Snesar: Becoming Green at Any Cost? Of Course, No.

Interview with Senior Vice-President of VTB Bank Dmitry Snesar.

In 2021, business has changed its attitude towards the ESG agenda. The process accelerated, following the adoption of a cross-border carbon tax in Europe. In an interview with Kommersant Money, Dmitry Snesar, Senior Vice President of VTB Bank, Head of Market Sector Clients Department, said that the ESG agenda is not limited to environmental issues, and it is crucial to keep in mind the social aspect of it.

— Today a lot of companies are following ESG principles, trying to stick to the current world trends in this direction. Regulators keep developing incentives and regulations. But is this agenda really relevant — especially in the context of the pandemic?

— It is relevant. After all, everybody is talking about it. But what we do about it, is a different story. It’s been a long time since the Sustainable Development Agenda was worked out, and we can already witness some changes. For example, several years ago investment funds began refusing to invest in coal assets. The logic is clear: coal emits a lot of gases, including CO2, when burned. But then Europe faced the energy crisis, which, among other things, can be attributed to short-sighted decision-making and blunders in switching to renewables. Another reason for crisis is gas deficit, which occurred for different reasons. And at that very moment coal got back to the agenda and again became an attractive asset for the investors who had earlier rejected it. Now they say: «We have figured out that there will be no abrupt shutdown of coal generation, but a smooth transition to other types of generation within the next 20 years.» While this energy transition is taking place, investors will profit from such assets and, accordingly, encourage these coal companies to become «green».

— And what about you? Do you encourage your clients to become «green»? If yes, in what ways?

— I believe, we, as a bank, shouldn’t be «ESG monsters». It is primarily the state that should be busy with regulations, incentives and sanctions. Moreover, we are cautious about our customers’ haste in this issue. We ask them questions about their company’s profits in five years’ time; calculate the possible damage it may suffer. So, we advocate a pragmatic approach. For example, some company wanted to finance the construction of an opencast coal mine right near the sea coast with our help. We decided not to consider our participation in this project for ethical reasons — damage to the environment could be too severe, which in turn might lead to losses.

— Are there any companies that have higher interest rates?

— The rates will become higher automatically once carbon tax, such as there may be, is introduced, which will directly hit companies’ profitability. Once the level playing field is created, this tax will become the way for the government to stimulate businesses transformation. At the same time, we have incentive measures as well. A program of providing loans to ESG-projects with a little discount of about 0.25 percentage point is among them. Basically, that’s the way we support out partners.

— According to what criteria do you select ESG-projects for your program?

— We go for projects, aimed at CO2 emissions reduction or that have some other environmental aspects to them.

But I would like to stress that ESG is certainly not just about reducing greenhouse gas emissions. For example, VTB supports export increase from timber and glass industry companies, operating in line with ESG standards. In 2021, within the state programs of export support we’ve provided RUB 14 billion to these sectors alone. The ESG initiatives they implement include recycling waste or glassware, planting forests, financing training and educational programs etc.

— It’s clear that the environmental aspect is mostly applicable to mining industries. But are ESG criteria relevant to bank assets?

— As for banks, many are already analyzing their loan portfolios for possible green risks. It can’t be ruled out that banks may be obliged to disclose the carbon footprint of their loan portfolios. Such initiatives have already been proposed by self-regulatory organizations. This could potentially pose an additional capital burden if the loan portfolio has a large carbon footprint. Though, it doesn’t seem likely yet, such schemes are already being discussed in Europe, with small countries like Denmark, the Netherlands and Belgium, which can easily do without oil or gas, lobbying such initiatives. However, at the EU level no big country has expressed support for such initiative yet. Obviously, the implementation of environmental and social projects requires incentives, not penalties. As you know, we’ve adopted a Sustainable Development strategy and, among other things, we have set the task of integrating ESG factors into an integrated risk management system. It’s about ESG scoring of a whole portfolio from 2023.

Let’s be clear: Russian business is still on the way of transformation, and now it’s still wrong to reject, for example, coal projects in Kemerovo, as there’s simply no other way of heating Kuzbass in winter. Everybody is disappointed with mining industry, but what about fast-fashion clothing segment, which produces cheap clothes we wear once and then throw away? Further production expansion is one of the problems mass-market brands are facing. Some 20 years ago it was normal and socially acceptable to produce such clothes. People had no problems with it, because everybody wanted to dress well. Now «disposable» clothes have become socially unacceptable.

