ESG (ENVIRONMENT – RESPONSIBLE ATTITUDE TO THE ENVIRONMENT, SOCIAL – HIGH SOCIAL RESPONSIBILITY, GOVERNANCE – HIGH QUALITY OF CORPORATE GOVERNANCE) IS A GENERAL TERM USED IN ECONOMICS TO DESIGNATE A NUMBER OF ENVIRONMENTAL, SOCIAL AND MANAGERIAL FACTORS BY WHICH INVESTORS CAN EVALUATE THE BEHAVIOR OF ORGANIZATIONS IN WHICH THEY ARE CONSIDERING INVESTING.
ENVIRONMENTAL FACTORS INCLUDE THE IMPACT OF THE ORGANIZATION ON THE ENVIRONMENT AND ITS RATIONAL USE. SOCIAL FACTORS IMPLY HOW AN ORGANIZATION TREATS ITS EMPLOYEES, CUSTOMERS, SUPPLIERS, AND THE COMMUNITY IN WHICH IT OPERATES. MANAGEMENT FACTORS EVALUATE HOW AN ORGANIZATION OPERATES IN TERMS OF ITS MANAGEMENT, EXECUTIVE PAY, AUDIT, AND INTERNAL CONTROL.
THUS, ESG IS THREE PARAMETERS THAT FORM A CERTAIN BUSINESS PHILOSOPHY, WHICH INVESTORS ALSO TAKE INTO ACCOUNT.
ESG financing instruments
ESG financing instruments are green, social bonds and loans to ESG firms, i.e. firms adhering to the three listed ESG principles.
Green finance means providing cash (bonds, loans, etc.) for projects aimed at improving the environ ment, mitigating the effects of climate change and using resources more effi ciently. "Green" sections have opened on many exchanges around the world, where green bonds and shares of ESG firms are traded.
In the Republic of Belarus, we usual ly use "green financing" instead of ESG financing, although this is a broader concept.
The main instruments of ESG financ ing are:
Profit is not the only goal of green investments; however, there is evidence that environmentally sound invest ments can outperform profits from more traditional assets. A study conducted by Morningstar Inc. in 2020 showed that most sustainable funds made significant profits.
Perhaps the simplest form of green investment is the purchase of shares in companies with environmental projects. Many companies are developing alter native energy sources and materials, and are betting on a low-carbon future. Some companies, such as Tesla, have been able to achieve multibillion-dollar value by targeting consumers who care about the environment.
Green bonds are fixed–income se curities that represent borrowings to help banks, companies and government agencies finance projects that have a pos itive impact on the environment. These bonds tend to have tax breaks, which makes them more attractive for invest ment. The top three issuers of green bonds include the United States, China and France.
According to Bloomberg estimates, almost $0.5 trillion worth of green bonds were issued worldwide in 2019 alone.
Is the project "green"?
The Climate Bond Initiative (CBI) pro posed the first standard for green bonds in 2011. The principles of placement and circulation of green bonds are formulat ed by the International Association of Capital Markets (ICMA – International Capital Market Association).
The categories of projects that are "green" include (but are not limited to):
In addition to the CBI green stan dards, in 2014, the Principles of Green Bonds (GBP – Green Bond Principles) were developed under the auspices of the International Bank for Reconstruc tion and Development (IBRD).
The issuer of the green bond must in form the investor of the environmental sustainability objectives of the project; inform about the process by which it determines whether the project belongs to the "green" category; provide addi tional information about the processes by which environmental and social risks associated with the project are identi fied and managed.
The GBP principles limit the direc tions of funds raised, determine the processes of project evaluation and se lection, management of funds received from the issue, and reporting.
The largest issuers of green bonds are international development banks. The main buyers are pension and insurance funds.
ESG-financing in the Republic of Belarus
There are a large number of companies in Belarus that have declared their social responsibility and are assessing environ mental, social and corporate risks. How ever, there are no Belarusian companies with an ESG rating yet.
