ACRA CONFIRMS THE COMPLIANCE OF THE PLANNED BOND ISSUE OF JSC “HC “METALLOINVEST” WITH THE CLIMATE TRANSITION FINANCE HANDBOOK

ACRA CONFIRMS THE COMPLIANCE OF THE PLANNED BOND ISSUE OF JSC “HC “METALLOINVEST” WITH THE CLIMATE TRANSITION FINANCE HANDBOOK PUBLISHED BY THE INTERNATIONAL CAPITAL MARKET ASSOCIATION (ICMA)

COMPLIANCE OF THE ISSUE

As part of the planned bond issue of JSC “HC “METALLOINVEST” (hereinafter, Metalloinvest, the Issuer, or the Company) ACRA has verified the compliance of the bond issue with the Climate Transition Finance Handbook published by the ICMA in 2023 (hereinafter, the ICMA Handbook).

The Agency has also confirmed the compliance of the issue with the Bank of Russia’s Regulation No. 706-P dated December 19, 2019 “On standards for issuing securities” (with regard to the requirements of Chapter 69.2 “Features of the decision on the issue and (or) program of climate transition bonds, as well as features of the registration of the issue and (or) program of these bonds”).

COMPLIANCE OF THE ISSUE WITH THE ICMA HANDBOOK

The Agency considers the planned issue to be an issue in the format of sustainability-linked debt obligations. The Issuer has provided a description of the process for selecting key performance indicators (KPIs) (in this press release, the Agency uses the term ‘sustainable development efficiency target’ (SDET) in accordance with its methodology, this term in the text of this release refers to the term ‘KPI (PT)’ used by the Issuer within its climate transition strategy (hereinafter, the Strategy), a justification for the relevance and significance of the KPIs for the Issuer’s core business, the methodology for calculating the KPIs and SDETs, a description of the characteristics of the obligations, and the format of future reporting and verification. In addition, the Issuer has presented the Strategy and additional materials thereto.

The complete list of materials provided by the Issuer to the verifier includes:

1.         The Strategy.

2.         Metalloinvest Group’s Climate Strategy (hereinafter, the Climate Strategy).

3.         The model of future greenhouse gas emissions.

4.         A description of events for reducing greenhouse gas emissions.

5.         Conclusion of an independent certification and verification body (TÜV AUSTRIA Standards & Compliance) on the volume of greenhouse gas emissions calculated in accordance with GOST R ISO 14064-1-2021. Greenhouse Gases. Part 1, for the period from January 1, 2023 to December 31, 2023.

6.         Metalloinvest Group’s sustainable development reports.

7.         Draft issuance decision.

8.         Answers to additional questions set by the verifier.

Based on these materials and as per the Methodology for Assessing Climate Transition Debt Obligations, ACRA has concluded that the Issuer’s planned bond issue complies with the base components of the ICMA Handbook and therefore, in the Agency’s opinion, the planned bond issue can be called a climate transition bond issue.

KEY ISSUE PROPERTIES

Sources: ACRA, issuer’s data

Metalloinvest is a world-leading producer of hot-briquetted iron (HBI), a leading producer and supplier of iron ore and metal products, and a regional manufacturer of high-quality steel. The Company holds the world’s largest proven iron ore reserves. The Company’s production assets are Lebedinsky GOK, Andrey Mikhailovsky GOK, and Alexey Ugarov OEMK.

In 2024, Metalloinvest Group’s Climate Strategy¹ was developed and adopted. Among other things, it sets out events to decarbonize production in 2024–2025, the main objectives of key stages of the Strategy, including in quantitative and qualitative terms, the main risks and opportunities related to execution of the Strategy, the projected dynamics of greenhouse gas emissions at Metalloinvest Group’s enterprises, the annual KPIs of the Strategy, as well as key events aimed at achieving the selected KPIs. In addition, the Issuer disclosed the dynamics of key indicators in retrospect. The Strategy is an integral part of the Climate Strategy.

