Examination of certain documents adopted in the field of the regulation of extra-financial reports in Russia.
Par Maiia Ivanova
Etudiante en Master 2 professionnel : Droit des Affaires : Droit ESQ dans les Entreprises
UNIVERSITE PARIS SACLAY - UVSQ
Posté le: 06/09/2023 17:06
The draft law "On Public Extra-Financial Information"[1] , which was later renamed the draft law "On Sustainable Development Information", had been developed by the Ministry of Economic Development of the Russian Federation during several last years and its consideration was postponed more than a year ago due to the geopolitical situation. In 2018, the first version of the draft law was published for public discussion. Its aim was to make public the extra-financial reports of state-owned companies, public-law companies, state unitary enterprises and commercial entities with annual sales or assets of 10 billion roubles or more, as well as companies whose securities are listed on stock markets. Consideration of the law in 2019 was hampered by the COVID-19 pandemic. In mid-March 2023, at the Union of Industrialists and Entrepreneurs of the Russian Federation congress, President Vladimir Putin expressed his support for the idea of companies disclosing extra-financial statements: "I propose to think about the annual publication of extra-financial reports for large companies. It would describe what such and such a company has done for society, for a village, a town, a region, for its country. I know that the vast majority of companies, practically all of them, have social programmes of this kind, but they are only known in a narrow sector, so let's make them known to society as a whole. This will benefit everyone and set a good example for everyone", said Putin, adding that such reports will help to increase the authority of Russian companies and strengthen their position in the market and in public opinion. In the instructions on the results of the congress, published at the beginning of May 2023, the government was instructed to draw up proposals for the publication of annual extra-financial reports by 1 June, with the participation of the Bank of Russia and the Russian Union of Industrialists and Entrepreneurs.
The Ministry of Economic Development of the Russian Federation believes that the consultative nature of regulatory legal documents in the area of extra-financial reporting does not guarantee the existence of a comprehensive system of sustainability reporting. The use of consultative approaches by companies makes it difficult for interested users to analyse extra-financial reports, does not help to improve their quality and reduces the comparability of the indicators disclosed. In this respect, the Ministry of Economic Development believes that legislation is needed to promote the principles of responsible business conduct and to define common approaches to the preparation and publication of sustainability reports.[2]
Despite the ordnance of Russian President V. V. Putin regarding the adoption of a law on the sustainable development declaration in 2023, it is now still being drawn up. Two bodies have been designated as responsible: the RSPP (Chamber of Commerce and Industry of the Russian Federation) and the Ministry of Economic Development of the Russian Federation.
The regulator Bank of Russia supports the promotion of the ESG agenda and the implementation of extra-financial reporting in Russia, mainly through the publication of methodological documents and advisory information letters. These are developed on the basis of research and surveys of interested stakeholders, including financial institutions and institutional investors.
At the end of June 2023, the Bank of Russia drew up recommendations[3] aimed at improving the quality of the methodology and developing the practice of assigning ESG ratings (Environmental, Social, Governance factors) in Russia. These recommendations advocate the use of a unified rating scale, reproducing the symbolism of existing credit ratings, from ESG-C (low level) to ESG-AAA (high level). They are intended both for ESG rating assessors and for the companies that use them, with the aim of making these assessments more objective, transparent and comparable.
The regulator has established a minimum set of factors that must be taken into account for each component: E (environment), S (society) and G (governance). With regard to the G component, the regulator recommends taking into account the strategic management of the company, the remuneration system for its managers, risk management, the ownership structure of the company, including the commercial reputation of the beneficiaries, the availability of information about them and the system for preventing conflicts of interest, as well as the disclosure of information.The assessed company can obtain three independent ratings for each component: E, S, G: E, S, G. The Bank of Russia favours ESG evaluation as a global service, giving priority to the ratings of each component, as well as to the publication of the values of the elements of each component. The development of a consolidated ESG-rating remains a matter of debate. The Bank of Russia stresses the importance of explaining how the individual components have been grouped together, as well as providing data on how the levels of the individual ESG components have been calculated. Consequently, it is recommended that the figures calculated and the detailed methodology for collecting, processing and weighting the data be disclosed, that the individual ESG components be grouped together in a consolidated ESG-rating, and that this be accompanied by detailed explanations of what the ESG-rating shows in accordance with the methodology.
