VTB Capital issues an environmental, social and governance forecast for Russia to 2030

13 October 2021

Major investment in alternative energy sources and carbon neutrality, as well as promoting women to boards of directors and ESG (environmental, social, governance) as part of motivating management: VTB Capital analysts forecast ESG developments in Russia to 2030 in the run-up to the first responsible business congress “ESG-(R) evolution.”

  • All major MICEX Index companies will commit to achieve carbon neutrality by 2050-2060 within the next five years.
  • Disclosure of non-financial reporting will become mandatory before 2025. Climate risk assessment will become an integral part of investment decision-making for both corporations and investors.
  • ESG will become part of KPI motivation for both management and the board of directors in all major Russian corporations. The position of Chief Sustainability Officer will be introduced in 100% of listed Russian companies.
  • The number of women on Russian companies’ boards of directors will continue to grow from the current 10% to 25% by 2030.
  • The size of landfills in the regions will start declining due to the introduction of deep waste sorting and the construction of waste incineration plants. For example, the volume of solid household waste disposal in the Moscow Region will have decreased by 90% in 2030.
  • Russia will return to the global market for voluntary carbon units as early as 2022. Marketing these units could bring companies an additional US$50 million in 2022 and, according to conservative estimates, US$1-2 billion in 2030.
  • Russia will launch a national carbon quota system in 2026. Non-complying companies will have to pay about RUB100 billion in the first year after the system becomes operational. The carbon load will gradually increase and may reach US$750 billion - RUB1 trillion by 2030-2035. This money will be returned to the economy in the form of subsidies and grants for carbon footprint reduction projects.

ENERGY

  • Investment in green energy will have amounted to RUB860 billion by 2030 and plants with up to 13,900 MW in capacity will have been built, which will reduce Russia’s energy’s carbon footprint by 9% (to 30g CO2/kWh) as compared to 2020.
  • As much as 41,200 MW in gas and coal capacity will be renewed by 2030 as part of the effort to modernise thermal generation. The investment will total RUB885 billion. This will reduce Russia’s energy’s carbon footprint by 4% (14g CO2/kWh) compared to 2020.
  • The Russian energy sector will see the largest ever investment period from now to 2030. A total of RUB3.4 trillion will be invested in renewing and expanding power generation using state-of-the-art thermal and renewable power generation technology, which will reduce Russia’s electric power industry’s carbon footprint by 35% (123g CO2/kWh) compared to 2020.
  • Domestic demand for green energy will continue to grow at double-digit rates over the next decade and will reach a third of national demand for electricity by 2030.
  • Due to one of the world’s lowest prices for renewable energy sources (RES), Russia will become a regional RES technology exporter both in terms of wind and solar power, thus taking over the markets in Kazakhstan, Belarus, Armenia, Iran, and Central Asia.

OIL AND GAS

  • Many global oil and gas companies, such as BP, Total Energies, or Shell, have set targets to achieve carbon neutrality across the board by 2050. The nature of the industry is such that most emissions are generated during the consumption of the industry's products rather than during the extraction or production of petroleum products. For this reason, a number of global companies are developing their strategies based on cuts in oil production. To offset the cuts, they plan to increase the share of gas projects and focus on renewable energy projects as well as hydrogen production. The most advanced global companies’ investment in decarbonisation and the development of low-carbon business can reach up to 25% of their total investment (for example, US$3-4 billion per year in the case of Total Energies).
  • Russian companies have not yet announced plans to cut oil production. Some, such as Tatneft and Lukoil, have announced plans to achieve carbon neutrality by 2050, subject to the availability of proper technology, but no specific steps have been announced yet.
  • Russian companies’ stated medium-term plans include eliminating routine flaring of associated gas by 2030 and reducing production emissions (coverage 1-2). Lukoil plans to reduce specific emissions per unit of energy by 20% by 2030 (compared to 2017), Tatneft by 10% by 2025 and by 20% by 2030 (compared to 2016), Rosneft by 30% in terms of output by 2035. According to VTB Capital analysts, Russia’s vertically integrated oil companies could spend over RUB500 billion (US$7 billion) to cut industrial emissions and environmental protection in 2022-2025.
  • Some companies, such as Gazprom Neft and Rosneft, plan to increase the share of gas in production, with Gazprom Neft promising to increase the share of gas to 45% as early as 2024-2026.
  • Russian companies have also expressed their overall intention to participate in blue hydrogen production projects. Novatek has announced plans to build its most ambitious blue ammonia project (ammonia produced with carbon dioxide capture) as early as 2026-2027. VTB Capital analysts believe the project could cost US$7 billion with a capacity of 5 million tonnes per year. More precise information on the plant's capacity should become available by the end of this year.

AVIATION

  • The development of ESG affects aviation more than other Russian transport companies.
  • The IATA (International Air Transport Association) aims to achieve full decarbonisation of this global sector by 2050. It is estimated that 65% of the emission cuts will be achieved through the use of biofuel (SAF), 8% through the use of quotas to be bought from green companies, and 27% through technology development and improved aircraft efficiency.
  • This will require Russian companies to invest in the development of biofuel, however, no company has come up with cost estimates for this investment so far. The European International Airlines Group, for example, plans to invest about US$400 million in the development of SAF over the next 20 years.
  • In addition, ICAO (International Civil Aviation Organisation) CORSIA regulations will be introduced in 2027, which will require compensation for all emissions on international flights in excess of 2019 emissions levels. This could set back Russian airlines by EUR250-300 million (RUB21-25 billion) in 2027.

FERTILISERS

  • Global corporations are setting a target to cut CO2 emissions by 25%-30% by 2030. The world’s largest phosphate fertiliser producer, the Moroccan OCP Group, plans to fully convert to clean energy by 2030.
  • A number of Russian producers have also announced similar, albeit less ambitious, plans. For example, PhosAgro plans to cut gross CO2 emissions by 14% by 2028.
  • Beginning in 2026, fertiliser producers will need to pay a carbon tax when importing their products into the EU. According to the Ministry of Industry and Trade, the costs for producers of mineral fertilisers could reach upwards of EUR500 million. The alternative solution is to cut emissions during the production of these products, which, according to VTB Capital analysts, would be a more economically viable approach.
  • To maintain their share in the European market, Russian manufacturers will need to invest at least RUB15 billion in technology upgrades within the next four to five years.

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