Within the framework of the Strategy, Metalloinvest Group refers to the main organizations whose shares (stakes) are directly or indirectly owned (managed) by the Issuer:

• Lebedinsky GOK (Belgorod Region);

• Andrey Mikhailovsky (Kursk Region);

• Alexey Ugarov OEMK (Belgorod Region).

In view of the above, the Agency considers that the Strategy reviewed in this press release is an integral part of the Issuer’s corporate governance documents and the Issuer fully participates in its implementation (the Strategy has been approved by decision of Metalloinvest’s sole shareholder).

¹ https://www.metalloinvest.com/investors/disclosure-of-information/

KEY ASSESSMENT FACTORS

The Issuer provided ACRA with documents that contain a description of sustainable development practices, a description of the KPI selection process, a justification of its relevancy and importance to the Company’s core business, a KPI and SDET calculation method, a description of characteristics of obligations, and the format of future reporting and verification. The issuer also provided the Strategy and supporting documents, including a description of changes in the Company’s business model, a description of the scientific basis for the Strategy, as well as a description of future reporting on the achievement of the Strategy’s objectives.

ASSESSMENT OF OBLIGATIONS

The Issuer provided ACRA with documents that contain a description of sustainable development practices, a description of the KPI selection process and its detailed calculation, a model for calculating SDETs, including key assumptions, and a description of approaches to compiling future reporting and its verification. A conclusion on the compliance of the planned bond issues with all the base components of the Sustainability-Linked Bond Principles published by the ICMA in 2023 was made based on these documents.

Sustainability Practices

The Agency highly assesses the current sustainability practices of the Issuer. In particular, Metalloinvest has regularly released sustainability reports for over more than 10 years, which are prepared in accordance with international non-financial reporting standards². The Issuer is currently committed to the following sustainability initiatives:

• UN Global Compact (UNGC);

• World Steel Association;

• Russian Steel Association.

The Issuer has also announced its support for the following initiatives:

• National network of the UNGC;

• UN Sustainable Development Goals (UN SDGs);

• Climate Action 100+.

A complete list of initiatives and associations is provided in the Issuer’s 2023 Sustainability Report.

As part of the annual publication of sustainability reports, the Issuer reflects its commitment to the UN SDGs and its contribution to achieving the focal UN SDGs:

• SDG 7: Affordable and Clean Energy;

• SDG 8: Decent Work And Economic Growth;

• SDG 9: Industry, Innovation and Infrastructure;

• SDG 11: Sustainable Cities And Communities;

• SDG 12: Responsible Consumption and Production;

• SDG 13: Climate Action.

The Agency highly assesses the level of management’s involvement in sustainable development issues. Sustainable development management is integrated into the current corporate governance structure of the Company. In 2020, the Company created the position of Deputy CEO for Sustainable Development and Corporate Communications, who reports directly to the CEO.

² https://www.metalloinvest.com/development/csr-reports/

KPI Selection

As a KPI, the Issuer, within the framework of the Strategy, chose the reduction of specific greenhouse gas emissions for Scope 1, 2 and 3 (in aggregate) per ton of the Company’s base product (iron ore concentrate). The selected KPI, in the Agency’s opinion, is relevant for the industry in which Metalloinvest operates (the mining industry). In ACRA’s opinion, improving this indicator will help solve current sustainable development problems facing the industry. In addition, the selected KPI is directly related to the Company’s main technological process — the production of iron ore concentrate.

The selected KPI is indirectly linked to the main priorities of the Company’s activities for the next 10 years³ because achieving the selected KPI partially contributes to achieving the Issuer’s planned financial indicators.

According to the data provided, the Company annually conducts a quantitative assessment of greenhouse gas emissions, energy efficiency indicators and product carbon footprint (PCF) with the involvement of an external consultant, which is also confirmed by information published in the Issuer’s sustainability reports. In addition, the results of the quantitative assessment are annually verified by an independent certification and verification body (TÜV AUSTRIA Standards & Compliance).

