COP27 for Russia: Interests of the domestic financial market in the international climate agenda
At the end of November, the annual Conference of the Parties to the UN Framework Convention on Climate Change (COP27) took place in Sharm el-Sheikh, where participants discussed the implementation of their commitments to combat global warming. The relevance of COP27 and the Sustainable Development Agenda for the Russian financial market is described in her article by Tatyana Komarova, a project lawyer at the nonprofit foundation Analytical Center Forum.
Despite the aggravated geopolitical situation and the challenges faced by the Russian financial market, the sustainable development agenda (including the climate one) has not lost its relevance. Environmental and climate problems not only threaten the existence of mankind (in the relatively distant future), but also now cause significant damage to the national economy.
In addition, the shortage of financing for climate projects and the need to attract private investment leads to an increased role for the financial sector in the process of the decarbonization of the economy. The presence of an internal consumer, and the interest of Russian companies in the implementation of the principles and practices of sustainable development, also remain relevant to the agenda.
An important contribution to the relevance of this problem is made by the regulatory framework. The fact that the Russian Federation, as a party to the Paris Climate Agreement, has public climate commitments to reduce greenhouse gas emissions has led to the introduction of changes and the issuance of a number of legal acts regulating relations in the field of sustainable development, including the climate agenda.
For example, the Regulation of the Bank of Russia (CBR) No. 706-P of 19.12.2019 “On Securities Emission Standards” provided issuers with the opportunity to issue green and social bonds. The decree of the Central Bank of the Russian Federation dated 01.10.2021, No. 5959-u, added bonds for sustainable development to the legal framework of Russia. By the decree of the Central Bank of the Russian Federation dated 04.07.2022, No. 6195-u, were added three more types of bonds: adaptation bonds, bonds related to sustainable development goals, and climate transition bonds.
The interest of foreign partners, including those from friendly jurisdictions, in implementing a sustainable development agenda also stimulates the Russian financial market to actively develop ESG practices. The desire of friendly jurisdictions to harmonize the requirements they have developed and adopted in the field of sustainable development with the requirements of the EU – preserves an interest in European regulations.
Thus, in November 2021, the International Platform on Sustainable Finance presented a report on Common Taxonomy, which includes a list of economic activities recognized by both the EU and China as environmentally friendly and sustainable, as well as making a significant contribution to climate change mitigation. The scope of the Common Taxonomy is expected to be expanded in the next phase, among other things to include taxonomies adopted by other jurisdictions.
At the end of December 2021, China and Singapore reported that they were exploring opportunities for closer cooperation between the public and private sectors of the two countries in the field of green finance, especially in key areas such as taxonomy and green FinTech. In June 2022, at the Forum of Ministers of the Environment of Latin America and the Caribbean, it was announced that work had begun on the creation of a common taxonomy framework for Latin America and the Caribbean (supported by the EU).
According to the Moscow Exchange, the volume of placement of sustainable development bonds, including green, social, and adaptation bonds, amounted to 86.2 billion rubles in 2022 (as of 06.12.2022) and 169.4 billion rubles in 2021, but in 2020 had been only 11.2 billion rubles. Analysts also confirm the thesis: the situation observed in the field of sustainable development is not a crisis, but a rethinking of the agenda.
“Russian companies continue to disclose non-financial information, and publish sustainability reports and annual integrated reports, even despite the extreme sanctions risks,” the credit rating agency Expert RA said. At the same time, according to the results of a survey of rating clients from various sectors of the economy conducted by Expert RA in November 2022, the importance of the ESG agenda remained steady for 67% of respondents, and for 5% even increased.
