SUSTAINABLE RUSSIA: A GUIDE FOR MULTINATIONAL CORPORATIONS 1

Moscow School of Management SKOLKOVO Institute for Emerging Market Studies Sustainable Business Lab The publication of this report has been made possible thanks to the support of Sustainable Business Lab’s co-founding partner - Unilever company.

Unilever is one of the world’s leading manufacturers ACKNOWLEDGMENTS of fast moving consumer goods. The company’s products are sold in more than 190 countries. Unilever employs about 169,000 people worldwide and its turnover in 2015 amounted to €53,3 billion. In Russia, Unilever owns 4 production sites: in St. Petersburg, Tula, Omsk, and Yekaterinburg. In 2012, the company celebrated its 20th anniversary at the Russian market.

Alexey KALININ, Director, Institute for Emerging Market Studies, Moscow School of Management SKOLKOVO PROJECT TEAM Natalia ZAITSEVA, Head of Sustainable Business Lab, Institute for Emerging Market Studies, Moscow School 2 of Management SKOLKOVO 3

Kamila NOVAK, Research Associate, Sustainable Business Lab, Institute for Emerging Market Studies, Moscow School of Management SKOLKOVO

Anna FIRSOVA, Research Associate, Sustainable Business Lab, Institute for Emerging Market Studies, Moscow School of Management SKOLKOVO

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This publication contains information in summary form and is therefore intended for general guidance only.

The views expressed are those of the authors and do not necessarily reflect the views of Moscow School of Management SKOLKOVO, as well as any companies and organisations mentioned in the report.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES Dear colleagues,

You are holding the report ‘Sustainable Russia: sustainability strategists working in global and A Guide for Multinational Corporations’ which Russian businesses, as it structures a number of represents a unique kind of analytical study of applied frameworks that outline potential ways 4 the corporate sustainability agenda and business of assessing business value and risks from the 5 cases implemented within the Russian business sustainability perspective. environment. The report was prepared by the Sustainable Business Lab of the SKOLKOVO Indisputably, the topic of sustainability is Institute for Emerging Market Studies. vast and of a dynamic nature, meaning that sustainability practices in Russia can be studied The publication focuses on the corporate from various perspectives. Hence, the coverage sustainability strategies of forward-thinking and scope of this publication is limited to multinational corporations operating in practical observations and selected cases. Still, Russia that have acted as drivers of more we believe in the importance of initiating this sustainable practices and transformations in meaningful dialogue about sustainability with the Russian business environment during the various stakeholders, and we hope that this report past two decades. The authors of the publication might spur interest and a constructive exchange have attempted to apply an integrated and of ideas within the Russian business community. interdisciplinary approach in their analysis and provide certain rigorous analytical judgments on We believe that by sharing the same values, this topical issue. Moscow School of Management SKOLKOVO together with Russian-based sustainability This research regards sustainability as a source proponents, can make a real impact on the of business opportunity that creates additional business environment and raise a new generation demands and challenges for corporate decision- of responsible business leaders, eventually makers who have to make adjustments in their making Russia a better place. mindset and approaches. In order to be responsive to these changes, corporate officers have to acquire new practical skills and instruments; as Andrey SHARONOV such, education and knowledge sharing become the key enablers for such business transformation. Dean, Moscow School of Management This Guide might be instrumental for corporate SKOLKOVO

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CONTENTS 60 OPERATIONAL EFFICIENCY

65 PARTNERSHIPS & ASSOCIATIONS

72 TOOL 3. CATEGORISATION OF IMPACTFUL BUSINESS CASES BY 3C IMPACT 05 DEAN’S STATEMENT 74 CHAPTER 3. CHALLENGES AHEAD 08 EXECUTIVE SUMMARY 76 INFRASTRUCTURAL BARRIERS

