Russia's place in the "green" finance market
Andrey Bednyakov, MBA, FCMA, CGMA, Sloan, PhD
Experienced Executive in Finance, Investments and StrategyOpen to new opportunities
Abstract. The article provides an overview of the development of "green" finance in the world and analyzes the prerequisites for its explosive growth. Key issues that need to be resolved in order to use the potential of "green" financing in Russia are identified on the basis of comparative research. Resolution of current problems in this field will increase the level of environmental friendliness of the economy and help to achieve sustainable development goals set out in international agreements.
Keywords. Investment management, monetary policy, public-private partnership, sustainable development
Introduction
The topic of "green" financing is relatively new for Russia in comparison with other countries, primarily European ones. By 2021, the global public debt market for "sustainable" financing (consisting of segments of "green" bonds, "social" bonds and sustainable development bonds), according to Climate Bond Initiative, exceeded $1.6 trillion[1]. It is expected that in 2021 share of sustainable finance in the global volume of public debt market will approach 10%, and by 2025 its volumes may grow 10 times more. In Russia, the volume of issued bonds in the sustainable development sector in 2019-2020 amounted to circa $ 3.5 billion. This corresponds to only 0.35% of the global market, and most of the funds raised are accounted for by the "green "bonds issued by JSC "Russian Railways".
?Green? finance in the world
The development of the "green" finance sector began in June 2007, when the European Investment Bank (EIB) made the first issue of green bonds (originally called Climate Awareness Bonds) to finance projects in the field of renewable energy and energy efficiency. The move was prompted by the EU's Energy Action Plan, which aims to improve energy efficiency, reduce dependence on traditional energy sources and reduce greenhouse gas emissions by 40% by 2030, in line with the Paris Agreement. The introduction of the Principles of Responsible Investment (PRI) in 2005, with the support of the United Nations Environment Programme, also had a major impact.
"Green" bonds market volume increased significantly in 2014 (by 268%). The average annual growth over the entire period is circa 60%. Such rapid development is associated with a number of initiatives and decisions. In January 2014, as a result of the initiative of 4 banks, the "Principles of Green Bonds" were first issued. In 2016, these principles were developed within the framework of the International Capital Markets Association (ICMA), and the number of signatories increased to 122 (75 joined in the status of observers). These processes were influenced by the Paris Climate Agreement signed in 2015 and the desire of the signatory countries to encourage the attraction of funds to "green" projects. In 2016, the G20 established a Task Force on Climate-related Financial Disclosure (TCFD).
It should be noted that, despite the relatively recent development of the "green" financing market (about 15 years), axiological questions related to the responsibility of investors and the usefulness of investments in general for society have been raised before. From economic history it is known that under the influence of religious ideas "ethical investment" was developed already in the early XVIth century, which became the prototype of modern socially responsible investment. The principles of "Islamic banking", based on religious ethical canons, appeared even earlier, in the Xth century. But they were expanded only in the second half of the XXth century. At the same time, the movement to reduce the environmental damage caused by human economic activity is gaining momentum around the world. It was led not only by public organizations, but also by individual commercial organizations, such as ABB, thanks to the efforts of which these issues were put on the UN environment agenda. It is obvious that the dynamic development of the "green" finance market in the last 20 years is not a spontaneous market phenomenon, but the result of a systematic policy, both at the international level and at the level of the leading economic powers. The main goal of this policy which gained momentum in the second half of the XXth century is improving the environmental situation, the key condition for future prosperity.
According to Standard & Poor's, the volume of issuance of ESG financial products (Ecology. Social. Governance) will reach $700 bln. in 2021 (an increase of one-third compared to 2020), and will continue to grow, taking into account the strong demand for investment in sustainable development projects as well as government regulations and incentives for such projects. This is due to the fact that the amount of funding for the transition to a low-carbon economy is estimated by experts at $120 trln.[2]
The methods of regulating and stimulating the market of sustainable development instruments, including "green" bonds, tested in leading countries, are aimed both at issuers, investors (including financial institutions) and at the market as a whole. An analysis of these measures suggests that the most generally accepted and effective are:
·????????Subsidizing "green" projects (for example, alternative energy)
·????????Tax measures:
- carbon tax
- tax breaks and benefits (have shown their high effectiveness in the US, China, Japan, the EU, and Brazil)
·????????Support of projects by development institutions (for example, preferential rate financing, capital grants, creation of information and financial infrastructure)
·????????Provision of state guarantees
·????????Prudential regulation (including differentiation of reserve rates based on ESG risk analysis)
·????????Introduction of the taxonomy of "sustainable" development projects / "green" projects
?Green? finance in Russia
As noted by the First Vice-President of JSC Gazprombank D. V. Shulakov during St. Petersburg International Economic Forum held from 2nd to 5th June 2021 withing session "International Capital Markets for Responsible Financing – a point of synergy for issuers and investors", only 4% of Russian companies meet the requirements of European legislation in the field of "green" financing. Only 16 "green" and "social" bond issues related to sustainable development sector established in 2018 at Moscow Stock Exchange are currently in circulation[3].
