Executive summary

Introduction

Resource-rich post-Soviet countries, such as Russia, Kazakhstan, Azerbaijan, and Uzbekistan, have faced challenges in fulfilling their Environmental, Social, and Governance (ESG) goals. These countries are endowed with significant natural resources, including oil, gas, coal, and minerals, which have contributed to their economic development. However, the reliance on these resources has led to a range of environmental and social issues, including pollution, climate change, income inequality, and weak governance.

Environmental concerns have been intensified by the heavy dependence on fossil fuels in these countries, leading to high levels of greenhouse gas emissions and air pollution. The extraction and processing of natural resources, especially in the oil and gas sectors, have led to water pollution, soil contamination, and habitat destruction. Climate change is also an increasing concern, as it exacerbates existing environmental challenges, such as water scarcity and desertification.

Social issues include income inequality, inadequate social services, and a lack of investment in human capital development. Resource-rich post-Soviet countries have often experienced uneven wealth distribution due to the concentration of economic power in the hands of a few oligarchs and political elites. This has hindered social mobility and exacerbated poverty levels (Pouokam et al., 2021)

Governance challenges stem from weak regulatory frameworks, corruption, and a lack of transparency in the management of natural resources. These issues have limited the effectiveness of policies aimed at addressing environmental and social challenges and have impeded the ability of these countries to meet their ESG goals.

In recent years, there has been a growing awareness of the importance of ESG factors in the post-Soviet region. Governments, corporations, and investors are increasingly recognizing the need to transition towards sustainable development and implement ESG best practices. Efforts have been made to diversify economies, invest in renewable energy, improve social services, and strengthen governance. However, progress has been uneven and significant challenges remain.

To accelerate the fulfilment of ESG goals in resource-rich post-Soviet countries, policy-makers need to address governance issues, promote transparency, and strengthen regulatory frameworks. Moreover, investments in human capital, social services, and economic diversification are crucial for ensuring sustainable and inclusive development. Finally, the transition to a low-carbon economy and the adoption of renewable energy sources are essential for mitigating the environmental impacts of natural resource exploitation (EBRD, 2019).

The aim of this analysis is therefore to compare ten post-soviet countries in terms of the natural resources rent and their performance in regards to selected ESG indicators. The following countries will be analysed: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. The observation period is from 1997 to 2020, although data is not available for each indicator and year.

Analysis

Inequality in total natural resources rents (% of GDP) among post-Soviet countries can be attributed to the uneven distribution of natural resources across the region.Some countries possess substantial resource endowments, which significantly contribute to their GDP, while others have limited or less valuable natural resources. This disparity can lead to economic inequality both within and between countries. Resource-rich post-Soviet countries like Russia, Kazakhstan, and Azerbaijan benefit from their abundant oil, gas, and mineral reserves. As a result, natural resources rents make up a significant percentage of their GDP. However, this dependence on natural resources can create an economic imbalance and lead to a phenomenon known as the “resource curse.”. The resource curse refers to the paradox where countries with abundant natural resources often experience slower economic growth, higher levels of corruption, and weaker institutions compared to countries with fewer natural resources (Basnet et al., 2016).

Figure 1 shows clearly that in the available data, the distribution is skewed with strong outliers, indicating significant inequality between post-Soviet countries when it comes to the accessibility of natural resources in order to increase their GDP. A similar distribution can be seen between the countries when investigating the Environment indicators of the ESG data. While the majority of data in Figure 2 shows CO2 emissions in metric tons per capita below 5, some reach higher than 15 metric tons per capita. Looking at the renewable electricity output in Figure 3, the gap is even wider, with some countries deriving close to none electricity from renewable sources while some reach up to 100%.

A similar picture can be seen when analysing the Social aspect of the ESG data. Figure 4 shows that range of life expectancy at birth, with some countries reaching as low as 60 and some up to 75. Looking at the poverty headcount in Figure 5, the the differences are similiarly strong ranging from almost 0% to 50%.

The Governance Indicators of the ESG data, show in Figure 6, shows that GDP growth is fairly normally distributed between 0% and 10%. Figure 7 shows that control of corrupation estimate for the majority of the data is negative, meaning corruption is increasing.

In the next section, the aim is to derive a comparison between the countries in term of their natural resources rents and their performance in the ESG indicators.

Environment

In Figure 8 and 9, the development over time in regards to Total natural resources rents as well as the CO2 emissions per capita can be compared. Figure 8 shows, that there is an overall contraction across all countries in the observed time-frame, with a small increase in 2018 when it comes to the % of total natural resources rents that contribute to GDP. Meanwhile in Figure 9 it is observable, that the CO2 emissions per capita in metric tons, have increased in Russia, Turkmenistan and Kazakhstan while the rest of the post-soviet countries remained on the same level of emission, with the exception of Ukraine who decreased strongly after 2013.