10 76 LACK OF SUSTAINABLE SUPPLIERS INTRODUCTION 78 INACCESSIBILITY OR EXPENSIVENESS OF SUSTAINABLE INFRASTRUCTURE, 14 TECHNOLOGIES AND SOLUTIONS CHAPTER 1. RUSSIA VS. BRICS PEERS: STRATEGIC IMPLICATIONS 81 LACK OF AVAILABLE LABOUR FORCE WITH EXPERTISE IN SUSTAINABILITY 83 INSTITUTIONAL BARRIERS 15 PLOTTING RUSSIA ON THE SUSTAINABILITY MAP 6 83 LACK OF EXTERNAL FINANCING MECHANISMS 7 16 INTRODUCING THE SKOLKOVO IEMS SUSTAINABILITY COMPOSITE INDEX 85 LIMITED APPLICATION OF FISCAL INSTRUMENTS AS SUSTAINABILITY INCENTIVES 18 ECONOMIC DIMENSION 89 IMPERFECT LEGISLATION AND REGULATION 22 SOCIAL DIMENSION 92 LACK OF POTENTIAL PARTNERS SUCH AS INTERNATIONAL AND NATIONAL NGOS 25 ENVIRONMENTAL DIMENSION 93 LACK OF AND LIMITED APPLICATION OF INTERNATIONAL 28 GOVERNANCE DIMENSION AND NATIONAL CERTIFICATION AND/OR ECO-LABELLING SCHEMES 33 TOOL 1. SCOPE FOR SUSTAINABLE BUSINESS ACTION 95 INFORMATIONAL BARRIERS 34 95 LOW CONSUMER DEMAND FOR SUSTAINABLE PRODUCTS AND SERVICES CHAPTER 2. BEST PRACTICES: 98 PREVALENCE OF SHORT-TERMISM BUSINESS CASES AND BUSINESS MODELS 100 TOOL 4. GLOBAL AND RUSSIAN EXPERENCE OF ADDRESSING THE TEN BARRIERS 35 MNC PORTRAIT

39 STRATEGIES AND PRIORITIES LOCALISATION ANALYSIS 102 CONCLUSIONS 44 TOOL 2. 5 SUSTAINABILITY STRATEGY BUILDING BLOCKS 47 CORPORATE BEST PRACTICES 106 48 SUSTAINABLE PRODUCTS & MARKETING APPENDIX. IEMS SUSTAINABILITY COMPOSITE INDEX METHODOLOGY 51 SUSTAINABLE SOURCING 54 PRODUCT FOOTPRINT 108 57 CLIMATE CHANGE & ENERGY EFFICIENCY REFERENCES