Such modest results are due to the fact that in modern Russia active work on the environmental agenda began only with the adoption of the National Project "Ecology" in December 2018 (these issues started to be discussed in 2016 and received high attention in 2017, declared as the year of ecology). In other countries these processes began much earlier: in the US, the fundamental documents in the environmental field were adopted in 1993, in the EU, the "green turn" began in 2005, in China - in 2015.
The importance of developing the "green" finance market in Russia is dictated by both environmental and economic reasons. According to the World Bank assessment[4] Russia is among the top ten countries that produce the most emissions, both in absolute terms and per capita. Russia produces the same amount of CO2 as the entire Latin American region (and Russia's population and GDP are 4 times smaller). Volume of waste produced is twice as much as in the EU, with the incomparable size of the Russian economy (in terms of GDP, 9 times less than the EU economy). From an economic point of view, Russia's GDP losses from environmental degradation, pollution and inefficient management of natural resources are estimated at 1%-6%. Achieving the energy efficiency indicators of advanced countries will save up to 45% of the electricity volume, which is a huge amount considering that Russia is the third largest energy consumer in the world, and electricity losses account for up to 50% of its consumption. Finally, according to KPMG, at the current level of damage caused by Russian companies to the environment they will pay about 33.3 billion. Euro of EU carbon Tax in 2025-2030[5]. This is not comparable to Russian fines for violating environmental regulations and makes Russian companies some of the most vulnerable to environmental risks, which take real monetary terms. To change the situation, large-scale "green" investments are required. According to the Ministry of Economic Development of the Russian Federation the potential for the introduction of "green" technologies until 2023 is three trillion rubles[6]
Despite the fact that Russia has set more modest environmental goals than the EU countries (reducing greenhouse gas emissions by 25%-30% by 2030, while in the EU this goal is set at 40%), their achievement is possible only with the involvement of the private sector in the implementation and financing of projects, taking into account the high capital intensity. Given that "green" projects are characterized by higher capital costs, longer payback periods and high dependence on the regulatory framework, the state faces even more ambitious tasks than in traditional infrastructure projects implemented on the principles of PPP. In order for the green finance sector in Russia to be actively developed, an active economic policy, adequate measures of state support, including issues of risk sharing and raising awareness of market players, are necessary.
The last issue is related to the need to train professional personnel in this new sector. As the experience of other countries shows, in order to succeed in attracting private players to the "green" economy, education and awareness-raising issues must be organically integrated into the State strategy and policy for achieving the Sustainable Development Goals. For example, in the United States, in 1993, along with the Pollution Prevention Act, the National Environmental Education Act was adopted. In Russia, at the present time, according to Deloitte less than 20% of banks feel themselves aware about ESG issues[7]. Less than 15% have the necessary competencies to fully analyze ESG risks. And only 10% of the largest banks pursue ESG practices. Other analysts are more optimistic about the current situation, but in general, it is obvious that there is a need for targeted work in this direction. After all, banks are the key agents of the "green" agenda, as they are the largest providers of financing for new projects and organize the attraction of funds from other investors using the tools of public capital markets.
Strategy for the development of "sustainable" finance and the role of the State
In all countries that successfully develop a "sustainable" financial market sector the financial regulator plays an active role. In this regard Russia cannot be an exception, especially given that the level of demand for "green" investments on the part of investors and society as a whole is at a significantly lower level than, for example, in the countries of Europe and the United States. Moreover, a number of projects aimed at reducing emissions (for example, incinerators) are severely criticized by public organizations and activists who want to earn political dividends, often using deliberately incorrect information.
As international experience shows, for the successful development of the "green" economy and the associated sector of "sustainable" financing at the State level, strategic documents should be developed that define strategic goals in general and in individual areas. Also, the ways to achieve these goals should be defined, including the development of state / regulatory policies on the various components that make the greatest contribution to the achievement of strategic goals. The implementation of the developed plans and activities should be ensured, including a monitoring and feedback system. Even though we can presume that such documents are formed in general in the environmental area (the National Project "Ecology" and its accompanying federal projects), although the quality of their preparation is questionable, because they are regularly amended, there is no such strategy for the related direction of "green" finance. At the same time, as noted above, the successful creation of markets for "green" and "sustainable" finance depends on the implementation of federal projects, which is impossible without attracting private funding.?As an example of best practice, we can cite the experience of France, which is the closest to Russia for a number of historical, cultural and regulatory reasons. The French National Strategy for Low-carbon Development, approved in 2015, provides for the reallocation of investments into projects that are most conducive to the "energy turnaround"[8]. As a result of a well-thought-out policy, France is among the top three leaders in the global market for "green" finance.
