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“We spent RUB8bn last year on the social aspects of our faculties and their surroundings. Some 17,500 people work for us and all our cities are mono-cities. We are happy we can take an active part in these communities. We build stadia and ski resorts. We give RUB1.5bn to charity and have a children’s initiative for their spiritual development. There are classes at local schools where they intensively study maths and chemistry. And we have supported 20 universities with placements where students will come and work for us after they finish,” says Evgeniy Novitskiy, first deputy general director of the PhosAgro fertiliser producer.
G
Of the three criteria the G, or governance, part is probably the most familiar to investors. In Russia the drive to improve corporate governance was kicked off by oil major Yukos in about 2000 when it went from being the bad boy of corporate governance to a leading light. As the boom years started Yukos began quarterly GAPP financial reporting and introduced new transparent policies in its relations with investors. The stock rocketed, rising from around $0.20 in 1999 to a peak of $15 over three years.
“G is the most important for investors. Russia is famous for its governance. The boom in the noughties was linked to the oligarch companies which were the main driver,” says Alexei Yakovitsky, global chief executive officer at VTB Capital. “The big owners of Russian companies have
a very positive experience as they found that if you follow the rules set by western investors then you can be very successful.”
Russia’s leading exchange Moscow Exchange (MOEX) has kept the ball rolling by insisting companies that want to list meet strict compliance criteria.
“We want to create a quality market for investors that are including strict criteria in the listing requirements. MOEX is the driving engine of these changes. MOEX pays attention to
the G – to corporate governance and general governance. We reformed our listing requirement in 2014 to improve governance and now it is one of the strictest in the world. First is the need
for an independent board of directors and steering committee,” says Anna Vasilenko, managing director for key clients and issuer relations at MOEX.
All emerging markets stocks are marked down for their emerging market risk. But in Russia’s case it has a discount
on top of the discount for its specific
“The ESG 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”
Exclusion to inclusion
Raby goes on to point out that until recently it was seen a breach of their fiduciary duty for asset managers to con- sider non-financial criteria like ESG when assessing an investment decision. The change to start taking ESG criteria into account is a fairly recent development.
“Making investment decisions that take the environmental impact into account so far has been an exclusion approach. We don't invest in fossil fuels. We don't invest in extractive industries. And there has been a big debate about nuclear power,” says Raby. “The social part has been a box-ticking exercise. Do they have a worker safety policy? Do they have women on the board?”
That will have to change now, as companies need to embrace the whole concept of ESG and build it into the heart of their businesses.
“These days ESG has gone from a nice- to-have to a must-have thing. If you don't want to lose existing investors and want to attract new ones then
“Russia risk” that cuts the valuation of Russian assets in half from their already depressed emerging market status level.
“Russian IT companies are the easiest
to sell to international investors as the Russian discount plays the least role
in this sector. But for more traditional companies ESG is one of the unique ways to minimise this Russian discount – especially if investors are specifically looking for ESG compliant companies,” says Dmitriy Sedov, chairman, Goldman Sachs Russia.
It is in everyone’s interests to pursue better ESG strategies, as some companies in Russia have already reported that they have lost investors in just the last year as the self-adopted conditionality is phased in, thanks to their inadequate ESG scores. The issue of improving their stories is already on the agenda of management boards in many of Russia’s biggest companies.
“It is difficult to evaluate the Russian discount. But there is also the G factor that is becoming more and more impor-
“These days ESG has gone from a nice-to-have to a must-have thing”
this is already a must,” says Oleg Goshchansky, chairman and managing partner of KPMG in Russia and the CIS.
And ESG could turn out to be a boon for Rus- sian companies as it is one of the few ways they have to undo the “Russian discount” on their market capitalisation valuations.
tant. It is a real issue for managers, and it is a KPI [key performance indicator]. It is regularly on the agenda for Russian boards,” says Alexander Shevelyov, chief executive officer of Russian steel giant Severstal Management.
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