From ESG to Sustainable Finance in Eurasia:  Discussions at the St. Petersburg International Economic (SPIEF 2021)

From ESG to Sustainable Finance in Eurasia: Discussions at the St. Petersburg International Economic (SPIEF 2021)

 

The Introduction of the ESG Taxonomy and Promotion of the Sustainable Development Goals in Russia and the Eurasian Economic Union after the 2021 St. Petersburg International Economic Forum:A Detailed Analysis of the Negotiations and the Role for the Belgian-Luxembourg Chamber of Commerce in Russia (BLCC & BLRB) in the Process.

 

The Belgian-Luxembourg Chamber of Commerce in Russia (for Russia and Belarus) took part in the 24th St. Petersburg International Economic Forum on June 2-5. One of the most crucial topics on the agenda was ESG, which stands for Environmental, Social, and Corporate Governance. It is defined broadly as non-financial factors used to identify material risks and growth opportunities. A number of panels dedicated to Sustainable Development and ESG were conducted on SPIEF. The BLCC CEO, Oleg Prozorov and the BLRB President, Stefan Van Doorslaer, as well as the Head of BLCC ESG and Green Finance Expert Council, Nataliya Ponomaryova and Chambers‘ member companies, managed to attend the meetings in person despite the pandemic. By special request of the CEO of Diplomatic World magazine, Barbara Dietrich, the BLCC Project manager, Artem Golikov, and the intern for BLCC Russia, Sarah Cucic, assessed the meeting reports to develop the proposal of how the Belgian-Luxembourg Chamber of Commerce may assist in the introduction and development of ESG taxonomy in Russia. To do so, the spread of ESG policies was investigated among major Russian businesses, the expertise gained by Luxembourg financial organizations and the industrial firms in Belgium were analyzed, as well as the speeches of BLCC’ ESG and Green Finance Expert Council speaker, Nataliya Ponomaryova, were looked into.

 

To start with, Rosatom, PhosAgro, Moscow Exchange, Gazprombank, Moscow Сity Council and Russian Agricultural Bank representatives have voiced their ways to meet the ESG policies introduction targets within their departments on the „Responsible Finance as a Point of Synergy for Issuers and Investors when Tapping International Capital Markets“ round table at theSPIEF.

 

Rosatom representative, Ilya Rebrov, narrated that the company has recently joined the UN agreement to confirm its compliance with the ESG principles. What is more, the internal programmes were introduced to issue the first “green” bonds totaling RUB 100 billion  in value. The first bonds are to be brought to the market as early as August, while they are to be intertwined with special ESG indicators for the company. Rosatom is to allocate the sourced funds for the development of non-nuclear projects and other sustainable solutions. Mr. Rebrov also noted that the foreign revenues are to be increased by targeting the development of non-nuclear solutions, whilst the traditional business activity will rest on Rosatom’s compliance in the long run, which is also tightly related to be environmentally and socially friendly. Therefore, the Russian state-owned market giants are interested in ESG finance and policy.

 

One of the companies, with which the Belgian-Luxembourg Chamber of Commerce maintains contacts, has also provided an example of internal sustainable development to prove its importance. Member of the Management Board of PJSC Sibur Holding, Alexey Kozlov, has also narrated on the development of intra-corporate ESG-policy with the example of his company. As early as in 2019, Sibur made public commitments and approved the company’s sustainable development strategy at the board of directors level, which reflects all the significant factors: E, S and G. The speaker highlighted that the effectiveness of establishing the policies rests on the transparency of actions undertaken by the corporate management teams. So, the ESG-oriented development at SIBUR started with the wider introduction of corporate management practices, which then gave the increasing impetus for the sustainable development agenda.

 

At the same time, a business from a different chemical field in Russia, PhosAgro, and its speaker, Aleksander Sharabayko, confirmed their focus on ESG development in Russia. The spokesperson highlighted the absence of a unified rating system as a major limit to develop ESG finance internationally. The same company could have different positions within this or that ranking due to the complex methodology of the latter. Thus, the access to certain loans and funds would be overly complicated for the businesses wishing to join the ESG-transition. It serves as a potential limit to domestic Russian and international investors to invest in ESG finance in the absence of adequate information, as well as unnecessarily complicates the process of raising ESG-awareness. So, the Russian government can intervene to harmonize the rating procedures across the state. The harmonizing rules can be expanded on the multinational level, which is to assist a better and efficient development of green projects. In this way, the Belgian-Luxembourg Chamber of Commerce can link the European and Luxembourgish agencies and funds with the accumulated expertise to unite the efforts and fasten the transition.

 

The Managing Director for Sales and Business Development at Moscow Exchange, Igor Marich, backed the role of the ESG agenda with some specific evidence. He concluded that with the 30% share of international clients in the Moscow Exchange market, ESG finance is already crucial and is to become pivotal in the years to come. MOEX determined the 7 pillars to its ESG agenda, which represents its dedication to be at the forefront of the agenda. Igor Marich also added that a significant number of green bonds have been issued: RUB 51 billion of capital were raised through the issue of green and social bonds of 15 issuers, meeting both Russian and ICMA green bonds requirements. Furthermore, Moscow City Council came to market as the first Federal State issuer of green bonds with RUB 70 billion on the market, which indicates the level of interest not only from the business spheres but also from the government sector. Yet, Mr. Marich states that to allow more government authorities to participate in the ESG bonds issue, more government regulations and standards should be established first. With the nationwide policy in place, the shift to ESG initiatives will occur at a faster pace.