The Bank of Russia's recommendations are based on a report by the International Organization of Securities Commissions (IOSCO)[4] of 2021 on ESG ratings and ESG data. According to the Bank of Russia's recommendations, an ESG rating (sustainability rating) is defined as a publicly independent external opinion on the profile of the rated entity (organisation or issuer) - the quantitative and qualitative characteristics of its sustainability activity - at the date the ESG rating is awarded, and on its management and vulnerability to sustainability risks over a period of one to three years. The ESG rating must combine both an assessment of the rated entity's potential impact on the environment and society, and an assessment of the rated entity's vulnerability to sustainable development risks over the specified period. In the context of the "dual materiality" concept[5] , the two types of assessment have a mutual influence. The concept of "double materiality" summarises the value of disclosing information on an organisation's consideration of ESG factors and related risks and opportunities and their impact on the company's financial results, as well as information on the organisation's impact on the outside world - the environment (including climate), the social sphere and the economy (sustainable development information). According to this concept, ESG factors and the associated risks and opportunities are very likely to lead to changes in financial indicators, making these issues the focus of attention for shareholders and investors. However, the company's impact on the environment (including the climate), the social sphere and the economy, as well as the company's activities to achieve sustainable development objectives, are of importance to a much wider circle of stakeholders, who can also have a significant influence on the company's long-term value creation.
It is also important to note that Dual Materiality is a key requirement of the European CSRD (Corporate Sustainability Reporting Directive)[6] . The Corporate Sustainability Reporting Directive, or CSRD, is a European Union directive that aims to significantly increase the reporting obligations for companies falling within its scope, in order to broaden the sustainability information available to users. Thefirst obligations under the directive will come into force in 2024 Dual materiality will form an important part of these new obligations, with the directive requiring companies to report.
Not only the information needed to understand the company's development, performance and situation, but also the information needed to understand the impact of the company's activities on environmental, social and employee issues, respect for human rights, and anti-corruption and fraud issues. This means that, for all companies concerned by the CSRD, double materiality reporting on ESG issues will soon become mandatory by law.
It is also interesting to note that this bank of Russia recommendations document presents greenhouse gas emissions assessment tools similar to those used in the European Union, such as Scope 1, Scope 2 and Scope 3. For example, Scope 1 relates to direct greenhouse gas emissions from sources owned or controlled by the reporting entity. For example, emissions from the company's vehicle fleet. Scope 2 concerns indirect energy-related emissions from the production of thermal and electrical energy purchased and consumed. Scope 3 covers the reporting entity's other indirect greenhouse gas emissions (excluding indirect energy-related emissions) that occur in the entity's value chain, including on the consumer and supplier side.
For two to three years after the publication of its recommendations, the Bank of Russia plans to monitor the application of the recommendations, to improve them and to reissue them as and when the provisions relating to the disclosure of information on sustainable development are updated. As the practice of ratings develops, there are plans to examine the desirability of regulating ESG ratings as a separate category - from extra-financial ratings. The future of ESG ratings depends on their practical application. Assigning ESG ratings according to a model methodology will make it possible to constitute a test sample of ESG ratings, on the basis of which an econometric analysis of the cause-effect relationships with other variables characterising the activity of the rated entities can be carried out.
Bibliography:
1. Russia has joined the Paris climate agreement
https://www.rbc.ru/politics/23/09/2019/5d88a9089a79475f76930863
2. Extra-financial public reporting bill // https://media.rspp.ru/document/1/1/0/107455ceaeabe24b68bda19afb80627e.pdf
3. The Department for Economic Development has proposed finalising the Extra-Financial Reporting Bill on 31 May 2023 INTERFAX.UK // https://www.interfax.ru/russia/904102
4. Information letter on the recommendations on the development and allocation of ESG (sustainable development) rating methodologies dated 30 June 2023 n°IN 02-05-46.
5. Environmental, Social and Governance (ESG) Ratings and Data Products Providers. Final Report № FR09/21. The International Organization of Securities Commissions, 2021. https://www.iosco.org/library/pubdocs/pdf/IOSCOPD690.pdf
6. Guidelines on reporting climate-related information European Commission Directorate-General for Financial Stability, Financial Services and Capital Markets Union European Commission https://ec.europa.eu/finance/docs/policy/190618-climate-related-information-reporting-guidelines_en.pdf
7. DIRECTIVE (EU) 2022/2464 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting (Text with EEA relevance) https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022L2464
8. ESG RATINGS Report for public consultation https://www.cbr.ru/Content/Document/File/144085/Consultation_Paper_17012023.pdf