Mongolia’s green initiatives offer “solid incentive” for environmentally friendly economic activity

Mongolia is one of the countries in the world most vulnerable to climate change. Increasingly inhospitable weather conditions have harmed traditional pastoral lifestyles, leading to rising urbanization and increased air pollution. In this regard, the Financial Regulatory Commission (FRC) of Mongolia has partnered with AFI to embrace the potential solutions presented by Inclusive Green Finance (IGF), particularly for non-bank financial institutions (NBFIs) and micro, small and medium enterprises (MSMEs). Celebrating its 13^th anniversary with AFI this year, the FRC has been chairing the network’s Eastern Europe and Central Asia Policy Initiative (ECAPI) since June 2021. FRC Chairman, Bayarsaikhan Dembereldash shared his insights on why the recently completed in-country implementation project for inclusive green finance (IGF) has proved pivotal. 

AFI: Could you give us a short retrospect on Mongolia’s in-country implementation (ICI) project for inclusive green finance (IGF)? What exactly were the objectives? 

D. Bayarsaikhan: The Financial Regulatory Commission (FRC) of Mongolia implemented the Regulated Entities Empowerment on Green Finance Project in collaboration with AFI to increase awareness of the importance of green finance and create a sound environment for green businesses.

As part of the project, we conducted a survey to assess the current state of green finance in Mongolia and identify challenges to green product endorsement among non-banking financial institutions (NBFIs). The findings revealed a major gap in the green performance index of Mongolia’s NBFIs compared to developed countries, exposing the need for a more supportive local infrastructure for green financing. This encouraged us to develop and distribute a manual to raise awareness of green financing, climate risks, and environmental and social governance (ESG) among regulated NBFIs.

We also hosted a Green Webinar which included training on the principles of sustainable development and the significance of green policymaking and green finance. Microfinance institutions that participated in the training expressed their interest in exploring increased green activities in their future operations.

In conclusion, I think it’s plausible to suggest that the project has had a significant impact on the promotion, perception, and initial development of inclusive green finance initiatives in Mongolia.

AFI: Which green finance products and recommendations were launched for Mongolia’s NBFIs? And how could these support IGF in the country?

D. Bayarsaikhan: To begin with, the FRC pursues policies that favor green investment in regulated sectors. It does this by promoting environmental and social governance (ESG) reporting and encouraging initiatives directed at green loans and risk management within the sector. The President of Mongolia has also shown his support for green policymaking by initiating the Green Finance Regional Forum – a series of high-level events centered on intensifying regional cooperation, reducing climate change, and developing sustainable and green finance. Finally, the country also adopted a Green Taxonomy in 2018 which facilitated banks’ and investors’ provisions of green loans and supported them in acquiring all the necessary loan categories and definitions of green products. In conjunction, all these green initiatives have helped lay the groundwork for a more environmentally friendly financial sector. In light of this, here’s a brief overview of what’s been achieved so far:

In 2022, the Financial Stability Council approved the National Sustainable Finance Roadmap, where major green goals were put forward for NBFIs and the broader financial sector, all of which are set to be implemented in stages over a period of 2-3 years. These include creating a favorable policy environment for sustainable financial development, directing fiscal and financial initiatives to green development, improving environmental and social governance risk management systems, and promoting transparent and open reporting among financial institutions.

As part of the Roadmap, the FRC committed to covering 5% of total NBFI loans with its green loan portfolio. To achieve this objective, NBFIs have been submitting Green Loan Reports to the FRC since the second quarter of 2022. In addition, the FRC approved a guidance model for developing environmental and social governance (ESG) risk management regulation. Designed to diversify the range of green loans available, the ESG risk management regulation also helps NBFIs to create a suitable environment for the introduction of sustainable finance.

AFI: Can you explain how green loans can contribute to sustainability? 

D. Bayarsaikhan: When providing green loans and services, credit providers consider whether applicants’ products or services meet the environmental and social governance standards set out in the green credit methodology. In other words, environmentally friendly projects are more likely to receive financial support. Projects are subject to various green measures and requirements, including the introduction of sustainability factors into business operations and decision-making, using projects’ performance as a basis for subsequent green loan approval, as well as the overall monitoring and reporting of ESG results. In this sense, green loans provide an incentive for business owners to take responsibility for the environment by meeting the standards and criteria imposed by credit providers.

To optimally allocate green loans, we first need to assess the environmental friendliness of applicants’ activities. In the case of Mongolia, commercial banks began to evaluate the environmental impact of their major customers in 2015. The FRC is working to introduce this rating system to NBFIs.

AFI: What are some of the opportunities presented by the development of green microfinance ecosystems?

D. Bayarsaikhan: Micro-finance ecosystems provide NBFIs and business owners with the chance to not only mitigate and build resilience to the impact of climate change but also to do their part in caring for their immediate environment and preserving it for future generations.

Micro-insurance with low premiums is a good example of a powerful tool for overcoming economic shocks brought on by natural disasters, and for providing economic stability. We have seen this in countries with well-developed insurance ecosystems. Green insurance and green loans present even more potential progress as low-cost services that encourage citizens and businesses to be more environmentally friendly, providing them with a solid incentive to plan, monitor and improve the impact their activities have on the environment. In order to inform and encourage business owners to commit to the concept confidently, the FRC also issued an in-depth definition of green insurance and created a legal framework governing the provision of green insurance products – three of which are already being offered by insurance entities.

If approached strategically, I think microfinance ecosystems have the potential to provide even positive changes to our environment in the future. For instance, according to statistics, green loans accounted for a very low percentage of the total loan balance issued by commercial banks. Therefore, I’d say there is an opportunity in diversifying green products and services by facilitating and simplifying individuals’ access to them. This can be achieved by implementing more optimal, user-friendly policies in microfinance institutions, thereby creating a more favorable green microfinance ecosystem for individuals and entities alike.

Lastly, our hope is that in the future, green microfinance ecosystems will trigger “green competition” allowing businesses’ success to be exclusively determined by their level of environmental friendliness – a future where profit will be directly proportional to climate action.

AFI: What can we expect from the FRC’s next steps in IGF? 

D. Bayarsaikhan: As I mentioned before, Mongolia adopted a green taxonomy in 2018. It was one of the first countries to do so. The FRC is now working on revising and updating the taxonomy to include the characteristics of current microfinance institutions and insurance companies.

While NBFIs have started introducing green credit products and services, the FRC continues to pursue policies to improve their green capacity and ensure their enforcement of regulations on environmental and social governance (ESG) standards, risk assessment, and reporting. In the near future, the FRC also hopes to further increase financial literacy and public awareness of green products and services.  
Lastly, as a result of the successful implementation of the in-country implementation project for inclusive green finance (IGF), we expect more advanced, innovative, and environmentally sustainable products and services to enter the market, with the necessary legal frameworks and low-cost financing to support them.

AFI’s Inclusive Green Finance workstream is part of the International Climate Initiative (IKI), supported by the German Federal Ministry for Economic Affairs and Climate Action (BMWK), based on a decision by the German Bundestag.