Assel Nurakhmetova, CEO of AIFC Green

Given the key role that “green” finance play in the transition to a “green” economy, their development in the world and in our country, in particular is important. In one of his latest speeches, our President once again emphasized that in the context of the current crisis caused by the COVID-19 epidemic, movement towards a «green» economy and «green» energy is an urgent need. Sufficient international experience has already been accumulated in the field of “green” finance development, and the Astana International Financial Centre (AIFC), as a leader in “green” finance in Kazakhstan, can share

knowledge about the measures currently being taken in the country and abroad to mobilize and stimulate investment in “green” sectors, and tell what trends have emerged, including in the current pandemic.

FINANCE CAN BE “GREEN”

“Green” finance is a group of financial products and services that help implement projects aimed at protecting and improving the environment, reducing greenhouse gas emissions, and etc.

At the moment, the main instruments for attracting private investment in “green” projects are stock market instruments such as “green” bonds, “green” investment funds, “green” indices and ETFs, less often - “green” loans and “green” mortgage. However, it is «green» bonds that are considered by many market participants as a promising instrument.

By their nature, «green» bonds are traditional debt­based financial instruments, but their feature is that the funds raised are directed exclusively to the implementation of environmental protection projects, that is the issuer undertakes to use the funds received from bond placement to finance projects with a potential positive impact on the environment. These include projects in the field of renewable energy, energy efficiency, sustainable management of living natural resources and land use, clean transport, construction of «green» buildings and so on. “Green” bonds, like traditional bonds, can be placed at the state, municipal and corporate level.

HOW THE “GREEN” BOND MARKET WAS FORMED

The “green” bond market was launched in 2007 with the bond issue by the European Investment Bank (EIB) and the World Bank. However, only when the first 1 billion USD of “green” bonds were sold within an hour after being issued by the International Finance Corporation in March 2013, broader bond market started to get interested in “green” bonds.

The first municipal “green” bond was issued by the State of Massachusetts in June 2013. Gothenburg was the first city to issue a “green” bond (October 2013). It is worth noting that the US states are the main issuers of municipal “green” bonds. Local government “green” bonds continue to rise.

In November 2014, the market took a turn when the first corporate “green” bond of the Swedish real estate company Vasakronan was issued. It was followed by major corporate issuers such as SNCF, Berlin Hyp, Apple, Engie, ICBC and Credit Agricole.

The “green” bond market saw a strong growth in 2014, when “green” bonds for a total of 37 billion USD were issued.

From 2015 to 2017, due to the signing of the Paris Agreement, the market doubled annually.

In 2018, “green” bonds for a total of 167.3 billion USD were issued, setting another record.

In 2019, the market beat all experts' expectations, reaching 255 billion USD.

VOLUNTARY “GREEN” BOND STANDARDS

Despite the above positive trends and progress in the “green” bond market, at the moment, there are no single standard for assessing “green” bonds for environmental friendliness and a mechanism for monitoring the targeted use of funds raised. However, most of the world's “green” bond issuers adhere to the Green Bond Principles (GBP) formulated by International Capital Market Association.

The principles consist of four main components: 1) use of proceeds, 2) process for project evaluation and selection, 3) management of proceeds, 4) reporting.

The first one is the key component: proceeds from the issuance should be used exclusively to finance or refinance, in part or in whole, projects of eligible categories, namely renewable energy, energy efficiency, pollution prevention and control, environmentally sustainable management of living natural resources and land use, terrestrial and aquatic biodiversity conservation, clean transportation and “green” buildings.

Issuers are also encouraged to carry independent evaluation to verify that their bonds meet the Principles. There are several levels and types of assessment, different by the degree of verification of the issuer's documents by the verifier and the investor's requirements for the issuer (second party opinion, verification, certification and rating).

Compliance with the Principles guarantees investors that the issuer meets certain standards regarding how proceeds will be used, how projects are selected and what reports are presented to investors.

