The Sustainable Financing Policy of the National Bank of Georgia

The National Bank of Georgia, in its capacity as the central bank of the country, has actively pursued efforts in recent years to enhance the financial sector’s role in Georgia’s sustainable development and promote sustainable financing. Since 2017, the National Bank has been engaged in the development of a green, social, and sustainable financing framework. This framework entails the thoughtful consideration of social and environmental issues by participants in the financial sector and capital markets, along with the management of associated risks, which is crucial for ensuring both financial stability and the sustainable development of the economy.

Today, the global financial system’s attention to environmental and social responsibility issues is growing in significance as a key element of sustainable development. Salome Tvalodze, the Head of the Sustainable Financing Department at the National Bank of Georgia, delves into the concepts of sustainable financing and the vision and strategy of the financial sector to achieve sustainable development goals.

Salome Tvalodze, the Head of the Sustainable Financing Department at the National Bank of Georgia, delves into the concepts of sustainable financing and the vision and strategy of the financial sector to achieve sustainable development goals.

What is sustainable financing, what do ESG issues mean, what is being done today to promote sustainable development of the country and what is the role of the National Bank in this process?
Sustainable financing is a comprehensive concept that encompasses the alignment of the financial system with sustainable development. While lacking a singular definition, it generally involves the integration of environmental, social, and governance (ESG) considerations into financial decision-making and directing financial resources toward achieving sustainable and inclusive growth.
ESG factors encompass environmental, social, and governance issues that can influence the financial performance or solvency of households, corporations, and financial institutions, either positively or negatively. More specifically, environmental factors cover climate change mitigation and adaptation, natural resource conservation, ecosystem protection, and other environmental concerns or associated risks. Social factors encompass matters like inequality, inclusiveness, labor relations, protection of human rights, empowerment of women and girls, poverty reduction, and more. Good governance, incorporating management structures, employee relations, compensation policies, stakeholder engagement, and other governance practices, plays a fundamental role in ensuring the proper incorporation of environmental and social issues into the decision-making process.
The financial sector holds a distinctive role in advancing sustainable development. As the central bank of the country, the National Bank of Georgia actively fosters the enhancement of the financial sector’s role in the country’s sustainable development. To achieve this objective, the National Bank has been actively involved in the development of sustainable financing in Georgia over the past few years.

The National Bank initiated the development of the sustainable financing framework in 2017, and in 2019, it released the sustainable financing guide, actively progressing towards implementing the action plan outlined within. What exactly does a sustainable financing framework entail?
The sustainable financing framework established by the National Bank encompasses the incorporation of ESG issues into the decision-making process of financial sector participants, the management of risks associated with ESG issues, and the redirection of financial flows towards projects with positive environmental and/or social impacts. This approach contributes to long-term economic sustainability and financial stability.
The 2019 Guide to Sustainable Financing stands as the primary policy document in this domain. Its chief aim is to establish a reliable, predictable, and stable regulatory framework, setting the stage for the transition to sustainable financing. The guide outlines four primary directions, each serving distinct goals within the action plan: raising awareness about sustainable financing, developing guiding principles, and enhancing market qualifications in the realm of sustainable financing; Directing capital flows toward sustainable sectors and investments to foster a green and socially inclusive economy; Considering ESG factors within the risk management framework and decision-making processes of financial institutions and corporations; Enhancing transparency and market discipline by imposing disclosure requirements on ESG issues.
The majority of the activities outlined in the Action Plan of the Guide have already been implemented: ESG issues have been integrated into the Corporate Governance Code, and principles and a relevant form for ESG reporting and disclosure have been developed. The Sustainable Finance Taxonomy has been published, alongside the release of the Climate Risk Radar and the Funded Emissions Tool and Methodology. Since 2021, we have started issuing the Sustainable Finance Report and we have recently concluded work on a guide to ESG issues. Over the years, a number of events and workshops on sustainable financing have been conducted, and we actively share our experiences with the central banks of other countries and financial sector regulators.

The Sustainable Finance Taxonomy (SFT) became effective on January 1, 2023. What implications does this regulation carry, what transformations does it bring about, and what is the primary objective of the Sustainable Finance Taxonomy? Additionally, what does the green and social taxonomy entail?
The Sustainable Finance Taxonomy serves as a classification system designed to identify activities aligned with green, social, or sustainable objectives. Developed by the National Bank in collaboration with various local and international experts and stakeholders, the taxonomy for Georgia was published in August 2022. Comprising two components, namely the green and social taxonomy, the taxonomy of sustainable financing delineates specific activities contributing to environmental goals and the development of a green economy. As for the Social Taxonomy, it focuses on the activities aimed at achieving social goals, particularly for target groups. Additionally, in the framework of taxonomy the green/social activities with social or green co-benefits are acknowledged as sustainable activities.
In conjunction with the taxonomy of sustainable financing, the National Bank endorsed the regulation for classifying and reporting loans based on the taxonomy of sustainable financing (taxonomy regulation) for commercial banks, effective as of January 2023. This regulation formally outlines the classifications of green, social, and sustainable lending and mandates reporting obligations for commercial banks concerning loans that align with the taxonomy. As per the regulation, a commercial bank can designate a loan as green, social, and/or sustainable only if it adheres to the technical criteria established in the taxonomy of sustainable financing. Furthermore, banks are required to provide monthly statements of green loans in the format specified by the taxonomy regulation. This framework ensures the availability of comparable and consistent data on green loans in Georgia, fostering the development of a sustainable financing market.

