Russian banks face conundrum of ‘dirty’ borrowers as ESG adoption tightens
Three stray dogs with bright green fur polluted with an unknown poison in Podolsk, about 35 km from central Moscow, on February 18.
Source: Getty Images News
ESG has a new fan. The first weeks of 2021 saw the Russian banking industry show its love for the ethical investing philosophy that is slowly transforming the global financial industry.
At the end of January, Russia’s largest bank, Sberbank of Russia, adhered to the United Nations Principles for a Responsible Bank. The announcement coincided with the completion of a $ 300 million social Eurobond issue by PJSC Sovcombank, the first Russian signatory to the United Nations initiative in 2019.
A few days later, the Association of Banks of Russia announced that it had approved recommendations for the implementation of environmental, social and governance principles by local lenders. And in the latest nod to the advance of ESG, Russia’s Central Bank Governor Elvira Nabiullina stressed its importance, stressing that it is a major challenge for the Russian economy, its financial system. and the regulator himself, who works on verification rules. ESG financial instruments.
This challenge mainly stems from the nature of Russia’s largest industries.
“The situation on the environmental level is difficult, ”said Andrey Klapko, executive director of equity banking and financial institutions research at Gazprombank, in an interview. credit book breakdown of the biggest Russian banks is strongly dependent at the structure of the Russian economy, which is strongly biased towards dirty industries – and banks to have at to have a exposure at these dirty Industries.”
The oil and gas, metals and mining sectors make crucial contributions to the Russian economy. Fuel exports accounted for 42.1% of Russia’s total exports of over $ 336 billion in 2019, while iron, steel, precious stones and precious metals made up another 9%.
These industries also contribute significantly to Russia’s carbon footprint and its uneven pollution control record. Russia was the world’s fourth worst emitter of CO2 in 2018, the most recent year for which data is available. The country accounted for 5% of global CO2 emissions, behind China at 28%, the United States at 15% and India at 7%, according to data compiled by the Union of Concerned Scientists.
As the attitude of the Russian government towards climate change and environmental issues changes, the country has finally ratified the 2015 Paris Agreement on Climate Change in 2019 – pollution continues to increase in some areas. A study by consultancy firm Finexpertiza based on data from the Russian Hydrometeorological Center found three times more cases of “high” and “extremely high” air pollution in the first nine months of 2020 than in 2019. 171 pollution cases over the nine-month period were higher than any annual total since records began in 2005.
Russian industry’s record on environmental issues poses a particularly uncomfortable problem for the country’s banks, as ESG becomes increasingly difficult to ignore. Some of the world’s largest asset managers, as well as local Russian players, are gradually taking increasingly strong positions on ESG when making investment decisions. If Russian banks, some of which already operate under international sanctions imposed by the US, EU and UK, want to avoid further restricting their access to capital, they must adapt to those demands, said Klapko.
Yet the central role that many of Russia’s most polluting industries and businesses play in its society, and the number of communities built around them, means that a delicate approach must be taken by Russian lenders to avoid damage. the social fabric of the country.
About 9% of Sberbank loans go to the oil and gas industry. For VTB Bank PJSC the figure is 10% and for AO Gazprombank 23%.
Sovcombank CEO Dmitry Gusev, who was a pioneer in the adoption of ESG by the Russian banking industry, said his approach aimed to strike the right balance between maintaining stable returns for shareholders, providing decent living conditions for its employees and ensuring high quality services for its customers and making a difference for society at large.
“The bank does not plan to change its lending policy overnight, and we do not intend to finance exclusively green projects,” said Gusev.
“We are prepared to provide financing to difficult industries,” he added, “on condition that they describe in their development strategy their goals and processes to reduce this negative impact. For companies that do not focus not on the cancellation of their negative environmental impacts, we will gradually reduce the amount. of funding. “
Leader of the pack
Much of the ultimate effectiveness of the Russian banking sector in promoting ESG in the wider Russian economy will be determined by the role of Sberbank, by far the country’s largest lender. Sberbank accounted for 36.1% of all loans to the largest Russian companies and 29.9% of all loans to large and medium-sized companies in 2019, according to Statista, a specialist in market and consumption data.
Based on Sberbank’s presentation of its new strategy in December 2020, the Russian banking giant appears determined to make a positive impact through ESG lending, said Ekaterina Marushkevich, banking and insurance analyst at S&P Global Ratings. “Sberbank is very serious in his intentions at improve things,” she said, noting that Sberbank has identified ESG as one of the top three areas of focus over the next three years. “At the High level of management at Sberbank, the is very good consciousness of long term ESG risks. “
Yet, as with Sovcombank, his approach will have to be managed with delicacy, added Marushkevich.
“What will constrain them is their environmental exposure risks, ”she said. do not to be power at Stop ready at the the biggest Russian companies because of their social importance in various Regions and cities. “
Sberbank’s influence on Russia’s banking sector should convince these banks not to fully commit to ESG yet that it’s not just a fad that can be ignored, Marushkevich said. Currently, 7% of Russian banks are already applying ESG principles in their business models, while 67% are preparing for the transition to ESG banking, according to an analysis by the Association of Banks of Russia.
“Yes we see back many years since, ESG was perceived with a awesome portion of skepticism [in Russia]”Said Marushkevich. “But recently we saw more and After enthusiasm among our note clients. “
To what extent this enthusiasm arose out of goodwill and a sense of duty is debatable. As Gusev told Euromoney in a 2019 interview on Sovcombank’s ESG efforts: “We are not altruists. We think it pays off.”
For Russia’s largest publicly traded banks, the nature of their motives around ESG is unlikely to be too different, Klapko said. “The is a clear motivation for public banks at tap the ESG investment money because the G agenda offers future Opportunities for their market ceiling and valuation, ”he said.
“This agenda is shifting the landscape at the active management side enough a bit.”