ESG and new reality

ESG and new reality

Expert Reports  

The transition to carbon neutrality is a fairly strong challenge for the Russian economy that is primarily focused on traditional hydrocarbons. The situation is analyzed by experts in the publication by the TASS correspondents.

The current global situation, the imposed sanctions, the exit of foreign investors from the Russian market, and the change in the economic paradigm have become an additional obstacle to the implementation of a rather labour- and capital-intensive process.
Nevertheless, the companies working on the Russian market “revive” one after another after a short pause in the implementation of their plans and declare their intention to maintain and implement the ESG strategies (the principles of environmentally friendly production, social responsibility and corporate governance) and to adapt to new conditions as well. The article is about the problems the companies have and the roadmaps the companies can use in solving these problems in their transition to carbon neutrality.

ESG under pain of penalty

Last two years have become key in the development of the ESG agenda in Russia. While at the beginning of 2020, only a few people heard about the ESG, by the beginning of 2022, the “green” financing instruments appeared at the state level, and the largest companies adopted new strategies involving environmental and social responsibility, as well as new approaches to corporate governance.

“Talking about the general practice of stimulating ‘green’ economic entities, we can talk about two main mechanisms - these are financial and market incentives. The former ones are primarily related to the introduction of tax incentives by the State, the provision of low-interest loans for investment in ‘green’ technologies,” Vadim Petrov, Head of the Clean Country project department of the Russian Ministry of Natural Resources, commented to TASS.
At the same time, he added that “the State cannot issue gratuitous funds for the transition of business to the ‘green’ economy”.

“There are also incentives associated with the introduction of restrictions and fines. If the level of emissions is exceeded, the organization pays additional money to the state budget. And in the future, it is cheaper to change the production process in this case than to constantly pay additional taxes,” Petrov added.

“We do not yet have any strict incentive measures aimed at reducing greenhouse gas emissions specifically. But it is worth noting that models adopted in other countries are now being actively analyzed, including emission quotas, emission taxation, and so on, and their relevance for Russia,” says Oleg Pertsovsky, Energy Efficient Technologies Cluster Operations Director at the Skolkovo Foundation.

According to Valentina Likhachyova, Director of Corporate Communications and Sustainable Development at the Sveza company (specializing in the production of birch plywood), in the near future, we can expect tougher environmental legislation, including an increase in fines for non-compliance with it as well as the environmental fees and charges.
“A serious change in regulation should push business to restructure its activities and increase the responsibility not only to the environment, but also to future generations,” Likhachyova believes.

Put your trust in the State ...

At the same time, experts also note the state support for the “green” transition. In particular, a domestic taxonomy of “green” projects has been developed, and a number of financial instruments have been adopted to stimulate the development of the eco-agenda.

“The Central Bank is launching a ‘green bond’ programme, and the Ministry of Economic Development is will launch a ‘green’ financing system and a taxonomy of social investment projects. It is assumed that these tools will give a significant economic advantage to the environmentally friendly companies,” the CEO of Jungheinrich (a German manufacturer of lifting and loading equipment and warehouse equipment) Alexey Makariev commented to TASS.

To develop the systematic work aimed at supporting the “green” transition, a law came into force at the end of last year that makes the largest companies’ carbon reports mandatory starting from 2023. Also, a law on mandatory non-financial reporting is expected to be introduced in the near future.

“In the near future, projects of unified standards for ESG reporting and the methods for their verification should be introduced, but so far, companies report on those parametres that are of interest to stakeholders,” said Valentina Likhachyova.

In addition, the experts note the State support at the regional level, in particular, in the development of industrial parks and industrial projects.

“You need to understand that the world has already entered the era of conscious consumption. In our country, this trend has just begun to take shape, but there are entities of the Russian Federation that are implementing ‘green’ standards at the regional level. These are Moscow, Tatarstan, Bashkortostan, the Moscow, Ulyanovsk and Novosibirsk regions. Industrial parks and technology parks are the growth points for environmentally friendly initiatives, as well as large infrastructure projects such as the Smart City Kazan and Innopolis in Tatarstan,” said Alexey Makariev.

