Russians remain wary of green finance despite policy shift
Policymakers in Moscow are finally promising to tackle climate change. Will the Russian private sector follow suit?
Have Russian policymakers finally accepted the necessity of tackling climate change? That is the question being asked in global environmental circles following the Kremlin’s surprise unveiling in mid October of plans to achieve net zero carbon emissions by 2060.
The announcement was broadly welcomed by advocates for climate action, who had begun to despair of seeing any serious action on greenhouse gas emissions from one of the world’s biggest commodity producers and carbon polluters.
Traditionally, Russia has been a laggard on climate. President Vladimir Putin was publicly sceptical of climate change until very recently and his government only ratified the Paris Agreement in 2019, and then with very unambitious targets for carbon reduction.
Over the last year, however, there have been increasing signs of a policy shift. Several months of climate-friendly rhetoric from the Kremlin was franked in July by a flurry of initiatives, including a requirement for larger polluters to disclose greenhouse gas emissions from 2022 and a recommendation from the central bank for companies to introduce non-financial reporting.
These were followed in September by the announcement that the government had started negotiations with businesses on the launch of a carbon taxation system in Russia.
A pilot carbon trading scheme is already running in Sakhalin.
Despite these progressive moves, questions linger over the Russian government’s climate bona fides – particularly after Putin’s last-minute decision not to attend the COP26 conference in Glasgow.
Sceptics note that, at the same time as touting their commitment to net zero, policymakers are also forecasting a 50% increase in gas production by 2035.
Repeated references to forestry protection have also raised suspicions that the Kremlin is planning to finesse its carbon emissions numbers by claiming vast tracts of Siberian woodland as offsets.
Policymakers have openly acknowledged that the main driver for the introduction of domestic carbon markets is ensuring that any taxes on carbon emissions go to the Russian government rather than the EU when the latter introduces its cross-border adjustment mechanism (CBAM) in 2026.
Meanwhile, the central bank’s new-found enthusiasm for sustainability has not yet extended to joining the 83 global regulators that have signed up to the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
A similar blend of ambivalence and pragmatism in relation to climate issues is evident in the Russian private sector.
While larger companies are well aware of the need to demonstrate their environmental, social and governance credentials to international investors, this is still widely seen as a question of having a dedicated web page, producing an annual sustainability report, and ensuring respectable ESG ratings.
ESG committees and dedicated ESG board members remain a rarity, and few firms have embraced the concept of sustainability in the same way as their Western peers.
“Public companies understand that when they go to industry meetings, when they go on roadshows, they have to talk about ESG,” says Alina Sychova, head of capital markets origination at Sova Capital in Moscow. “If you don’t, you're not part of the gang.
Public companies understand that when they go to industry meetings, when they go on roadshows, they have to talk about ESG. Whether that is translating into meaningful environmental transition is another question
“Whether that is translating into meaningful environmental transition is another question.”
One reason suggested by locals for this slow progress is confusion over the lack of standardization globally on ESG metrics and disclosure requirements. “It is a grey area, and Russians prefer things in black and white,” says Sychova.
Companies also still face little pressure on ESG from domestic stakeholders in Russia, where climate remains a low priority for investors and consumers, while even sustainability-minded firms are faced with the hard realities of Russia’s dark-brown economy.
This is the challenge facing the Russian banking sector.
As Sychova notes: “Banks’ biggest clients will be oil and gas companies, and commodity producers, because the Russian economy is dependent on commodities. Unless you cut them off from financing, that makes it difficult to set environmental KPIs [key performance indicators].”
From a developed-market perspective, the answer would be for banks to set net-zero targets and put pressure on clients.
So far, the concept has not gained traction in Russia. The country’s largest lender, Sberbank, has started to make the right noises, signing up to the UN Principles for Responsible Banking (PRB) in January and introducing sustainability reporting according to international standards.
This was followed in May by a pledge to make Sberbank’s own operations carbon neutral by 2030 and “help our clients minimize the negative impact on the environment”.
Other leading Russian banks are also touting their ESG credentials. Sovcombank joined the PRB in September 2019 and issued a social Eurobond in January. Credit Bank of Moscow has introduced financing linked to self-developed ESG KPIs, while VTB Capital established a climate finance and carbon markets business in October.
As yet, however, there is little indication that this is translating into the development of a meaningful sustainable-finance sector.
A domestic sustainable bond market, governed by local standards, has seen corporate and public-sector deals, while a handful of corporates – mainly in the metals and mining sector – have signed up for foreign-currency sustainability-linked loans.
ESG-labelled Eurobonds remain few and far between, however, with the bulk of volumes made up by a couple of green issues and a social bond from Russian Railways, and Sovcombank’s social deal.
Sustainability-linked bonds, hugely popular in most big markets over the last year, have yet to gain traction in Russia. Several issuers have reportedly considered the format but decided not to go ahead.
Bankers say this is partly due to a general wariness of structured products among Russian clients, but also to a lack of appetite for instruments that include financial penalties for missing targets.
“Clients have asked us about sustainability-linked financing using KPIs, but they don’t like the uncertainty of the structure,” says Sychova. “They’re already taking on foreign currency risk with most of their funding and they don’t want to add interest rate risk to that as well, in the form of a step-up coupon.”
Announcing a strategy with targets doesn’t cost companies anything, but issuing a bond with penalties linked to specific KPIs has the potential to really hit their P&L
Another banker puts it more bluntly: “Announcing a strategy with targets doesn’t cost companies anything, but issuing a bond with penalties linked to specific KPIs has the potential to really hit their P&L if they fail to achieve them.”
Similarly, bankers report that Russian borrowers’ main interest in green bonds is to achieve improved pricing.
The concept of using the sale of ESG-labelled debt as a way of advertising sustainability pledges and achievements to the market – as many Western issuers have done – is still foreign to them.
Sergey Sedov, director of investment banking at Renaissance Capital, says this is partly because most Russian companies have yet to fully formulate sustainability strategies.
“Russian corporates are catching up on European peers in terms of making strong statements on their strategy regarding environmental sustainability targets, whether that’s emissions reduction, pollution, water or waste management,” he says. “It is a work in progress. They are setting internal targets, but most don’t want to disclose these to the market until they have a programme to deliver on them.”
The process is expected to speed up over the coming months, however, as pressure on corporates continues to build.
Bankers are warning that even issuers of conventional Eurobonds will struggle to attract interest from international investors in future without a comprehensive ESG strategy, particularly on climate.
“It’s very clear that not having a sustainability agenda will make financing more expensive,” says Sychova. “International investors will punish companies that don’t focus on ESG. That’s what’s triggering corporates to look into it.”
Sedov agrees. “We will definitely see Russian corporates coming out with more detailed transition pathways in the near future,” he says. “At the moment, they can still do capital markets transactions without a long-term ESG strategy, but in a year or two that will likely no longer be the case.”
Russian firms are also bracing for more regulatory pressure on environmental issues. Previously, the focus for larger companies has been on policy shift in international markets, primarily Europe and the US.
The EU’s proposed CBAM, for example, has been a source of concern for big commodity producers since it was first mooted two years ago. Russian metal producers such as En+ and Evraz have even explored the possibility of creating separate 'green' products for export to Europe.
Following Russia’s policy shift on climate, the focus is turning closer to home. Sychova says the expectation is that the local green taxonomy will be aligned with those of the largest global financial markets.
“Policymakers understand that local policies need to be aligned in order for Russian companies to be attractive to the wider investor base and remain competitive,” she says.