Several challenges are apparent in the implementation of the Sustainable Finance Taxonomy, such as low levels of private sector awareness and limited capacity to align operations with the Sustainable Finance Taxonomy. What plans does the National Bank have in place to address these challenges?
Implementing the taxonomy of sustainable financing in practice poses a complex and challenging undertaking. This necessitates banks to formulate suitable internal procedures and integrate them into their day-to-day operations. Achieving this, on the one hand, requires a combination of knowledge, experience and resources, and on the other hand, demands the time for practical implementation. Thus, it’s understandable that, approximately a year after the adoption of the taxonomy, the banks, particularly those lacking experience in green and social lending, encounter challenges. Compounding the situation is the low demand for green loans from the private sector. The National Bank is consistently engaged in assisting banks with the implementation of the taxonomy of sustainable financing, including by organizing workshops, developing pertinent tools, and offering feedback on technical issues.

Five Georgian banks currently offer loans in accordance with the sustainable taxonomy. What is the National Bank’s assessment of the practical implementation of the sustainable financing taxonomy based on this observation?
Since the introduction of the taxonomy regulation, five banks have commenced the implementation of the sustainable finance taxonomy. As of September 2023, the portfolio of green loans aligning with the taxonomy reached around 412 million GEL, constituting less than one percent of the total credit portfolio. This relatively modest share is attributed in part to the ongoing adoption process among banks and the fact that not all banks have initiated the process. Collaborative efforts with the sector are underway to facilitate the implementation of the taxonomy by more banks, and an increase in the volume of green loans is anticipated in the coming years.
When examining the loans issued in accordance with the taxonomy in terms of sectoral distribution, 63 percent of the total loans are directed towards the renewable energy sector. More specifically, 57 percent of green loans are allocated for hydropower projects. Additionally, 17 percent of green loans were issued in the green transportation sector, with other sectors contributing to a relatively lower share.

How can the promotion of financial education, encompassing sustainable financing, be facilitated in both financial institutions and society?
Raising awareness on ESG topics and enhancing qualifications represent fundamental requirements for sustainable financing development, posing a significant challenge not only in Georgia. Hence, one of the four pillars of the National Bank’s sustainable financing framework focuses on raising awareness and fostering qualification growth. It’s crucial to acknowledge that, alongside the financial institutions, raising awareness among their clients is equally vital, as their engagement and support are pivotal for achieving successful outcomes.
Sustainable financing is a relatively new yet comprehensive field. In the absence of dedicated university programs, one solution is to conduct training sessions and workshops. Over the recent years, we’ve made active efforts in this regard, with numerous seminars and workshops conducted, especially for financial institutions, and this initiative will persist in the future. Additionally, short informative videos on contemporary sustainable financing issues have been prepared. However, to ensure sustained, high-level funding in the long term, a crucial prerequisite is a professionally trained workforce, necessitating the development of appropriate training programs and courses. Universities and other educational institutions play an essential role in facilitating this process.

How crucial is the cross-sectoral collaboration involving financial institutions, development banks, and the civil sector to facilitate the advancement of sustainable financing in Georgia?
The engagement of stakeholders in shaping the sustainable financing framework and executing the action plan is particularly significant. This collaborative effort receives support and involvement from various organizations, including the International Finance Corporation (IFC), the Sustainable Banking and Finance Network (SBFN) with the IFC, the Organization for Economic Co-operation and Development (OECD), Finance in Motion, the Green Growth Fund (GGF) Technical Support Program, the German Sparkasse Foundation (DSIK), UN Global Compact Georgia Network, and the European Investment Bank (EIB). Working closely with financial institutions and banking associations through the Sustainable Financing Working Group and coordinating with other local stakeholders, including various ministries, is an integral part of the operational process. This active collaboration with stakeholders ensures adherence to high standards within the sustainable financing framework and its effective implementation.

What are the future plans/projects of the National Bank in the realm of sustainable development?
We are actively advancing the development and implementation of our sustainable financing framework. Currently, a significant project involves creating scenarios and a stress test framework for climate change, over which we have been working for the past year, in collaboration with the international experts, enhancing our ability to assess climate-related risks within the financial sector. Additionally, we’re nearing completion of a framework for green, social, and sustainable bonds, aligning with our sustainable finance taxonomy. An upcoming highlight is the 5th International Sustainable Financing Forum, scheduled for March 6. This forum, co-hosted with IFC and SBFN, has been an annual event since 2018, fostering valuable discussions on the advancement of sustainable financing in Georgia and other emerging economies.