The Macro Dimension of the ESG Paradigm

The application of ESG (environment, social, governance) principles has mostly been explored at the level of corporates, with less attention being accorded to issues concerning the compatibility of macroeconomic policies at the level of countries and regions with such principles. There are signs however that the regulatory regimes and macroeconomic policies are increasingly geared towards ESG principles and human capital development. Russia’s macroeconomic exigencies related to the ESG agenda pertain to such issues as the implementation of National projects, the operation of economic policy rules and the expansion in the scope of green financing instruments.

The ESG framework is not yet familiar to most Russians — according to the Ivanov survey conducted by Sber CIB Investment Research nearly ¾ of the population has not heard and does not know about ESG principles whereas only 6% know about ESG and can explain what it is about. At the same time, there is clearly a growing concern and preoccupation of Russia’s population with the main elements of the ESG agenda, most notably environmental issues. In particular, the most recent Levada-center polls (the regular polls asking Russians about their key concerns) suggest that the share of those concerned about the state of the environment has increased nearly two-fold in the past 5-6 years, with social issues (medical care availability, income inequality) as well as governance (corruption) also exhibiting upward dynamics in terms of popular worries. This in turn is likely to result in the transformation of the consumer preferences of the population with goods and services with superior environmental and social standards being prioritized.

At the macro level the main platform for the implementation of the ESG agenda in Russia resides in the National projects, whose key components may be associated with the respective elements of the ESG framework. In particular, the ecology project corresponds to the “Environment” element, projects such as demographics, education and health-care pertain to the “Social” category, while the digital economy component may be associated with the potential to improve “Governance” at the macro level. Taken together all projects that fall under the ESG umbrella account for nearly 43% of the financing of all National projects and the revisions of the past several years were directed towards increasing the share of socially-oriented projects.

From the point of view of macroeconomic policy the compatibility with ESG principles is certainly not tantamount to simplistic increases in budgetary allocations to expenditure items such as environmental protection or the expansion of the social safety net. There is also an important qualitative element related to the operation of economic policy rules, whose application may be associated with the “Governance” component of the ESG triad. According to Finn Kydland and Edward Prescott, rules may be superior to discretionary ad hoc macroeconomic policies — this is the principle that won the Nobel prize in Economics in 2004. The superiority of economic policy rules such as fiscal and monetary rules stems from stabilizing expectations and building trust in the policies conducted by the authorities.

In Russia the cornerstone of the operation of the economic policy rules is the budget rule that sets a cut-off oil price beyond which oil and gas proceeds accrue into the National Wellbeing Fund. The budget rule allows for the accumulation of fiscal reserves during periods of high oil prices and the counter-cyclical spending of these reserves during crises and periods of low oil prices. The National Wellbeing Fund also represents an important reserve for investment into green financial instruments, including rouble green and social bonds. On the monetary policy side the inflation-targeting framework and the efforts of the monetary authorities to keep a lid on inflation also relate to the social element in the ESG framework as inflation is the key factor (not only in Russia, but across EM) in the incidence of higher poverty and income inequality.

Another important element related to the ESG agenda at the macro level is the issue of financial literacy and the educational element in the services supplied by corporates and most notably the financial industry. The Central Bank in Russia and the Ministry of Finance are according notable importance to issues related to raising the level of financial literacy across the growing retail investor community and the population more broadly. Financial institutions are called upon to simplify the financial products that are offered to the inexperienced part of the investor community, while also advancing joint initiatives geared towards educating the populace about the risks of investment in volatile markets.

The rising importance of the ESG agenda at the corporate level also necessitates a transformation in the country-level policies that relate to companies and sectors. In particular, the countries’ industrial policies geared toward boosting growth and the development of priority sectors will likely incorporate elements of ESG-conditionality that requires companies to comply with environmental/social/governance standards in return for the support from the state. A similar conditionality framework could be employed in devising anti-crisis policies and regional support policies. The countries’ trade policy could also be significantly affected as the share of trade disputes in the WTO and defensive measures related to environmental standards (green protectionism) could increase significantly in the coming years.

From our partner RIAC

Yaroslav Lissovolik
Yaroslav Lissovolik
Founder, BRICS+ Analytics contact: yl[at]