In Figure 10, it is observable, that the countries which have higher “Total natural resources rents (% of GDP), have lower Renewable electricity output (% of total electricity output). The top three countries in terms of natural resources rents, which are, Turkmenistan with 18%, Azerbaijan with 15% and Russia with 10%, have only 0%, 7% and 16% in electricity output done by renewable energy sources in 2015 (the year 2015 was selected as it is the most recent year that has data for all 10 countries in terms of renewable output). Meanwhile the three highest countries in terms of renewable energy output are Tajikistan with 98%, Georgia with 78% and Armenia with 28%. These countries only produce 2% (Tajikistan) and 1% (Georgia and Armenia) of the their GDP from natural resources rents.

Social

In order to compare the relationship between the natural resource richness of the post-soviet countries with the social pillar of the ESG, the mean life expectancy at birth (years) is calculated per country for the whole observation time frame. The same is done to the Total natural resources rents (% of GDP). In Figure 11, the observations show that, the higher the % of the natural resources rent at the GDP in a country, the lower the life expectancy at birth. Armenia, Georgia and Belarus have the lowest total natural resources rents and show the highest life expectancy, while Turkmenistan, who has the highest %, shows the lowest life expectancy.

The same approach was taken for Figure 12, where the mean rates of total natural resource rents and poverty headcount ratio at national poverty levels were calculated for the available time frame. The data shows, in contrary to Figure 11, that countries with lower natural resources rent tend to worse, with a higher % of population living at national poverty lines (Georgia, Armenia and Tajikistan).

Governance

The Governance pillar of the ESG indicators is analysed by looking at the GDP growth (annual %) of the post-Soviet countries. The GDP growth is averaged over the observation period 1997-2020. Figure 13 shows, that Azerbaijan, Turkmenistan and Tajikistan are the top three countries when it comes to GDP growth.

If compared to figure 14, the top two countries in terms of GDP growth - Turkmenistan and Azerbaijan, are historically also the countries with the highest natural resources rent.But compared to Figure 8 and Figure 9, the dependency on natural resources has drastically reduced in the last 10 years.

Analysing the corruption estimate of the post-soviet countries, we can see from Figure 15 that historically, countries with lower natural resource rent do better (Georgia, Belarus and Armenia) in terms of corruption estimate. But looking at the time-series of Figure 16, it shows that these countries do exceptionally better compared to the rest in the last 10 years and are also historically the three countries with the lowest natural resources rent (see Figure 14).

In order to get a deeper understanding on how all the indicators correspond to each other. It creates a matrix of scatterplots, where each variable is plotted against every other variable. It creates correlation coefficients, which can be usefull to assess the strength and direction of a relationship between variables. In Figure 17, we can see that, the correlation between natural resources rent and corruption is negative significant (the higher natural resources rent the higher corruption), strongly positive with GDP and also with poverty. In this plot the relationship between the indicators can be further explored, for example poverty and life expectancy are strongly negativ correlated to each other, meaning the poorer a country, the lower the life expectancy.

Conclusion

In conclusion, this study aimed to investigate the relationship between total natural resource rents as a percentage of GDP and various ESG indicators, including CO2 emissions, renewable electricity output, life expectancy, poverty headcount, GDP growth, and control of corruption estimate. The findings revealed a clear trend that countries with higher natural resource rents tend to have poorer performance in their ESG indicators. This negative relationship suggests that countries with significant natural resource wealth may face unique challenges in achieving strong ESG performance, potentially due to factors such as resource dependency, governance issues, or economic inequality.

The results of this study underscore the importance of increased ESG investment in countries with high natural resource rents. By directing capital towards projects and initiatives that prioritize environmental, social, and governance factors, these countries can work to mitigate the negative impacts associated with their natural resource wealth. ESG investment can help drive the transition towards cleaner energy sources, reducing CO2 emissions and increasing renewable electricity output. Simultaneously, it can promote social development by addressing poverty, improving life expectancy, and fostering more equitable growth.

Moreover, ESG investment can play a critical role in strengthening governance in resource-rich countries. By encouraging transparency, accountability, and effective management of natural resource revenues, ESG-focused investments can contribute to reducing corruption and promoting better governance practices. This, in turn, can create a more stable and predictable environment for businesses and investors, further encouraging sustainable development and long-term growth.

In light of these findings, policy-makers, investors, and other stakeholders should recognize the potential of ESG investment as a tool for addressing the challenges faced by countries with high natural resource rents. By prioritizing and supporting ESG initiatives, these countries can work towards improving their ESG scores, promoting sustainable development, and ensuring that their natural resource wealth benefits all citizens in an equitable and environmentally responsible manner.

References

EBRD (European Bank for Reconstruction and Development). (2019). Transition Report 2019-20: Better Governance, Better Economies. European Bank for Reconstruction and Development. https://www.ebrd.com/publications/transition-report

Basnet, A., Blomkvist, M., & Galariotis, E. (2022). The role of ESG in the decision to stay or leave the market of an invading country: The case of Russia. Economics Letters, 216, 110636. https://doi.org/10.1016/j.econlet.2022.110636

Pouokam, N. (2021). Sharing Resource Wealth Inclusively Within and Across Generations, IMF Working Papers, 2021(097), A001. Retrieved Apr 19, 2023, from https://www.elibrary.imf.org/view/journals/001/2021/097/article-A001-en.xml