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES EXECUTIVE SUMMARY

tarting from the early 2000s, Russia has inherent in the Russian business environment sustainability agendas implemented by the Lack of potential partners such as been one of the most attractive emerging that create scope for sustainable business sampled 30 MNCs has yielded five building international and national NGOs; Smarkets for foreign investors. Between 2002 actions. Depending on the nature and industry of blocks (products, operations, stakeholders, and 2013 Russia continuously ranked among the the business, some of these factors become more fundamentals and CSR) that can be incorporated Lack of and limited application of top 25 most likely Foreign Direct Investment or less relevant. Each of the economic, social, into a comprehensive tool applied by any international and national certification (FDI) destinations in the A. T. Kearney Foreign environmental and governance factors can lead sustainability strategist working anywhere in the and/or eco-labelling schemes; Direct Investment Confidence Index. to potential sustainable business action. For world. In addition to the assessment of the high- example, developed ‘hard’ infrastructure denotes level sustainability agendas, the research also Low consumer demand for sustainable In the process of entering the Russian market minimum capital expenditures on the part of focused on the analysis of several most impactful products and services; multinational corporations (MNCs) have to foreign investors themselves, as in Russia the initiatives implemented by these corporations customise not only their core business strategy state of roads, ports, airports and warehouses in Russia. These corporate best practices have Prevalence of short-termism. to the specific market conditions, but also their is of sufficient quality and coverage. The state illustrated the MNCs’ role in transforming the sustainability strategy. Each market where the policy on ‘import’ substitution offers scope Russian business environment by educating Most of these barriers denote significant 8 MNC operates is featured by different economic, for localising production and supply chains. suppliers, supporting the development of business implications, for example, a lack of 9 social, environmental and institutional Advanced level of consumer sophistication voluntary certification schemes, engaging in sufficient infrastructure, either in the form of challenges, hence application of a universal coupled with high proportion of the middle collective lobbying activities as members of human capital or accessible technologies, creates sustainability strategy which does not take into class illustrates consumer readiness for buying industrial associations, in addition to some other additional costs for businesses. It means that account local specifics cannot be feasible. Once customised product portfolio. Educated and sustainable business actions. The analysis of businesses have to invest in the development of global business enters a new sales market, it healthy labour force represents valuable impactful business cases has made it possible ‘soft’ infrastructure or import technologies from has to start balancing the global sustainability intangible asset for MNCs which can tap to highlight areas where sustainability can pay abroad instead of sourcing for them locally. While commitments made by the headquarters and the significant managerial expertise locally, without back through the approach targeting chains, most of the success stories presented in this need for localisation. having to fill in positions with expatriate staff. The consumers and communities. report have illustrated the sustainability efforts Russian market is peculiar in that for some of the of individual corporations, the global experience Working in Russia and implementing the traditional solutions in corporate sustainability In the process of implementing their corporate suggests that the critical mass gained as a result sustainability agenda there can be indisputably it is still too ‘early’, while for others it is already sustainability initiatives, MNCs encounter ten of collective actions in partnerships can become a very unique and challenging experience due to too ‘late’. external barriers that are inherent in the Russian the enabler for overcoming external barriers. the ‘transitional’ nature of the Russian market. business environment: Because of certain comparability in their profile In addition to the analysis of the country To conclude, the role of MNCs as powerful and characteristics, it has been decided to compare sustainability profile, this research has applied Lack of sustainable suppliers; effective transformational agents should be Russia’s factor endowment with its BRICS a bottom-up approach and assessed the state acknowledged. During the past 25 years the peers. IEMS Sustainability Composite Index of the Russian business environment from the Lack of available labour force with notion of corporate sustainability has evolved which was the methodological exercise aimed at perspective of the multinational corporations that expertise in sustainability; in Russia, the Russian business environment ranking 142 countries along four sustainability have to localise their global sustainability agenda has transformed, and certain industries have dimensions has been instrumental in making and overcome certain barriers in the process. The Inaccessibility or expensiveness of emerged or metamorphosed. Sustainable business such comparison. According to the IEMS research analysed a sample of 30 multinational sustainable infrastructure, technologies actions which MNCs have implemented in Russia Sustainability Composite Index, Russia is ranked corporations (MNCs) from five industrial sectors: and solutions; became a significant driver behind some of those 50th out of 142 constituent countries, hence technological; oil, gas & chemical; health, beauty positive changes. This fact gives hope that some positioning the country in the middle of the & pharmaceutical; furniture, pulp & paper, Lack of external financing mechanisms; of the identified ten barriers might be successfully development spectrum along four sustainability and FMCG, food & beverages. These particular tackled in the nearest future. Collective work and dimensions: economic, social, environmental and companies were selected based on their leading Limited application of fiscal instruments joint efforts among various market players can governance. position in the global corporate sustainability as sustainability incentives; hasten this accomplishment, as the time when ratings and strong operational presence in companies could succeed on their own has passed. Furthermore, the country-level analysis defines Russia. Imperfect legislation and regulation; It is high time for joint actions, and only then the operational context for the MNCs, as it sustainability would become even more beneficial identifies fifteen strengths and weaknesses The analysis of the global and national-level and a source of value-added for all participants.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES EXECUTIVE SUMMARY INTRODUCTION

urrently, the importance of sustainable agenda in response to growing social and development is growing for all countries environmental challenges, with the potential and all stakeholders, especially for to transfer their best practices to the countries business. On September 25, 2015, where they operate. Because of the companies’ Cthe 193 countries of the UN General Assembly large size and scope, the impact of the activities adopted the 2030 Development Agenda entitled of these MNCs is sizable, and as a result they are “Transforming Our World.” The framework constantly in the spotlight and fall under massive consists of 17 Sustainable Development Goals scrutiny for any misconduct. These corporations 10 (SDGs) and 169 targets. In comparison with no longer view sustainable development as an 11 the 2000 – 2015 Millennium Development ‘add-on’ activity to their major operations; rather, Goals (MDGs) framework, the SDGs give more they perceive it as an important extension of scope and set higher expectations for the active shareholder and stakeholder value, as well as an involvement of corporations in sustainable integral part of the core business operations. As development. Over the next decade corporate a result, MNCs can gain considerable economic strategies will be without any doubt shaped by and social benefits within any country where the SDGs. they adapt their sustainable business practices.

