Spearheading innovative “green” financing – for sustainable modernization
November 11, 2022
We live in a world of uncertainty. Humanity’s looming challenges – the climate and biodiversity crises, inequalities and political polarization, technological upheavals – confront us today, they are our reality. The new UNDP Human Development Report, “Uncertain Times, Unsettled Lives: Shaping our Future in a World in Transformation” helps us to navigate the turbulent seas of these unprecedented days and behooves us to focus on investment, insurance and innovation, three practical actions that will enable people to thrive in the face of these challenges.
Where we direct investment flows is critical. A key focus must be on establishing new mechanisms at global and country levels to increase innovative “green” financing to ease pressures on our planet and generate sustainable economic growth.
For Kazakhstan, unlocking “green” investment is a prerequisite for achieving the ambitious goal of carbon neutrality by 2060. The Ministry of National Economy of the Republic of Kazakhstan estimates that this transformation will require US$647.5 billion in investment over the next 40 years. Significant public funding will be required both to establish the regulatory framework and to build the financial and physical infrastructure. The private sector is expected to provide 96.5 percent of the financing.
UNDP plays a key role in supporting the integration of the Sustainable Development Goals into strategic planning and aligning public finances with them. UNDP contributes to the discussion on fiscal policy reform to redirect fossil fuel subsidies to “green” energy, sustainable transport and other sustainable sectors in a way that reduces poverty and inequalities and that is progressive, socially just and economically fair.
Private investment – sine qua non for transformation in “green” technologies
Large-scale transformation requires a massive amount of private capital for “green” growth, and the good news is that the funds are there. The loan portfolio of second-tier banks, for example, is $43.4 billion, including $19.0 billion in loans extended to SMEs, not to mention the global debt markets. The National Bank of Kazakhstan reported excessive liquidity of the banking sector of $ 6.6 billion in the second quarter of 2022.
However, the end user could obtain loans with interest rates as high as 19 percent, which is challenging even now when “green” technologies prices have dropped significantly, in order to repay the loans and stay afloat. On the other hand, second-tier banks tend to be cautious and reluctant to lend, regarding their “green” customers as risky.
UNDP – bellwether in creating new “green” finance tools
To overcome current barriers to financing “green” initiatives, UNDP has spearheaded the creation of an enabling environment and development of a “green” finance system in Kazakhstan. Jointly with the “Damu” Entrepreneurship Development Fund” JSC, UNDP has tested several financial instruments, focused on improving the accessibility and affordability of “green” finance for SMEs in the energy efficiency and renewable energy sectors as part of the GEF-funded portfolio of projects.
All instruments either simplify borrowing by reducing risk and/or lower the cost of funds raised to finance eligible projects. One of such instruments is the interest rate subsidy, which was already introduced in 2018. 36 projects were supported by paying compensation to the bank for the interest rate. A good example is the complex energy efficiency and renewable energy modernization project at Zerenda Youth Health Camp in Kazakhstan “Parus”.
Through the project the camp received a significant reduction in electricity and heating bills. The savings were used to service the debt thereby leading to a reduction in the services cost. By improving the buildings’ appearance and making the children’s stay at the camp more congenial, this environmentally friendly investment made the camp more competitive and led to a long-term government contract.
SMEs – benefit from “green” loans
Piloted financial instruments demonstrated good economic, social, and environmental results, for example:
- Attraction of private investments (₸1 of subsidy allows attracting up to ₸6 of investments (in case of co-financing by companies, the amount of attracted investments reached a ratio of 1 to ₸14);
- Energy service companies bring new tax revenues to the budget from the implementation of projects within the scope of their activity, with ₸1 of subsidies generating up to ₸3 tenge of tax revenues over 6 years;
- An average of ₸21.3 million in investments creates one “green” job, which promotes the development of SMEs.
The path to realizing this has been created. An interest subsidy has been introduced nationwide in the framework of the State Programme for Promotion of Small and Medium Entrepreneurship “Business Road Map-2025”. This programme proposes “green” loans for SMEs at an interest rate of 8 percent. To simplify the process of selecting “green” projects and minimizing corruption risks in “green” instrument support, UNDP developed a catalogue of eligible technologies. This catalogue was later incorporated in the national taxonomy for “green” projects adopted in 2021.
“Green” bonds – a first in Kazakhstan
“Green” bonds are another debt instrument pioneered by UNDP in Kazakhstan in August 2020. As UNDP partner, the AIFC Green Finance Center, noted, this issue helped to establish the sustainable bond market in Kazakhstan. It was followed by three more ESG bonds, two issues by the Asian Development Bank of $32.5 million and one issue by Damu of $2.4 million. The leverage of funds the UNDP spent to support the first green bonds issuance is remarkable: $1 of donor funds used to subsidize green bonds and to demonstrate their feasibility helped mobilize $175 in following issuances of bonds so far.
To address one of the critical barriers impeding investment in energy efficiency in Kazakhstan – the inability of SMEs to obtain affordable financing because of the lack of collateral, UNDP introduced a loan guarantee instrument to test the market, where UNDP took an obligation as a guarantor to pay a debt of a green project to a bank in case of a default.
UNDP has also facilitated experimental factoring deals in Kazakhstan that help solve the problem of upgrading the old building stock and significantly reduce GHG emissions from the building sector in economically and socially viable way.
In addition to financial instruments, investments de-risking regulatory interventions by UNDP demonstrated good results and enabled the mobilization of significant funds in renewable energy. For example, the 50 MW solar plant in Shaulder village in Turkestan region received $40-50 million in foreign direct investment.
Carbon pricing is a new prominent policy tool most countries have adopted to facilitate their National Determined Contributions. UNDP is helping Kazakhstan benefit from integration into global carbon markets and mobilize international and private sector investment in a low-carbon economy.
All the introduced instruments reduce risk and costs, simplify the process for the final users, and are replicable and scalable, helping generate sustainable economic growth.