Current state of financing of sustainable projects
A positive aspect can be called global efforts to combat the pandemic and climate change, which accelerate the dynamics of the spread of sustainable financing products. According to UNCTAD estimates, the value of sustainable investment products in global capital markets in 2020 amounted to $3.2 trillion, which is 80% more than in 2019 (include sustainable investment funds — $1.7 trillion, green bonds — $1 trillion, social bonds — $212 billion, mixed socio-environmental bonds — $218 billion).
Figure 1: Assets of sustainable investment funds in 2016-2020 (USD billion)
Source: UNCTAD, based on Morningstar and TrackInsight data.
The vast majority of sustainable investment funds are concentrated in Europe (73%) and in the USA (18%); other countries account for less than 10% of funds. This reflects the maturity of the market and the relatively developed regulatory environment for sustainable investments in Europe.
UNCTAD's analysis of 800 sustainable equity investment funds shows that about 27% of their total assets ($145 billion out of $540 billion) are located in eight SDGs.
The main role for the development of sustainable projects is played by institutional investors who are focused on a long-term strategy of making a profit from their assets, therefore it is important for them that companies apply more sustainable development mechanisms. There are 4 main institutional investors in the investment market:
1. pension funds (assets of $52 trillion);
2. sovereign wealth funds (assets of $9.2 trillion);
3. insurance companies (assets of $32.9 trillion);
4. banks (assets of $155 trillion)
The special role of institutional investors in sustainable development is noted by reputable research institutes. Thus, according to the Harvard Business School study "Corporate Sustainability: A Strategy?", institutional investors are increasingly demanding increased social and environmental responsibility from companies in whose business they are directly involved.
For example, institutional investors require disclosure of information on the sustainability policy of the business, in particular information on environmental, social and managerial factors (hereinafter — ESU) of the enterprise. As a rule, ESM factors cover a wide range of issues that are traditionally not part of financial statements, but have economic significance.
In accordance with the UN initiative on Sustainable Stock Exchanges, there are now 16 stock exchanges covering more than 15,000 companies that have included the requirement of reporting on ESS in some form as a listing rule. These include exchanges in Brazil, Peru, India and Singapore.
If we talk about Kazakhstan, then KASE is one of the 32 exchanges in the world that distribute the ESU methodology for providing ESU information on a voluntary basis (introduced on December 1, 2016). The exchange is among the 18 exchanges in the world that promote ESU criteria through trainings. However, in our opinion, this is not enough to attract investment for the development of "green", social and infrastructure projects of the country.
Companies implementing ESU factors are more profitable and can receive more investments. Thus, the report by Gunnar et al analyzed the results of over 2,200 studies on the impact of ESU factors on the financial performance of companies. According to the results of the study, in 62.6% of cases, a direct correlation was found between ESU factors and the financial performance of companies.
EY experts note that companies that systematically implement sustainable development practices can receive 47% of the additional value to one share. Bloomberg experts predict that the assets of ESU projects will exceed $53 trillion by 2025.
All over the world, the governments of resource-producing countries are increasingly demanding that companies operating in their jurisdictions disclose ESA data. In addition to national legislation related to the requirements of stock exchanges for reporting on ESS, governments establish obligations to disclose non-financial information. For example:
1. In Indonesia, companies are required to regularly and publicly disclose environmental information, including environmental impact assessments, greenhouse gas emissions data and water quality monitoring results.
2. In South Africa, companies are required to publicly provide information on ESM issues, including data on air quality, greenhouse gas emissions, workplace safety incidents and plans for the closure of extractive enterprises.
3. In Peru, mining companies are required to publish annual sustainability reports detailing the socio-economic impacts of their activities, including information on pollution, greenhouse gas emissions, resource use, environmental degradation, working conditions and stakeholder engagement.
4. Chile has legislated the right of its citizens to access all environmental data of the Government and publishes information on environmental impact assessments at the level of projects provided by companies.
5. Brazil publishes a "dirty list" of Brazilian companies fined over the past two years for the use of slave labor, including forced labor, and the deterioration of working conditions in their supply chains.
And what about Kazakhstan?
Kazakhstan, as a participant in the global decision-making process, has assumed a number of international obligations. Kazakhstan has joined all major international documents related to the 2030 Development Agenda. These are the Addis Ababa Action Agenda of the 3rd International Conference on Financing for Development; the adoption of the Sustainable Development Goals until 2030 in the UN General Assembly; the Paris Agreement on Climate (reduction of greenhouse gas emissions) and so on.
However, in order to fulfill its international obligations, Kazakhstan needs to carry out a deep transformation of the economy, primarily through the modernization of existing production facilities and the creation of new modern enterprises.