At the same time, the scale and ambition of the Different countries offer different opportunities 2030 sustainable development agenda create a for the development of corporate sustainability tremendous opportunity for the private sector initiatives. In each country, including Russia, to contribute to sustainable development and MNCs localise their global sustainability agenda human prosperity. In all countries of the world, differently, depending on the country’s level of at the national level, stakeholders evaluate the sustainable development along four dimensions: activities of private business from the perspective economic, social, environmental and governance. of impact on society and environment, and Various sovereign sustainability indices and their expectations with regard to corporate ratings can be reasonable proxies for plotting sustainability enhancement are constantly countries on the so-called ‘sustainability map’; growing. however, it should be noted that the preliminary research has not identified the existence of a Businesses, in general, should constantly seek four-dimensional index. new opportunities for building sound and impactful business cases. At the present time, In terms of the sustainable development the leading MNCs act globally as intermediary spectrum, highly-industrialised, developed agents when it comes to driving sustainable countries and the least-developed countries development and leading the sustainability represent extrema of this spectrum. As a result,

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES INTRODUCTION corporate sustainability strategies should In Russia, at present, there appears to be a void in The research report consists of three chapters barriers that impede the implementation of the be customised towards the particular factor this respect. Russian consumers are not mature that discuss the following points: impactful business cases that are presented in endowments of these countries. In developed enough in order to act as a sustainability driver, Chapter 2. This research attempts to classify countries, business has significant opportunities ‘command-and-control’ methods still prevail in Chapter 1 assesses Russia’s factor endowment these external barriers, describe their current for implementing corporate sustainability the legislative and regulatory environment, and including the analysis of four sustainability status and suggest the potential implications for initiatives, thanks to developed legislation and global multilateral institutions and international dimensions: economic, social, environmental and the private sector. Then the global experience regulations, market incentives and advanced NGOs do not have such a strong influence as governance. Russia’s sustainability performance of the private sector in addressing the same environmental and social cultural norms. In low- they do in developing countries. Also, most of the is compared to its BRICS peers from the historical barriers is analysed in order to identify the key income and developing countries, in contrast, impactful initiatives that companies successfully and snapshot perspectives, and that gives us enabler. there are low costs for sustainability investments implement in other developing countries and that valuable insights on absolute and relative and the return on social investment is higher, as are designed to serve the ‘bottom of the pyramid’ dynamics. At the end of each of the four sections basic human needs are not always being met. represent a very poor fit for the Russian context, on sustainability dimensions, implications for For the purpose of this research, it was decided to In addition, there are greater opportunities for as the demand for these services and products global businesses resulting from the interplay of focus the analysis on the experiences and existing scaling up social efforts while addressing the has been fully satisfied, usually by the state. dimensional strengths and weaknesses are listed. approaches towards the sustainability of global ‘bottom of the pyramid’ and building a large In addition, the Russian business environment The analysis of Russia’s factor endowment leads businesses with strong operational presence in customer base via community-based initiatives. features certain external barriers that limit to potential sustainable business actions, which Russia, rather than Russian companies. This was the application of certain sustainability MNCs can implement in order to capitalise on done in order to ensure the scope for comparison Apart from the two extrema of the development instruments that MNCs successfully implement strengths or mitigate weaknesses. of international priorities and localised strategies spectrum, there is also a bloc of emerging in developed markets. Because of this reason, as well as to study corporate sustainability countries which have ‘transitional’ status, MNCs often have to fine-tune the national Chapter 2 presents a sample of 30 MNCs strategies of MNCs operating in a similar business and where the sustainability playing field is sustainability strategy on a case-by-case considered to be leaders in corporate environment. still evolving and sustainability solutions are basis in Russia. sustainability, based on their position in the not as straightforward as the ones applied in most representative ratings such as Forbes 2015, developing and developed countries. Due to This research project studies the experience of Green Brands 2014, Dow Jones 2014, as well as Russia’s membership in the BRICS bloc of MNCs implementing sustainability initiatives their operational presence in Russia. The analysis countries, Brazil, China, India and South in Russia, addresses the lack of certain includes the ‘degree of localisation’ of the global Africa are frequently compared to Russia guidelines, and provides examples of business strategic priorities of the selected MNCs in the 12 as relevant benchmarks, as all five countries models that can serve as success stories in Russian agenda. 13 are classified as emerging countries with similar corporate sustainability. Despite these potential profile characteristics. At first glance, it appears constraints, leaders in sustainability among the Breaking down the sustainability agenda of that this peer group is highly homogeneous; MNCs operating in Russia have to introduce these companies enables the identification of however it should be noted that these emerging sustainability initiatives in order to comply with specific building blocks which can be included countries differ in national priorities; sources of their headquarters’ requirements. MNCs may in any sustainability strategy. This has the economic, social, environmental and institutional encounter a variety of constraints in the process potential to offer valuable insights and become distress; and material threats. For example, Brazil of addressing corporate requirements and instrumental for sustainability strategists, as prioritises sustainable management of natural localising global sustainable practices, as there the building blocks of a successful sustainability forests, while in India, water, sanitation and could be fewer stimuli and fewer opportunities in strategy that could be effectively applied in the hygiene issues are of the paramount importance. the ‘transitional’ countries. Russian context are not fully explored at the moment, and there are no sufficient guidelines Within the research framework, the analysis The following questions are answered within available to global and Russian businesses on of sustainability profiles across countries the research scope of this project: this subject. assesses Russia’s position along four dimensions of sustainability with other BRICS peers, 1 What is the operational context for The chapter focuses on presenting the most identifying each country’s main strengths implementing sustainable business impactful business cases implemented by the and weaknesses, and later ranking the actions in Russia? sampled MNCs that are considered to be the BRICS countries in accordance to their level of best practices. All business cases are classified sustainable development. 2 What are the best practices in corporate into several sustainability themes, and there is sustainability that are implemented at least one case described in great detail for Because of the ‘transitional’ status, it is not by the leading MNCs in the Russian each sustainability theme. Each business case always evident whether there is a strong milieu? illustrates the material and non-material value rationale for the corporate sustainability which global business gains from implementing case in Russia, or even if MNCs can find the 3 What are the main barriers impeding the these sustainability actions. right space for building value-added business evolution of corporate sustainability in cases across the four dimensions of sustainability. Russia? Chapter 3 reviews the presence of certain external

