Key Russian banks entering ESG-responsible lending
Only several years ago, so-called responsible investment was perceived sceptically in Russia, but now the country’s largest banks are beginning to implement these principles in their strategies. However, the lenders should take a delicate approach due to the structure of the Russian economy, as it is heavily dependent on “dirty” industries.
Russian banks are turning to environmental, social and governance (ESG) principles, says S&P Global. At the end of January, Russia’s largest lender Sberbank signed up to the United Nations’ principles for responsible banking following the example of Sovcombank, which engaged in the initiative in 2019. On 4 February, the Association of Banks of Russia approved recommendations for the implementation of ESG principles by local lenders, and two weeks later, head of the Central Bank Elvira Nabiullina said that the regulator was working on rules for verifying ESG financial instruments.
However, according to Executive Director of Equity and Financial Institution Banking Research at Gazprombank Andrey Klapko, the situation on the environmental side is difficult. “The loan-book breakdown of the biggest Russian banks is heavily dependent on the structure of the Russian economy, which is heavily skewed towards dirty industries,” he said in an interview. About 9% of Sberbank’s loans are to the oil and gas industry, while for Gazprombank, the figure amounts to 23%. The oil and gas sector as well as metals and mining make crucial contributions to the Russian economy, but they are also large contributors to the country’s carbon footprint. While the Russian government is gradually changing its attitude toward climate change and environmental issues, pollution continues to rise in some areas.
Meanwhile, ESG becomes increasingly hard to ignore, as some of the world’s largest asset managers, as well as local Russian players, are paying more and more attention to the issue when making investment decisions. If Russian banks, some of which are already operating under international sanctions, want to avoid further restricting their access to capital, they have to adapt to these demands, considers Klapko.
At the same time, the central role of Russia’s polluting industries and companies in its society requires that local lenders should take a delicate approach. According to CEO of Sovcombank Dmitry Gusev, his bank aims to strike the right balance between multiple factors. “The bank is not planning to change our lending policy overnight, and we have no plans to finance green projects exclusively,” he says adding that the lender is open to providing funding to challenging industries if they outline their goals and processes to reduce that negative impact in their development strategy. “For companies not focused on reversing their negative environmental impacts, we will gradually reduce the amount of funding.”
As for Sberbank, it may become a key influencer in promoting ESG in the wider Russian economy, as the bank accounts for around a third of all lending to Russia’s businesses. “Sberbank is very serious in its intentions to improve things,” says Ekaterina Marushkevich, banking and insurance analyst at S&P Global Ratings, pointing out that the lender identified ESG as one of three major areas of focus over the next three years. Nonetheless, its approach will have to be delicately managed. “They will not be able to stop lending to the largest Russian enterprises because of their social importance in various regions and cities,” explains Marushkevich. She considers that Sberbank’s influence on the Russian banking sector should convince other banks that it is not just a fad that can be ignored. Currently, 7% of Russian banks already apply ESG principles in their business models, while 67% are preparing for the transition to ESG banking, reads data prepared by the Association of the Banks of Russia.