The volume of assets in European ESG funds. Source: Morningstar
The instruments of “green” and “socially responsible” investments are still far from being popular among Russian borrowers, but the upcoming experiment of Russian Railways in the placement of green bonds can be considered the beginning of a trend for large borrowers to enter this market. Judging by the failed (due to the technical subtleties of recognizing the issue as ESG) attempt to sell the issue of “social” bonds of the state monopoly to the world’s largest bond fund PIMCO, Western investors are interested in Russian assets that meet sustainable development standards.
ESG agenda is gaining momentum around the world, although this can be viewed in different ways. Despite the fact that the real effect on the economy and the environment of such targeted investments can still be estimated, in 2020 only European sustainable development funds exceeded the level of 1 trillion euros in assets, increasing their number by 51% over the year.
Sovereign issuers also come to the ESG market: in 2020, 14 countries placed sovereign bonds within the framework of green standards and for sustainable development. Even those countries whose credit ratings were downgraded during 2020 – Chile and Mexico – managed to successfully place issues. Among the relatively stable developing countries, Thailand can be distinguished (it has a credit rating one grade higher than Russia – “BBB +”), which issued green bonds in national currency, which allowed the government to raise funds at a discount in relation to classical government bonds. In a number of placements of state ESG bonds, the so-called ‘greenium’ was formed – a premium in the price of green bonds (lower yield on placement) in relation to issues on the curve of state securities.
Sovereign ESG Bond Issues and Pricing Outcome Source: Climate Bonds Initiative
ESG financing is likely to remain relevant for a long time, thus forming a special attitude towards such assets. The first place in evaluating such investments will be the goal of attracting them, pushing other considerations into the background. And for Russian issuers worried about the negative geopolitical background around the country, this is a good way to finance their projects with foreign money. However, this will need to be learned.
Author: Ilya Grigoriev