Journal № 1 (15) 2022

ESG development cannot be ignored

The worldwide trend of global growth in the market for sustainable development of financial instruments cannot be overlooked. Among such instruments are ESG loans, green bonds and various exchange-traded funds for responsible financing.

Stimulating green investments gives significant competitive advantages in the form of reducing the unit costs of resource consumption, generating additional income through waste disposal (recycling), improving product quality and demand for it due to its environmental friendliness.
The transition to a new resource-saving (efficient) model of the economy, the welfare of society and the provision of employment of the population correlates with a reduction in environmental impact. This approach focuses on the development of public-private partnership as an effective form of cooperation between government and business, and as well as a way to reduce the budgetary burden.

What role does the state play?

The state acts as both a catalyst and a coordinator of its creation at the stage of the formation of a new market. The State provides the necessary and favorable conditions for the targeted use of financial flows for all participants. However, as the practice of attracting green investments expands, the share of private capital will constantly increase.

Thus, for 1 pound sterling invested by the government, there are 3 pounds of additional private capital in the investment portfolio of the green investment bank created by the UK Government, for 1 pound sterling invested by the government, there are 3 pounds of additional private capital.

Financial market with green investments in the EAEU

The issues of developing financial markets that are effective in terms of attracting green investments have become relevant in the countries of the Eurasian Economic Union.

On October 14, 2021, the EAEU member states adopted a Statement on economic cooperation within the climate agenda. All States of the Union are also Parties to the United Nations Framework Convention on Climate Change and the Paris Agreement. Within the framework of this Statement, it is necessary to use the significant potential of digital platforms in the implementation of the climate agenda, to prevent the widening of the gap between developed and developing countries, to prevent the emergence of barriers to trade and investment.

Additionally, the intention of developing economic cooperation among the EAEU member states within the framework of the climate agenda was announced. Notably, to achieve the goals of the Paris Agreement and the UN Sustainable Development Goals, including the formation of the necessary approaches and mechanisms that emanate from the principles of the functioning of the EAEU single market.

What is happening with the development of ESG in the EAEU

The greatest progress in this regard has been made in the Russian Federation and the Republic of Kazakhstan. Thus, the volume of the stable bond market in the Russian Federation amounted to two billion US dollars, and in the Republic of Kazakhstan – more than 150 million dollars.

The Moscow Exchange, along with its colleagues from Kazakhstan, has created a sustainable development sector to finance ESG projects; new securities issuance standards were adopted, which provide for the specifics of green and social bonds. The list of rating agencies and companies whose conclusions are used for project verification was also determined.

Moreover, in addition to the introduction of new tools (instruments), there are examples of collective and individual asset trust management, which are based on the principles of responsible investment.

In the Republic of Kazakhstan, the Astana International Financial Center has set a strategic goal – to become a green financial hub for investing in environmental, energy-efficient climate projects.

The financial market is the locomotive of the transformation of the green economy

The modern financial market acts as a locomotive of ecological transformation of the economy, stimulates and orients its participants to reduce the negative impact on the environment and preserve the ecosystem.

That is why the ability of our economies to respond to the immediate challenges and risks associated with the introduction of cross-border carbon regulation in the Union will depend on how effectively we will be able to carry out its transformation. Moreover, there are many similar challenges facing both exporting enterprises and the Union economy as a whole – for example, a drop in export revenue, budget revenues, and an increase in prices for consumers.

What are the risks?

The key risk of carbon regulation is the possible loss of part of the markets for energy resources and carbon-intensive products. The greatest consequences will be the gradual loss of oil sales markets because of lower demand and prices. The levying of a carbon tax, as well as a ban on the sale of cars with an internal combustion engine in the EU as early as 2035 may exacerbate this. At the same time, in some countries, oil revenues play one of the main roles in the budget, their share may be a significant part of it.

After 2030, countries with a high share of fossil energy sources in the production of goods may lose EU market share in favor of European producers or foreign competitors with a smaller carbon footprint in production. Thus, the lack of synchronization with changes in legislation in the Union's trading partner countries can lead to a significant decline in export potential, therefore, constant monitoring and analysis of the legislative regulation of the EU countries, China and other EAEU trading partners is required.

The introduction of a carbon tax will help reduce the demand from the EU for Russian finished products (primarily for some types of steel with carbon-intensive production technologies). According to consulting company BGG, the losses of Russian exporters from the introduction of the tax are estimated at $ 3-5 billion per year.

At the same time, with the recognition of natural gas as a source of "green generation" in the EU countries, investments in gas production and production of goods using natural gas are recognized as meeting the criteria of a green economy. Thus, it is likely that some producers who widely use coal and petroleum products in the production of goods will switch to natural gas.

How can the risks be mitigated?

We are confident that the existing risks can be mitigated only through the active introduction of sustainable development tools and the transformation of the common financial market in the direction of the green agenda. The Commission has already started consultations on the development of a proposal for unified criteria for green and adaptation projects. In this direction, the supranational body can play an important role in the implementation of standardized approaches for verification and subsequent monitoring of green standards.

Not the least factor in solving this problem is the active creation of a digital financial infrastructure. The ability to compete effectively in the market and solve the issues of the green economy requiring a high level of project management, optimization of operational activities, acceleration of information exchange, depends on this.

In addition, the implementation of the digital agenda and the launch of digital projects will allow achieving significant economic results, ensuring a significant contribution of the digital economy of the Union states to the gross domestic product, increasing labor productivity in priority sectors of the economy, increasing the share of exports of digital goods and services.

When (while) forming the common financial market of the EAEU, we are working to create conditions under which finance supports the development of business, of the state, improves the well-being of society, and takes care of the environment.

We must ensure the availability of borrowed funds on the common financial market, including in national currencies, for the development of such areas as education, healthcare, agriculture, environmental protection, infrastructure and major industrial cooperation projects.

Ruslan Beketaev was born in 1975 in Shymkent (Kazakhstan).

He graduated from the Kazakh State Agrarian University with a degree in "Economist-accountant" (1996, diploma with honors), Bristol University with a degree in Economics, Finance and Management, Oxford University, Said Business School (UK) with a degree in Financial Strategy (2011, diplomas with honors), Kazakh Humanities and Law University with a degree in Law (2014), Imperial College London University with an Executive MBA (Master of Business Administration) (2019).

He started his career in 1996 at the National Securities Commission of the Republic of Kazakhstan. Then - Deputy Head, Head of the Securities Market Inspection Department of the Financial Supervision Department of the National Bank of the Republic of Kazakhstan (2001-2004); Head of the Bank Inspection Department of the Banking Supervision Department of the Agency for Regulation and Supervision of the Financial Market and Financial Organizations of the Republic of Kazakhstan (2004-2005).

He served in the financial police from 2005 to 2010: Head of the Department, Head of the Department, Deputy Head of the Department of Economic and Financial Crimes of the Agency for Combating Economic and Corruption Crimes of the Republic of Kazakhstan.

Then he worked as Deputy Chairman of the Financial Monitoring Committee of the Ministry of Finance of the Republic of Kazakhstan (2011-2012), Chairman of the Treasury Committee of the Ministry of Finance of the Republic of Kazakhstan (2012-2014).

He held the post of Vice-Minister of Finance of the Republic of Kazakhstan from 2014 till 2021.

On March 5, 2021, by the decision of the Supreme Eurasian Economic Council, he was appointed a member of the Board (Minister) for Economics and Financial Policy of the Eurasian Economic Commission.

He was awarded the medal "Ерен Енбегi ушiн" ("For labor distinction"), the badge "Excellent Student of the financial system", the Order " Құрмет" ("Honor").