The green agenda is dominating global financial markets. Governments and regulators are encouraging investment in sustainable and green companies and projects — putting environmentally damaging businesses at a competitive disadvantage. This model relies on so-called green financial instruments. We tell you what they are, how they came to be, when they came to Russia and how they will evolve in the new environment.
Green bonds and loans: what they are and how they differ from conventional bonds
In their mechanics, green bonds, aka green bonds, are no different from conventional bonds. That is, they are debt securities that are traded on the stock market. Organisations issue (issue) and sell them in order to raise funds for their activities, and investors buy them in order to receive a fixed income and thus finance the activities of the issuing organisations. What makes them “green” is that the proceeds from their sale go exclusively to finance “green” projects — the issuers make such commitments, stating a list of specific areas and performance indicators to be achieved.
“Green bonds are issued not only by corporations and banks, but also by municipalities, national and regional governments, and supranational institutions. Green bonds emerged against the backdrop of the global promotion of responsible investing. In other words, the kind that takes into account whether companies investing in them adhere to the principles of environmental, social and governance (ESG).
There are cases where an organisation implementing a green project is unable or unwilling to enter the public stock market. In this case, they can raise green loans from banks — the borrower of such a loan is obliged to use the funds to finance or refinance green projects.
The term “green projects” refers to activities that aim to improve the environmental situation and promote environmental sustainability, i.e. minimising the harm caused to nature. The areas include renewable energy, carbon-free transport, energy and resource efficiency, green waste management, environmental initiatives, ecosystem restoration, land reclamation, green technologies in production and construction, improved wastewater treatment facilities, adaptation to climate change and many others.
Why green finance is beneficial
Issuing green bonds offers significant benefits to issuers. Firstly, it improves the image, and secondly, it ensures an influx of environmentally and socially responsible investors. But most importantly, it allows attracting resources for eco-projects on favourable terms. In the practice of many countries, issuers of green bonds and their investors are entitled to all sorts of benefits. In particular, they may not pay any interest on their bonds in full or in part — this burden is often borne by their governments. And investors who purchase such bonds are exempt from paying income tax on their interest.
One notable example is Clean Renewable Energy Bonds (CREBs) and Qualified Energy Conservation Bonds (QECBs), with 70% of the payments on these bonds borne by the US government. As a result of such schemes, everyone benefits: issuers receive “cheap” money for their projects, investors receive tax-free income, and the government receives guarantees for the implementation of necessary environmental projects on the ground.
The popularity of green loans is based on the same principle: banks grant them on more favourable terms, thereby stimulating both the implementation of environmental projects and the greening of borrowers’ activities in general.
Aerial view of a solar energy farm
Photo by: Nikada / iStock
How the green bond market emerged and developed
The first green bonds were issued by the European Investment Bank in 2007. They were called Climate Awareness Bonds and the funds raised were used to finance renewable energy and energy efficiency projects. A year later, the International Bank for Reconstruction and Development issued its own bonds, called Green Bonds. The initiative was quickly picked up by other supranational institutions and development banks.
The green bond market began to grow rapidly in the mid-2010s when governments and private companies started issuing them. In 2012, the global issuance of green bonds was $3 billion, in 2015 — $42 billion, in 2019 — $260 billion, and by the end of 2021 — $620 billion. The adoption of the 17 Sustainable Development Goals and the Paris Climate Agreement in 2015, as well as subsequent reports by the Intergovernmental Panel on Climate Change on the growing threat of global warming, contributed to this rapid take-off.
Special indices have emerged to monitor green bonds and their average yield on exchanges around the world. The largest ones are Bloomberg Barclays MSCI Green Bond Index, S&P Green Bond Index, Bank of America Merrill Lynch Green Bond Index, The Solactive Green Bond Index. Exchange-traded funds that track them have also emerged, such as the iShares Global Green Bond ETF (their ticker symbol is BGRN) and the VanEck Vectors Green Bond ETF (GRNB). By buying shares in such funds, investors receive shares from entire portfolios made up of many different green bonds. In 2021, $128 billion worth of green bonds were sold through such funds.
According to the international organisation Climate Bonds Initiative, a total of $1.1 trillion in green bonds were issued between 2007 and 2020. Among the world’s regions, Europe was in first place, with $432.5 billion in green bond issuance over 13 years. In second place were North American countries ($237.6 billion), and in third place — the states of the Asia-Pacific region ($219.3 billion). By country, the US leads the ranking ($211.7 billion), with China ($127.3 billion) and France ($115.6 billion) in second and third place.