ROLE OF AIFC IN PROMOTING TRANSITION TO A “GREEN” ECONOMY IN KAZAKHSTAN One of the pillars of “green” finance development, along with the creation of an enabling environment and the implementation of environmental laws, is undoubtedly enabling regulatory framework - AIFC has taken a leading role in introducing best practices.

Back in 2017, within the framework of a joint project of AIFC and the European Bank for Reconstruction and Development, a draft Concept for the development of a «green» financial system in Kazakhstan based on the Centre was created. The concept became the starting point for the development of «green» finance. On its territory, AIFC has the right to introduce norms that differ from those applied at the national level, which make the Centre innovative and allows testing the developed rules at the initial stage before introducing them throughout the country.

With an ambitious goal to become a hub for “green” finance in the region, in November 2017, AIFC adopted the Strategy for ensuring regional leadership of AIFC in the sphere of “green” finance.

Since then, the AIFC has already taken a number of measures to form a working regulatory framework for “green” finance, developing a scheme and rules for issuing “green” bonds based on international standards, including appropriate incentive tools and a draft country-specific taxonomy of “green” projects and brought in a number of legislative initiatives. In April 2019, the AIFC Exchange signed the Green Investment Principles under the Belt and Road program.

Also, in order to develop and promote “green” finance in Kazakhstan and Central Asia, the AIFC Green Finance Centre Ltd (hereinafter - the Centre) was created, which is a kind of public service center for potential issuers, investors and market players in general. The Centre helps companies to issue “green” bonds on the AIFC Exchange. In addition, the Centre conducts research in the field of sustainable finance, advising the Government of the Republic of Kazakhstan on developing “green” finance, providing first aid to potential issuers, investors and market players on the issuance of “green” bonds on the AIFC Exchange. In addition, the Centre covers the costs incurred by issuers for carrying out a mandatory external review of “green” bonds.

KAZAKHSTAN ON THE WAY TO HARMONIZE LEGISLATION ON «GREEN» FINANCE

Within the framework of the currently reviewed draft Environmental Code of the Republic of Kazakhstan, certain steps are envisaged to harmonize legislation on «green» finance and economic stimulation of «green» investments. Environmental regulation system laid down in the draft Environmental Code aims to create demand for “green” finance, consolidating effective incentives and correct signals to the market. The definitions of «green finance», «green projects», «taxonomy», «green bonds» and «green loans» proposed by AIFC aim to provide a common language for all participants. In addition, taking into account international experience of state financial incentives for «green» finance, amendments in other legislative acts (the Entrepreneurial Code of the Republic of Kazakhstan) proposed by AIFC and aimed at subsidizing the interest rate on loans issued by second-tier banks for the implementation of “green” projects and subsidizing the coupon rate on “green” bonds issued on the AIFC Exchange supplement the mentioned amendments to the draft Environmental Code.

TAXONOMY AS A BASIS FOR “GREEN” FINANCE DEVELOPMENT

Recently, the field of “green” finance has seen the appearance of a concept of “green” taxonomy (already mentioned above). To build an effective “green” finance scheme, it is necessary to determine what “green” projects are and whether they are qualified for receiving “green” finance. Accordingly, “green” taxonomy, a classification of “green” projects, is needed to ensure a common understanding and approach to the identification, development and financing of “green” projects, as well as to increase investors' confidence and prevent “green camouflage” - when projects with no environmental benefits are marked as «green». The taxonomy also provides a framework for disclosure and reporting, and for the application of economic incentives such as subsidizing interest rates and providing guarantees.

At the same time, taking into account the urgent need of potential developers and investors for a more detailed specification of «green» projects, as well as the need to take into account local specifics, the Centre decided to develop a «green» taxonomy specifically for Kazakhstan. Given the similarity of ecological and climatic parameters, it was proposed by international experts to adapt the taxonomy of Mongolia, while ensuring the compliance of the proposed taxonomy with the goals of national policy for solving environmental and social problems.

