Over the past year, Russian largest corporates have achieved progress in understanding of ESG reporting and responsible investments principles. They are encouraged by the increasing demand from international investors, regulatory initiatives in Russia and the emergence of ESG competitors from the neighboring countries. It is time for mid-sized and local companies to gain momentum and join the ESG initiative.

By mid-2019, the number of companies adhering to the UN Principles for Responsible Investment had reached almost 2 500 from more than 50 countries. An example of the continued growth of international investors' interest in ESG is the dynamics of investment funds with focus on various ESG indices in their strategies. According to the 1H 2019 results, the volume of assets under their management amounted to USD 4,7 bn, twice as much as in the same period of 2018.

The second group of motivating factors for Russian companies were local regulatory initiatives, including the establishment of a Sustainable Development Sector on the Moscow Stock Exchange. Currently, the process of filling the sector with “green” and “socially responsible” issuers is underway. In the future, after the realization of all the planned initiatives, tax benefits will be available for investments in financial instruments of this sector, which means that the demand for such securities will increase.

Finally, competition for international “responsible” investments in the post-Soviet area is growing. Several countries have recently announced the creation of “green” financial infrastructure. In particular, in Kazakhstan, the International Financial Center “Astana” is preparing to issue the first green bonds, while similar plans are announced in Belarus by state-owned banks.

Maintaining methodological consistency with the previous release of the ranking, we focused only on the largest Russian corporations. However, in the course of preparing the ranking, we revealed a large number of companies outside the TOP-50 of Russian business having detailed ESG- or Sustainable reports and practices. The most vivid illustration is the “RSB HMAO Ltd.”, which was the first issuer of green bonds in Russia. In our view, medium-sized companies can be at least as effective in their ESG practices as large businesses.

The Agency continues to enhance corporate ESG ranking methodology and broaden the scope and universe of this ranking in cooperation with representatives of large and medium-sized businesses committed to sustainable investment. We look forward to your feedback and proposals for further development of the ranking.

RAEX-Europe has published the first ESG ranking of the largest companies of Russia. The results of the ranking were presented by Svetlana Grishankova, Managing director of Rating-Agentur Expert RA GmbH at the conference RAEX-600, which took place in Moscow in 3^rdof October 2018.

The Russian companies listed on international stock exchanges are the most widely represented in the TOP-10 ESG ranking. The leader of ESG ranking is oil company “Lukoil”. Also, the companies having highly developed social and corporate governance procedures, as well as modern practices of environmental risks mitigation, joined the leading positions in the ranking: MMK, Gazprom, Tatneft, ALROSA.

The “e-leaders” group (environmental section) was formed not only by the companies from the industries with low environmental impact, such as transport, logistic and electric power transmission, but also from the ecologically “unfriendly” sectors, such as oil, gaz and chemical industries, where the modern technologies help to minimize the negative environmental impact.

The “social” leaders (social section) were mostly presented by the oil- and still industries companies with well-developed human capital and industrial safety development practices.

The companies included to the TOP-10 by the corporate governance efficiency are mostly public companies using the world best-practices of the corporate governance and having highly transparent financial reporting.

The original universe of the companies for ESG ranking was formed by the TOP-50 RAEX-600 ranking (by total volume of revenues). We excluded the companies from the industries having a negligible environmental impact, such as retail, financial sector, telecom and holding companies. In addition, we excluded the subsidiaries and affiliates of the international companies, operating in Russia. Finally, only 30 companies were chosen for the assessment within the ESG Ranking.

The ESG ranking of the Russian companies was based on the assessment of the optimal set of selected indicators that show how the company impacts the ecological and social environment, as well as degree of its exposure to the social and governance risks. The following indicators were used:

Environmental (as a ratio to total revenues)

• Water use (million cubic meters)
• Waste generated (th. tonnes)
• Total emissions (th. tonnes)

Social

• Social expenditure and Human capital investments per one Employee (th. RUB)
• OHS (Accident frequency rate, number of accidents per 1,000 employees)

Governance:

• Share of independent board members (% of total Board)
• % of shares in free float
• Transparency in corporate reporting (according to Transparency international)

The final score for each section (E, S and G) was calculated as an average score for all indicators included to the correspondent section. The final ESG-score was determined as a weighted average of all indicators included to all three sections having the equal weights in the model.