The analyzed KPI has been selected by the Issuer for the first time and cannot be subjected to a comparative analysis with regard to peer companies in the industry. At the same time, according to data provided by the Issuer, this is due to the specific business of the Company (production of concentrate). Besides this, the Issuer has a base for calculating the selected KPI since 2019, which makes it possible to compare the specified KPI in dynamics for the Company itself.

In the Agency’s opinion, the selected KPI is related to SDG 13: Climate Action, however, the Strategy does not fully reflect this link.

³ Detailed information is provided in the Company’s 2023 Sustainability Report (pages 18–23): https://www.metalloinvest.com/development/csr-reports/

SDET Calibration

The Issuer provided the Agency with a detailed model for calculating the selected KPI for the period from 2019 to 2023 (actual data) with a forecast period up to 2025. The Issuer’s Strategy indicates that specific greenhouse gas emissions for Scope 1, 2 and 3 (in aggregate) per ton of concentrate for 2019 amounted to 1.9 tons of CO₂ equivalent. For 2023, this figure was 1.3 tons of CO₂ equivalent per ton of concentrate (a decrease of 32% compared to 2019).

The Issuer chose last year as the base. As an intermediate value for 2024, the Issuer chose the range from a 0.1% to 1% decrease vs. the base year, the final KPI value was selected by the Issuer for 2025 in the range from a 0.1% to 2% decrease vs. the base year.

In the Agency’s opinion, the established SDET provides for a significant improvement of the corresponding KPI, taking into account the level already achieved compared to the base year.

ACRA assumes that the established SDET⁴ is generally achievable during the Issuer’s current activities (business as usual) and is relatively ambitious. However, its achievement may be impacted by external factors (lower rates of production, M&A deals, changes to legislation, etc.).

The Agency believes that the intermediate and final values of the SDET will highly likely be achieved taking into account:

• Current progress compared to the base year;

• The availability of an action plan and a plan for capital expenditures as part of Strategy implementation;

• The presence of buyers’ commitments to purchase the main products of Metalloinvest Group;

• Key assumptions when calculating climate effects (page 10).

At the same time, the attainment of intermediate and final SDET values may be affected by external factors beyond the Issuer’s control (changes in market conditions, changes in legislation, or other circumstances, including force majeure).

The established SDET is easily comparable to the Issuer’s own benchmarks (as noted above, KPI calculations have been carried out since 2019). However, due to the uniqueness of the chosen KPI, industry comparisons are not applicable.

The established SDET is fully consistent with the Climate Strategy adopted in March 2021, as well as with the Issuer’s strategic priorities in sustainable development as outlined in its Sustainability Reports.

SDET calculations are based on data from the corresponding KPI calculations for five years. The SDET was determined by the Issuer in advance.

The projected KPI values were calculated by the Issuer independently. At the same time, according to the Issuer, the model for quantitative estimation of GHG emissions and PCF was developed in 2020 by a third-party consultant with extensive experience in developing similar models. In addition, the actual values of the two indicators were verified by a third-party verifier and audited as part of sustainability reports for previous years.

Data on peer companies and/or issuances was not used by the Issuer in the SDET calculation due to the uniqueness of the chosen KPI.

In calculating the projected values, the Issuer used data from the Intergovernmental Panel on Climate Change and the Ministry of Natural Resources and Environment of the Russian Federation, as well as industry benchmarks from the World Steel Association. The GHG emissions for Scopes 1, 2, and 3 were calculated by the Issuer using the GHG Protocol, the most common global standard.