 

Maria Bagreyeva, Deputy head of the Department for economic policy and development at the City of Moscow Apparatus, confirms the significant demand for ESG finance in Moscow. Throughout the round table, she stated that it equaled nearly USD 1 billion. Nevertheless, it was noticed that while the majority of ESG investors were Russian banks, the foreign finance was attracted to vanilla bonds of the Moscow city because of the alleged lack of understanding and communication for the ESG finance in Russia and its representation overseas. The speaker emphasized that the Russian legislation regulating ESG financing is likely to be introduced shortly. It will cover not only the taxonomy but establish the provisions of incentives allocation for both issuers and investors, which should speed up ESG finance in Russia, despite the political situation in the former years and reduced demands for Russian bonds on the global markets, regardless of their credit quality and ESG compliance.

 

Other members of the panel assured that after the recent crises, international partners would prefer domestic markets, so locally licensed and regulated regions would best suit the shift in demand for now.

 

Some relevant criticism was voiced throughout the meetings at SPIEF. For instance, Denis Shulakov, who is the First Vice President at Gazprombank, stressed out that only 4% of Russian companies manage to actually comply with ESG taxonomy in Russia. Yet, such a view to ESG principles compliance does not position Russia negatively, as the same challenge is faced all around the world. Ekaterina Trofimova, Partner for Deloitte CIS, concludes that more than 80% of the Russian institutions are not aware of ESG policies, and less than 10% apply them selectively. It can be inferred that the services of ESG finance should be advanced among and beyond the top 6 Russian banks. The services should expand outside the Russian borders so that sufficient synergy is gained. BLCC Russia maintains active contact with the major Russian banks, e.g. Gazprombank, both in Russia and in Luxembourg, and could navigate throughout the web of contacts to promote the ESG topic in Russia.

 

Russian Agricultural Bank is tackling the problem of ESG policies unawareness with the help of strict imposition of ESG principles internally and bridging connections with the Russian Union of Industrialists and Entrepreneurs (RSPP) to promote its ESG finance there. Then, it jointly brought the developed relationship and initiative to the Moscow Exchange, which is the party to the UN Initiative for the Sustainable Stock Exchange, according to Roman Serov from the RSHB Asset Management. The growth of the investors‘ base can be maximized with help of the Belgian-Luxembourg Chamber of Commerce in Russia, as it has developed a comprehensive network of business connections since its emergence in 2013.

 

Concerning the Luxembourg speakers that were invited to the forum, namely Sachin Vankalas from LuxFLAG and Julie Becker, CEO at the Luxembourg Stock Exchange. The former spoke about the importance of clarity and visibility on the markets. LuxFLAG offers labeling and certification for investment products. The labels can be used as a positive tool for issuers and Asset Managers to showcase their sustainability credentials whether the products are sustainable or not. The differentiation serves positively to attract more finance. Still, such labeling is absent in Russia and could be developed soon with help of external experience and expertise.

 

The latter speaker notices that LGX constitutes a meeting place for issuers, asset managers, and investors who wish to make their mark on sustainable finance and is the world’s first and leading platform dedicated exclusively to sustainable finance. Julie Becker also states that there is too much ESG data today, and there is a growing need to have a comparable data platform to compare and harmonize every standard. Russia can potentially position itself at the forefront with the development of such a platform. The European taxonomy initiative led by the European Commission proposes a positive direction regarding the setting of a common ground for taxonomy, which may also be used for the Russian experience. Last June, the World Bank (WB) recognized that national taxonomies might be needed to consider every country’s specificity. Six actions were recommended by the WB in the form of a guide to developing the national taxonomy. Among them are criteria of usability by market participants, presence of recognized expertise, and international compatibility. The expert from the Luxembourg Stock Exchange concludes that ESG policies market fragmentation should be avoided if sustainable finance is to become the mainstream way to fight challenges across borders jointly.

 

BLCC Russia could not agree more, as the motto for the Chamber is to “Act and Succeed Together”. International harmonization should be achieved jointly with help of the inter-regional initiatives that the Chamber of Commerce presents. The head of the ESG Expert center of the Belgian-Luxembourg Chamber of Commerce, Natalia Ponomaryova, participated in the SPIEF 2021 panel “ESG: New Corporate Ethics”. There Natalia elaborated on the International Financial Reporting Standards Foundation initiative to establish the new board that will be responsible for the sustainable development standards. Five major standards developers on sustainable development are participating in the negotiations. The companies will have to rank their business models, major business activity, and profits in accordance with the developed requirements and standards, as well as the European taxonomy. The directive is to require companies to disclose the information on non-financial reporting at the enterprise and product levels. At the same time, the significant proposal that was made lies in conducting the EU-wide auditing on providing sustainability reports. In other words, as noted by Natalia Ponomaryova, the relation to sustainable development is changing to the new format when the company either discloses information on ESG policies adherence or explains why it has not managed to follow the latter. So, the expertise and experience on all levels of overlapping interests for business and governments should be used to tackle the environmental problems by the harmonization of taxonomy, legislation, and policies.

 

 

From left to right: Oleg Prozorov. Stefan Van Doorslaer, Maria Suvorovskaya, H.E. Belgian Ambassador to Russia Marc Michielsen, Arcadi Arianoff, H.H. Grand Duc George Romanoff