Russian ESG bond market: dropped down and did some push-ups

• According to ACRA’s base case scenario, ESG bonds totaling RUB 115 bln will be issued in Russia in 2023, and taking into account national and adaptation projects segment of the Sustainable Development Sector of the Moscow Exchange (hereinafter, the SDSME), this indicator will exceed RUB 160 bln. This is a 51% increase in the volume of issued ESG bonds compared to 2022, but down 24% versus the result of 2021, which was a record year in terms of placement volume. If only ruble-denominated ESG bonds of the SDSME placed in 2021 are taken into account, then the size of placements in 2023 will be similar to the indicator for the year before last year.

• ACRA’s optimistic scenario assumes that the volume of new placements, taking into account the segment of adaptation and national projects, will amount to more than RUB 205 bln this year and will be almost double the result of 2022. However, ACRA believes that this scenario is less likely, and the prospects for its implementation will largely depend on interest rate dynamics until the end of the year.

• The Russian market’s largest ESG issuers continue to be state-owned banks and companies with state participation. The placement of bonds issued by these issuers will determine how the analyzed market behaves overall.

• In the absence of regulatory incentives and external shocks similar to the shocks of early 2022, the volume of issuance of ESG bonds in 2024 will be no more than RUB 220 bln.

• The global ESG bond market in 2023 will most likely return to the indicators of 2021 (after the shock year of 2022), while the European Union will continue to be the largest ESG bond market in terms of placement volume.If we compare only ruble issues in the Sustainable Development Sector of the Moscow Exchange, then the volumes of ESG bond placements in 2023 will exceed the figures not only for 2022, but also for 2021 if ACRA’s base case scenario materializes.

¹ For the purposes of this analytical commentary, ESG bonds are understood as green, social and adaptation bonds, sustainable development bonds, and sustainability-linked bonds (SLBs).

Over nine months of this year, six ESG bond issues were placed in the SDSME to a total of RUB 85.8 bln, including two issues of SPC Infrastructure Notes (worth RUB 15 bln and 30 bln), which were included in the segment of national and adaptation projects. These six included two issues of a new instrument for the Russian market — sustainable development bonds — issued by ROSBANK PJSC and DOM.RF Mortgage Agent LLC (RUB 3 bln and 29.8 bln, respectively). Taking into account the Moscow government’s over-the-counter placement of green bonds for the population, the total volume of ESG placements in Russia from January to September was RUB 87.8 bln.

ACRA believes that there is a high likelihood of several more large placements in the remaining three months of the year, including in the SDSME. The Agency’s base case scenario envisages issues of green, social and sustainable development bonds worth RUB 72 bln being placed by the end of the year. In this case, the total volume of ESG bonds placed in 2023 will be RUB 115 bln, and taking into account the segment of national and adaptation projects, will exceed RUB 160 bln (51% higher than the result of 2022, but 24% lower than the record year of 2021).

It should be noted that the total volume of ESG bond placements in 2021 (RUB 211.9 bln) takes into account placements in the SDSME, placements made in foreign exchanges and a single over-the-counter placement. The Eurobond market has been practically closed for Russian issuers since 2022 and therefore, ruble-denominated ESG bonds in the SDSME account for more than 90% of the market (while the share of over-the-counter placements is insignificant). If we compare only ruble issues in this sector, then the volumes of ESG bond placements in 2023 will exceed the figures not only for 2022, but also for 2021 if ACRA’s base case scenario materializes.

If we compare only ruble issues in the Sustainable Development Sector of the Moscow Exchange, then the volumes of ESG bond placements in 2023 will exceed the figures not only for 2022, but also for 2021 if ACRA’s base case scenario materializes.

According to ACRA’s optimistic scenario, the volume of new placements, taking into account the segment of adaptation and national projects, will amount to more than RUB 205 bln in 2023, which is almost double the result of 2022. This scenario involves potential ESG bond issuers carrying out all their plans before the end of the year and interest rates remaining unchanged.

Under the scenarios described above, the Agency does not expect new types of ESG bonds — climate transition bonds and sustainability-linked bonds — to appear on the market in 2023. These instruments may appear no earlier than H2 2024.

Figure 1. Volume of placements of ESG bonds by Russian issuers (including the segment of national and adaptation projects), RUB bln

In 2023, the ESG finance regulatory environment was adjusted further. In March, a new version of Resolution of the Government of the Russian Federation No. 1587² was approved. In particular, new categories of green and adaptation projects were introduced, a number of criteria for existing project categories were clarified, and a description of model approaches to assessing the environmental impact of projects was outlined. In addition, the requirements for verifiers were updated.

