Recommendations for boards of directors in the field of sustainable development were discussed at a meeting of the expert council of the Central Bank on corporate governance on June 10. The document describes what the councils need to do so that the company, making a profit, does not spoil the environment, is socially responsible in relation to its own employees, counterparties, local communities and has a high-quality corporate governance system (Environmental, Social, Governance, ESG).
This is a very opportune moment for issuing recommendations for issuers to listen to. In 2020–2021 a number of high-profile accidents occurred – a diesel spill made by Norilsk Nickel in May 2020, a collapse at the Norilsk concentration plant of the same Norilsk Nickel in early 2021, where workers died. Among the most famous incidents are the pollution of the Ob River due to the breakthrough of the underwater product pipeline Sibur in March 2021, two oil and oil product spills in Komi by Lukoil, one last fall, the other in May 2021. at Russian oil and gas facilities increased sharply in January-May 2021, Rostekhnadzor reported. In January – May, 22 accidents occurred, which is 40% more than in January – May 2020.
Obligations to develop steadily, that is, not to create problems for future generations, are not enshrined in Russian laws, and the Central Bank assigns a key role to the boards of directors in caring for sustainable development.
Step-by-step instruction
The document contains a seven-point checklist for directors that will help determine how mature the board is to spearhead ESG implementation in the company. The council should evaluate itself – how well it understands ESG topics – and, if necessary, learn some more. The Council should define sustainable development goals (by choosing, for example, any of the 17 goals and 169 goals of sustainable development formulated by the UN), embed sustainable development plans in the business development strategy, in the system of risk management and internal control, as well as in the information disclosure standards …
It is recommended that a separate sustainability committee be created, as well as a separate sustainability unit in the organizational structure of the company.
In addition, the board should oversee the disclosure of sustainability information. Companies are encouraged to disclose information on social and environmental responsibility (clause 291 of the Criminal Code of Ukraine): social and environmental policy; a sustainable development report prepared in accordance with international standards; results of technical audit, audit of quality control systems, results of certification of the quality management system for compliance with the requirements of international standards.
Sustainable development in general will require the preparation of many internal documents and regulations: a code of corporate ethics, a corporate governance code, an information security policy, an occupational health and safety policy, an anti-corruption policy, a climate strategy, a top management remuneration policy, a risk management and internal control policy, and dr.
The Central Bank recommends that the councils regularly, for example quarterly, analyze the dynamics of the company’s indicators in the field of sustainable development. To find a balance between the long-term and short-term interests of the company, it is necessary to include the KPI for sustainable development in the top management remuneration system, the recommendations say.
It is also recommended that the Board of Directors conduct an assessment of the effectiveness of risk management in the area of sustainable development, including climate risks. But there is no need to create a separate unit for sustainability risk management.
The recommendations did not cause any complaints from the expert council. The executive director of the Association of Professional Investors Alexander Shevchuk says that the recommendations of the Central Bank are a description of the world’s best practical experience, he has nothing to add – everything is perfectly stated. Boards of directors of Russian companies, which often play only a formal role in company management, thanks to the educational content of the Central Bank, will at least know that there is a topic of sustainable development and it would be nice for the council to study it, he explains.
Andrey Bugrov, Senior Vice President for Sustainable Development of Norilsk Nickel, called the Central Bank’s recommendations a high-quality and comprehensive document, but noted that of the three aspects of ESG (ecology, social responsibility and corporate governance), the Central Bank is only responsible for corporate governance.
The members of the RUIE gave a number of editorial comments to the recommendations of the Central Bank (for example, to exclude the words “necessary” and “must”, which are not typical for a recommendation document), said a representative of the RUIE.
Rating is not a guarantee
The board of directors should consider the feasibility of assessing the company for compliance with the criteria of ESG ratings, ratings and indices, the Central Bank recommends. The recognition of high standards of the society in matters of sustainable development by investors and rating agencies will strengthen the company’s competitive advantages, the Central Bank reminds. But how informative are ESG ratings really?
In Russia, the ESG rating is RAEX Europe; in 2021, 121 companies were included in it. In May 2021, Polymetal became the leader of the rating. The second and third places were taken by Lukoil and Sibur.
There are about 40 Russian companies in international ratings, and usually they occupy positions much higher than enterprises of the same industry from China or Latin America.
The most authoritative ESG ratings in the world are: RobecoSam (now in S&P Global), Sustainalytics, MSCI, CDP, ISS, Vigeo Eiris (Moody’s), FTSE Russell and FTSE4Good. Their methods of collecting and evaluating information differ significantly (Vedomosti studied the descriptions of the methods on the websites of the agencies). Sustainalytics, MSCI, Vigeo Eiris (Moody’s) ratings are based entirely on publicly available information – companies ‘own reports, media news, analysts’ opinions and their research results. Companies participating in the rating receive drafts and can insist on justified corrections. To get into the S&P ESG rating, companies must receive an invitation and fill out questionnaires – conclusions are made based on their answers and open sources.
The stricter the rating, the fewer Russian companies there are. The most stringent rating is RobecoSam (S&P Global). In 2021, analysts at RobecoSam (S&P Global) analyzed about 7,000 companies and 250,000 documents. Each of the 61 industries has its own questionnaire. To be included in the annual ranking, companies must have an ESG rating within 30% of the best performing companies in their industry, according to the RobecoSam website (S&P Global). In previous years, only Polymetal represented Russia in the ranking. In 2021, she again hit the rating, but changed her registration to Cypriot. China is represented in the ranking by three companies, the USA – by 97.
