This material is developed to inform stakeholders about point 8 of the “Roadmap for Stimulating and Promoting the Adoption of Environmental, Social, and Governance (ESG) Principles for 2024.”

ESG encompasses three main areas: Environmental (potential and current impact on the environment), Social (approaches to society, employees, and the social environment as a whole), and Governance (management of internal structures and processes regulating company activities).

Sustainability Reporting Standards

In 2022, sustainability reporting disclosure was at 96% among the 250 largest companies in the world, compared to just 35% two decades ago. The field of sustainability reporting is rapidly and significantly changing due to new challenges and stakeholder expectations. These changes have led to the emergence of new standards and frameworks, such as IFRS and ESRS.

IFRS Standards: In 2023, the International Sustainability Standards Board (ISSB) published the IFRS sustainability disclosure standards.

- IFRS S1 defines general requirements for financial disclosure, including the scope, materiality, boundaries of reporting, presentation, and verification of sustainability disclosures.

- IFRS S2 provides specific guidance on climate-related disclosures, including resources, targets, and scenarios to be used.

ESRS Standards are European Sustainability Reporting Standards designed for consistent and comparable sustainability disclosures. These standards will apply to all companies subject to the Corporate Sustainability Reporting Directive (CSRD) starting from 2024. The standards cover environmental, social, and governance topics such as climate change, biodiversity, human rights, remuneration, and anti-corruption.

Prospects for the Development of ESG in Azerbaijan

The Paris Agreement is an international accord addressing climate change. Azerbaijan signed the Paris Agreement in 2016, and its provisions came into effect in 2017.

Objectives:

- To limit the increase in global average temperature to well below 2°C above pre-industrial levels, and to pursue efforts to limit the temperature increase to 1.5°C.

- To enhance the ability to adapt to the adverse impacts of climate change, increase climate resilience, and reduce greenhouse gas emissions.

- Focusing Financial Flows on Reducing Greenhouse Gas Emissions and Sustainable Development Amidst Climate Change

Commitments:

- To support developing countries in transitioning to a low-carbon economy through innovations in developed countries and to provide $100 billion annually in investments to combat climate change. 

- At COP26, parties announced new financial commitments to the Adaptation Fund and the Least Developed Countries Fund to help vulnerable groups enhance their resilience to climate change impacts.Azerbaijan ranks 53rd in the global “SDG Index 2023” with a score of 73.5.

Risks Faced by Azerbaijani Companies

Azerbaijan’s ESG Priorities

- Azerbaijan 2030: National Priorities for Socio-Economic Development

- Strategy for Socio-Economic Development of the Republic of Azerbaijan for 2022─2026

- Roadmap for Sustainable Financing of the Republic of Azerbaijan for 2023-2026

- 2023 Roadmap for Stimulating and Promoting the Adoption of ESG Principles

Carbon Emission Assessment System and Carbon Tax

Emissions Trading System exists in countries that generate over 55% of global GDP and over 17% of global greenhouse gas emissions. While Azerbaijan does not currently prioritize the development of emissions control measures, this could offer two main advantages. Specifically, this includes: reducing export costs from Azerbaijan to foreign countries and more flexible and effective integration into international climate-related goals and principles.

Note: To promote ESG widely in Azerbaijan, consolidate the efforts of the public and private sectors in this area, and ensure the formation and implementation of a conceptual vision, a subgroup on “Environmental, Social, and Governance Standards” was established on September 30, 2022.  The sub-group is led by the Small and Medium Business Development Agency (KOBİA). The sub-group includes representatives from approximately 20 institutions and organizations from both the public and private sectors.

Fidan Sadykhly

Manager of the Climate Change and Sustainability Services Department at EY Azerbaijan

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