The Rise of ESG in Kazakhstan: A Path Towards Sustainable Finance

Climate protection has emerged as a pivotal concern for financial markets worldwide, particularly in developed nations where Environmental, Social, and Governance (ESG) criteria are increasingly used to evaluate corporate responsibility and resilience. As this trend gains momentum, Kazakhstan is witnessing a burgeoning interest in green and social bonds, signaling a shift towards sustainable finance in the region.

Understanding ESG: A Global Imperative

The concept of ESG was popularized by former United Nations Secretary-General Kofi Annan, who urged the world’s largest financial institutions to integrate eco-friendliness, corporate governance, and social responsibility into their strategies. ESG stands for:

• E (Environment): This principle emphasizes environmental responsibility and the need for businesses to minimize their ecological footprint.
• S (Social): This aspect focuses on social responsibility, including fair labor practices, community engagement, and diversity.
• G (Governance): This principle pertains to high standards of corporate governance, ensuring transparency, accountability, and ethical decision-making.

The primary goal of ESG is to steer the global economy towards sustainable growth, challenging the notion that economic advancement must come at the expense of environmental and social well-being.

The Financial Market’s Shift Towards ESG

The financial landscape is rapidly evolving, with a noticeable shift away from investments in traditional energy sources. According to the Institute for Energy and Finance Foundation, over 200 major financial institutions globally reduced or ceased their involvement in coal energy projects in 2022, despite the sector’s profitability. This transformation illustrates how ESG principles are reshaping the investment market, compelling businesses to adopt sustainable practices to attract funding.

For instance, if Kazakhstan were to seek investments for new thermal power plants, it might face significant challenges in securing funding or could encounter unfavorable terms due to its reliance on fossil fuels. This scenario underscores the importance of ESG in facilitating business transformation and aligning with global investment trends.

The Growth of ESG Bonds

The rise of ESG-related bonds has been remarkable. The Climate Bonds Initiative reported a steady year-on-year increase in the issuance of these instruments, with a record $1 trillion issued in 2021. In 2023, nearly two-thirds of the bonds issued were green securities aimed at promoting environmentally friendly projects, while the remainder focused on social and sustainable development initiatives. Europe led the charge, accounting for 46% of total issuance, followed by Asia-Pacific and North America.

Kazakhstan’s Position in the ESG Landscape

In Central Asia, sustainable investments are still in their infancy, primarily due to a less developed domestic securities market and an economy heavily reliant on traditional energy sources. However, Kazakhstan is gradually aligning with international trends. Research indicates that the region’s sustainable finance market is valued at approximately $2.7 billion, representing less than 1% of the global ESG securities volume. Notably, Kazakhstan and Uzbekistan dominate this market.

Kazakhstan’s financial institutions and companies are increasingly issuing green bonds to fund sustainable projects. Since 2021, the volume of green loans in Kazakhstan has surged from $183.3 million to nearly $437.6 million. In 2023 alone, the Kazakhstan Stock Exchange (KASE) and Astana International Exchange (AIX) facilitated the issuance of ESG bonds worth $431.3 million, including green, social, and gender bonds from various development banks and companies.

Recent Developments and Future Prospects

The trend towards sustainable finance continues to gain traction in Kazakhstan. For example, Almaty Electric Power Plants announced plans to issue sustainable development-related bonds in 2023, aiming to transition its Central Heating and Power Plant-3 from coal to gas. Additionally, the Development Bank of Kazakhstan made headlines by issuing sustainable development Eurobonds worth $208.4 million, marking a significant milestone as the first CIS country to issue such bonds in its domestic currency.

Kazakhstani companies are also seeking ESG ratings from international agencies to enhance their attractiveness to foreign investors. In December 2023, the National Management Holding "Baiterek" and its subsidiaries achieved a Level 3 rating from Sustainable Fitch, reflecting their commitment to sustainable practices.

Challenges and the Road Ahead

Despite these positive developments, Kazakhstan faces significant challenges in its pursuit of sustainability. The country aims to achieve carbon neutrality by 2060, necessitating substantial restructuring of its economy. This includes reducing coal dependency, investing in renewable energy, and lowering emissions. The tightening of carbon regulations globally poses additional risks, as companies with high carbon footprints may face increased import duties, particularly in markets like the European Union.

The UN Conference on Trade and Development (UNCTAD) estimated that Kazakhstan could lose over $200 million in profits if the EU implements a carbon tax. Addressing these challenges will require substantial investments, estimated at up to $650 billion by 2060, primarily in the energy and agricultural sectors.

Conclusion: A Sustainable Future for Kazakhstan

The market for green, social, and sustainable credit instruments in Kazakhstan is poised for growth, driven by both global ESG trends and the country’s economic development goals. As Kazakhstani businesses increasingly embrace sustainability, they will not only enhance their competitiveness in international markets but also contribute to a more sustainable future for the nation.

In conclusion, Kazakhstan stands at a crossroads, with the opportunity to leverage ESG principles to transform its economy and secure funding for strategic projects. By aligning with global sustainability trends, Kazakhstan can pave the way for a greener, more resilient future.