The Issuer stated that the Strategy is based on the SSP1–2.6 scenario (Shared Socio-economic Pathways 2.6), one of the internationally recognized climate change scenarios, according to a report of the IPCC⁵. This scenario assumes that companies make significant efforts to reduce GHG emissions, and is used in strategic planning by such steel companies as ArcelorMittal, SSAB, Thyssenkrupp, as well as large companies from other industries (Tesla, Ford, Samsung, BP, Siemens, Microsoft, Apple, Coca-Cola). In this regard, the Agency believes that this scenario is internationally recognized.

The attainment of intermediate and target KPIs in the long term will contribute to the Group’s attainment of carbon neutrality by 2050, which corresponds to the expected indicator for the ferrous metals industry within the framework of this scenario. In this regard, the intermediate and target KPI values are consistent with the internationally recognized climate change scenario SSP1–2.6 (Shared Socio-economic Pathways 2.6).

The Issuer has determined in detail the deadlines for attaining the SDET. SDET calculations are based on a verified baseline KPI, the value of which has been verified by a third party.

In the Agency’s opinion, the Issuer has elaborated, in its Strategy and Climate Strategy, the measures contributing to the attainment of the SDET.

The Issuer described in detail the main risks associated with achieving the abovementioned KPIs in its Strategy, as well as partially described measures to mitigate these risks in its Climate Strategy.

Characteristics of the Obligations

The Issuer does not intend to change any characteristics of the bonds depending on the attainment/non-attainment of the KPIs, which limits the assessment of this factor as per the Agency’s methodology.

At the same time, in the draft issuance documentation, the Issuer stated that “in case of non-implementation of the Strategy, Metalloinvest Group undertakes to participate in the implementation of target climate projects in the regions of its presence, ensuring the attainment of GHG targets”. These projects include:

1)      Natural climatic projects:

• Reforestation;

• Afforestation;

• Creation of carbon landfills.

2)      Technological climatic projects:

• Active introduction of low-carbon technologies in the production processes of the Group’s enterprises.

This information has been taken into account by the Agency as part of this factor assessment.

⁴ In this press release, the Agency uses the term SDET in accordance with its methodology. This term refers to the term ‘KPI (PT)’ used by the Issuer within the framework of its Strategy.
⁵ Sixth Assessment Report, 2023, Chapter 4: Future Global Climate: Scenario-based Projections and Near-term Information: https://www.ipcc.ch/report/ar6/wg1/

Reporting and Transparency

According to the Issuer, quantitative assessment of GHG emissions and PCF is carried out on an annual basis. This data along with the production volumes are published in the Sustainability Reports. In the Agency’s opinion, this is frequent enough to indirectly monitor the dynamics of selected KPIs. In addition, the Issuer has sufficient, in the Agency’s opinion, experience in calculating, verifying and disclosing this information. In previous periods, these indicators were also verified by an independent party with a sufficient experience in verifying similar indicators.

The Climate Strategy and Hydrogen Strategy section of the Issuer’s 2023 Sustainability Report provides data on Scope 1, 2 and 3 GHG emissions across the Company’s divisions and business segments, as well as data on energy consumption by type of fuel and energy. These indicators, according to the Issuer, were verified by a third party as part of the annual audit of the Issuer’s non-financial reports. In this regard, the Agency assesses the Issuer’s willingness to calculate, disclose and verify the indicators used in SDET calculations as high.

The Company also plans to issue annual sustainability reports detailing progress in achieving the abovementioned KPIs, and to disclose the dynamics of the KPIs in the reports for 2024 and 2025, including information on achieving interim and final KPIs.

The Issuer also plans to disclose the Security Issuer’s Reports in accordance with Regulation of the Bank of Russia dated March 27, 2020 No. 714-P “Disclosure of Information by Issuers of Equity Securities”, including the following information:

1)      Description of the Issuer’s climate transition strategy;

2)      Progress in implementation of the Issuer’s climate transition strategy.

Verification

The Issuer is expected to conduct three consecutive verifications of the analyzed issue:

• Verification at bond issue registration stage (before any issue proceeds are received);

• Verification of the interim value of the SDET attained by the end of 2024;

• Verification of the final SDET attained by the end of 2025.

