GREEN FINANCE FOR SUSTAINABLE ECONOMY

The pressing need to shift to a green economic model has introduced new challenges for governments, including the implementation of a green finance model. Tackling these challenges should encourage projects that enhance the social and environmental landscape globally. Essentially, financial institutions are now tasked with creating mechanisms to support businesses in their environmental sustainability efforts.

Azerbaijan, hosting the 29th session of the Conference of the Parties to the UN Framework Convention on Climate Change (COP29), is naturally positioned at the forefront of the shift towards a green economy. At the Green Finance and Sustainable Development Forum held in Baku, financial sector representatives outlined their plans for advancing these initiatives in the near future.

Global Part

On a global scale, climate change significantly impacts Azerbaijan's economy. Therefore, investing in green finance is crucial not just for environmental benefits but also for fostering a sustainable economy, according to Taleh Kazimov, Chairman of the Central Bank of Azerbaijan. "Our strategic initiatives focus on enhancing economic sustainability, promoting green investments, and ensuring that financial institutions are prepared to support ongoing efforts in this direction. We are actively working to improve the regulatory framework and provide essential support to encourage green investments. Our aim is to equip financial institutions with the necessary tools and guidance to align their portfolios with the Sustainable Development Goals," he stated.

The CBA has a strategic agenda for the medium term that includes tasks such as enhancing the regulatory framework and incentivising green investments.

CBA Director General Shahin Mahmudzade highlighted that the Central Bank's sustainable finance policy centres on four main areas: building the financial sector's capacity, addressing regulatory and legislative gaps, developing a taxonomy, and ensuring transparency. By the end of 2024, the CBA aims to introduce sustainable finance principles for local financial institutions.

During the Finance Day at COP29, Azerbaijan's banking sector intends to make specific financial commitments to combat climate change. "Banks generally recognize the risks to both the economy and the financial sector in this context and are actively collaborating with the Central Bank to integrate sustainable finance principles into risk management and lending practices. The insurance sector is also heavily involved in sustainability initiatives," remarked Kazimov.

COP29 President Mukhtar Babayev stressed the importance of green finance mechanisms to support the financial sector's efforts against climate change. Azerbaijan's banking sector must adapt to global green finance trends and play a key role in transitioning to a sustainable economy. "The new financial target should provide substantial and sustainable resources to finance climate action, reflecting the growing financing needs of developing countries. Beyond increasing climate finance, discussions around the 'new goal' focus on significant steps toward adaptation and reducing loss and damage," stated Babayev. He highlighted Azerbaijan's active participation in these discussions to achieve ambitious yet practical results and support efforts to make climate finance accessible, inclusive, and relevant to vulnerable countries' needs. Babayev underscored the banking sector's vital role in financing clean energy transitions, building climate-resilient infrastructure, and promoting sustainable agriculture.

The Minister noted that numerous seminars, sessions, and trainings have been organized in cooperation with global financial organizations such as the World Bank, IFC, EBRD, and Ernst & Young. "We have initiated the development of a taxonomy for green finance. The CBA has conducted consultations on the preliminary version of this taxonomy with government agencies, industry associations, financial institutions, investors, and international organizations. The final draft of the taxonomy will soon be submitted to the government," he added.

Acting UN Resident Coordinator in Azerbaijan Nasar Hayat emphasised the importance of cooperation and innovation within the financial sector. By integrating green finance into national economic strategies, he noted that new opportunities could arise for innovation, economic development, and combating climate change. "The actions we take today will lay the foundation for a stable and prosperous future not just for Azerbaijan but for the entire world," Hayat asserted.

Financiers' Welcome the Message

It seems financiers are ready to back these new trends with tangible actions. Zakir Nuriyev, President of the Association of Banks of Azerbaijan (ABA), highlighted that climate finance flows have been rising over the past decade. "The ABA's ESG strategy initiatives strengthen environmental responsibility within the banking sector. These initiatives ensure Azerbaijani banks align with global climate goals while promoting environmental responsibility and sustainability throughout the economy. This positions banks not only as financial institutions but also as contributors to sustainable low-carbon development," stated Nuriyev.

For concrete steps, Nuriyev mentioned that the ABA plans to reduce greenhouse gas emissions from the banking sector by 35 percent by 2030. This aligns with Azerbaijan's governmental climate goals while reinforcing environmental accountability within banking. Ten initiatives have been identified to achieve these targets, including enhancing bank resilience, strengthening experience-sharing activities, developing ESG awareness campaigns, fostering human capital development, and increasing digitization within the banking sector. To facilitate the successful implementation of the ESG strategy, 97 strategic objectives have been defined to support comprehensive integration of ESG principles into banking practices.

"The rapid reduction of carbon emissions in Azerbaijan by 2060 will necessitate investments totalling $44 billion, with approximately $17.6 billion allocated specifically through banks for green finance," Nuriyev explained. Part of these investments could be financed through both private sector involvement and banking participation. He indicated that 60 percent would be funded by government and state institutions while 40 percent would be sourced from banks. "This means that over the next 36 years, banks must allocate around $17.6 billion toward green finance," Nuriyev elaborated.

It is clear that achieving these goals requires expanding public-private partnerships and encouraging banks to support market initiatives by offering green loans and sustainable financial instruments. Additionally, closer cooperation with state and international financial institutions, as well as foreign investors, is necessary.

Azerbaijan is proposing to establish a new fund dedicated to supporting green finance or assigning this function to an existing fund within the country. "In some countries, government institutions and agencies, along with NGOs, have established green banks specifically for this purpose. In Azerbaijan, creating a new fund or transferring this function to an existing one could be pivotal for sustainable financing. Support from international financial institutions is also critical," Nuriyev stated.

Another potential source of financing for banks could be issuing "green" bonds, creating additional avenues for investors looking to invest in environmentally friendly projects. The conditions for issuing such bonds have already been established and are currently undergoing approval with relevant government agencies.

Elmar Mirsalayev, Executive Director of the Association of Insurers of Azerbaijan (ASA), emphasized that the slogan "Green World - Green Finance" has become a central tenet of corporate policy among insurance companies. "A prime example is reflected in various steps taken by us as part of the 'Green' Marathon project in collaboration with the Central Bank, the Ministry of Ecology and Natural Resources, and local insurance market participants. During this period, local insurance companies have made strides in environmental protection and created various insurance products to manage climate risks. This is not merely a domestic market demand but a global necessity," he asserted.

Representatives from Azerbaijan's financial sector associations highlighted strong support for "green" initiatives, echoed by direct market participants who recognize the global importance of these innovations and understand the need to reformat operations according to new regulations. Consequently, businesses will soon find themselves incentivized to restructure their activities in accordance with "green" standards.