| Project Detail |
Project Name
Accelerating Environmental, Social, and Governance-Focused Private Sector Market Development in the Central and West Asia Region
Project Number
58025-001
Country / Economy
Regional
Armenia
Azerbaijan
Georgia
Kazakhstan
Kyrgyz Republic
Pakistan
Uzbekistan
Project Status
Active
Project Type / Modality of Assistance
Technical Assistance
1. This technical assistance (TA) program seeks to promote transformational private sector development (PSD) by tackling hurdles that are impeding private sector investment related to environmental, social, and governance (ESG) growth in underserved markets. These interventions will bridge the gap between upstream policy reforms and downstream client-specific interventions. The TA will support innovative and transformational interventions that have a high demonstration effect. The TA will also deliver outputs that support and align with the ongoing upstream PSD reforms, policy actions, and other ESG-related Asian Development Bank (ADB) programs.
2. The TA is designed to support projects that will have a strong ESG impact for the targeted Central and West Asia developing member countries (DMCs) and will align with ESG-related interventions for focus areas of ADBs private sector financing.
3. The TA is aligned with ADBs ambition for systematic expansion of support for PSD and is aligned with ADBs Strategy 2030 and the ESG-related sections of target DMCs country partnership strategies (CPSs). It will also contribute to the PSD shift under ADBs new operating model. To support Central and West Asia DMCs in realizing their development potential, ADB, in line with the new operating model and Strategy 2030, intends to be a catalyst for PSD.
Project Rationale and Linkage to Country/Regional Strategy
1. Weak enabling environment for PSD and climate action. Central and West Asia DMCs typically face critical private sector development challenges, including limited access to finance for climate-related projects, inadequate infrastructure, suboptimal or new and unproven regulations hindering investment, and governance issues. Most Central and West Asia DMCs strongly emphasize programmatic approaches for climate action and strengthening the private sector enabling environment. Among the participating DMCs, a lack of capacity and/or a poor enabling environment are highlighted in ADBs CPSs for Armenia, Georgia, the Kyrgyz Republic, Pakistan, and Uzbekistan. An inability to meet investment requirements to address decarbonization as well as climate resilience targets are mentioned in several CPSs (Kazakhstan, the Kyrgyz Republic, and Pakistan), as are governance, legal, and regulatory obstacles (as per the CPSs of all targeted DMCs). These needs are compounded by the fact that many Central and West Asia DMCs are still recovering from the consequences of the coronavirus disease pandemic, which include high levels of public debt, increased sovereign risk, rating downgrades, capital outflow, reduced tax revenues, challenges in financing for the private sector, and even a reversal of many social policies and green economic development policy mandates in favor of short-term revenue recovery measures.
2. Lack of private sector readiness for ESG-themed investments. There is insufficient institutional capacity among domestic private sector institutions in Central and West Asia DMCs to mobilize large-scale global ESG-themed investments that contribute to sovereign development efforts (footnote 9). Strongly ESG-focused private sector activities are often underfunded because of market failures related to overestimated political, systemic, or operational risk and market apprehension related to a lack of precedents in the given subsector or type of technology and/or approach proposed. The private sectors understanding of key ESG-related issues and standards is often limited, and it is poorly equipped to handle evolving environmental and governance requirements, both domestically and internationally (footnote 11). ESG financing, especially ESG-related lending, has grown significantly in other regions, with high standards maintained by borrowers and lenders. In contrast, the Central and West Asia region has seen slower growth, partly because of the limited capacity of domestic private sector institutions to track and report on ESG performance data. These institutions need to collect real-time operational data on environmental and social activities, internalize cost-effective monitoring processes, and report progress to ESG investors promptly. This TA will also incorporate globally accepted ESG investment standards and practices to maximize impact.
3. Private sector understanding of key ESG-related issues and standards is often limited. To address specific market failures and develop practical and actionable approaches, local private sector institutions and value chain associations would have to evaluate various globally successful strategies and ESG investment models. However, these institutions face significant constraints, including regulatory uncertainty, high initial transaction costs, lack of technical expertise, and long-term operational horizons. In short, "first mover" risks mean that often financing options for the required investments in ESG-compatible market expansion are prohibitively expensive and prevent the necessary interventions from being undertaken.
4. Nascent ESG investment ecosystems and weak climate (or thematic) financing systems. The limited financing sources, compared to developed economies, significantly hinder economic development in this regions DMCs, especially in ESG-related sectors, because of higher perceived risks. Sub-investment-grade sovereign ratings and limited fiscal resources further exacerbate the constrained business environment. Despite this, many DMCs in Central and West Asia are adopting ESG-themed financing guidelines, recognizing that thematic financial instruments like green or blue bonds can mobilize private capital to meet nationally determined contributions (NDCs). However, the use of such instruments is low because of high transaction costs, ineffective project validation, inadequate risk mitigation, and unprepared domestic financial institutions.
5. Alignment with ADB approach for the region. ADB has been supporting PSD through financing, advisory, and knowledge products. Such support has focused on improving the business environment for the private sector, state-owned enterprise (SOE) reforms, and downstream financing to the private sector as part of nonsovereign operations.
6. Central and West Asia DMCs generally need to increase private sector engagement to (i) maximize funding opportunities, particularly for climate, environmental, and social benefits; and (ii) secure diverse financing sources aligned with their NDCs, net-zero commitments, and the sustainable development goals. This will require systematic capacity development of the private sector in key areas where identified market distortions have limited foreign and domestic investment to levels insufficient to meet key ESG-related goals.
Impact
Institutional capacity of Central and West Asia DMCs for ESG-focused private sector development enhanced and financial resources for development mobilized |
