ESG metrics for Russian cities – Economy – Kommersant

The application of the principles of ESG (environmental, social and corporate governance), including for financing the improvement of the quality of life in Russian cities, in the column for Kommersant tells Andrey Samokhin, head of the analytics and marketing unit at VEB.

During the pandemic, Russians’ demands for the environment began to shift towards greater attention to social services and the environment. According to a recent study by the National Research University Higher School of Economics, the first place at the end of 2020 came to the demand for an increase in funding for education, medicine, environmental protection, payment of pensions, and social support. At the same time, 60% of the respondents agreed to pay additional taxes for this. Another “covid” trend is remote work. According to GfK’s September survey “Disruptor Consumers. Reversals in Trends ”, on average 20% of Russian residents already work remotely, in Moscow this figure reaches 30%.

Intertwining with each other, these two trends force us to reconsider the definition of a prosperous city. Factors similar to ESG factors, by which commercial companies are evaluated, are beginning to play an increasingly important role in assessing the suitability of a city for life.

After the collapse of the USSR, our citizens evaluated the city primarily by the availability of jobs and the average salary, and these indicators are still crucial, as in the case of profit for commercial companies.

But with the growth of prosperity and the formation of the middle class, the requirements for improvement, the ecology of the city, the level of social security and the quality of urban governance in general grow. Ignoring these criteria, as in the case of ESG factors in a company, means losing residents, who, in conditions of remoteness, can even more easily choose their place of residence.

VEB State Corporation is implementing an extensive program of urban infrastructure renovation in order to make Russian cities outside Moscow and St. Petersburg comfortable, convenient and beautiful. We, like the Higher School of Economics, record the growing importance of environmental, social and management indicators in the course of our work, but we have not yet digitized these feelings. To assess these factors more systematically, we are developing the ESG index of Russian cities as part of our work on a comprehensive assessment of the level of urban development.

It will take into account three groups of factors (quality of environmental policy, social security and urban governance) and compare municipalities with each other.

This index is part of the project “Index of the quality of life in Russian cities”, created by VEB.RF with the involvement of international consultants from PwC and Russian scientists, and from there the data will be taken to calculate the new indicator.

The resulting ESG metrics of Russian cities can be used, among other things, to form a kind of sustainability-linked bonds, financial products tied to the achievement of certain ESG indicators or the UN sustainable development goals, which are now spreading throughout the world. For example, the loan rate for the construction of a new enterprise could be lower by 0.2–0.3% if the borrower, as a result, would raise the city’s ESG rating (improve its environment or create a new social infrastructure).

The practice of European banks shows that the state actively uses leverage to stimulate them to form a portfolio of projects that improve ESG metrics. In Russia, this is also possible, given that the state has great influence over the largest financial institutions, including VEB.RF. Here it will be necessary to think over a mechanism that protects against greenwashing and rating hacking, so that companies really benefit the city, and not just catch up with formal indicators. A similar problem is relevant for ESG ratings in the commercial sector, and the answer here, most likely, can only be a high-quality independent audit.

Of course, a direct transfer of corporate ESG metrics to cities is not possible; significant adjustments to the indicators will be required. One of the main tasks of a commercial company is to increase the value of its share capital. Cities, of course, do not have such goals: they exist in order to create a comfortable environment for their inhabitants. But the townspeople can well be imagined as both clients and employees of the city, who are provided with services every day and who, at the same time, have every right to participate in the management of the “company”.

If everything is intuitively clear with the selection of analogues of environmental and social metrics, then with the managerial one, questions arise. G in ESG – relationship between management and shareholders, audit, internal control, respect for shareholders’ rights and equal representation of important groups in government (avoidance of discrimination).

The “shareholders” of the city are its inhabitants, and it is to them that the “hired managers” in the form of the mayor or city manager are responsible.

Accordingly, it would be appropriate to calculate the quality of functioning of city services and feedback mechanisms, the perceived level of corruption, the openness of budget data, etc.

A similar OECD Local SDG Index is calculated for territories around the world based on more than 100 indicators, it is informative, but cumbersome and does not take into account local specifics that are important for citizens. The more compact and more frequently updated ESG index of Russian cities is more adequate and understandable for citizens. Small and medium-sized cities cannot win the race for the highest salary, but it is quite possible for comfort, ecology and high-quality city services.

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