... but keep your “powder” dry

Despite the presence of certain support measures from the State, most enterprises are switching to more environmentally friendly production on their own, realizing this as an urgent need.

In particular, the managing partner of the VKhZ.31 innovative chemical holding (producing wood-polymer composites) Ilya Gorbatsky noted that the Company is taking its own measures to shift to a “green” economy as an initiative, and so far, without a support at the federal level. At the same time, he notes that the energy transition will affect the cost of the final product. “We have just begun our work in this direction, but, according to our preliminary estimates, if we calculate the ‘green’ transition over five years, the rise in price [of our products] will be less than 1 rouble; if the transition is over three years - the rise in price will be approximately 1.5 roubles per kilogramme [of product]. This measure does not remove the problem of the accumulated carbon footprint,” he said. 

According to Gorbatsky, the Company is working on the development of new areas - for example, on the launch of the wood-polymer composites (WPC) production. “WPC is composites with plant fibres, or “green compounds”. This is the latest direction in the polymeric material production. Each biocomposite granule contains about 50% organic fibres. In injection molding, these materials perform better than traditional polymers,” said Gorbatsky. According to him, the biocomposites will reduce dependence on the rising oil prices and produce high structural rigidity finished products.

“The essence of the ‘green’ transition is to reduce investment in oil and other ‘dirty’ sectors of the economy. Obviously, we cannot abandon oil production or metallurgy; in this case, it is worth talking about the introduction of cycling systems in production, sequestration, and forest compensation projects, which will help achieve carbon neutrality,” said Vyacheslav Nechayev, Head of the TIAR Center (an independent think tank and advisory firm).
In his opinion, decarbonization has now become a routine procedure for many major Russian companies.

In turn, Oleg Pertsovsky of the Skolkovo Foundation recalled that many investors are no longer ready to invest in non-environmentally friendly companies and projects. “When providing loans, the project’s environmental friendliness plays an important role for some banks, and the rate can directly depend on this. Therefore, the lack of due attention to the topic of sustainability can make it difficult to raise funding and also increase the cost of capital for the company,” he said.

Easier than it looks

Speaking about the ESG transformation, the representatives of a number of companies note that the transition to “green” technologies is a number of companies note that the transition to “green” technologies is a natural and inevitable process, which, however, is easier to adapt to than it seems.

"We look a little differently, in principle, at the ‘green’ transition. This is not a burden of additional costs. This is inevitable for any business. Because there is essentially no choice: if you go ‘green’, you have a chance to save your place in the market. If you do not go ‘green’, you are to lose your business sooner or later for sure,” says Sergey Ivanov, Executive Director, member of the board of directors of the EFKO Group of companies (a food company engaged in the use of biotechnology to improve food).

The Fix Price company does not face the costly modernization. “The Fix Price facilities, in principle, are not too energy-consuming since our goods do not require special storage conditions. We do not sell fresh products, there are almost no refrigeration equipment at our stores, there are no special temperature zones and fruit aeration chambers in our distribution centres, and the goods can be delivered by trucks without special refrigeration units. This helps to reduce the consumption of power, fuel, and refrigerants, which leads to a significant reduction in CO2 emissions,” the Company’s press service commented.

As noted in the press service of the VK company, the IT industry is traditionally the “cleanest” one in terms of negative impact on the environment compared to classical manufacturing companies. At the same time, the ESG should cover all areas of business activity, from the work of data centres to the workplaces of office employees. The “green” technologies can help. These include the use of energy-saving technologies in data centres, for example, free-cooling using the outside air. This also includes the data centre waste management, proper disposal, installation of energy-efficient office equipment, staff training in new technologies, and other solutions,” the Company’s press service said.

