Kazakhstan Leads Central Asia in Green Finance

Funding sustainability is widely considered history’s largest investment opportunity, and as green finance expands globally, Kazakhstan is building its green economy.

Sustainable development is a requirement in today’s world, as climate change and limited resources demand swift policy innovation and bold initiatives. Green finance—encompassing financial instruments earmarked to fund projects that prioritize sustainability—represents a rapidly expanding investment opportunity, as nations around the world transition to a low-carbon future.

The Republic of Kazakhstan, Central Asia’s leading financial hub, aims to transform its economy, traditionally based on oil and minerals, to a cleaner, greener model by issuing green bonds for domestic projects and by boosting numerous green initiatives. Green bonds, climate bonds and other forward-looking instruments are driving renewable energy and energy efficiency, environmental improvement, reduction of industrial pollution, clean transportation initiatives, climate change mitigation, reforestation, carbon footprint reduction and zero-carbon strategies.

The nation is also leading the way by hosting groundbreaking regional sustainability conferences attended by intergovernmental organizations, domestic and regional state representatives, sustainability experts, investors and private enterprises.

Kazakhstan aims to increase its share of alternative and renewable energy to 50% of all energy production by 2050. This major transition will require tremendous investment, and the Astana International Financial Centre (AIFC), which opened its doors in July 2018 in the futuristic and recently renamed city of Nur-Sultan, now provides the structural framework for the advancement of green finance in support of the nation’s ambitious plans.

Kazakhstan, a signatory to the Paris Agreement, is uniquely positioned in the region to lead the green finance charge. The world’s largest landlocked nation and ninth-largest country, with a population of just under 19 million people, straddles two continents and borders China, Kyrgyzstan, Russia, Turkmenistan and Uzbekistan.

Recent infrastructure and rail upgrades have efficiently connected the country to Europe and increased transshipments from China as the modern Silk Road takes shape and facilitates trade, even as Kazakhstan’s digital capacity continues to expand. The government’s focus on the financial sector and fintech is seen as key to transforming Kazakhstan’s economy, and issuance of green bonds, green sukuk (Islamic bonds) and other instruments to finance sustainable projects—increasingly popular among international investors—are planned.

Growth of Green Bonds

The green bond market launched with AAA-rated issuances from the European Investment Bank (EIB) in 2007 and the World Bank in 2008. “The green bond market has seen strong growth, with the market really starting to take off in 2014 when $37 billion was issued,” states the Climate Bond Initiative (CBI). “In 2018 issuance reached $167.3 billion, setting yet another record.” The CBI notes that “Green bonds were created to fund projects that have positive environmental and/or climate benefits. The majority of the green bonds issued are green ‘use of proceeds’ or asset-linked bonds.”

Green Bond Principles Explained

The Green bond market aims to enable and develop the key role that debt markets can play in funding projects that contribute to environmental sustainability. 

The Green Bond Principles (GBP) promote integrity in the Green bond market through guidelines that recommend transparency, disclosure and reporting. 

They are intended for use by market participants and are designed to drive the provision of information needed to increase capital allocation to such projects. 

With a focus on the use of proceeds, the GBP aim to support issuers in transitioning their business model towards greater environmental sustainability through specific projects.

Source: International Capital Market Association

On Sept 10, at the second annual Green Growth Forum in Nur-Sultan, AIFC Governor Kairat Kelimbetov provided an optimistic assessment: “Today, the AIFC, together with international experts, is working on creating a regulatory framework for green finance within the jurisdiction of our center. We are also actively working with the Ministry of Ecology, Geology and Natural Resources to formulate new legislation regarding the development of green financing. We hope the preparation of the draft environmental code and its approval in the Parliament allow introducing many innovations related to the green finance industry.”

Kelimbetov told the forum—an international platform for governments, organizations and enterprises to advance the transition to a green economy in the countries of the Commonwealth of Independent States (CIS) and Eurasian Economic Union—that the AIFC’s draft for its green finance regulatory framework, covering green financing, green projects, green bonds and other instruments of green finance, will be submitted to the Kazakh Parliament by the end of this year.

“As part of the development of the Islamic finance market, we are working on the issue of green Islamic papers or green sukuk,” Kelimbetov confirmed. “In addition, we are actively working with the [municipal administrations] of the cities of Nur-Sultan and Almaty to form a pool of green projects for which new green financial instruments could be used. We believe in our ambitious goal to make the Astana International Financial Centre venue a leader in the field of green finance in the entire Central Asian region.”

Kelimbetov noted that all the necessary conditions have been created for green finance to thrive, and that in 2017, “legislative amendments were adopted at the highest levels.” The AIFC has been assisted in its development of green finance by the European Bank for Reconstruction and Development (EBRD), which has €8,273 million in cumulative investment in Kazakhstan.

Source: Unescap/AIFC

• Until 2030, up to $155 billion in fully or partially green infrastructure investments is needed to reach the NDC and GEC targets. 
• In recent years, green investment from climate investment funds and Global Environment Facility (GEF) has accounted for about one-third of green investments in Kazakhstan. 
• As climate finance needs increase significantly, domestic sources and international capital markets have to play a bigger role.  

AIFC Green Finance Centre

The AIFC’S Green Finance Centre was launched to develop and promote green finance in Kazakhstan and neighboring countries, and provides an important platform that will be key to sustainability efforts in the region going forward. The center provides assistance to issuers, investors and market players in the preparations for issuance of green bonds on the Astana International Exchange (AIX).

The AIX’s Green Bond Rules—unique to Kazakhstan among CIS countries—are based on the Green Bond Principles (GBP) and the Climate Bonds Standard (CBS), and were revised by CBI experts, and apply to green projects in various categories adapted from the GBP.

Key activities of the AIFC Green Finance Centre:

• Facilitating the introduction of green finance instruments in Kazakhstan;  
• Development of green finance instruments and their management principles by different market participants, including development institutions, commercial banks, funds, etc.;
• Project support, including preparation for issuing green bonds;  
• Specialist training and certification of green finance specialists (together with CBI);  
• Roster management for international financial institutions that provide green projects with grants and other funds.  

Source: AIFC

The Green Finance Centre is building the capacity to serve as the hub of green finance for the region, and regularly networks with leading experts and organizations. The center is developing a detailed database of green projects in Kazakhstan, and conducts green finance workshops, seminars and presentations. Starting this year, in cooperation with the AIFC Bureau for Continuing Professional Development, the center provides annual training courses for potential issuers, brokers and other stakeholders. The center is also helping to create a pool of local green bond and post-reporting verifiers, and to expand the boundaries of the investor base.

AIFC Enables Green Finance in Central Asia

1. AIFC supports the development of green finance, and provides a platform for issuing green bonds for companies that implement projects to ensure more efficient use of existing natural resources, reduce negative environmental effects, improve energy efficiency and mitigate the impact of, and enhance adaptation to, climate change. 
2. In 2017, $333.5 billion was invested in green energy worldwide, compared with less than $0.4 billion in 2004. In 2017, global green bond issuance reached $155.5 billion, a 60% increase compared to the previous year. From 2018 to 2050, over $11.5 trillion will be invested in the green energy sector. Almost half of it—over $5.5 trillion—will be invested in countries of Asia and the Pacific. 
3. The concept of the “green economy” is being actively implemented in Kazakhstan. A goal was set to increase the share of alternative and renewable energy in the country’s energy mix to 50% by 2050. AIFC is designed to become the major regional platform for implementing and funding such projects both in Kazakhstan and in neighboring countries.  

Source: AIFC

Written by Gabe Kirchheimer for Bloomberg Media Studios.