Based on the 2023 results, it can be said that the ESG bond market has practically recovered from the Fall of the previous year, and already from the first months of 2024 it is showing optimistic prospects for further growth. However, many are concerned with the question: can this be considered a trend, or is it still a temporary effect?
Responsible or, as they are called, ESG bonds include investments in securities that have a sustainable course, focused on financing corporate governance and projects related to developing the social sphere and environment. Such bonds have been named «green bonds.»
In 2023, green bonds proved their leadership as their volume reached 65 billion rubles. Bonds for social development totaled another 45 billion rubles and sustainable development bonds totaled 32.8 billion rubles. As estimated by the ACRA rating agency’s forecast, the securities market in 2024 may see further growth, which will lead to its 1.5-fold increase, i.e. it may reach 220 billion rubles.
However, it should not be overlooked that the environment in which bond development takes place is sometimes influenced by directly opposing forces — positive government decisions and geopolitical shocks. Therefore, it would be incorrect to say that the state of affairs is static — everything depends on the condition of both the domestic and international markets.
Securities on the Russian market
ESG bonds appeared on the Russian market almost a decade later than in Western countries, so they still do not play a significant role in the global securities market. In addition, there is a different approach to ESG finance in Russia and abroad, especially in Western countries. Whereas in European countries, the main issuers were immediately representatives of big business, in Russia the first to enter this market were government structures and representatives of medium-sized businesses.
The first «green» bonds were issued in 2016 by Transport Concession Company. Later, securities of other companies also entered the market, such as Khanty-Mansiysk Resources Saving Company, Tsentr-Invest Bank, Guarant-Invest Investment Fund and others.
With the development of the regulatory and legal framework, regulatory mechanisms were also developed: first and foremost, green financing led to the National Standard, and with the development of rating agencies, verification of green bonds and external audits of projects became possible. Currently, these tasks can be performed by the National Rating Agency, ACRA, Expert RA, and RAEX.
Analysis showed that the significant decline in the sustainable development sector on the Moscow Exchange, which lost 36% of the market in 2022, was related to the withdrawal of the largest Western investors. However, already in the second half of 2023, the Government approved a taxonomy, the purpose of which was to establish the definition of a social project and its criteria. As a result, cases related to areas such as education, healthcare, culture and employment are considered social projects.
Currently, the ESG sector on the Moscow Exchange accounts for 390 billion rubles. This sector includes 33 types of securities, with issuers including companies such as MTS, Rostelecom and others. It was only thanks to the efforts of the Moscow government, which issued green bonds for individuals, that 70 billion rubles were raised. These funds are intended for the implementation of a project to replace ordinary city buses with electric buses.
It is not only attracting private investors that will positively impact the securities market. Any financier would confirm that thanks to government investments, many companies will gradually decide to return to plans that were previously postponed due to events related to the pandemic and geopolitical instability. Now even the 50% growth forecast for 2024 seems realistically achievable.
Growth Points for ESG Bonds on the Russian Market
To understand how the securities market will develop going forward, it is necessary to understand the results with which the Russian and global markets concluded 2023. It is no secret that «sustainable» bonds were negatively impacted by the consequences of political tensions, the global logistics crisis, and rising interest rates. All this led to a 10% reduction in the global ESG market in 2022.
The entire global market represents a global supply chain, and Russia cannot do without cooperation with other countries. Partnership with Asian countries forces Russia to adhere to common trends and consider sustainable development agendas a priority. This is because many Asian companies have taken on commitments to achieve Net Zero, so 45% of countries in the Asian region already have their own social and green taxonomies.
Currently, the main area of focus in Russia for developing the ESG system is the development of its own non-resource sector and the expansion of cooperation with Asian countries and establishing relations with developing countries. The reason for the change of course was the imposition of sanctions, which ruled out the return of large corporations to the Russian market, as well as led to the absence of opportunities to attract Western investments.
Russian securities in the ESG segment can become promising only in one case, if they attract interest from domestic investors, i.e. they will be directed at developing the domestic market. For this to happen, measures need to be taken to improve infrastructure and support those companies engaged in issuing the relevant instruments.
At the same time, attention should be paid to expanding cooperation with the BRICS countries. This requires not only developing and implementing uniform requirements for reporting, but also developing standards for control and stimulating investors. The first steps in this direction are already being observed from the Bank of Russia. As the state regulator, the Bank of Russia has planned in its strategic development plan until 2026 to address the issue of stimulating sustainable development through financial market incentives.
In turn, the Central Bank also plans to stimulate the sustainable development market in order to increase interest in these areas among participants through financial injections into various projects. To this end, the bank may provide tax incentives or state subsidies regarding ESG bonds.
Judging by the pace at which business representatives and government agencies are developing regulatory mechanisms and the economic development programs being proposed, and listening to statements from officials, one can get a firm belief that by 2026, Russia, once considered a “sandbox” for ESG financing, will become a fully-fledged market functioning with confidence.
Transparency in the use of funds for project implementation makes their financing attractive to investors, who can boost their business reputation by investing in sustainable bonds. Moreover, the ability to consider all factors when making business decisions will help calculate all investment risks from a long-term perspective.