² Resolution of the Government of the Russian Federation No. 1587 dated September 21, 2021 “On approval of the criteria for sustainable (including green) development projects in the Russian Federation and requirements for the system for verifying sustainable (including green) development projects in the Russian Federation”.

Regulatory amendments have not had a significant impact on market dynamics, but they did expand the list of projects for which green and adaption financial instruments can be issued.

In 2023, amendments were also introduced into the Listing Rules of the Moscow Exchange in order to harmonize them with the Bank of Russia’s current regulatory requirements. These amendments have not had a significant impact on market dynamics, but they did expand the list of projects for which green and adaption financial instruments can be issued. In addition, a number of new recommendations of the Bank of Russia in the field of sustainable development indirectly support the interest of certain issuers in issuing ESG bonds.

The draft national taxonomy for social projects was not approved within nine months of 2023. The adoption of the document would, on the one hand, set a clearer framework and definitions for social finance, and on the other hand, limit, according to ACRA’s estimates, the potential issue volume of social bonds and sustainable development bonds in the Russian market. The Agency attributes this to the fact that, other things being equal, issuers tend to select projects exclusively from the list of social taxonomy projects, and this list will not include some of the projects for which social bonds were previously issued.

ACRA considers it unlikely that any benefits and regulatory incentives for issuers and investors in ESG bonds will appear in the Russian market in the coming years. Given the absence of systemic ‘greenium’³ in the national market, this limits the potential number of placements to a mere few issues a year, with mainly large state-owned companies and financial institutions acting as issuers. In its base case scenario, ACRA assumes that the volume of new ESG bond issues will not exceed RUB 220 bln in 2024.

³ Herein, greenium means sustainably high investor demand for ESG bonds compared to conventional bonds of the same issuers.

The global ESG bond market will grow by 10–15% in 2023 in terms of new issuances compared to 2022, but will not reach the volume of 2021.

Due to the gradual recovery of global financial markets after the inflationary shock that occurred in 2022, the global ESG bond market, will grow by 10–15% in terms of new issuances in 2023 compared to 2022, but will not reach the volume of 2021.

According to the Climate Bond Initiative (CBI), the global volume of new GSS+⁴ bond placements decreased by 15% year-on-year in H1 2023 and amounted to USD 448.2 bln (Fig. 2).

Most of the GSS+ bonds issued in H1 2023 were green bonds, which accounted for 62% of new issues. They were followed by social bonds and sustainable development bonds (approximately 15% each). In the same period, 8% of the issues were SLB bonds, and less than 1% were transition bonds. It should be noted that the GSS+ bond market in the United States, according to CBI, has declined more strongly than the global average (-39% compared to the indicator for H1 2022), while the European Union remains the largest market in terms of the issue volume of these instruments.

Taking into account the recovery of financial markets and the level of interest rates, as well as the current statements of a number of major issuers (including sovereign and intergovernmental issuers), it is highly likely that the volume of GSS+ bond placements will be within the range of USD 800mln to 1 tln by the end of 2023 (10–15% growth vs. 2022).

⁴ According to the CBI’s definition, GSS+ bonds are a set of the following: green bonds, social bonds, sustainability bonds, sustainability-linked bonds, and transition bonds.

The key driver for issuance of GSS+ bonds will gradually become Asian countries, mainly China, where a domestic green bond market has been formed and there are also standards for the issuance and circulation of these instruments.

According to various estimates, the global GSS+ bond market has already exceeded 10% of the entire global bond market, and by the end of 2023, its share may increase to 15%, given the slow growth rates of conventional bond placements.

In the next few years, the European Union will remain the largest market for, among other things, green bonds. However, given the gradual tightening of the regulatory framework (primarily, the introduction of the European Green Bond Standard), as well as the results of recent studies that have shown the absence of systemic greenium in the EU market, the supply of GSS+ bonds may shrink. At the same time, the US green bond market will continue to experience domestic political pressure, which may also negatively affect supply. In ACRA’s opinion, the key driver for issuance of GSS+ bonds will gradually become Asian countries, mainly China, where a domestic green bond market has been formed, and there are also standards for the issuance and circulation of these instruments.

Figure 2. Volume of CBI-certified GSS+ bonds issued globally, USD bln 

ACRA is grateful to CBI, the Bank of Russia, the Moscow Exchange, and INFRAGREEN Expert-Analytical Platform for the information provided by them, which was used in this analytical commentary.