The participants of the UN Glob al Compact (it refers to the Concept of Sustainable development and unites three ESG directions) in the republic are 28 companies, among which are JSC "ASB Belarusbank", LLC "Mobile TeleSystems", the company "SoftTeco", CJSC "MTBank", CJSC "Minsk Plant of Soft Drinks", CJSC "BSB Bank", JSC "Alivaria Brewing Com pany", Finteco company, JSC "BMZ – the management company of the holding "BMK", the Association of European Business, LLC "INTERTRANSAVTO", JSC "Grodno Glass Factory", NGO "Belarusian Society of Appraisers", JSC "Sber Bank", JSC "Krinitsa" and others.
Green banking is one of the most prom ising elements of the sustainable financing market in the Republic of Belarus.
For example, Belinvestbank posi tions itself as an "eco-friendly bank", which means supporting and financing "green" projects, creating "green" prod ucts. In 2020, the bank financed the con struction of a wind power plant. The total amount of financing amounted to 15 million euros.
About 5% of Alfa-Bank's loan port folio consists of loans for green energy and agriculture.
Belarusbank has been a member of the UN Global Compact on Corporate Social Responsibility (CSR) since 2017. The Bank supports a global campaign to raise awareness of children and youth about finance.
BelVEB Bank also adheres to the principles of CSR and has been prepar ing sustainable development reports since 2011, including annually disclos ing events in the field of corporate social responsibility.
The trade sphere of Belarus also does not remain aloof from environmental issues.
The Green hypermarket chain be came the first major retailer to sign an agreement on mutual social responsi bility and cooperation in the field of ecology. An ecological platform was opened on the basis of a network of hy permarkets, within the framework of which support will be provided for the "environmentally friendly" production of products of the brand "Local Famous", the sale of paper bags at the price of plas tic, the rejection of the use of plastic tubes, the allocation of grants for busi ness development.
ESG risks
Since the emergence of ESG financing, ESG risks have become a new type of risk. Moreover, in addition to the tradi tional risk of a "green" (like any other) project, there is a risk of "green cam ouflage", i.e. disguising the project as "green" in order to obtain benefits.
Emerging ESG risks may have a neg ative impact on the assets, financial po sition or reputation of the bank. They include environmental risk, social risk and management risk, and ultimately affect the profit and liquidity of banks.
ESG risks also include environmental risks of conventional projects financed by the bank.
ESG risks include environmental, social and corporate governance risks. The impact can be direct on banks (for example, damage to a building because of a natural disaster) and on customers (changes in the risk environment, inter ruptions in production, etc.). All this can lead to more unpaid loan arrears.
In some countries (for example, in Lebanon), a favorable prudential regime is applied to banks implementing "green" projects in the form of a reduction in re serve requirements, but only if an inde pendent center confirms that the project really belongs to the "green" ones.
ESG ratings
The main advantage of using ESG ratings is the possibility of obtaining important information for the company's activities. Taking into account ESG factors, issu ers can increase shareholder value (for example, through proper risk manage ment), while contributing to the sustain able development of the company. These factors also have a significant impact on the company's reputation.
The analysis of ESG information can become a determining factor when choosing investments between compa nies with approximately the same finan cial indicators: an investor will make a choice in favor of digging with the high est ESG indicators.
ESG ratings are usually used to as sess the risks and potential of the issuer; when forming a portfolio that complies with the principles of ESG investment; to raise awareness of society and coun terparties.
The ESG rating is formed by indepen dent research agencies: Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI, Refinitiv and others. They evaluate the development of companies according to three criteria – E, S and G – and assign points on a one-hundred-point scale.
For example, the Kering conglomer ate (fashion houses Gucci, Balenciaga, Saint Laurent) has remained the leader of the rating of one of the most respect ed analytical index agencies Morgan Stanley Capital International (MSCI) among 28 companies in the field of cloth ing and luxury goods since 2019, ad hering to its sustainable development program, which includes the rejection of the use of toxic plastics by 99.8%, the use of "regenerated" cashmere (created from production waste), the launch of a free online course on conscious fashion.
