SberCIB Investment Research has prepared the first review of the key ESG trends in Russia.
The review consists of three parts: an analysis of forthcoming changes in legislation on greenhouse gas emissions; a review of the ESG debt financing market in Russia and a comparison with other countries’ markets; a handbook on the ESG profiles of leading Russian companies.
In Russia, goals for the reduction of greenhouse gas emissions by 2030 have been set. In November 2020 a decree was adopted on the reduction of greenhouse gas emissions to 70% of 1990 levels, taking into account the maximum absorptive capacity of forests and other ecosystems. Russia made these commitments in the framework of the Paris Agreement. Moreover, the government was instructed to prepare a 2050 low greenhouse gas emission development strategy.
Russia’s 2020 development strategy should be approved this year. Last year, the Ministry of Economic Development prepared a draft development strategy (Strategy for the Socioeconomic Development of the Russian Federation with Low Greenhouse Gas Emissions) in which several scenarios were considered. According to the ministry’s forecasts, without state support measures, emissions will rise to 2.38 bn tons CO2e, 76% of the 1990 level. In the baseline scenario, which entails improved energy efficiency due to new support measures, it is presumed that the emission level will increase to 2.08 bn tons CO2e, or 67% of the 1990 level. According to the severe scenario, based on additional state measures, 2030 emissions will amount to 64% of the volume in 1990, or 2 bn tons CO2e. We expect the document to be approved in 2021.
An emissions trading experiment will be launched in Sakhalin. The draft law is to be introduced into the State Duma as soon as July 2021. The regulations necessary for its implementation are to be drafted and adopted by February 2022. Additionally, an emissions inventory will be carried out (by August 2021) and an information system with a roster of participants, projects, and emissions levels will be created. Emissions trading is scheduled to begin as early as mid-2022. Based on the results, the experiment may be expanded to encompass other regions.
ESG financing infrastructure has been actively developed over the past two years. The Russian market now features green and social bonds, albeit in modest quantities so far and with a limited number of companies issuing them. We expect to see new categories of ESG bonds on the Russian market soon: sustainable development bonds, as well as sustainable development KPI-linked debt securities. Such instruments could expand the list of companies and sectors capable of entering the ESG financing market.
So far Russian investors are displaying moderate interest in ESG financing. Major Russian commercial banks introducing ESG approaches are the exception. The expansion of state support of ESG financing for both borrowers and investors could catalyze this market. We do not exclude that Russia could enter the market as a sovereign borrower issuing ESG bonds. This would be an important step for the development of green financing in Russia and would improve the country’s image in the eyes of the international investment community.
Consistency with the needs of the Russian economy. In some respects, ESG values correspond to the major challenges that the Russian economy is facing. These include the need for more long-term planning when formulating economic policies and investing, as well as the need for greater attention to environmental standards and social issues. In the financial sector, the primary matter of concern is the creation of a more developed (and less speculative) market, in addition to improving the level of education and supporting the emerging retail investor class. Moreover, developing the ESG sector will facilitate transparency and higher standards of corporate governance.
The review also includes detailed ESG profiles of the 42 largest Russian companies, representing various sectors of the economy – from mining and transport to finance and e-commerce. The profiles emphasize the most important ESG factors for each concrete sector. E.g., greenhouse gas emissions and security for the metal and mining industries, the oil and gas sector, and the energy industry. For other sectors, social factors are more important, such as employee satisfaction levels, privacy, and data protection. Aspects related to corporate governance are significant for all companies considered.