ASSESSMENT OF THE CLIMATE TRANSITION STRATEGY

The Issuer presented a Strategy, including a description of changes in the Company’s business model, scientific validity of the Strategy, as well as a description of future reporting on the attainment of the Strategy’s goals. Based on these documents, conclusions were drawn on the compliance of the bond issue with the key components of the Handbook.

Climate Transition Strategy and Management Practices

At the time of verification, the Issuer has developed, approved and disclosed its Strategy containing information sufficient for assessment in accordance with the Agency’s methodology.

The Strategy’s goals are aligned with the goals of the Paris Climate Agreement. In addition, the Agency believes that the interim short and medium-term goals are sufficiently detailed in the Strategy. The Strategy also provides a plan to reduce GHG emissions for the entire period of the Strategy, as well as describes the main mechanisms for implementing this plan. In addition, these measures are described in more detail in the Climate Strategy.

The Issuer presented a detailed description of the mechanisms for managing and overseeing the implementation of the Strategy. The main tool for monitoring the implementation of the Strategy’s measures is a quantitative assessment of GHG emissions and PCF in the target year, which is carried out in the first quarter of the year following the target year by a third-party consultant or Metalloinvest Group and verified by an independent and internationally recognized certification and verification body. Following this assessment, the actual specific GHG emissions per ton of concentrate produced in the target year and the specific GHG emissions per ton of concentrate produced in the base year are correlated, and the result is then compared to the intermediate and final values of the SDET set out in the Strategy.

When monitoring the implementation of the Group’s Climate Transition Strategy and the attainment of the Group’s performance targets, corporate governance tools are not used, which limits the assessment.

Metalloinvest Group’s Climate Transition Strategy is an integral part of the Climate Strategy, which is defined by the Issuer as a key document of Metalloinvest Group’s climate change strategic planning.

At the same time, the Strategy, in the Agency’s opinion, contains only a general description of the consequences that the Issuer will face after its implementation. This factor limits the assessment.

Significance of the Business Model for Environment Protection

In the Agency’s opinion, the Strategy’s key elements are relevant for the Issuer’s industry. The Strategy covers the Issuer’s main line of business and relevant key processes. The Agency believes that the implementation of the Strategy will have an obvious climate impact on the industry at the national level. In addition, the Strategy is aimed at an obvious, in ACRA’s opinion, reduction of the negative environmental impact.

The climate transition trajectory chosen by the Issuer as part of its Strategy, from the Agency’s point of view, partially takes into account the scale of the Issuer’s impact on the environment and society.

At the same time, the Issuer has not presented a description of the impact of the Strategy’s implementation on its financial performance in the long term, which limits the assessment.

Scientific Validity of the Strategy

The Issuer’s Strategy includes quantifiable indicators. In addition, the Agency was provided with confirmation of the compliance of these indicators with the internationally accepted calculation methodology.

The Issuer has compared the KPIs indicated in the Strategy to internal historical indicators. An industry comparison is not applicable due to the uniqueness of the selected KPIs.

The Strategy was developed with the involvement of an entity that, in the Agency’s opinion, has extensive experience in developing strategic documents in the field of climate. It is worth noting that there was no external independent assessment of the quality of the Strategy’s implementation, as it was approved in 2024.

ACRA notes that the Issuer’s Strategy has been developed taking into account the SSP1–2.6 (Shared Socio-economic Pathways 2.6) scenario, which is one of the internationally recognized climate change scenarios. The scenario assumes a sharp reduction in GHG emissions and the attainment of carbon neutrality by the middle of this century. According to the goal outlined in the Climate Strategy, the Issuer expects to achieve carbon neutrality by 2050. This fact, in the Agency’s opinion, indicates that the Strategy meets to the chosen scenario and confirms its scientific validity.

