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32 I Cover story bne July 2019
Companies in Russia are waking up to the need to improve their ESG record and some of them have already lost substantial shareholders as a result of under par ESG scores, market partici- pants tell bne IntelliNews.
“The trends are entering our life very quickly. We are not talking just about new investors but there is a risk of losing existing investors as well. Companies really need to pay attention to it. If we don't have these credentials then it is nearly impossible to involve European and US investors. We have seen it as necessary to pay attention to these issues over the last three years,”
says Pavel Grachev, chief executive officer of Polyus Gold.
Commitment to the cost of clean-up
Several of Russia’s companies have now embraced the new ideas, despite the extra costs they incur, with open arms. Polyus Gold was recently included in the MSCI ranking of ESG leaders.
“There are only six companies in this index. We are third after Novatek and Lukoil. This is a ranking for companies for sustainable development. This is not just about formal criteria to be included in the ESG ranking, but just as important is the motivation to be included,”
Polyus’ Grachev says.
Russia’s giant metal producer Norilsk Nickel is another one that has decided to change its spots. The nickel, copper and PGM (platinum group metals) plant is based in the far north of Russia at the site of a former Gulag camp.
“Norilsk used to be for decades the largest polluter in the world, or at least the northern hemisphere. That was due to the decisions that were implemented in the 30s through to the 60s when the prevailing environment was the neglect of the environment and other aspects
of what we now call the ESG concept,” says Andrey Bugrov, senior vice president, deputy chairman of the board of directors, MMC Norilsk Nickel.
The company has embarked on a five-year programme to clean up its act – literally. It has introduced new
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technology to remove sulphur from its emission gases and by 2023 it should be removing 75% of those emissions.
“But ESG is costly,” says Bugrov. “The sulphur capture project will cost $2.5bn and it doesn't increase my production.
It just goes into my bottom line. It is important to delineate the two sides of metals and mining: the one that pollutes the atmosphere, but there is the upside too including the catalytic converters as without them the populations of big cites would suffocate.”
E
Defining the contribution or harm
a company does to the environment is
a more complicated concept. It is easy
to say that a big metals or petrochemical plant is a polluter, because they are, but the equation doesn't end there. Norilsk was one of the biggest polluters in the whole world, but the PGMs it produces are used in cars and massively reduce CO2 emissions.
“As we produce nickel and PGMs one has to recognise we are contributing to the green economy as they are used in catalytic converters. Every third
or fourth car in the US market uses our metals in these converters,” says Norilsk’s Bugrov.
Sibur has a similar issue. The giant petrochemical company doesn't produce any oil and gas itself, but buys it from the majors and processes it to make its range of polymers, as Dmitry Konov, chairman of the management board
of Sibur Holding, described to bne IntelliNews in detail in the feature “Plastics in the snow” in December 2018.
“We used the associated gas as raw material that would otherwise be flared off. So this is a positive contribution
to the environment but it is not taken into account in any of the rankings,” says Konov.
Sibur is a global company and the petrochemicals it produces have a far- reaching impact on the environment beyond the mere making of its polymers.
“What we produce – synthetic materials – release less CO2 and we can help
other companies use less materials in their own businesses, which also has a positive effect,” says Konov.
Konov adds that government plays
a role here too as while plastics are processable and can be used as stock to make other materials, the bigger issue is to collect plastics that have been used and currently end up in landfills – currently a hot domestic political issue as Russians have been protesting against landfills. However, the government has responded and in Moscow at least the city is introducing laws to force Russians to start sorting their trash for the first time.
“We are still in ESG 1.0 – the simple view of these issues. In ESG 2.0 it will be more nuanced and ESG 3.0 you will be able to bring all the factors together to have a complete view of what you want to do as an asset manager. Like in Norilsk’s case it is important to look at the external realities,” says Jean Raby, chief executive officer of Natixis Investment Managers, which has been following a sustainable investment strategy for years.
It’s easy to get stuck looking at a tree and losing sight of the forest. Investors have been drawn to the Tesla electric car, for example, as it seems to be a technology of the future, whereas they dumped VW stocks after the company got caught cheating on its emissions levels.
“You might want to invest in Tesla because their cars are cleaner, instead of VW. But Tesla will produce 200,000 cars in total this year whereas VW will produce mil- lions. So if VW make any improvements it is VW that will have the real impact on the environment,” says Raby.
S
For many large Russian companies the S part is hardwired into their genes thanks to the Soviet legacy and Russia’s harsh weather. The big raw material producers tend to be located in the tundra in the middle of nowhere and entire cities were built to house the workforce sent there to exploit the rich deposits. That means the HR departments are intimately intertwined with the local city and its life.