“The ESG race for $30 trillion of investments is on”

Environmental, social and governance (ESG) score is gaining importance for investors worldwide, so Russian companies have to catch up

Since environmental concerns became a global issue in the 2010s, the use of ESG as an additional consolidated investment metric has been growing up steadily. Russian extraction industry players are also putting sustainability policies in place or at least intending to invest in ESG in order to expand their investor base.

The preference for ESG compliant stocks is high, and failing to pay attention to sustainability is already reducing the pool of investors a company can sell its shares to, considers bne IntelliNews. Although ESG compliant or “green bonds” currently account for only 1% of the total outstanding bonds, their share is growing fast, according to the Institute of International Finance. In Scandinavia, fund managers are already obliged to look at sustainability when making investments, and the local regulator has even banned investments into companies that are not ESG compliant. In 2011, Norway’s largest pension fund dumped all the shares it held in Norilsk Nickel due to Arctic pollution.

Other big stock markets have not gone that far yet. Russian-based BCS Global Markets (BCS GM) found that 43% of European firms could not invest in a company with a poor ESG score, while for UK-based funds it was only 7%. “For London/Europe/US, it is more about awareness, albeit slow migration towards prohibition is possible,” said BCS GM in a report, adding that most companies confirmed the increasing use of ESG as an additional consolidated investment metric in their investment process and expected the trend to continue. In Russia and the US, funds have no such restrictions at all.

Meanwhile, even defining what is environmentally or socially compliant is difficult, as there is still no standard set of rules. Currently, the most developed rating of ESG is Morgan Stanley Capital International’s ESG ranking, which covers 7,900 global companies and 650,000 equity and fixed income securities. Independent scoring from privately owned Sustainalytics covers 13,000 global companies. Among the world’s key rating agencies, Fitch Ratings became the only one that launched a detailed ESG rating service at the beginning of 2019. At the moment, it is making all the rankings publicly available.

Fitch Ratings’ list includes 50 leading Russian firms, such as Aeroflot and X5 Retail Group, scoring mostly in the middle of the range of “minimally relevant to the rating”. At the same time, a poll conducted by BCS GM found that 70% of the Russian companies they surveyed intended to expand the resources they spend on ESG.

After Norges pension fund banned investments into Norilsk Nickel in 2011, the mining company saw significant changes. Since then, the company’s management has spent over $2bn to clean up its emissions. Seven out of ten of Russia’s biggest firms are now intending to invest in ESG to expand their investor base. CEO of Polyus Gold mining company Pavel Grachyov estimates the pool of investments targeting ESG compliant companies at $30 trillion. “The ESG race for $30 trillion of investments is on,” Grachyov said during the St Petersburg International Economic Forum this summer.

By Anna Litvina