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Investors in Russian bonds see securities fall short of their own ESG credentials

The likes of Allianz Global Investors and UBS Group who purchased green bonds from Russian Railways and social debt from Sovcombank were blindsided by the invasion

Ethical investors in Russian bonds are facing an extra challenge as the securities fall short of their own ESG credentials, prompting a debate about the industry’s standards.

Funds from the likes of Allianz Global Investors and UBS Group that purchased green bonds from Russian Railways and social debt from Sovcombank were blindsided by Russia's invasion of Ukraine. Sanctions against both companies have made holding such debt untenable from an ethical as well as investment perspective. The issue speaks to an inherent tension in debt markets where borrowers with controversial environmental or governance credentials can still sell green or social debt.

It’s spurring a broader rethink of what counts as sustainable and how best to do ESG investing.

"We expect investors and rating agencies to increasingly include country-related social and governance risks into their ESG decision frameworks," said Stephan Kippe, head of ESG research at Commerzbank. That could "limit future demand for ESG assets from low-ranked countries."


The pariah status of Russian companies, frozen out of international markets and SWIFT payments, led ESG ratings firm Sustainalytics to withdraw its certification for both Russian Railways’ and Sovcombank’s bonds.

These so-called second-party opinions serve as an independent verification of

green and social credentials and are a must for many ethical investors.

Will Russian bonds default?

There’s debate about that: QuickTake said Russian Railways no longer qualifies for its sustainable bond funds and divestment will depend on prevailing market conditions. Allianz, which declined to confirm whether its one billion-euro ($1.1 billion) green bond fund still held Russian Railways’ green debt, said the securities no longer qualify for its green bond strategy.

It’s an unusual situation for ESG bond investors, not least because they rarely hold bonds that carry meaningful default risk. Russian Railways has so far delivered on both dollar and euro coupon payments due earlier this month, though both arrived late, and a payment on a Swiss franc bond is still pending. Sovcombank has a dollar coupon payment due next week. Russian Railways declined to comment. Sovcombank did not respond to a request for comment.

The proceeds of green and social bonds are meant to go to environmentally or socially beneficial activities. That means companies and countries with poor climate and human rights records can in principle issue such securities so long as they have appropriate projects to finance.

The situation has divided custodians of the sustainable bond market. Non-profit organisation the Climate Bonds Initiative, which runs a widely-used market standard, said its certification for Russian Railways’ green bonds still stands and is not under review. “They met and meet the requirements of the standard,” said chief executive Sean Kidney. It finances “truly green” investments that are not diminished because of Russian president Vladimir Putin’s actions, he said.

Even so, ESG investors are no longer going to buy such debt for years until the conflict is resolved and sanctions are lifted, with credit ratings now also falling below acceptable levels for most, said Lutz Roehmeyer, chief investment officer of Capitulum Asset Management. – Bloomberg.