With an eye on the future. Green investments in Kazakhstan
Climate protection has long been an important issue for the financial markets of developed countries, where they use ESG criteria to assess businesses’ responsibility and resilience. On the other hand, enterprises may face many difficulties raising funds without reducing emissions and developing social policy. This trend is reaching Kazakhstan as more companies that offer green and social bonds enter the domestic or foreign stock exchanges.
What is ESG and why is it on everyone’s lips
Former Secretary-General of the United Nations Kofi Annan was the first to develop the ESG concept as it is today. In his address to executives of the world’s 50 largest financial institutions, he called on them to include principles of eco-friendliness, corporate governance and social orientation into their development strategies.
ESG is an acronym derived from the names of its key principles: E stands for environment, meaning environmental responsibility; S stands for social responsibility; and G stands for governance, meaning high standards of corporate governance.
The main objective of ESG is to turn the global economy to sustainable growth. This idea derived from a popular belief that economic advancement inevitably conflicts with climate-related and social issues.
One of the decisions made was a widespread introduction of the ESG principles into the activities of large companies. Actually, the financial system drives up this trend as it proactively abandons investments in traditional energy source-related projects. According to the Institute for Energy and Finance Foundation, over 200 major financial institutions worldwide reduced or entirely halted their involvement in coal energy projects in 2022, despite the sector’s continued profitability.
In other words, if Kazakhstan were to seek investments for the construction of its three new thermal power plants in Kokshetau, Semey and Ust’-Kamenogorsk through the international capital market, it might either be unable to secure funding or face unfavorable terms. This is how ESG works: it facilitates business transformation by reshaping an investment market.
Working with investors without their own long-term sustainability strategy has become difficult in the developed countries: many large funds will simply not consider investing in a business with a high carbon footprint or toxic work culture. The idea behind this approach is the belief that such projects are riskier and not in line with the common public agenda.
The market transformation resulted in rapid growth of the ESG-related bond sector. According to the Climate Bonds Initiative, the issuance of such instruments demonstrates a steady year-on-year increase, with the record set in 2021 reaching $1 trillion.
Almost two-thirds of the bonds issued in 2023 were so-called green securities initiated to promote environment-related projects; the remainder were designated for social and sustainable development projects. Regarding securities markets, Europe accounted for 46% of the total issuance volume, while Asia-Pacific and North America held market shares of 33% and 11%, respectively.
What about Kazakhstan?
ESG bond distribution across various markets shows where sustainable investments impact businesses the most. In Central Asia, sustainable investments aren’t yet widely introduced due to a less developed domestic securities market and economics oriented on traditional energy sources, including raw material extraction with limited processing.
Nevertheless, Central Asian states are keeping up with international trends, and domestic sustainable financing markets are gradually developing. According to the Sustainable Finance in Central Asia research, the region’s market volume is about $2.7 billion, which is less than 1% of the global ESG securities volume. At the same time, nearly every security and loan falls only on two countries, Kazakhstan and Uzbekistan.
The common bond issuers are major financial institutes or companies themselves who do this to implement sustainable projects. According to the Agency for Regulation and Development of the Financial Market, since 2021, the volume of green loans has increased from $183.3 million to almost $437.6 million.
Only in 2023, the Kazakhstan Stock Exchange (KASE) and Astana International Exchange (AIX) placed ESG bonds worth $431.3 million for sustainable project finance. These include green, social and gender bonds issued by the Eurasian Development Bank, the Asian Development Bank, the Damu Entrepreneurship Development Fund, the Development Bank of Kazakhstan and the Kazakhstan Electricity Grid Operating Company (KEGOC). The latter company in the list raised around $35.2 million on the stock market to finance modernization of energy facilities in the Western Energy Zone of Kazakhstan.
The trend has continued this year as well. For instance, in 2023, Almaty Electric Power Plants announced its plans to issue sustainable development-related bonds. The point at issue is the AIX listing of securities worth $493.4 million to implement the project that would switch the energy source of Central Heating and Power Plant-3 (CHPP-3) from coal to gas.
Kazakhstani companies are also entering international markets with ESG bonds. In April 2024, the Development Bank of Kazakhstan issued sustainable development Eurobonds worth $208.4 million, denominated in tenge and with a three-year maturity, available both on the Vienna Stock Exchange and the Kazakhstan Stock Exchange (KASE). This marks the first time a CIS country has issued sustainable development Eurobonds in its domestic currency as a non-sovereign issuer.
The world has already changed
More and more Kazakhstani enterprises strive to obtain ESG ratings from the relevant international agencies. In December 2023, the National Management Holding «Baiterek» and its subsidiaries were ranked at Level 3 by the Sustainable Fitch agency. All these companies operate in the financial sector and obtain international ratings aids in attracting more investors from abroad.
However, these are not the only interests and goals the private and quasi-public companies in Kazakhstan seek. On the one hand, the country has announced plans to achieve carbon neutrality by 2060, but on the other hand, carbon regulations are gradually tightening in the world. That means that the economy needs heavy restructuring. The minimal changes include reducing the use of coal in the energy sector, building additional renewable energy power plants and reducing emissions.
Carbon regulation, in turn, may result in tightening the requirements for companies linked to greenhouse gas emissions: the larger the footprint is, the higher the import duties are. For instance, the European Union (EU) is introducing the so-called carbon tax that technically implies an additional charge for importing goods from countries that still produce most of their energy from coal and other non-eco-friendly sources.
This outcome may undermine the competitiveness of Kazakhstani companies that are actively operating in European markets. In 2021, the UN Conference on Trade and Development (UNCTAD) estimated that Kazakhstan would lose more than $200 million in profit if the European carbon tax was introduced.
Fixing everything requires significant investments, estimated at up to $650 billion by 2060. Energy and agricultural fields require most of this volume, $305 billion each. If compared directly, the total amount exceeds the 2023 GDP of Kazakhstan by two times. Therefore, these funds are to be raised through bonds issued on local and foreign stock markets, where the trend for ESG investments has recently strengthened.
Therefore, the market for green, social and sustainable credit instruments in Kazakhstan is expected to expand over time, allowing the government and businesses to raise funds for the strategic projects. Currently, the issue pertains not only to the global ESG trend but also to broader economic development.
