The Russian economy, which has traditionally been heavily reliant on the extraction and export of fossil fuels, the production of hydrocarbon and mining is now attempting to shift its focus to clean sources of energy and environmental, social and governance (ESG)-friendly investments. ESG compliance has become an important factor in investment practices in recent years, and Russia understands its importance as well as its risks if its local companies are not in compliance with the principles of ESG.
Following on from this global trend, the Central Bank of the Russian Federation alongside the Ministry of Finance have begun initial discussions and consultations on the first issuance of green bonds. The authorities are currently also assessing the systemic risks to the financial markets which result from climate change and the implementation of green projects by foreign states. Furthermore, the City of Moscow has announced that it is considering the issuance of green bonds, the proceeds of which will be used to finance ecology-related projects.
Green bonds are a new and growing category of fixed-income securities. The funds raised through such issuance are used to finance projects in the renewable energy sector, such as wind and solar energy and to reduce emissions nationwide. Research by BBVA indicates that the size of green bonds in 2020 reached USD 1 trillion, which amounts to roughly 0.9% of the total bonds in circulation worldwide. In fact, a number of states and multilateral organizations have entered the market of green financing in the past few years, with 2021 expected to see a growing number of issuances.
Russian Businesses and ESG
Furthermore, in the private sector, Russian companies have been made aware that the compliance and adoption of ESG principles must be placed at the top of their agenda, despite the transformation to a more sustainable framework representing a costlier option. This is especially relevant given a number of domestic companies are currently operating in the conventional energy sector. Furthermore, certain global financial market participants have divested their holdings from companies with a low ESG rating, resulting in the cost of financing for Russian energy firms expected to increase in the near future.
Thus, prioritizing green projects in order to bring down emissions and improve energy efficiency may be crucial to keep the costs of financing for domestic companies in line and to ensure the stability of their financial position. By way of example, the Russian Railroad company RZHD has placed a bond issuance of EUR 500 million in the EU market, the issue was subsequently oversubscribed and the borrowing costs drastically decreased.
Measures in Place
Even though Russia has not had a reputation for being an active preserver of the environment or a promoter of reducing reliance on fossil fuels, some measures have already been taken in recent years. Russia signed the Paris Climate Accord in 2019 and has roughly 54 million of hectares of protected natural reserves, with Russia having already reduced its carbon footprint by 30% since the year 1990.
In 2019 the program “Ecology” was adopted , with the priority to liquidate illegal garbage dumps, reprocess 60% of communal waste, and decrease air pollution in large urban areas with a considerable population between the years 2018 to 2024. The projects will also preserve Russian forests, rivers, and lakes. The “Ecology” project’s cost is estimated to be around EUR 50 billion, with a significant amount of this cost to be financed in private markets both in Russia and abroad. At last, Russia has implemented a Russian Green Finance Standard which is a new policy aiming to transform the local economy and place it on a sustainable path. The standard will outline methods of facilitating private investments into environmental projects.
Following the shift of national policies in countries worldwide towards a green and sustainable future, Russia has also turned its attention to this issue. The Central Bank and the Ministry of Finance are already in discussions to issue the first green bonds, while the private sector should be able to shift towards more ESG-friendly practices in order to keep the costs of financing sustainable.
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