In late December 2018, the Russian capital markets quietly passed a significant milestone: a refuse-processing company, Resursosberezhenie KhMAO, listed on the Moscow Exchange the first green bonds ever issued by a Russian company. The proceeds will be used to establish a municipal recycling and refuse processing facility in the Khanty-Mansiysk region. While the transaction was small (₽ 1.1 billion, US$ 16.4 million), it marks Russian issuers’ long-awaited entry into the green bond market and lays the groundwork for bigger transactions, including eurobonds.

What are green bonds anyway?

As with any bonds, the issuer borrows money from bondholders in return for promising to repay the money borrowed, plus interest. Unlike conventional bonds, however, the money borrowed by an issuer of green bonds is earmarked for environmental projects for renewable energy generation, clean transportation, sustainable waste management and the like, thereby allowing the issuer to court the increasingly large community of ethical investors.

The risk is that unscrupulous issuers may describe their bonds as green even though the environmental benefits of the activities funded are at best questionable. To combat this ‘greenwashing’ risk, a market practice has developed whereby bonds marketed as green are expected to align with a ‘green framework’ – most often the ICMA Green Bond Principles(which was used for Resursosberezhenie’s bonds). Such frameworks set out broad categories of green projects (further defined in various ‘green taxonomies’), and make recommendations as to disclosure, monitoring use of the funds and – importantly –independent third-party review of the ‘greenness’ of the bonds.

What took so long?

Following the first issuance of corporate green bonds in late 2013, the global green bond market has expanded at pace. Even in the past four years, green bond issuance worldwide has nearly quadrupled – rising from US$ 37 billion in 2015 to US$ 136 billion in 2018, according to Bloomberg data.

While the most active green bond markets are in China, the U.S., and France, issuers from over 50 countries have issued green bonds. Yet, until now, Russian issuers were conspicuously absent. This was at first glance surprising, given that at least two factors point to Russia having been ‘ripe’ for green bonds for some time. First, there is plenty of scope for green investment in Russia thanks to its abundance of exploitable natural features (such as its vast river network) and the prevalence of heavy industries looking to clean up their act. Second, green bonds have the blessing of the government. Of the ₽ 4 trillion to be channeled into the ‘Ekologiya’ environmental investment initiative announced by President Putin in 2018, just ₽ 275 billion has been allocated from the state budget. The rest is to come from private investment, including, as the Minister for Natural Resources and Ecology recently announced, green bonds. The government has even mooted subsidizing such bonds by refunding up to 70% of the interest paid to investors.

Nonetheless, would-be Russian green bond issuers have been faced with a number of disincentives.

• First, the legal framework is fragmented and incomplete. There is only a limited worldwide consensus on what makes a bond green. On top of market-led international standards (such as the ICMA Green Bond Principles), many individual countries (most notably China) superimpose their own requirements to adapt the existing rules to their local markets. While the Central Bank of Russia has set up a working group to formulate a green finance ‘roadmap’ that includes the adoption of Russia-specific rules, the absence for the time being of a fully developed green bond regulatory environment is likely to have hindered Russian companies looking for green cash.
• Second, the relatively underdeveloped non-financial reporting regime in Russia may limit the marketability of Russian green bonds. To comply with a green framework, the issuer must report on how it has used the bond proceeds for the environmental purposes initially specified. However, so-called “impact investors” are more demanding: they part with their money only where they are able to monitor the effect of their investments in quantitative terms. While steps are being taken to develop the regime for non-financial disclosure by Russian public companies, World Bank research shows most do not at present make such disclosure, and voluntarily collecting, analyzing and disclosing the relevant data solely for the purpose of green bond reporting could represent a significant incremental cost for issuers.
• Third, conditions in the Russian debt market have been challenging in general. While the effectiveness of sanctions is much debated, it is safe to say they have contributed to the creation of an uncertain environment for new bond issuances by Russian issuers in recent years, undermining Russian issuers’ appetite to experiment with a new asset class.  
• Fourth, the PR risks associated with green bonds are considerable, particularly as issuers that market their bonds as green will be subject to ongoing scrutiny. While failure to use the proceeds of green bonds for the specified green purposes will typically not constitute an event of default entitling the bondholders to demand immediate repayment of their investment, it is likely to result in a severe PR backlash. Worse still, even where the use of proceeds is indisputably green, there is a risk of the press seizing on less sustainable aspects of the issuer’s operations to ridicule the issuance or level accusations of greenwashing.

What’s next?

Resursosberezhenie’s green bonds raised roubles on Russia’s domestic capital market; the next milestone will be the issuance by a Russian issuer of green bonds to raise foreign currency on the international capital markets – in other words, a green eurobond. Given that such a plan has piqued the interest of heavy industry giants Rusal and Norilsk Nickel, there is good reason to think the next milestone is rapidly approaching.

Matthew Fisher and Ed Hicks are lawyers in the London office of Cleary Gottlieb. Their practices focus on high-value corporate/financial transactions in the Russia and CIS markets.

Matthew Fisher may be contacted via email, LinkedIn or Twitter; Ed Hicks via email.  

This article represents the views of the authors only and does not constitute legal or financial advice.