Azerbaijan sets priorities ahead of COP29 "Green" financing, ESG implementation

In recent years, Azerbaijan has accelerated work to achieve the UN Sustainable Development Goals (SDGs) until 2030, including the international program on "green" transformation. In particular, projects in the field of alternative energy, decarbonization of industry are being implemented, as well as the first steps have been taken to comply with ESG criteria of "green" transformation of the financial sector. In the run-up to the 29th session of the Conference of the Parties (COP29) to the UN Framework Convention on Climate Change scheduled for November, the country is holding specialized events. Thus, the event “Enhancing Ambition, Enabling Action: COP29 Sustainable Business Forum” in Baku discussed the prospects for business and banks' participation in the "green" transformation.

In order to overcome the consequences of global climate change and create new opportunities for "green" transformation of the economy, Azerbaijan is making maximum efforts to transition to renewable energy sources (RES), attracting international investors to these projects. With the support of the EBRD and other international donors, work is underway to introduce energy efficiency technologies in the municipal sector and decarbonize industry, and the number of jobs in the green and digital economy is gradually increasing. Nevertheless, all these large-scale endeavors require substantial amounts of funding, and relying only on budget funds is an impossible task for developing countries, including Azerbaijan.

"It is necessary to involve the private sector in the transformation of the green economy as well as all other sectors: the transformation requires proper regulation, in particular it is necessary to identify potential risks and conflicts," Chairman of the Central Bank of Azerbaijan (CBA) Taleh Kazimov said during the forum. According to Kazimov, today both global and Azerbaijani economies are facing problems related to climate change, the consequences of which need to be eliminated. In particular, as  Kazimov noted, the CBA is taking measures to stimulate "green" financing and strengthen the Bank's participation in the regulation of energy efficiency initiatives.

"The development of the financial sector will promote an ecosystem of sustainable financial flows: one of the tasks, according to the roadmap, is to introduce climate, environmental, social and governance factors into the financial system," the chairman said.

He emphasized that the CBA amended the corporate governance standards of banks, insurance and investment companies, and under these standards, financial structures should take into account environmental, social and governance factors to ensure long-term sustainability.

Today, this trend is recognized as the key direction of development of the global financial system: issues of corporate and social responsibility are brought to the forefront, when companies contribute to public welfare, address climate change and environmental issues. Such approaches, which originated about a decade ago mainly in the corporate sector of European countries, are widely spread in different regions of the world and are called ESG-criteria (environment, social, governance): responsibility in relation to the environment, society, and corporate governance. Accordingly, these approaches have formed a stable concept - responsible investment, which envisages the extraction of profits with unconditional compliance with ESG criteria.

One of the key principles of responsible investment is that investors should include ESG criteria in their decision-making process. For example, when assessing environmental performance, attention is paid to whether the company is striving to reduce its negative impact on the environment. Such activities may include, for example, the company's efforts to reduce waste, promote biodiversity conservation, and combat the effects of climate change.

Green obligations or green bonds are considered to be one of the effective tools for responsible investing. These are securities that companies issue to raise funds for the implementation of projects in the field of renewable energy, waste management, biodiversity conservation, green transportation, green construction, etc. By the way, Azerbaijan is also planning to issue "green" bonds; currently, specialists of the Asian Development Bank are negotiating with 3-4 private companies with Azerbaijani capital in this regard.

In general, the roadmap for sustainable finance for 2023-2026 approved by the Central Bank last year was a significant step towards the implementation of ESG criteria in Azerbaijan. The document is designed to ensure the resilience of domestic financial institutions to the risks arising from climate change and their compliance with other ESG criteria - social and governance, as well as the realization of opportunities associated with the transition to a sustainable economy.

It is noteworthy that the CBA's policy of introducing ESG criteria in the country's financial sector is fully supported by the World Bank (WB) and the International Finance Corporation (IFC), which are ready to participate in Azerbaijan's initiatives on the way to decarbonization and formation of a financial system resistant to climate, social and other risks.

"The CBA is currently developing a taxonomy of sustainable financing of the country, the ministries of economy, environment and natural resources, energy are also involved in the preparation of this document, WB specialists also support the development of the taxonomy," CBA Chairman Taleh Kazimov said during the forum. He also emphasized that the transition to "green" growth and development of lending on ESG principles is one of the strategic goals of the Central Bank for the development of the financial sector.

A similar collaboration is underway with IFC specialists supporting green transformations in energy, agriculture, transportation, industry and urban areas. "To ensure an integrated approach to sustainable development, IFC is also channeling funding to projects related to climate-smart financial systems. Investing in low-carbon technologies, developing innovative solutions and improving climate resilience opens up new opportunities for the private sector in Azerbaijan," another forum participant, IFC Country Representative Aliya Azimova said.

The key emphasis in the green transformation of Azerbaijan's financial sector is aimed at the banking sector. "Azerbaijani banks should implement a well-considered climate policy, introduce climate component and responsibility measures in their portfolios for the long-term perspective," Minister of Ecology and Natural Resources Mukhtar Babayev said during the forum.

Special mechanisms, new types of loans are needed to finance "green" projects, banks should offer preferential loans to those projects aimed at environmental protection. The regulator and the government are ready to facilitate this".

The Ministry of Economy and its agencies are also working in a similar direction: for example, the Entrepreneurship Development Fund (EDF) has developed its own ESG model in accordance with international standards. Currently, the Fund has prioritized co-investment in "green" projects with a preferential 5 per cent annual interest rate on loans. In particular, with the support of EDF, endeavors in the field of solar panels at a poultry farm, the development of charging infrastructure stations, and an environmentally important project for the production of building materials using recycled materials are already underway.

"The main theme of COP29 is climate finance, and we are working on how to support businesses: the necessary laws have been passed, and various tax and customs measures are in place. Facilitating the involvement of private investment in the process of implementing the climate agenda is one of our key priorities," Azerbaijan’s Deputy Minister of Economy Sahib Mammadov said in his remarks at the forum.