There is no single approach to rating formation. All agencies analyze open data about companies, but they count points differently. Therefore, the ESG ratings of different agencies can vary greatly. For example, MSCI divides com panies into three categories: leaders with AA and AAA ratings; companies with average indicators – A, BBB, BB and lag gards – B, CCC.
Regulation of ESG financing
Today, the regulatory documents of the National Bank of the Republic of Belarus and the Central Bank of Russia do not single out borrowers with ESG status; special rules and risk coefficients do not apply to such loans. Sberbank of Russia held discussions with the Central Bank that such borrowers, as a rule, are more "transparent" and open in terms of information, are fundamentally more stable, which means that their risk of non-payments is lower. VTB Bank also proposed the introduction of a reduced risk weight to 50% for green financing, but the Central Bank of Russia sees risks in such measures at the moment.
Meanwhile, many large Russian banks (but not all) are implementing criteria for evaluating ESG business strategies to assess the solvency of com panies. According to a survey by the Expert RA agency, a third of banks do not plan to implement them, expecting benefits when reserving and reducing risk weights on ESG loans from the state.
At the same time, most of the world's governments, in order to stimulate the green market, use such measures as re ducing the reserve rate for banks, in creasing liquidity, and preferential tax es. Thus, the United States introduced a reduced income tax for "green" projects. EU countries introduced zero tax on gas and electric transport, renewable energy generation and reduced the tax burden for enterprises using renewable energy. China introduced zero tax on green bonds and zero tax for companies whose main activity is environmental projects. Japan has introduced a reduced tax rate and base, additional depreciation measures, as well as tax exemption for gas transport.
Perhaps, over time, this experience – as well as the experience in the field of ESG in general – will be useful for both the Repub lic of Belarus and the Russian Federation.
ENVIRONMENTAL FACTORS INCLUDE THE IMPACT OF THE ORGANIZATION ON THE ENVIRONMENT AND ITS RATIONAL USE. SOCIAL FACTORS IMPLY HOW AN ORGANIZATION TREATS ITS EMPLOYEES, CUSTOMERS, SUPPLIERS, AND THE COMMUNITY IN WHICH IT OPERATES. MANAGEMENT FACTORS EVALUATE HOW AN ORGANIZATION OPERATES IN TERMS OF ITS MANAGEMENT, EXECUTIVE PAY, AUDIT, AND INTERNAL CONTROL.
THUS, ESG IS THREE PARAMETERS THAT FORM A CERTAIN BUSINESS PHILOSOPHY, WHICH INVESTORS ALSO TAKE INTO ACCOUNT.
ESG financing instruments
ESG financing instruments are green, social bonds and loans to ESG firms, i.e. firms adhering to the three listed ESG principles.
Green finance means providing cash (bonds, loans, etc.) for projects aimed at improving the environ ment, mitigating the effects of climate change and using resources more effi ciently. "Green" sections have opened on many exchanges around the world, where green bonds and shares of ESG firms are traded.
In the Republic of Belarus, we usual ly use "green financing" instead of ESG financing, although this is a broader concept.
The main instruments of ESG financ ing are:
- green stocks, bonds;
- green lending;
- guarantees of financing of green projects;
- grants;
- loans;
- green insurance tools;
- financial benefits.
Profit is not the only goal of green investments; however, there is evidence that environmentally sound invest ments can outperform profits from more traditional assets. A study conducted by Morningstar Inc. in 2020 showed that most sustainable funds made significant profits.
Perhaps the simplest form of green investment is the purchase of shares in companies with environmental projects. Many companies are developing alter native energy sources and materials, and are betting on a low-carbon future. Some companies, such as Tesla, have been able to achieve multibillion-dollar value by targeting consumers who care about the environment.
Green bonds are fixed–income se curities that represent borrowings to help banks, companies and government agencies finance projects that have a pos itive impact on the environment. These bonds tend to have tax breaks, which makes them more attractive for invest ment. The top three issuers of green bonds include the United States, China and France.
According to Bloomberg estimates, almost $0.5 trillion worth of green bonds were issued worldwide in 2019 alone.
