this year, the regulator is preparing to begin implementing a plan for sustainable financing and the framework conditions for financial institutions, with this policy being pursued along four key directions," stated Shahin Mahmudov, the Director General of the CBA.

The first direction focuses on developing the financial sector's capacity, preparing human resources, and enhancing the skills of CBA specialists and the financial sector as a whole. Next, efforts will be made to address legislative gaps and regulatory shortcomings. Another key focus is the creation of a taxonomy, which is expected to be completed within six months, expedited due to COP29. Finally, another direction is to ensure transparency in the financial sector.

As noted by the chairman of the CBA, the work on developing the taxonomy for "green" financing has already been completed. The relevant documents have been discussed with government agencies, investors, international financial institutions, and industry associations. In the next phase, the final draft of the taxonomy will be submitted for government approval.

The preparation of the taxonomy documents involved the ministries of economy, ecology and natural resources, and energy, as well as specialists from the World Bank (WB) and the International Finance Corporation (IFC), who are ready to collaborate on Azerbaijan's initiatives aimed at decarbonization and the establishment of a financial system resilient to climate, social, and other risks.

The UN is prepared to support Azerbaijan's efforts on the green track by collaborating with national partners and the private sector to promote ESG financing and accelerate the implementation of the Sustainable Development Goals (SDGs) while also addressing climate change, according to Nasar Hayat, the Acting UN Resident Coordinator in Azerbaijan.

"The work of the UN and the Central Bank of Azerbaijan in the field of green finance is aimed at the harmonious development of the economy. In addition, we worked with the Entrepreneurship Development Fund under the Ministry of Economy to develop a roadmap for introducing ESG principles into the fund's activities," the UN country representative stated during the forum in Baku.