As you know, all the previous years, the growth of the economy of Kazakhstan was mainly due to extractive industries (hydrocarbons and metals). This circumstance puts our country in a very vulnerable position from external shocks and crises. In addition, the production of raw materials is always accompanied by a deterioration of the environmental situation in the country, as outdated infrastructure, technologies, standards and methods inherited from the USSR are used. Today, Kazakhstan's economy is one of the most energy—intensive in the world, since the extractive sector accounts for 50% of industry. Almost 70% of electricity production still depends on coal.
The existing problem of environmental degradation is confirmed by the annual SDG Index rating (rating of countries for achieving the Sustainable Development Goals), which indicates serious environmental problems caused by the generation of electricity from coal-fired power plants. For example, Kazakhstan is one of the world leaders in terms of CO2 and SO2 emissions per capita.
It can be said that electricity production in Kazakhstan is one of the "dirtiest" in the world (according to various estimates, the country accounts for 0.7 to 1 ton of CO2 per 1 kWh of electricity consumed). According to the National Energy Report of KAZENERGY for 2021, the structure of electricity production is dominated by: coal - 69%, gas - 20%; SES - 7.31%; RES - 3.69%.
Modernization of outdated equipment and installation of metering devices can significantly contribute to reducing resource losses, in particular, it is very important to increase the efficiency of electricity use. The annual energy saving potential, according to government forecasts, can range from $3 to $4 billion, and by 2030 reach an annual figure of $ 6-10 billion.
Kazakhstan's potential to attract investments in renewable energy projects
Today, renewable energy technologies are developing rapidly, so the cost of electricity production is decreasing every year. For example, in 2020, 162 GW of renewable energy was introduced, of which 62% were significantly cheaper than energy from fossil fuels. Thus, compared to last year, the cost of solar energy decreased by 16%, wind energy – by 13%. Thus, renewable energy opens up the opportunity for countries to strive for the commercial attractiveness of renewable energy projects and "carbon neutrality". New renewable energy projects introduced in 2020 will allow developing countries to save up to $156 billion.
As an example, the experience of the People's Republic of China, which is the world's leading country in the use and implementation of renewable energy technologies, can be cited. It should be noted that in China there are more than 1,600 state incubators and science parks, most of which implement projects in the field of clean technologies. So, in 2021, China produced 2.48 trillion kWh of electricity from renewable energy sources, which accounted for 29.8% of the total electricity consumption in the country.
Renewable energy projects are included in the list of priority investment projects in Kazakhstan and have a number of investment preferences:
By the end of 2021, the number of renewable energy facilities in Kazakhstan has reached 134, with an energy capacity of about 4.2 billion. kWh.
In addition, there are barriers in Kazakhstan for foreign investors to enter into sustainable projects in Kazakhstan (for example, there is a problem of allocating land plots for foreign investors for renewable energy projects. All this is because most of the territories for the construction of renewable energy are agricultural land, however, according to the current legislation of Kazakhstan, companies that have non—resident founders cannot register these plots as property).
What should Kazakhstan do to attract more investments in sustainable projects?
1. Provide financial and non-financial support to domestic entrepreneurs for the implementation of projects in the field of sustainable development. Thus, the introduction of the principles of sustainable development in business has a number of undeniable advantages, such as reducing production costs, gaining access to financing, loyalty of customers and employees, etc. In addition, it is important to create conditions for attracting foreign institutional investors and international organizations that play a key role in the development of sustainable projects and reporting on ESM.
It is also necessary to develop risk diversification tools, such as public-private partnerships, investment insurance and mixed financing, to help improve the risk-return ratio of SDG-related investment projects.
In Kazakhstan, little attention is paid to carrying out information and explanatory work for business entities about the positive aspects that the introduction of the principles of sustainable development of companies can give.
2. Introduce a mandatory requirement for disclosure of non-financial reporting among subsoil users. Many resource-producing countries have introduced mandatory reporting of subsoil users on disclosure of non-financial information within the framework of the ESU. There are no mandatory regulatory requirements for disclosure of non-financial reporting among subsoil users in Kazakhstan.
At the same time, it is important to pay attention to the fight against "green camouflage", which will increase confidence in the company's sustainability reporting (for example, with the help of more reliable and regulated standards and taxonomies).
3. In Kazakhstan, the cost of renewable energy technology is high, so the price of "green" energy in the country is three times higher than world prices. Thus, in the Republic of Kazakhstan, the price for solar energy is 8.6 cents, when the global average price for solar energy does not exceed 1.1–3 cents and tends to decrease every year.
As a solution, it is possible to offer investors state guarantees of the repayment of funds and the provision of land plots for renewable energy sources.