Is it possible to integrate the ESG-principles in Russia
Vadim Petrov
Member of the Ecological Chamber of Russia

Is it possible to integrate the ESG-principles in Russia

Vadim Petrov, Co-Chairman and Secretary of State of the Russian Environmental Chamber, Chairman of the Public Council at the Roshydromet (Federal Service of Russia on Hydrometeorology and Monitoring of the Environment) explains in his interview with FederalPress why the ESG principles in Russia are often just marketing. The expert also speaks about what the point of separate waste collection is and why small- and medium-sized businesses in Russia cannot get a soft lending rate on ESG loans.

- How to make businesses have the desire to support the environment and join the ESG agenda?

- Today, ecology is not an economic category in our country. When it is profitable to deal with the environmental issues, you get advantages, benefits and less inspections. It is difficult to make economic calculations relating to ecology. Fines are a serious tool, the payment for the negative impact on the environment is extremely low. If ecology would become an economic category in our country and would give additional advantages, maybe, even financial ones… We see now how the project of green bonds issued to provide environmental protection measures are being successfully implemented. They were the first to appear in the waste management system. More than 100 mn rubles have already been invested in this project, and they are in great demand as an investment tool. It is surprising that the authorities began to take environmental measures and use financial instruments because they bring income, are understandable and clear. We also see the responsibility, including the investors’ one. They invest in green projects and we consider it as a success. The President said that this practice should be developed.

We are now getting off the ground. We are talking about the closed-loop economy, about measures to eliminate the accumulated environmental damage. In fact, we are cleaning up the waste accumulated during the past years of the Soviet times. But in addition to that, we need to create and develop a national green economy system to minimize the amount of waste generated. Even a resolution was issued in 2016 or 2017 saying, “In order to develop this area, a set of economic incentive measures should be developed.” But they haven’t been developed yet. This must be done. Regions can develop them on their own, but the measures do not exist at the federal level.

Moreover, the Russia’s Ministry of Agriculture has already created a system of subsidizing the integrated recycling of agricultural products to obtain biodegradable polymers and so on. Everything, in principle, is slowly developing.

- At present, the businesses are suffering from a pandemic and sanctions. If we ask them to engage in a ‘green economy’, will it harm the country’s economy?

- If we consider the environmental component as an additional burden and a load on business, this is not an economic category, it is regulation and an economic load. After all, each situation associated with a conflict with a local community, ‘costs’ much more in terms of stopping and settling it. For example, a cigarette factory came a long way before making odor filters. They had to move the factory from its historic site, build a new one. And all they had to do was just to put filters and eliminate the problem.

We do not reject the ESG-principles. This is a very important category for the population, for any country and society. The ESG-principles were very well explained to us. In 2016, the President mentioned them, speaking at the UN General Assembly. He said that amid modern challenges and global threats associated with climate change and ecology, principally new approaches are needed: it is necessary to find a balance between the biosphere and the technosphere led by man. That’s what the ESG practice is, everything is quite simple. We must find a solution. We have a solution for every problem. If there is no solution, it must be found. It is necessary to deal with the problem and understand it. Really, today there are difficulties with European and American ESGs. But there is an Asia-Pacific market where all these criteria apply. There is the Middle East with wealthy Arab investors who are interested in investing in the Arctic. Turkey is building infrastructure for the Arctic to use the Northern Sea Route.

- Are the ESG-principles really a working tool or are they just a marketing vehicle?

- The ESG-principles are the principles of sustainable development, the concepts of ecology, social sphere and governance, they were formulated almost 20 years ago, even before the UN adopted these sustainable development goals. On the other hand, many of our colleagues use it as a marketing vehicle and a pressure tool.

In many ways, it often lacks an objective approach. Therefore, if we initially sought to include our enterprises in the international ones, we need our own criteria now. We have our own characteristics: the climatic, geographical, social ones, and so on. We have the opportunity to develop the ESG criteria for the post-Soviet space.

- What are these criteria? How are we going to transform them to fit our mentality and our economic reality?

- They already exist. These are the principles that everyone should follow in ecology. There is such a good form - Model Laws in the CIS. We have now completed our work on a model law on accumulated environmental damage in the CIS. It is an ideal document that can be integrated in any country. It comprises uniform principles on how the system should be built, how to act. Just a single principle that needs to be ranked based on the priorities for our territory.

- Why in ecology only? What about the social sphere?

- I mean that in ecology, there should be purely ecology issues. We have a large number of businesses involved in the social sphere. Monotowns are a synergy of business and municipalities. The points of growth are created on the basis of single-industry towns. There are unique production capabilities, they have a highly developed corporate governance system.

- The ESG-principles are not observed in small-scale companies. How to implement them in these companies?

- When a large-scale company attracts investments, it wants to cut funds. When a company complies with the ESG-principles, it is beneficial for it; if a company it is included in some kind of rating, a financial institution gives a loan to it at a lower interest rate. Moreover, many of our companies, projects financed by foreign partners received money at a discount due to compliance with these ESG criteria. For example, since 2020, we have launched a tax base formation system for charity, up to 1% of the company’s profits can be deducted. In fact, this money is used for charity purposes, and is not paid as a tax. The companies find this important and interesting.

Small businesses dos not approach major investors to get money. Today, small- and medium-sized businesses are somewhat ignored. Of course, the ESG system does not work for them. Social obligations are specified. It’s not interesting to develop this. What are the ESG? It means doing more than specified by the law. If you do more, you are given ‘cheaper’ money or additional privileges, that means, this is beneficial for large-sized businesses. As for small businesses, it is not so obvious.

- That is, small- and medium-sized businesses do not have the opportunity to receive a soft lending rate on an ESG-loan? 

- They receive a soft lending rate under the Ministry of Economic Development’ program of regional support. But this has nothing to do with what they do in terms of ecology, social sphere and corporate governance. To make it work, it is necessary to make ecology an economic category. Then, it will be profitable and useful for everyone, and the situation will be different. Then, everyone will be involved in solving economic and social issues.

- Are you sure that this is not a utopia?

- This is not a utopia. This works for large-scale businesses, for single-industry towns. The way of scaling this practice up is very important. There is no universally applicable approach.
Regions should implement the ESG-principles. Usually, a region does not do this until any rating is published where it is in last places. Making inventory of objects of accumulated damage is not well developed because if a region includes this object in the State Register, it must eliminate the damage, and money to do this is not always available. And if it is in the State Register, it is negative when assessing the work of a region’s leader.

- Is it good that one waste recycling plant soon will appear in St. Petersburg and two are being built in the Leningrad Region?

- This is the recycling of the total mass of waste, and the waste should be sorted out. It is good that waste recycling plants are being built. Everything becomes legal and transparent so that we understand where and how much waste is generated. Why can’t we reduce the wastes at the landfills today? Everything is very simple: if organic waste is removed and each person gives garbage without organic waste, recyclable materials can be obtained. We have now launched the recyclable material treatment, and also adopted the regulatory framework. If bags, jars, bottles, paper are mixed with food waste, they will rot, and if you add plastic there, then all these processes become chemical ones. After that, a filtrate is formed, and so on. It is necessary to solve problems with organic waste.

- Should garbage be collected separately?

- Separate collection is not about separating an aluminum can from a glass jar. If you put them together dry, there will be no harm. This means that they should be accumulated and then recycled. If paper is contaminated, for example, with food, then it can no longer be recycled. If you have a waste disposer in your house, then you will not use garbage chutes and thereby greatly reduce the amount of waste generated. If organic is removed from the general mixture of wastes, there will be no waste as such. Here it is, the closed-loop economy.