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES INTRODUCTION PLOTTING RUSSIA ON THE CHAPTER 1. SUSTAINABILITY MAP ll countries are characterised by a different highest added value, in order enhance level of sustainable development. As the specificity of territorial products and Aa result, MNCs have to localise their services.”[1] global sustainability agenda in accordance with RUSSIA VS. BRICS the country’s position in some sustainability- SOCIAL SUSTAINABILITY can be defined as related coordinate system due to the presence “the ability to guarantee welfare (security, of these country-based specifics. Depending health, education), equitably distributed on the country’s specific conditions, various among social classes and gender. Within PEERS: STRATEGIC a territory, social sustainability means sustainability strategies and practices make more sense. While in the least developed world, business the capacity of the different social actors is expected to address basic needs and build (stakeholders), to interact efficiently, to IMPLICATIONS bottom of the pyramid models, in the developed aim towards the same goals, encouraged world, regulation and mature customer demand by the close interaction of the Institutions, provides another sustainability playing field. at all levels.”[1]

Despite this fact, it is surprisingly hard to find ENVIRONMENTAL SUSTAINABILITY businesses focused on attempting to analyse the can be defined as “the capacity to preserve global map from the corporate sustainability over time the three basic functions of perspective and plot the respective positions of all the environment: the resource supply 14 countries there. One of the reasons is that there function, the waste receiver function 15 is still no universal definition for “sustainability”. and that of direct usefulness. In other words, within a territory environmental In an attempt to analyse Russia’s state of sustainability means the capacity to sustainable development, Institute for Emerging increase and bring up the value of Market Studies (SKOLKOVO IEMS) applies the environment and its peculiarities, the approach of defining the sustainability while assuring the protection and the space through the perspective of the quadruple renewal of natural resources and the bottom line (QBL*), which is defined by a unique environmental patrimony.”[1] combination of economic, social, environmental and governance factors. Although the QBL The governance dimension usually concept has been widely used in recent years, concerns the INSTITUTIONAL there is no single metric assessing the country’s SUSTAINABILITY of the system, which position from the four-dimensional perspective. is based on accountability, transparency, the rule of law and ethics. Three aspects of ECONOMIC SUSTAINABILITY can be governance are usually incorporated into defined as “the capacity of an economic the extended definition of sustainability: system to generate a constant and good governance (the processes of improving growth of its economic decision-making and their institutional indicators. Within a territorial system, foundations), effective governance economic sustainability means the (the capacity of countries to pursue capability, through the most efficient mix sustainable development), and equitable of resources, to produce and maintain the governance (distributive outcomes) [2].

