On 30 December 2024, the Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market took a major step forward in developing corporate governance of credit and financial organizations and enhancing risk control in the country's banking system. The National Bank of the Republic of Kazakhstan introduced amendments in their Resolutions of July 28, 2017, No. 136, and November 12, 2019, No. 188 which include the following innovations:
Definition of ESG risks of banking activities
Resolution No. 188 has been supplemented with amendments concerning reputational, compliance, and credit risks. One of the key innovations is the definition of ESG risks, that include environmental, social, and corporate governance risks.
Approval of sustainable development policy and other procedures for environmental and social risk management
From 2025 onward, all second-tier banks are required to develop:
- Sustainable Development Policy;
- A set of policies for environmental and social risk management;
- A procedure for disclosure of information on sustainable development (ESG);
- A procedure for decision making on the acceptability of environmental and social risks in significant and high-risk projects prior to signing a loan agreement;
- A procedure for avoiding loan operations with high environmental and social risks;
- A data collection system for creating statistics on environmental and social risk management for the purpose of generation of information on sustainable development (ESG);
- A procedure for implementing sustainability principles within the organization.
The Bank's Management Board monitors the timeliness and accuracy of disclosure of the information on sustainable development (ESG).
Enhancement of the credit risk management system - implementation of the environmental and social risk management system (ESRMS)
The asset classification system by credit risk level now includes an assessment of environmental and social risks of operations. The development of an environmental and social risk management system (ESRMS) is becoming mandatory, which should include:
- The process of identifying, assessing and managing environmental and social risks;
- A set of risk management policies;
- Requirements for documentation to ensure transparency and efficiency of governance;
- Procedures and decision-making processes related to risk identification and management;
- Responsibilities and powers of the bank's collegial bodies and the heads of the risk management and the sustainable development departments;
- Conducting a comprehensive environmental and social risk assessment (ESDD) of the potential borrower's activities in financing medium-sized enterprises, corporate and project finance;
- Monitoring of environmental and social performance of the client.
Stress testing and monitoring of environmental risks
Another important change is related to stress testing. According to the updated regulations, banks are required to conduct stress tests at least once every six months and include scenarios related to environmental and social threats in their forecasts.
Establishment of a department/appointment of a responsible person for sustainable development
Banks should establish a separate department responsible for implementation of ESG practices. If establishing a separate department is not practicable, the bank should appoint a responsible person for sustainable development, supervised by a member of the bank's Management Board and/or Chief Sustainability Officer.
The department/responsible authorized person shall perform the following functions:
- Implementation of sustainability (ESG) practices and approaches into the bank's operations;
- Development of internal ESG documents;
- Provision of information related to sustainable development to the bank's Management and Board of directors;
- Organization of regular training of the Bank's employees on sustainable development, environmental and social risks, as well as updating the content of training materials;
- Coordination of the preparation of the Sustainability (ESG) Report.
Sustainability (ESG) Report
The bank shall disclose information on sustainable development (ESG) by including it in the annual report and/or publishing a separate report on sustainable development. The report shall be published annually by July 30th of the year following the reporting year when preparing the annual report and by August 30th of the year following the reporting year when preparing a separate report. The report shall include quantitative information on the reporting year and two previous years (starting from January 1, 2027).
Development of a grievance mechanism
Resolution No. 136 has been supplemented with a clause regulating the grievance registration process. The bank is obliged to provide functionality allowing clients to easily submit grievances, including via a mobile application.
According to Resolution No. 188, the Bank's Management Board is responsible for developing an internal procedure for handling the clients’ grievances related to the banking services.
ENSOR Comments
The above-mentioned legislative innovations constitute a significant step for the Republic of Kazakhstan to improve practices of risk management in banking activities taking into account ESG factors. It should be noted that the Republic of Kazakhstan is the first country in Central Asia, where these requirements are now enshrined in legislation. Implementation of the requirements will require certain efforts from the banks of the RoK, however, if the process of internal changes is successfully implemented, the banks will be able to gain additional benefits, for example, easier access to loans from international financial institutions, such as the European Bank for Reconstruction and Development (EBRD), International Finance Corporation (IFC), Asian Development Bank (ADB) and others.
ENSOR has extensive experience and expertise in providing support to the banking sector in implementing ESG practices, including environmental and social risk management. We would be pleased to assist banks of the RoK in complying with the new legislative requirements in the area of ESG compliance.