There are 2,800 companies in the MSCI rating, of which a dozen are Russian. Most are in the middle risk zone and have noticeably improved their positions over the past five years.
Sustainalytics evaluates ESG risks and analyzes a large database of approximately 14,000 companies. Of these, 24 are from Russia. Each company is assigned a place in the industry, a place in the world, as well as a risk score in points. The value is made up of two aggregated indicators: for ESG risk management and for the level of exposure to ESG threats. On the Sustainalytics scale, scores of 20-30 are moderate risk, 30-40 are high, and scores above 40 are considered significant risk.
Most of the domestic companies participating in the Sustainalytics rating are in the zone of medium or high risks. The lowest risk was shown by the Moscow Exchange (14.2 points; 38th out of 791 financial companies), Polymetal (20.3; fourth out of 118 precious metal miners in the rating) and X5 (20.8; 60th out of 191 retailers) … Surgutneftegaz (48.1 points; 167th out of 282 oil and gas companies), Tatneft (44.3 points; 135th) and MMK (40.2; 40th out of 144 steel producers) ). In their industries, good results were shown by Polymetal (4th place), NLMK (5th), Polyus (10th), Severstal (11th) and Evraz (18th) in branch).
As the recent environmental incidents in Russia have shown, a worthy place in international ratings does not at all guarantee, for example, that a company will stop polluting the environment in the future.
The petrochemical company Sibur announced in February that it was included in the Sustainalytics rating in the chemical industry in the 1% of companies with the lowest risk level (out of 444 companies). The company said it had significantly improved its environmental policy, environmental management system and certification scores compared to last year. And in March there was a breakthrough of the product pipeline in the region of Nizhnevartovsk and pollution of the Ob.
After the oil spill in Komi in 2020, Lukoil received 35.7 points and 55th out of 282 companies in the oil and gas industry. After the accident at the processing plant and the kerosene spill in Taimyr, Norilsk Nickel received 36.9 points and 35th place out of 156 companies in the metallurgical industry – before the accident, the risks were assessed higher (38.9 points and 33rd place).
When asked about the mandatory participation of Russian companies in ESG ratings, the representative of the Central Bank replied that such ratings are a relatively new area of work for rating agencies. And most often ESG-rating or ranking is assigned not on the basis of an agreement with the issuer, but at the request of investors. In addition, ESG assessment methodologies differ significantly. In 2021, the “Group of 20” (including with the participation of the Bank of Russia) began to unify these methods, said a representative of the Central Bank.
Director of the Russian Institute of Directors Igor Belikov considers it appropriate to make the clause on the participation of Russian issuers in national or international ESG ratings mandatory. This will increase the company’s responsibility for the text describing its ESG practices. If an external auditor is involved to certify the corresponding report, he will also know that his opinion will be the subject of analysis. The more professional eyes study the situation, the better. In addition, it will contribute to the development of the consulting infrastructure in Russia and its market. Rating agencies in Russia have few clients, so it is difficult for them to maintain independence and objectivity, Belikov says.
Encouragement and punishment
Investors should push companies towards sustainable development: asset owners (pension, insurance and other funds) are gradually introducing investment criteria based on ESG and public companies will have to adjust, Shevchuk says. But without a reform of pension savings and investment opportunities in Russia, none of this will work properly. According to MOEX, the total amount of pension assets in Russia is 6.5 trillion rubles, of which 4.5 trillion rubles. – non-state pension funds, which, in turn, invest only 7% of their assets in shares (300 billion rubles). The population has 34 trillion rubles. lies in banks and 12 trillion rubles. cash savings with a total stock market capitalization of RUB 56 trillion. In order for Russian companies to engage in sustainable development, they first need to attract as many investors as possible, Shevchuk said. And investors, first of all, need a fair and transparent judicial system, laws that ensure the rights of investors (offers, disclosure of information, etc.), consistency and transparency of decisions made by the state, including those affecting the stability of the national currency and inflation risks.
Belikov says that incentives and sanctions that the state will use will play a decisive role in the practical implementation of ESG principles, such as encouraging the issuance of green loans by banks, stringent environmental control, stringent environmental standards and sanctions for their violation, as well as Russia’s relations with The West (they will influence the mood of large institutional Western investors – the main adherents of sustainable development of portfolio companies).
So far, compensation for environmental damage is not too burdensome for violators. The fine of 146.2 billion rubles imposed on Norilsk Nickel is an exception. Recently, a preliminary estimate of the damage was made at 300 million rubles. for a spill allowed by Lukoil-Komi. Lukoil disagrees with the assessment, but will pay for the damage, said the president of the company Vagit Alekperov at SPIEF. And the culprit of the recent oil spill in the Black Sea in Tuapse, 700 meters from the city beach, has not yet been identified, the Rosprirodnadzor estimated the damage at 70 million rubles.
On behalf of the president, the government will prepare a bill on the financial liability of enterprise owners for environmental damage, Prime Minister Mikhail Mishustin said in May. The costs of eliminating the consequences of accidents will not be included in the prime cost, as before, but will be deducted from the net profit, that is, paid by the owners and top management.
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