The largest issuers of green bonds were banks ($205.6 billion) and corporates ($205 billion). Among the largest issuers were financial conglomerate Fannie Mae and companies such as Apple, SNCF, Berlin Hyp, Engie, ICBC and Credit Agricole. A notable proportion over the 13 years have been issued by development banks ($158.8 billion) and state-owned companies and institutions ($153.1 billion). By contrast, governments issued green bonds worth $63.9 billion between 2007 and 2020.
The largest share of green bond investments was in energy, construction and transport projects — these three segments account for around 80% of the global green bond market.
How green financial instruments are regulated
Rules for recognising bonds as green bonds began to emerge in the mid-2010s. Their emergence was necessary against the background of rapid market growth in order to eliminate the possibility of so-called greenwashing, i.e. such situations when projects for which funds from green bonds are allocated are not green at all, but are only passed off as such. The fact is that, for many issuers, the rewards of unreasonably declaring the “greenness” of their securities are often greater than the potential penalties for failing to deliver declared “green” projects.
The International Capital Markets Association’s (ICMA) Green Bond Principles (GBP) and the non-profit organisation Climate Bond Initiative (CBI) Green Bond Standard (GBS) are now recognised as key standards in the global green bond market. ICMA and CBI accredit advisory organisations — Deloitte, Moody’s, S&P and others — and issuers use their services to independently verify the green credentials of their bonds. Once the independent verification verifies that projects, reporting and use of funds are in order, the bonds are recognised as green.
Even after that, however, issuers must report regularly on the intended use of funds and the progress of their green projects.
Drawing on ICMA and CBI standards, international organisations (e.g. ASEAN) and national governments are creating their own rules — national and even regional assessment systems for green finance instruments are spreading rapidly around the world. These are commonly referred to as taxonomies and are lists of criteria for assessing compliance with ESG principles.
According to the CBI, the European Union and at least five countries outside it (including Russia) already have their own taxonomies. Another 20 countries and international organisations are developing such documents. Bringing all this diversity to a common denominator, standardisation and harmonisation is an ambitious global task that aims to guarantee the efficiency of the green finance market as a whole. To this end, in particular, the Council for International Sustainable Development Standards was established in 2021. In addition, a cross-regional taxonomy is being worked on that would combine the approaches of China and the European Union and allow other countries to be included.
Russian Railways electric locomotive
Photo from: Wikimedia Commons
Green bonds in Russia
The first Russian green bonds were issued in December 2018 by Resource Conservation Khanty-Mansi Autonomous Area. The issue amounted to RUB 1.1 billion, with funds raised for the creation of an intermunicipal landfill for the disposal, neutralisation and recycling of solid municipal waste in the Nefteyugansk district of the Khanty-Mansi Autonomous District. The papers were recognised as compliant with ICMA’s GBP standards and were included in the international Environmental Finance Bond Database in 2019, as well as in the Green, Social and Sustainability Bond Database.
Russian Railways was the first Russian company to place green bonds on the foreign market in May 2019. The issue amounted to €500 million; the funds were raised to finance loans for the purchase of electric locomotives and Lastochka passenger trains.
At the same time, in May 2019, the Russian government introduced a programme to subsidise green bonds — issuers were able to reimburse between 70% and 90% of the costs of payments to investors. The Ministry of Industry and Trade has planned 27 billion roubles for this (for the period until 2024).
In August 2019, the listing rules for green bonds were launched on Moscow Exchange and a separate specialised sector, Sustainable Development, was established for green bonds. Today, investors have access to green bonds from the Moscow Government, state corporation VEB.RF, Sberbank of Russia, KAMAZ, Moscow developer Garant-Invest, RuSol 1 financial company, transport company TKK and other players.
The issue of “green” bonds of the capital’s authorities on the Moscow Stock Exchange took place in the spring of 2021. The volume amounted to 70 billion roubles, the funds were intended for projects to reduce carbon dioxide emissions and pollutants from motor vehicles: replacing the bus fleet with electric buses, as well as building the Moscow Metro Grand Ring Line and restoring old metro stations. The placement proved extremely successful, with demand exceeding output by 20%.
According to the ESG and Green Finance Russia report of the Infrastructure and Finance for Sustainable Development (INFRAGREEN) expert analytics platform, 23 green bond issues worth 330.5 billion roubles took place in Russia over 2018–2021. At the same time, the volume of the Russian green bond market was 211 billion roubles in 2021, showing a year-on-year growth of 25% (from 168 billion roubles in 2020).