The lack of a national strategy for "green finance" puts Russia in the position of a country that is trying to catch up with countries that have gone far ahead, and copy those standards that may not fully correspond to the current level of its development. This leads to chaotic decisions that are aimed at "pleasing" potential foreign investors, but at the same time some issues of the accumulated experience of countries that have passed a significantly longer path are not taken into account, in the hope of jumping over certain stages of development and "saving" time. For example, among the "green" projects the World Bank considers those that can significantly reduce greenhouse gas emissions. A similar position is taken by the European Bank for Reconstruction and Development. This fully meets the goals of "green" projects, which are laid down in the definition of the G20 Working Group on Green Finance: Green finance is "financing of investments that provide environmental and climate benefits in the broader context of environmentally sustainable development". In Russia, the authors of the draft national taxonomy of "green" projects have adopted an approach that is mainly related to the expectation of how potential foreign investors will react to this document, and not to the effect on emissions that the objects under consideration may have. As a result, a whole layer of projects that are useful for improving the environmental situation may remain outside the framework of "green" projects, not for objective reasons, but only because they "may cause doubt" among foreign investors. As recent economic history has shown, foreign investment, even during the economic boom, did not take the main share in volume of fixed capital investment in Russia. Based on the data of the Bank of Russia and Rosstat, it can be seen that on average they amounted to 13% during 2007-2018, with the maximum values of around 20% in 2007 and 2008. After 2018, they have significantly fallen and their contribution did not exceed 2%-3%. Foreign investment in Russia was mainly directed into high-yield sectors – oil and gas, commercial real estate, etc. At the level of the infrastructure gap, which exceeds current investment by about 1.4 times or 6% of GDP (InfraONE Research. Analytical review: Infrastructure investment, 2020[9]) it is difficult to hope that even with the level of foreign investment that was observed during the "reset" period, they will be able to fill the missing investment resources. Moreover, it is difficult to expect this today, at a time of unprecedented political pressure, without regard to how much "green" the proposed projects are (especially given the high risks and low profitability that accompanies them). It seems that such a simplified approach with a focus not on a domestic investor with real financial resources, but on ghostly foreign investments is associated with the lack of a basis on which economic policy should be based in relation to such an important topic as ecology, namely, with the lack of a strategy. It is also indicated by the fact that it took around two years to prepare such a taxonomy, and the result leaves much to be desired.
Speaking about the measures aimed at stimulating "green" financing, in addition to the ones already mentioned above, the following can be noted:
·????????organization "green" procurements by the State with the publication of a portfolio of "green" projects;
·????????facilitating "green" SMEs market access in order to create greener value chains (SMEs account for around 20% of Russia's GDP);
·????????improving the stability of the regulatory framework and tax policy;
·????????subsidizing the preparation of "green" projects;
·????????active participation in international organizations engaged in "green" financing in order to obtain and use the best world practices;
·???????issuance of sovereign "green" bonds, which has already been done by two dozen countries.
Development of systems and standards for assessing the impact of "green" finance on achieving environmental goals, primarily - reducing greenhouse gas emissions, is of great importance for the development of the "green" finance sector. Without such standards it is difficult to prioritize projects, assess needs, attract financial resources to the most important industries that give the maximum effect, and then to monitor the achievement of strategic goals. Projects from such areas should be included in the national taxonomy of "green" projects, which should take into account the State's ability to support such projects. The taxonomy should be flexible enough and be updated as problematic environmental issues are addressed and sustainable development goals in various sectors of the economy are achieved.
Conclusion
Summing up, it can be said that the emerging market of "green" finance in Russia has a huge growth potential, taking into account the accumulated environmental problems and tasks to solve them. The solution to these problems is provided for, among other things, by international obligations. As the experience of other countries shows, the success of the development of this market will primarily depend on a clear strategy and an effective coordinated State policy to attract private capital to the "green" finance sector, including attitude to regulatory and incentive issues, which are still in their infancy in Russia. This policy should be multi-faceted and take into account both the rich international experience and local characteristics. In this case, we can hope that Russia will take a worthy place in the global market of "green" finance in the world.
REFERENCES
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