Is the project "green"?
The Climate Bond Initiative (CBI) pro posed the first standard for green bonds in 2011. The principles of placement and circulation of green bonds are formulat ed by the International Association of Capital Markets (ICMA – International Capital Market Association).
The categories of projects that are "green" include (but are not limited to):
- renewable energy (including produc tion, transmission, equipment);
- energy efficiency (for example, cre ating conditions for rational energy consumption in new and renovated buildings, energy storage, central heating, etc.);
- prevention and control of pollution (reduction of harmful emissions, con trol of greenhouse gas emissions, soil reclamation, waste reduction and re cycling);
- environmentally sustainable agricul ture, biological protection of plants, restoration of forests and natural landscapes;
- conservation of terrestrial and aquat ic biodiversity (including protection of coastal and marine environments);
- environmentally friendly transport (use of electricity or hybrid systems, infrastructure for electric vehicles, reduction of harmful emissions);
- sustainable management of water re sources and wastewater (infrastruc ture for clean and/or potable water, wastewater treatment, various forms of flood mitigation);
- adaptation to climate change (more climate-resilient infrastructure, cli mate monitoring and early warning systems);
- products adapted to the closed-cycle economy (design and implementa tion of reusable, recyclable materi als), and/or certified environmental products;
- "green" buildings that comply with national or internationally recog nized certificates or standards.
In addition to the CBI green stan dards, in 2014, the Principles of Green Bonds (GBP – Green Bond Principles) were developed under the auspices of the International Bank for Reconstruc tion and Development (IBRD).
The issuer of the green bond must in form the investor of the environmental sustainability objectives of the project; inform about the process by which it determines whether the project belongs to the "green" category; provide addi tional information about the processes by which environmental and social risks associated with the project are identi fied and managed.
The GBP principles limit the direc tions of funds raised, determine the processes of project evaluation and se lection, management of funds received from the issue, and reporting.
The largest issuers of green bonds are international development banks. The main buyers are pension and insurance funds.
ESG-financing in the Republic of Belarus
There are a large number of companies in Belarus that have declared their social responsibility and are assessing environ mental, social and corporate risks. How ever, there are no Belarusian companies with an ESG rating yet.
The participants of the UN Glob al Compact (it refers to the Concept of Sustainable development and unites three ESG directions) in the republic are 28 companies, among which are JSC "ASB Belarusbank", LLC "Mobile TeleSystems", the company "SoftTeco", CJSC "MTBank", CJSC "Minsk Plant of Soft Drinks", CJSC "BSB Bank", JSC "Alivaria Brewing Com pany", Finteco company, JSC "BMZ – the management company of the holding "BMK", the Association of European Business, LLC "INTERTRANSAVTO", JSC "Grodno Glass Factory", NGO "Belarusian Society of Appraisers", JSC "Sber Bank", JSC "Krinitsa" and others.
Green banking is one of the most prom ising elements of the sustainable financing market in the Republic of Belarus.
For example, Belinvestbank posi tions itself as an "eco-friendly bank", which means supporting and financing "green" projects, creating "green" prod ucts. In 2020, the bank financed the con struction of a wind power plant. The total amount of financing amounted to 15 million euros.
About 5% of Alfa-Bank's loan port folio consists of loans for green energy and agriculture.
Belarusbank has been a member of the UN Global Compact on Corporate Social Responsibility (CSR) since 2017. The Bank supports a global campaign to raise awareness of children and youth about finance.
BelVEB Bank also adheres to the principles of CSR and has been prepar ing sustainable development reports since 2011, including annually disclos ing events in the field of corporate social responsibility.
The trade sphere of Belarus also does not remain aloof from environmental issues.
The Green hypermarket chain be came the first major retailer to sign an agreement on mutual social responsi bility and cooperation in the field of ecology. An ecological platform was opened on the basis of a network of hy permarkets, within the framework of which support will be provided for the "environmentally friendly" production of products of the brand "Local Famous", the sale of paper bags at the price of plas tic, the rejection of the use of plastic tubes, the allocation of grants for busi ness development.