— So you support a balanced approach to this issue? Won’t this balancing hurt your performance?

— You have to be very cautious and insightful under the ESG approach, no need to be at odds with reality. Ill-considered steps may lead to social unrest. In Europe the transition to green energy is ultimately paid for by consumers. In England, Spain and France people are already unhappy with growing power prices. In Spain, for example, in 2021 prices shot up by 50% versus last year. Let me remind you, the country is going through a protracted crisis with a high unemployment rate. Naturally, people took to the streets to protest this.

Our approach to ESG is reasonable and pragmatic. Does one have to go green? Of course one has to. Should one go green regardless of the cost? Of course not.

— Which costs would be too high?

— Many forget social implications when chasing environmental goals, and these are interlinked. I believe that the social component should be put first. And I hope that at «Russia Calling!» forum we will discuss, which of the three factors — E, S or G — has to be foremost in order to solve issues and not just speak about them.

The issue of СО2 emission reduction is much more complicated than just reducing emissions in developed countries and forcing developing countries to follow suit. It should be kept in mind that still there are about 4 billion people living in poor countries. What should they do? How do they heat their homes? Where should they source their power from? They do not have the money for green energy. The Glasgow Summit was followed by cries for help from poor countries. They say: «You are giving us aid in loans. But we will still have to repay this aid». And even this «loan» support is below the level that was initially declared by developed countries.

We live on the same planet, breathe the same air, this is why reduction of СО2 emissions in individual countries will not be enough to solve the global issue. Poor countries also want to have high living standards. We cannot let the environmental race of the developed countries result in an Elysium from the Hollywood movie, and lead to people in developing countries living in poorer conditions.

— Greta Tunberg’s speeches in favor of the clear sky cause more concern than some remote plantation workers ...

— Maybe we should give a hand to those who are closer to us? Frankly speaking, I am very much inspired by Polyus or Polymetal companies, performing many social activities in the regions of their presence. And such examples are numerous in Russia. This work is colossal but goes unnoticed by many. The companies buy whole buildings to attract employees, including graduates, to work in Amursk or in any other city. I stayed at such an apartment during a business trip, and it was a very decent apartment by current standards. Is this social support? Of course it is. Moreover, they build swimming pools, gyms to develop infrastructure — not only for their employees, but for their children and for other residents.

— Do foreign investors take note of such activities?

— By all means. Last year VTB Capital was one of the managers of the Russian Railways social bond issue, and the demand exceeded the offer. And half of the issue was bought by foreign investors. Russian Railways is one of the largest Russian ESG borrowers and the only one to represent Russia at the green bond market. They have outperforming growth of capital volumes, managed by green funds. And what is important— local investors also value these steps.

— Let’s go back to VTB. What is it that you are doing under the agenda for your customers, apart from preferential loans?

— We have launched an open ESG platform — it’s a one stop shop for customers, and not only for services. In retail we provide preferential loans for electric car purchases, we have introduced green mortgage loans, fraud insurance for funds of pensioners.

We provide ESG consulting under our corporate investment business, which is rating consulting. Very soon, in 2026 a European cross-border carbon tax will be introduced. It will primarily apply to those companies that export products from Russia to Europe. To assess the impact of the tax on profits of our producers their carbon footprint would need to be evaluated. An in-depth study and footprint measurements would be required to draw conclusions whether this issue exists or not. This is a part of ratings which also evaluate social aspects, corporate governance. This is especially important for public companies, traded at Western markets, in London and New York. They were the first to obtain such ratings, since foreign investors look at these values.

— How many of your customers have ESG ratings? Ballpark?

— It’s not hundreds, more like dozens.

— What would be the highest number of Russian companies that may get an ESG rating?

— I would say that over the next few years dozens may become hundreds, but this mostly concerns those public companies that are related to nature resources, electric power.

— Which ESG initiatives does the bank develop internally?

— We are actively shifting to power-saving technologies, «smart offices», we are introducing paperless document management everywhere. We used to bring large stacks of paper to our credit committee meetings and sign them by hand, and now almost everything is paperless, all signatures are digital. The pandemic taught us all to read from screens. Approvals have also gone digital, that’s why we have an almost paperless office. And of course, social programs, projects — including museums, theaters, sports. These are the best investments.

Interviewer — Ksenia Dementieva