In the dying days of 2018, the Russian capital markets quietly passed a significant milestone: a refuse-processing company called Resursosberezhenie KhMAO listed on the Moscow Exchange the first green bonds ever issued by a Russian company. The proceeds of the bonds will be put towards the establishment of a municipal recycling and refuse processing facility in the Khanty-Mansiysk region of Western Siberia. While the transaction was small in size (RUB1.1bn, or $16.4mn), 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?

Like any other bonds, green bonds represent an arrangement by which an 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 environmentally friendly purposes like renewable energy, clean transportation, sustainable waste management, and so on. Green bonds therefore allow issuers to burnish their green credentials while accessing 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 under which Resursosberezhenie’s green bonds were issued. Such frameworks set out broad categories of potentially green projects (which are defined in detail in various market-led ‘green taxonomies’), and make recommendations as to disclosure, monitoring of the use of the funds and – importantly – review of the greenness of the bonds by an independent third-party (Rating-Agentur Expert RA GmbH in the case of Resursosberezhenie’s green bonds).

What took so long?

Following the first issuance of green bonds by a corporate issuer in late 2013, the global green bonds market has expanded extremely rapidly as awareness increases and the monumental scale of the task of complying with environmental targets becomes clear. Even in the past four years, green bond issuance worldwide has nearly quadrupled (see graphic below). 

While the most active green bond markets are in China, the US 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 Russia has appeared ripe for green bonds for some time:

• First, Russia abounds with potential green projects. Despite the country’s varied climate, vast rivers and windswept steppe, renewable energy accounts for less than 4% of Russia’s energy consumption, as reported in The Financial Times. Similarly, Russia’s many heavy industries are faced with various ecological challenges that will require significant investment to resolve.
• Second, green bonds have the blessing of the government. Faced with increasingly stringent international obligations with respect to environmental targets (such as those set out in the landmark 2015 Paris Agreement on climate change) and sustained protests over environmental issues (relating to the Volokolamsk landfill, for example), the Russian government has come out in support of increased environmental investment, including green bonds specifically. Most recently, upon issuance of the Resursosberezhenie bonds, Russia’s Minister for Natural Resources and Ecology lauded green bonds as an important mechanism for the realisation of the “Ekologiya” project announced by President Vladimir Putin in 2018, which aims to channel RUB4 trillion of public and private funds into environmental initiatives in Russia. In the context of this project, the government has also mooted the possibility of refunding up to 70% of the interest paid by Russian green bond issuers to investors – a sort of green bond subsidy.  

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

• First, the legal framework is fragmented and incomplete. While all seem to agree that green bonds should satisfy minimum sustainability standards, there is only limited worldwide consensus on what those standards are. On top of market-led international standards (such as the ICMA Green Bond Principles and the CBI Climate Bonds Standards) and regional standards (such as the ASEAN Green Bonds Standards and the green bonds standards currently under development by the EU), many individual countries (most notably China) superimpose their own requirements, in order to adapt the existing rules to their own 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 companies attempting to understand whether their projects are eligible for financing by green bonds.
• Second, conditions in the Russian debt market have been challenging in general. While the effectiveness of sanctions and their net impact 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. With some investors also having concerns about the health of the emerging markets in general, Russian issuers can hardly be blamed for not wanting to experiment with an asset class hitherto unknown to the Russian market.  
• Third, the public relations risks associated with green bonds are considerable. Failure to use the proceeds of green bonds for the specified green purposes will in general not constitute an event of default entitling the bondholders to demand immediate repayment of their investment. However, having marketed the bonds as green, the issuer will face ongoing investor scrutiny, meaning any failure (or perceived failure) to use the proceeds as billed is likely to result in a public relations backlash. Worse still, even where the issuer is faithful to the proposed use of proceeds and the greenness of its green-bond-funded project has been confirmed by an independent third party, there is a risk that the press will seize on less sustainable aspects of the issuer’s operations to ridicule the issuance or level accusations of greenwashing. 

What 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. With the aluminium giant Rusal reported to have come tantalisingly close to issuing a $500mn green eurobond in January 2018, and prolific eurobond issuer Norilsk Nickel also having announced its interest in green bonds, 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, such as the Rusal eurobond transaction referred to in the article. 

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.