The ESG agenda and the sustainable development agenda remain in the focus of the attention of Russian regulators and government agencies. In particular, one of the tasks described in the draft Guidelines for the Development of the Financial Market of the Russian Federation in 2023, and for the Period of 2024 and 2025 (ONRFR), is the expansion of the contribution of the financial market to the achievement of sustainable development goals and the ESG transformation of Russian business. The document notes that “the Bank of Russia and the Government of the Russian Federation will continue to create conditions for the development of ESG financing in Russia.” In addition, “in the medium term, the Bank of Russia will work on the possibility of integrating ESG risks into prudential regulation and supervision.” In the draft Strategy for the Development of the Financial Market until 2030, prepared by the Ministry of Finance of Russia and the Bank of Russia, sustainable development is also named as one of the priority areas.
In turn, the agreements reached within the framework of COP27, the initiatives announced, and the provisions contained in the final document, allow the participants of the Russian financial market to identify priority sectors of the economy and climate projects for financing.
The Role of the Financial Sector in Ensuring Carbon Neutrality
According to the final document of the Conference – the Sharm el-Sheikh Implementation Plan – at least $4-6 trillion per year of investments will be needed to ensure the transition to a low-carbon economy at the global level. To ensure this level of funding, a comprehensive transformation of the financial system, its structures and processes is necessary.
At the same time, a key outcome of COP27 was the decision of member states to establish new financing mechanisms to assist developing countries that are particularly vulnerable to the adverse effects of climate change, with a focus on “redressing loss and damage by providing assistance through the mobilization of new and additional resources.” Thus, during the Conference, the participating states once again drew attention to the special role of the financial sector in making carbon neutrality possible.
Measures to Combat Greenwashing
It should be noted that the lack of clear, normatively fixed requirements and rules in the field of sustainable development – namely requirements for non-financial reporting, ESG ratings and rankings, and taxonomies – make the issue of greenwashing a key problem. However, over the past six months, several jurisdictions have announced initiatives aimed at preventing greenwashing.
In June 2022, the Australian Securities and Investments Commission issued a fact sheet aimed at preventing greenwashing in the process of offering and promoting products related to sustainable development. In August 2022, the Financial Services Board of Australia announced the publication of requirements for investment managers who must set targets to combat greenwashing and report related risks. In October 2022, the UK Financial Conduct Authority published for public consultation a package of new measures to combat greenwashing (draft requirements for disclosure of information in the field of sustainable development and labeling of investment products). In November 2022, the Joint Committee of European Supervisory Authorities (ESA) announced the collection of information on the risks and practices of greenwashing in the banking, insurance and financial sectors, which will be used by ESA to prepare a report for the European Commission.
The Sharm el-Sheikh conference also did not sidestep this issue. During COP27, the High-Level Expert Group on Commitments of Non-State Actors to Achieve Net Zero Emissions (NetZero) presented a report containing 10 recommendations for companies, including financial institutions, aimed at preventing greenwashing, including:
- transparence of the company’s commitments to achieve NetZero
- the binding nature of the intermediate NetZero targets for every five-year period and the identification of specific ways to achieve them in accordance with the IPCC or IEA NetZero scenario (with the aim of limiting warming to 1.5°C)
- priority of the reduction of greenhouse gas emissions throughout the value chain (Coverage 1, 2 and 3)
- public availability of the company’s plan for transition to NetZero, with a detailed description of the measures to be taken, including in the fields of capital expenditures and investments in human capital
- end to new investments in fossil fuels, and decommissioning and abandonment of existing fossil fuel assets
- supporting the transition to NetZero, including by lobbying for such efforts at the national level
- presence of a policy of financial institutions to end by 2025 all investment in and finance of businesses related to deforestation
- providing annual reports on progress towards the goal of NetZero
- increased investment by financial institutions in green energy for developing countries
At the same time, national regulators are also encouraged to develop requirements and standards aimed primarily at high-performance corporate issuers.
The circumstances described here suggest that in the near future, the volume of regulation and mandatory requirements in the field of sustainable development (especially in terms of improving green/sustainable taxonomy, non-financial reporting requirements, and prevention of greenwashing) in various jurisdictions, including the Russian Federation, will continue to grow.