Yuliya Fedorinova

28 December 2020

A disconnect between Russia’s climate policies and the sustainability ratings of some of its biggest companies highlights the challenges investors face in assessing environmental, social and governance performance.

While ESG scores for companies like Novatek PJSC and Polyus PJSC rank on par or better than many of their international peers, their ambitious growth plans will contribute to a forecast increase in Russia’s greenhouse gas emissions over the next decade.

Favourable ratings have become a priority as impact investments, which are designed to be both socially and financially rewarding, surge in popularity and many funds demand more accountability. Assets in impact funds swelled to $715 billion at the end of last year from $8 billion in 2012, according to the Global Impact Investing Network.

“ESG ratings are a valuable tool for investors and sustainability advocates alike, but they are not uniformly standardized, transparent, or accountable,” said Ariel Pinchot, an associate with the World Resource Institute’s Sustainable Finance Center. “They should be interpreted with some caution.”

The improving scores in Russia, the world’s fourth-biggest carbon emitter, exposes the difficulties of assessing companies involved in extractive industries in an economy that needs them for growth.

Russia remains a resource-based economy where oil and gas taxes account for nearly a third of revenues. After President Vladimir Putin ratified the Paris Agreement last year, the Economy Ministry published a strategy in March that foresees an increase in emissions while reducing carbon intensity over the next decade.

ESG Emphasis

Concepts of socially-acceptable policies in Russia, where domestic violence was partially decriminalized in 2017 and “homosexual propaganda” to minors is outlawed, also differ widely from European and U.S. investors’ expectations.

Russian companies “lag global peers on climate targets and lack biodiversity management approaches while disclosure of controversies, particularly around social issues, remains limited,” said Bonnie Saynay, head of Research and Data Strategy for ISS ESG.

Still, many large Russian companies are placing more emphasis on ESG, including environmental remediation, according to Saynay. “Directionally, this is what investors are looking for,” she said.

Cleaning Up

Large Russian companies are improving their MSCI ESG ratings

Source: MSCI website

Natural gas producer Novatek this month was upgraded by MSCI ESG to A, the highest rating held by a Russian oil and gas company and just two steps below the top score. Polyus, Russia’s largest gold miner, scored ahead of 72% of its peers in the 2020 SAM Corporate Sustainability Assessment.

MMC Norilsk Nickel PJSC received an overall rating upgrade from FTSE4Good despite being responsible for the largest Arctic fuel spill ever in May.

“The improvements reflect the fact that Russia’s biggest companies are really devoting resources to environmental and social issues,” said Boris Krasnojenov, chief of research at Alfa Bank. “It’s also due to increased attention to ESG by investor relations departments.”

In-House ESG

Many companies have joined global sustainability efforts as they have climbed in the rankings. Novatek this year joined the Methane Guiding Principles initiative, Chief Financial Officer Mark Gyetvay told investors after its rating upgrade. Polyus has signed onto the UN’s Global Compact to implement sustainability principles.

“In the past five years, we have cut our carbon intensity almost by half while increasing our production volumes by more than 60%,” a spokesman for Polyus said. Emissions are expected to grow more slowly than production in the future, as the company phases out coal power, he said.

Ekaterina Iliouchenko, a money manager at Union Investment Privatfond, said her Frankfurt-based fund is gradually switching to in-house ESG ratings because of questions about how agencies grade companies.

“As an investor you need to do appropriate due diligence on each company’s disclosures,” George Serafeim, a Harvard Business School professor who specializes in sustainable investing, said. “Ratings can be helpful as a first step but they are only the starting point.”

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