Transparency of Information on Strategy Implementation

As part of the verification, the Agency was presented with excerpts from the planned capital expenditures required to implement the Strategy. In addition, as part of the Strategy, the Issuer presented key measures aimed at reducing GHG emissions (Scopes 1, 2 and 3) by 2025.

Criteria for making decisions on capital expenditures based on the Strategy were presented by the Issuer to the Agency. In addition, the Climate Strategy provides a detailed cost estimation of its implementation and an estimated reduction of base costs by period, which was taken into account by the Agency in the factor assessment.

The Issuer does not have a plan for phasing out operations/products incompatible with the Strategy. At the same time, the Strategy provides for the transition to low-carbon production of direct reduction iron, as well as optimization of sinter, coke and pig iron production (implemented in February 2022 through the sale of the asset), which was taken into account by the Agency in the factor assessment.

In ACRA’s opinion, the Strategy does not disclose the share of green capital expenditures (as per Decree of the Government of the Russian Federation dated September 21, 2021 No. 1587) in the total amount of capital expenditures, and there is also no information on the percentage of assets (or other financial indicators) covered by the plan to reduce GHG emissions. Moreover, there are no assumptions on the level of the internal carbon price in the Issuer’s strategy. These factors limit the assessment when combined.

According to the Issuer, there will be no significant negative effects of the Strategy’s implementation for the environment and society. At the same time, the Agency notes that the approaches to mitigating the negative effects of the Group’s core operations on the environment, society and employees are described in detail and disclosed in Sustainability Reports, which was taken into account by the Agency in the factor assessment. In addition, the Issuer presented to the Agency a description of the project risk management system.

key assumptions

• The Strategy will be implemented in full.

• Timely attainment of specified SDET ranges.

key assumptions WHEN calculating climate effects

• Implementation of production and sales plans in full in line with the presented model.

• The carbon footprint of different types of products for three assets (Lebedinsky GOK, Andrey Mikhailovsky GOK, and Alexey Ugarov OEMK) was calculated by a third-party consultant based on the actual data of the Group, and will not change until 2025.

• As part of the Strategy, in accordance with the practice accepted in the metals industry, PCF was calculated per unit of the base product (concentrate), while the calculation included total emissions from all assets and processes of the Company, including steel production at Alexey Ugarov OEMK.

• The calculation of GHG emissions for Scope 3 was carried out by the Issuer using the ratios given in the Sustainability Indicators 2023 Report of the World Steel Association AISBL⁶ for various types of products.

• The SSP1–2.6 scenario (Shared Socio-economic Pathways 2.6) was used as the basis for the development of the Strategy.

ASSessment components

Compliance of the issue with the Handbook: yes.

Assessment level: CTR2.

additional information

The compliance of the bonds of JSC “HC “METALLOINVEST” with the ICMA’s 2023 Climate Transition Finance Handbook has been assessed on the basis of the Methodology for Assessing Climate Transition Debt Obligations and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

ACRA’s opinion on the compliance of the bonds of JSC “HC “METALLOINVEST” with the ICMA’s 2023 Climate Transition Finance Handbook has been published by the Agency for the first time. The assessment may be revised within one year following the publication date of this press release.

ACRA’s opinion on the compliance of the bonds of JSC “HC “METALLOINVEST” with the ICMA’s 2023 Climate Transition Finance Handbook is based on data provided by JSC “HC “METALLOINVEST”, information from publicly available sources, and ACRA’s own databases.

The assessment of the compliance of the bonds of JSC “HC “METALLOINVEST” with the ICMA’s 2023 Climate Transition Finance Handbook is solicited and JSC “HC “METALLOINVEST” participated in the assessment process.

In assigning the assessment, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.

No conflicts of interest were discovered in the course of the assessment process.

The assigned assessment is not a credit rating.

⁶ https://worldsteel.org/wp-content/uploads/Sustainability-indicators-report-2023.pdf