* Quadruple bottom line is the extension of the traditional triple bottom line framework comprising economic, social and environmental dimensions, adding governance as the fourth bottom line.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 1. RUSSIA VS. BRICS PEERS: STRATEGIC IMPLICATIONS A country’s position along each dimension is on each of the sustainability dimensions based on FIGURE 1. APPROXIMATE DISTRIBUTION OF 142 COUNTRIES IN THE IEMS SUSTAINABILITY COMPOSITE INDEX determined by the unique combination of specific the issuer’s own interpretation of sustainability. strengths and weaknesses. The interplay between For example, in the Sustainable Society Index economic, social, environmental and governance (SSI), human wellbeing is assigned the weight factors can determine the so-called ‘longitude’ and of 43%, environmental wellbeing – 33%, and ‘latitude’ of the position of almost any country economic wellbeing – 24%. In ROBECOSAM’s on this four-dimensional space. This mapping Country Sustainability Ranking, governance exercise can be a good starting point for an MNC factors (60%) outweigh the other two dimensions sustainability strategist, as it can be instrumental - social (25%) and environmental (15%) - due for understanding the country-specific factors of to the assumption that healthy governance is almost any market where a company operates or the primary and most relevant risk factor for is thinking about entering in the future. investors’ decisions. In addition, there is the Happy Planet Index (HPI), which is not calculated either as a sum or product of three sustainability INTRODUCING THE dimensions. Rather, it is based on the proportion of relevant economic and social indicators vs. SKOLKOVO IEMS ecological footprint. Finally, the UNDP Human Development Index (HDI) assigns equal weight SUSTAINABILITY to each of the indices comprising the three dimensions: Gross National Income (GNI) index, COMPOSITE INDEX Education index and Life Expectancy index.

The creation of the IEMS Sustainability Composite here is no universal understanding of a Index was an exercise aimed at designing an definition for “sustainability”; however, all-encompassing index that incorporates all Tvarious country sustainability ratings indicators, which SKOLKOVO IEMS considers and indices can be considered as reasonable relevant for assessing a country’s position on the 16 proxies that provide insights into a country’s sustainability map. The index includes four sub- 17 strengths and weaknesses across a broad range of indices, which correspond to the four dimensions Source: SKOLKOVO IEMS economic, environmental, social and governance of sustainability. According to the IEMS indicators. Because there is no sovereign four- Sustainability Composite Index Methodology†, dimensional index in place, SKOLKOVO IEMS a country’s economic sustainability is measured introduces a methodological innovation – the through a composite rating consisting of IEMS Sustainability Composite Index, which indicators like Genuine Savings, Gross Domestic so not all best practices adopted in the Western has been designed in order to measure all Product, Employment, and Public Debt. The The distribution of 142 countries according to their markets can be transferred to the Russian setting. indicators that are considered of relevance for a social dimensional analysis includes Sufficient ranking in the IEMS Sustainability Composite country’s sustainability performance along four Food, Sufficient to Drink, Safe Sanitation, Index illustrates the phenomenon of ‘transitional’ On the other hand, Russia has achieved a high dimensions of sustainability. Education, Healthy Life, Gender Equality, Income countries, which are positioned in the middle of level of social and human development thanks Distribution, Population Growth and Good the spectrum, with Russia being one of them. The to the Soviet legacy, and that is reflected in its The IEMS Sustainability Composite Index is Governance. Environmental sustainability is top three countries with the most advanced state position as a best performer in the social sub-index different from all existing sovereign ratings calculated as a weighted average of two metrics of sustainable development are from Scandinavia in comparison to other BRICS peers. The countries and indices in two ways. First of all, it is an measuring endowment of natural resources (the (Norway, Finland and Denmark). The bottom of the characterised as ‘transitional’ successfully take attempt to interpret sustainability from the difference between biocapacity and ecological spectrum is represented by the African countries, care of basic human needs, and as a result, their four-dimensional perspective, while all existing footprint) and the quality of ecosystem protection which are typically associated with the ‘poverty social scores are close to the levels of the leaders country sustainability ratings have a three- and resource management. Governance metrics trap’ problem, namely Mauritania, Chad and the of the ranking. However, they perform much dimensional structure. Second, it assumes that measure institutional sustainability across six Democratic Republic of the Congo. more poorly in the ecological dimension, as very all four dimensions should be assigned equal indicators: Voice & Accountability, Political often they have followed the ‘brown’ economic weight of 25%*. Stability & Absence of Violence/Terrorism, As a ‘transitional’ country, Russia does not growth model, which prioritised economic and Government Effectiveness, Regulatory Quality, have the same level of consumer activism, social objectives, often at the expense of the With regard to weighting, different composite Rule of Law & Property Rights & Judiciary civic and corporate responsibility, access to environmental and governance dimension. This country ratings place different level of importance Independence, and Control of Corruption. green technologies, consumer demand for research chapter attempts to compare Russia’s ‘green’ products, good governance, comparable strengths and weaknesses described above along * Although the governance dimension is assigned the weight of 20%, it should be noted that there is a good governance opportunities and stimuli as more mature markets, indicator that is embedded in the social dimension. all four sustainability dimensions to other BRICS * Presented in Appendix 1. which are positioned in the left of Figure 1, peers.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 1. RUSSIA VS. BRICS PEERS: STRATEGIC IMPLICATIONS FIGURE 2. IEMS SUSTAINABILITY COMPOSITE INDEX AND SUB-INDIXES: RANKING OF RUSSIA VS. OTHER BRICS COUNTRIES Booming oil prices were a major factor in the 2008, when the global financial crisis brought it economic success that Russia enjoyed up until to an abrupt end.