Russia already has its own system for evaluating green projects — it is based on the taxonomy developed by VEB.RF and approved by the Ministry of Economic Development, which was approved by the Russian Government’s decree of 21 September 2021. It harmoniously takes into account both the 17 UN Sustainable Development Goals and leading global practices — including the ICMA, CBI and EU approaches — as well as, last but not least, national priorities. In particular, according to the country’s low-carbon development strategy approved in 2021, Russia should achieve carbon neutrality by 2060.
Who gives and takes green loans in Russia
The domestic green lending market is also actively developing. As stated by Elvira Nabiullina, head of the Central Bank of the Russian Federation, it is the banks that should become a guide in the transition of the Russian economy to ESG, and this transition should be financed by supporting green projects. According to First Deputy Chairman of the Central Bank Ksenia Yudaeva, in the future it is planned to reduce capital requirements for banks that issue loans for environmental projects. On the contrary, for those who finance businesses that are harmful to the environment or do not disclose their impact, the requirements will be tightened.
Examples of environmentally friendly products are available from many major Russian banks. Sberbank was the biggest player in this arena, with green loans totalling 300 billion roubles by the end of 2021. Specific cases include a loan for Sistema Joint-Stock Financial Corporation with ESG covenants, the rate on which depends on the company’s environmental policy and the pace of implementation of responsibility principles in its investment process and business model.
VTB issued 50 billion rubles in green loans in 2021 for the construction of solar plants and wind farms, and Gazprombank reported financing more than 60 percent of all deals to build renewable energy facilities in the country. Sovcombank issued a $300 million ESG loan for the construction of a nuclear power plant in Turkey. The same project was financed by Otkritie Bank. It also provided 27 billion roubles for Russia’s first “green” metallurgical complex, Ecolant.
Green loans for individuals are also being developed in Russia. In 2021, VTB began offering loans at a reduced rate for flats in high-efficiency buildings; Rosbank and Rosbank Insurance launched a home insurance programme with an eco-service that promotes energy and water savings. In addition, VTB and Gazprombank have introduced green loans for the purchase of electric cars, which do not require a down payment.
How the green finance market continues to evolve in the new reality
The Russian green finance market will be worth 3 trillion roubles between 2020 and 2023, as forecasted by Alexander Vedyakhin, First Deputy Chairman of Sberbank’s Management Board, in August 2020. He singled out three constituent parts in the market. The first is industrial ecology, “which will amount to 1.6–1.8 trillion roubles”. The second is urban infrastructure projects, “solid municipal waste management, good water for cities and so on”. Vedyakhin estimated investments in it at 0.8–1 trillion roubles. The third direction is “corporate ESG-investments, when businesses themselves improve their contribution to the environment, reduce their carbon footprint [...] this is another 500 billion roubles.
Perhaps, given the conditions in 2022, such figures will not be achieved in full — but the development of Russian green finance has not stopped. “No one will give up on ESG,” says Svetlana Bik, head of INFRAGREEN and chairman of the Expert Council of the REO public company.
For example, in July 2022, VEB.RF, a state-owned corporation, issued green bonds worth 50 billion roubles on the Moscow Exchange to finance projects in the field of green transport, as well as sustainable water and wastewater management. And a month earlier, Sber reported an increase in its green loans to 395 billion roubles.
Many Russian companies have been working on the “ESG for export” principle in the expectation of high positions in international rankings. And despite the limitation of interaction with the West, nor the reorientation towards the Asia-Pacific Region (APR), the situation is not fundamentally changing. “After all, the ESG agenda in these markets is in no way weaker, and in some cases even tougher,” says Igor Korotetsky, Head of the Operational Risk and Sustainability Group at KPMG.
According to a recent KPMG survey, the proportion of the largest companies in Asia Pacific that publish non-financial reports is higher than in Europe: 84% versus 77%. Specifically, in China it is 78%, and in India and Malaysia it is over 90%. “Our business is actively reorienting towards eastern markets, and there, just like in Europe, they impose fairly stringent environmental requirements on imported products,” Alexander Vedyakhin said in June 2022. — Moreover, the Asia-Pacific region is already taking the lead from the European Union when it comes to developing a green economy.
According to the expert, "Asia is the second region after Europe in terms of the number of ESG regulation initiatives. For example, in 2021, China became the world’s largest issuer of green financial instruments and launched the world’s largest greenhouse gas emission quotas trading platform. And about 70% of Asian companies implement climate policy to some extent. “And Russian exporters are forced to reckon with this agenda,” Alexander Vedyakhin is convinced.
Author: Ivan Bolotov
Cover photo: Nigel Jarvis / iStock
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