One step ahead

Many companies note that they have been implementing the “green” agenda for a long time and their focus on the decarbonization and environmental friendliness has not become something new for them. “For example, CDEK, which is the largest logistics company in Russia, uses a large amount of packaging materials. In this regard, we have introduced recycling in order to reuse our packaging,” said Olga Sgibneva, Marketing Director of CDEK. According to her, their company uses recycled packaging to make new things. “We manufactured raincoats using the envelopes once sent through CDEK and gave the used materials a second life. Thus, CDEK can already talk about the introduction of an environmentally friendly approach,” she added.

As noted in the press service of the X5 Retail Group, the entire chain of stores of the Group implements the principles of the ESG. In particular, the Pyatyorochka chain’s stores has begun their shift to renewable energy sources (RES).

“By the end of 2022, we plan to bring the amount of ‘green’ energy to 25% of the total consumption of Pyaterochka’s stores in the Republic of Karelia,” the Group said.

The power-generating company RusHydro is ready to lead the clean energy development agenda in Russia through the modernization and construction of new renewable energy facilities. The Company is able to sell “green” electricity. In particular, at the beginning of 2021, RusHydro concluded bilateral non-regulated environmentally friendly electricity (produced at hydroelectric power plants) contracts.

The transition to “green” energy is also accompanied by a shift to cleaner transport. For example, the X5 Group shifted 19% of vehicles to gas-diesel fuel, replaced the trucks with ones having lighter cargo beds that help reduce emissions.
“All new and refurbished stores are now adopting a ‘smart store’ system that uses special sensors, controls and software to integrate into the existing work processes to help reduce energy consumption, automate equipment management and minimize the risk of accidents,” the Group’s press service added.

The Metro company also actively included the retail in its eco-agenda. According to them, first of all, this is required by the consumers.

“Practically all the chain’s stores have containers for putting various fractions for further processing, and the practice is to completely refuse using plastic bags,” the Company’s press service said.

In his turn, Mikhail Livshits, Chairman of the Board of Directors of the ROTEK company (servicing various gas and steam turbines), critically assesses the numerous statements of companies about their commitment to the principles of sustainable development. “All this taxonomy so much talked about today has received numerous ‘derivatives’. And now any production, without taking a single actual step to reduce emissions or replace equipment for more environmentally friendly ones, becomes ‘sustainable’ through buying some I-REC-certificates,” he said.

Proper recycling and rejection of plastic bags

The press service of M.Video-Eldorado noted that for more than two years, they have been collecting all types of equipment in any condition for correct processing. “Electronic waste is transferred to licensed enterprises, where it is processed by 80-90% into secondary raw materials,” the Company’s press service said.

A significant part of the retail segment refuses to use plastic in favour of more environmentally friendly goods. In particular, M.Video-Eldorado offers customers FSC-certified paper bags instead of plastic ones, part of the revenues from the sale of these bags goes to the restoration of historical areas of broad-leaved forests.

Regular plastic bags are also being abandoned at the Fix Price chain. “In February, we announced that we started using eco-friendly branded bags, which contain 40% of recycled polyethylene. Within a few months, all large ‘T-shirt’ type bags, 4-8 mln pieces per month, will be replaced with new eco-friendly ones,” the Company said.

The VkusVill company opposes incineration and promotes separate waste collection and recycling, that is why it accepts bottle caps, batteries, soft packaging, cards, books, plastic bottles, and aluminium cans. “In 2021, we sent - by joint efforts - over 277 tonnes of recyclable materials and 335 thousand units of packaging for recycling,” said Vardan Vardanyan, Environmental Project Manager at VkusVill.

Decarbonization and consumers

The active involvement of companies in the ESG agenda is understandable in terms of the impact on the environment on a global scale. But financial issues, in particular, the change in costs and the resulting cost of finished products, remain open and debatable. In particular, the question arises whether the strive of companies to become more environmentally friendly will affect the final cost of their products, because modernization is sometimes quite a costly process.