FIGURE 3. HISTORICAL CORRELATION BETWEEN RUSSIAN GOVERNMENT REVENUES AND OIL PRICES

Source: SKOLKOVO IEMS

ECONOMIC DIMENSION

GDP HISTORICAL GROWTH

Russia’s leading sustainability position in the In terms of historical GDP dynamics, 1998-2008 18 BRICS peer group is significantly determined by was the decade when the Russian economy 19 the country’s economic progress, as demonstrated experienced record economic stability. During by the IEMS Economic Sub-Index, where Russia that time period, Russia was one of the fastest is ranked 31st out of all 142 constituent countries. growing countries in the world in economic Source: OECD (2016), U.S. Energy Information Administration (2016) [5], [6] Due to the lagging nature of the economic indicators development terms. Russia’s real national used for the ratings’ analysis, the 2014 data indicates income increased, on average, by 6.9% per year that Russia continues to enjoy the gradually in contrast to the cumulative GDP decline of Starting from 2009, Russia’s economic growth highlighted Russia’s overdependence on the diminishing benefits of the oil-fuelled economic almost 30% during the previous seven years slowed down, recording a growth rate of 4.3% natural resources segment and the failure to boom experienced during the previous decade. (1992-1998) [3]. in 2011, 3.4% in 2012, 1.3% in 2013 and 0.6% diversify its economic profile. in 2014 [7]. The current economic contraction TABLE 1. RUSSIAN FEDERATION: KEY PRODUCTION INDICATORS

EMERGENCE OF THE MIDDLE CLASS

The period of economic growth brought an of the middle-class [9]. Thanks to steadily rising improvement in the standard of living of the incomes, Russia became Europe’s largest market average Russian citizen and also contributed to for a wide range of consumer goods in 2012, the emergence of a middle class, which reached a and it was the world’s 11th largest consumer level of approximately 30-35% of the population market in the world, according to Euromonitor by the end of that decade, according to the Institute International [10]. of Sociology at the Russian Academy of Sciences [8]. While throughout the 1990s the middle-class proportion of the Russian population lagged behind Brazil, starting from the early 2000s Russia overhauled all other BRICS countries and Source: Foreign Investment Advisory Council (2015) [4] became the country with the largest proportion

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 1. RUSSIA VS. BRICS PEERS: STRATEGIC IMPLICATIONS COMPARISON TO BRICS PEERS FIGURE 5. ANNUAL DYNAMICS IN THE NUMBER OF THE WORLD'S LARGEST 500 CORPORATIONS REPRE- SENTED BY THE COUNTRY

FIGURE 4. BRICS: GNI PER CAPITA, PPP (CONSTANT 2011, INTERNATIONAL $)

Source: Azahaf, N. and Schraad-Tischler, D. (2013) [11]

