BAKU, Azerbaijan, November 29. A vibrant financial sector will be needed to mobilize financing toward Azerbaijan’s ambitious climate goals, Trend reports, referring to the Climate and Development Report (CCDR) on Azerbaijan.
"Overall, the financial sector is currently focused on banks and offers a limited range of long-term financing tools," the report said.
The report notes that key barriers to the development of long-term green finance include low awareness, limited capacity of financial institutions to identify green assets and manage climate risks, lack of criteria for green projects, and lack of long-term and blended finance tools.
"The Central Bank of Azerbaijan (CBA) has taken a leading role in promoting sustainable finance in the country. The CBA approved its first Sustainable Finance Roadmap 2023–2026 in February 2023 with the goals of ensuring the resilience of financial institutions to climate-related risks; incorporating environmental, social, and governance (ESG) factors into its regulatory and supervisory frameworks; and realizing opportunities associated with the green transition. Authorities need to build on these efforts to promote a broader strategy on climate finance and establish a national green finance force," the World Bank Group said.
The report highlights that a key step towards mobilizing green finance is the issuance of debt tools (bonds or loans) designated as green, social or sustainable bonds (GSS).
"As part of the roadmap, the CBA is leading the development of a green bond framework and has recently submitted a proposal (which is pending approval) for introducing the concept of green bonds into relevant legislation. Given the relatively shallow domestic capital markets, international bonds may be the preferred option to finance climate investments at an initial stage. The issuance of sustainable bonds based on the use of proceeds would likely be the appropriate tool to use. Issuances of GSS bonds domestically are also promising and could be considered alongside substantial efforts to deepen and diversify the domestic capital markets more broadly," the bank said.
The report also notes that transparency, awareness raising, and capacity building are cornerstones for mobilizing green finance.
"Initial actions include addressing gaps in climate-related data, introducing disclosure requirements, and developing a green finance taxonomy to foster transparency. Additionally, raising awareness and building capacity of the industry are critical, as currently only a few financial institutions are taking steps to incorporate ESG factors into their decision-making. Regulations outlining verification and certification measures for sustainable projects also provide needed incentives for GSS bond issuances. Unlocking private capital for climate adaptation will require specific efforts, including identification of tangible investments in vulnerable sectors, development of a pipeline of bankable projects, and support for project preparation/structuring, which provide basis for the development of blended finance tools," said the report.
The bank noted that CCDRs are new key diagnostic reports that address climate change and development.
"They will help countries prioritize the most effective actions that can reduce greenhouse gas emissions and accelerate adaptation while achieving more effective development goals," said the report.