“As for the traditional EFKO products: bottled oils, mayonnaise, and sauces, the main pricing factor in oil and fat products is the cost of oils at the exchanges closely related to the national currency exchange rate and many other reasons. The costs of the ESG transition will be the same for all the market participants. Therefore, we do not think that this will form a disproportion in the industry,” said Sergey Ivanov, Executive Director, member of the Board of Directors of the EFKO Group of Companies.

The press service of the Metro chain also notes that consumers are unlikely to feel the sting because of the company’s transition to the principles of sustainable development. “Since Metro has been adhering to sustainable development standards for years, the consumers receive quality products manufactured and transported in accordance with all the legal and ethical standards already now. Thus, the consumers simply receive the required product on our shelves without visible changes for them,” the Company’s press service told TASS.

According to the founder and managing director of Piklema company (offering solutions for optimizing the operation of quarry vehicles) Mikhail Makeyev, if the optimization initiatives pay off through the economy of the processes themselves, the introduction of technologies and the eco-trend should not affect the increase in the cost of goods and materials.

At the same time, according to Vadim Petrov, the Head of the Clean Country project office of the Russian Ministry of Natural Resources, the energy transition will dramatically affect the usual way of life, from pricing to the disappearance of certain types of industrial and household goods that cause irreparable harm to the environment. “You can give a small example at the level of human perception - instead of a charcoal grill, a person will use an electric grill powered by renewable energy sources. This will both reduce emissions and show a preference for choosing cleaner energy,” Petrov believes.

In his opinion, sustainable development already influences and will influence the usual way of living of people in all aspects. “For example, here we can talk about owning a personal car. From an environmental point of view, it is more expedient to travel by electric transport or use public transport. In this respect, the state will introduce additional taxes for engine power, emissions, age of the car, rise prices for gasoline, etc. to implement a policy in order to reduce emissions when using a vehicle. All this will affect every person in one way or another, and in particular, those people who do not want to take part in the ‘green’ transformation,” Petrov summed up.

What are consumers thinking about?

In a conversation about the importance of sustainable development for the end user, the opinions of experts were different. In particular, a number of experts talking to TASS believe that the significance of the energy transition for an average person is greatly exaggerated.
“In my opinion, the importance of the ESG principles that are so persistently imposed on Russia is greatly exaggerated. First of all, buyers look at the availability of goods and want to be sure that the product meets all quality criteria, and not what carbon footprint this product leaves. Therefore, not the ESG principles, but time and digital technologies should be considered as a key factor when consumers make their choice,” says Roman Rumbesht, member of the Commission on Legislation, Social Policy, Education, Health, Culture, Sports, and Youth Affairs.

According to Alexey Makariev from the Jungheinrich company, the Russian consumers, unlike the European one, are not ready to pay now for eco-trends and solutions reducing their own negative impact on the environment. “However, they are quite willing to pay for reducing the environmental burden on themselves, for reducing the impact of an aggressive environment,” the expert added.

In turn, Irina Nikulina, Director General of the Boiron pharmaceutical company in Russia, noted that an environmentally friendly choice is a priority for the Company’s consumers. “We see that both producers and consumers support the ‘green’ economy wishing to significantly reduce pressure on the environment. This is an important marker that enables the Russian economy to reach a new level of development not associated with an increase in the consumption of exhaustible resources,” Nikulina said. In particular, she cited data from a NielsenIQ survey for 2021 showing that almost 68% of the Russian consumers prefer products for a healthy lifestyle, despite their higher price.

Maxim Kanishchev, Head of Sustainability at SERCONS, also notes that “consumers tend to purchase goods made with a low carbon footprint, even at a higher price” as their way to contribute to the global “green” agenda. “Therefore, it is quite possible that a certain consensus will form - the companies will spend significant moneys to comply with the principles of sustainable development and shift these expenses into the cost of their products, but the market will treat this with understanding,” the expert notes. In his turn, Oleg Pertsovsky argues that the change in the cost of goods is very individual - in some cases, the consumers must decide whether they are ready to pay more, and in other cases, no change may occur, since some decisions are economically viable.