With banks scrutinising loan agreements for sanctions wording, performance verifiers closing local operations and second-party opinion providers starting to walk away from their reviewed deals, Russian ESG bonds and loans look increasingly precarious. Even if sanctions and the sovereign’s stance don’t bring about formal default, the ESG standing of more than US$10bn in debt seems unlikely to survive the Ukraine conflict.
Russian borrowers have racked up some US$8.9bn at face value in international green, social and sustainability-linked bonds and loans since 2018, according to Refinitiv data. More has been closed in local currency ESG debt, amounting to around US$1.2bn-equivalent when it was issued.
The bulk of the total has been in loan format. Among international deals, this comprises some US$5.8bn in syndicated and club deals, headed by June’s landmark US$1.25bn sustainability linked pre-export facility for potash producer Uralkali, plus another US$1.7bn of bilateral facilities.
In addition, Russian Railways and Sovcombank have issued US$1.4bn of offshore green and social bonds between them over the period.
In tatters
Now, though, this growing area of activity is in tatters, with ESG ratings on even unsanctioned entities slashed and many ESG investors no longer able to own such debt. “Is it wonderful to be holding Russian ESG instruments in this situation? It’s not great,” said one head of sustainable finance.
Nor are there established resolution mechanisms to hand. "The reality is there's no formalised process and nobody's really had to deal with this before,” said a head of ESG capital markets. “I defy anyone to predict accurately what's going to happen here. Clearly, if I was a lender or a bondholder and I was holding some of these ESG-labelled instruments I'd be worried about getting my money and I'd be very sceptical as to whether I would get any other things that would normally be provided in connection with those ESG labels."
For example, the mass exodus of professional services firms from Russia has made verification of issuer performance impossible unless lenders and investors are willing to accept self-certification by issuers.
While the domestic Russian ESG debt sector may continue, given strong official support evident in measures such as offers to pay coupons on rouble green bonds, the international market appears to have closed for the foreseeable future. “I would say it would take a long time before any ESG investor would be willing to take on exposure to anything connected to Russia, just on the G basis,” the ESG capital markets head said.
But selling may prove challenging for holders of existing instruments, as trading venues such as Tradeweb (a sister company to IFR) drop activity in conventional and ESG bonds of sanctioned entities like Russian Railways and Sovcombank.
For now, bond investors may have to treat their holdings as no longer ESG instruments but transfer them to conventional buckets. “I think asset owners would expect that these bonds would not be considered as eligible for ESG portfolios anymore,” said the ESG capital markets head.
A similar fate appears likely for the larger volume of Russian green and sustainability-linked loans. “Loan agreements talk about third-party assurance, either specified or with an alternative provider. So I can imagine that if they can't find a third-party verifier, then there will be a discontinuation of the mechanism,” said one senior loans banker.
The risk of default in the face of sanctions and economic crisis is substantial. “I suspect in most cases they will have an event of default way before they have a sustainability reporting issue,” the loans banker said.
SPO departures
One leading provider has already suspended its second-party opinions on Russian ESG financings. Sustainalytics’ SPOs on Russian Railways and Sovcombank are “no longer valid since March 14 2022, given that the compan[ies are] subject to sanctions as a result of the situation in Ukraine,” Sustainalytics said.
Other SPO providers are less definitive. Cicero Shades of Green, which emphasises that it is not actively working with any Russian entity, is “discussing the current considerations” around its pre-issuance SPO on Polymetal with banks, according to co-founder Christa Clapp.
Cicero has had no contact with the unsanctioned precious metals miner since publishing its SPO in 2020.
Not all opinion providers are walking away. Climate Bonds Initiative is maintaining its certification of the only international Russian green bond issuer, Russian Railways, as meeting its Low Carbon Land Transport Standard. Since 2019 the company has issued senior green bonds in euros and Swiss francs, as well as hybrid debt in the latter currency.
“It's still green. We will not be withdrawing anything that is not material to the war,” said Sean Kidney, CBI chief executive. “The money was raised and spent years ago, so there are no sanctions issues.”