Thus, in order to stimulate “green” projects in Kazakhstan through the AIFC platform, the adoption of the first draft of the “green” taxonomy under the AIFC Exchange Rules on Green Bonds is being considered, which could potentially serve as a working document for the development of a draft national or regional taxonomy, and not only for “green” bonds, but also in the broader context of “green” finance. The developed draft “green” taxonomy is aimed at projects with significant environmental benefits and provides for their division into 8 categories (level 1), 28 sectors (level 2) and 59 subsectors (level 3) with a detailed explanation and indication of (threshold) criteria for classifying projects as “green” projects taking into account local specifics. The proposed taxonomy would be implemented with the aim to subsequently integrate standards and criteria developed by the European Union.

REVALUATING INVESTMENT VALUES

For some companies, environmental issues are significant because they are already disrupting supply chains and changing consumer behavior. For others, environmental issues are significant in making long¬term strategic decisions. One way or another, investors are increasingly calling on companies to report on environmental problems, goals and measures and not only environmental, but also social, management risks. With growing global concern about achieving the Sustainable Development Goals (SDGs) by 2030, investors and other financial market players are increasingly interested in understanding how companies manage their environmental, social and governance opportunities and risks (ESG) and how they can contribute to the achievement of the sustainable development goals. As of the end of September 2019, there were over 2,600 investment institutions worldwide that had signed the UN Principles for Responsible Investment; they managed 89 trillion USD in assets - a significant increase from 22 trillion USD in 2010.

However, there is a gap between investor expectations, environmental practice and ESG reporting in general, both in terms of quality and level of detail of the information provided.

Due to economic instability caused by the pandemic, businesses today face even more serious environmental and social challenges that jeopardize their sustainable growth potential. But early data suggests that stocks and bonds of companies with higher ESG ratings have shown more resilience in the coronavirus-driven market crash compared to peers that lagged behind in ESG. Currently, in Kazakhstan, most companies are limited only to financial issues, not paying due attention to ESG risk management, and there is no mandatory requirement on the part of investors and financial organizations to assess the ESG factors of companies when investing funds, as well as to reporting on them. Moreover, not a single Kazakh investor has joined the UN Principles for Responsible Investment, and domestic national funds and institutional investors have no mandate for “green” or responsible investments.

However, according to the sustainable Stock Exchanges Initiative (SSE), 54 stock exchanges around the world that have joined sse adhere to guidelines on ESG reporting by listed companies and investment managers. The AIFC exchange is also considering the adoption of the voluntary ESG reporting guidelines (for listed companies and asset managers) as a recommendation.

Despite the fact that Kazakh companies lag somewhat behind global trends and often do not pay enough attention to proper disclosure of information related to sustainable development, the number of companies ready to set a good example is growing. According to the 2019 national QRA, of the top 100 annual reports, 9 companies issued sustainability reports or integrated reports that include ESG factors. The five largest national companies by ESG reporting include KazMunayGas, Kazatomprom, Kaztransoil, KazMinerals PLC, Karachaganak Petroleum Operating B.V.

The growing interest on the part of global investors in «green» and social projects related to the elimination and prevention of economic consequences of the global epidemiological crisis, makes it more important to expand the role of AIFC in supporting the Sustainable Development Goals not only in environmental but also in social aspects, including by more actively promoting sustainable finance in a broad sense, for example, by issuing socially-oriented financial instruments (social bonds, loan and investment instruments).

Summing up, we should emphasize that as international practice shows targeted development of «green» finance starts from transforming ideology and ensuring a common understanding that «green» finance is a potential economic driver and a new development model. It requires strategic public-private partnership, in which public investment can catalyze private one. Moreover, nowadays there are active calls to make financing of «green» projects a key component of the «green» anti-crisis package. A new policy outlined by the Government of Kazakhstan in response to the COVID-19 crisis, focuses on transitioning to the “green” energy sector. It is high time now for the state, industrial and financial sector and consumers to coordinate efforts and develop a set of effective tools and programs to finance «green» projects. At the same time, currently under conditions of high pressure on the financial sector, banks and a reduction in the potential of central banks, the role of AIFC and the capital market as an additional system stabilizer will only increase.