ESG risks
Since the emergence of ESG financing, ESG risks have become a new type of risk. Moreover, in addition to the tradi tional risk of a "green" (like any other) project, there is a risk of "green cam ouflage", i.e. disguising the project as "green" in order to obtain benefits.
Emerging ESG risks may have a neg ative impact on the assets, financial po sition or reputation of the bank. They include environmental risk, social risk and management risk, and ultimately affect the profit and liquidity of banks.
ESG risks also include environmental risks of conventional projects financed by the bank.
ESG risks include environmental, social and corporate governance risks. The impact can be direct on banks (for example, damage to a building because of a natural disaster) and on customers (changes in the risk environment, inter ruptions in production, etc.). All this can lead to more unpaid loan arrears.
In some countries (for example, in Lebanon), a favorable prudential regime is applied to banks implementing "green" projects in the form of a reduction in re serve requirements, but only if an inde pendent center confirms that the project really belongs to the "green" ones.
ESG ratings
The main advantage of using ESG ratings is the possibility of obtaining important information for the company's activities. Taking into account ESG factors, issu ers can increase shareholder value (for example, through proper risk manage ment), while contributing to the sustain able development of the company. These factors also have a significant impact on the company's reputation.
The analysis of ESG information can become a determining factor when choosing investments between compa nies with approximately the same finan cial indicators: an investor will make a choice in favor of digging with the high est ESG indicators.
ESG ratings are usually used to as sess the risks and potential of the issuer; when forming a portfolio that complies with the principles of ESG investment; to raise awareness of society and coun terparties.
The ESG rating is formed by indepen dent research agencies: Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI, Refinitiv and others. They evaluate the development of companies according to three criteria – E, S and G – and assign points on a one-hundred-point scale.
For example, the Kering conglomer ate (fashion houses Gucci, Balenciaga, Saint Laurent) has remained the leader of the rating of one of the most respect ed analytical index agencies Morgan Stanley Capital International (MSCI) among 28 companies in the field of cloth ing and luxury goods since 2019, ad hering to its sustainable development program, which includes the rejection of the use of toxic plastics by 99.8%, the use of "regenerated" cashmere (created from production waste), the launch of a free online course on conscious fashion.
There is no single approach to rating formation. All agencies analyze open data about companies, but they count points differently. Therefore, the ESG ratings of different agencies can vary greatly. For example, MSCI divides com panies into three categories: leaders with AA and AAA ratings; companies with average indicators – A, BBB, BB and lag gards – B, CCC.
Regulation of ESG financing
Today, the regulatory documents of the National Bank of the Republic of Belarus and the Central Bank of Russia do not single out borrowers with ESG status; special rules and risk coefficients do not apply to such loans. Sberbank of Russia held discussions with the Central Bank that such borrowers, as a rule, are more "transparent" and open in terms of information, are fundamentally more stable, which means that their risk of non-payments is lower. VTB Bank also proposed the introduction of a reduced risk weight to 50% for green financing, but the Central Bank of Russia sees risks in such measures at the moment.
Meanwhile, many large Russian banks (but not all) are implementing criteria for evaluating ESG business strategies to assess the solvency of com panies. According to a survey by the Expert RA agency, a third of banks do not plan to implement them, expecting benefits when reserving and reducing risk weights on ESG loans from the state.
At the same time, most of the world's governments, in order to stimulate the green market, use such measures as re ducing the reserve rate for banks, in creasing liquidity, and preferential tax es. Thus, the United States introduced a reduced income tax for "green" projects. EU countries introduced zero tax on gas and electric transport, renewable energy generation and reduced the tax burden for enterprises using renewable energy. China introduced zero tax on green bonds and zero tax for companies whose main activity is environmental projects. Japan has introduced a reduced tax rate and base, additional depreciation measures, as well as tax exemption for gas transport.
Perhaps, over time, this experience – as well as the experience in the field of ESG in general – will be useful for both the Repub lic of Belarus and the Russian Federation.