Source: The World Bank (2016) [7] ECONOMIC SLOWDOWN AND 20 SANCTIONS 21 While Russia has succeeded in reporting The 2015 list of the world's 500 most valuable The economic slowdown in Russia that started and exporters are ambitiously attempting to much higher income per capita values, this is brands also includes six Russian brands: Sberbank in 2009 intensified further in 2014 as a result of take advantage of the weaker ruble. As of the partially the result of stagnant or declining (state-owned bank), Gazprom (oil & gas), Magnit plunging oil export revenues and international end of 2015, there were more than 2,500 import- population growth. Its BRICS peers, in particular (food retail), MTS (telecommunications), Lukoil sanctions, both of which led to ruble depreciation. substitution projects with the total cost of 2.5 India and China, have been more successful (oil & gas) and Megafon (telecommunications). There have been multiple negative economic trillion rubles to support them [12]. at achieving impressive economic growth by While all the constituent Russian brands effects experienced at the household level, as, on introducing products and brands in industries represent one of four industries - oil & gas, average, the standard of living of the majority of In the light of the economic contraction, it can other than oil and gas capable of competing in financial services, food retail or telecom, the Russian population has deteriorated during be assumed that Russia’s position in upcoming the global markets. China’s high-tech products other BRICS countries have brands that offer the past few years. Household consumption and global sustainability ratings and indices will manufactured by Huawei, ZTE and Lenovo competitive tangible products or intangible high- real wages started declining in 2013 before finally weaken from 2015 onwards, as they would reflect compete globally, while many Chinese brands are value services. Examples include Brazil’s Skol falling 9% in 2015 [12]. The middle class has also deepening recession and resulting deterioration constituents of Brand Finance’s Global Top 500, (beer) and Natura (cosmetics), or India’s Larsen started shrinking, and it is expected to fall further in economic health. such as Alibaba Group (e-commerce), WeChat & Toubro (engineering) and HCL (technology). from 20% to 15% of the population in 2017 [12]. (messaging app), Hikvision (producer of video- Today, an average Russian family spends 40% of surveillance equipment) and Evergrande Real its income on food products compared with the (real estate). 15% level recorded for developed markets [12].

The economic crisis hit not only Russian consumers, but also Russian producers that had been heavily dependent on imported raw materials and machinery, both of which became less affordable due to the Russian currency depreciation. In response to international sanctions, the Russian government adopted the “Made in Russia” national policy, which is focused on import substitution. Many Russian producers

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 1. RUSSIA VS. BRICS PEERS: STRATEGIC IMPLICATIONS FIGURE 6. LEVEL OF EDUCATION (GROSS ENROLMENT RATIO): RUSSIA VS. THE OECD COUNTRIES IMPLICATIONS FOR GLOBAL BUSINESSES FIRST of all, the Russian market does not represent the ‘bottom of the pyramid’ due to the high proportion of the middle class, which has a high disposable income. This assumption offers a MARKET POTENTIAL FOR MNCs TO INTRODUCE SUSTAINABLE PRODUCTS that are customised for Russian consumers. Although the consumer boom peaked in 2011-2013, the Russian market remains attractive for global businesses.

SECOND, Russia has a strong 25-year record of Foreign Direct Investment (FDI) inflows and sufficient endowment of economic resources to accommodate foreign investors. TheGENERAL STATE OF RUSSIAN INFRASTRUCTURE IS MORE THAN SATISFACTORY, AS THE RATES OF ELECTRIFICATION AND MOBILE COVERAGE ARE HIGH, and there is an ESTABLISHED NETWORK OF PORTS, ROADS AND RAIL. Russia inherited many physical assets as part of the Soviet legacy, Source: Foreign Investment Advisory Council (2015) [4] including a decent power network and an extensive railway system. In the World Economic Forum’s Global Competitiveness Index, Russia is ranked 35th out of 140 countries for its infrastructure base. Hence, global businesses would not have to make expensive capital investments in order to POPULATION DYNAMICS get their raw materials to production sites or final products to market.

As of December 30, 2015, Russia’s total main driver of Russia’s population growth. The THIRD, as the Russian government is committed to import substitution, MNCS WILL BE population was 146.3 million people [15]. After revival in Russian population dynamics could ENCOURAGED TO LOCALISE PRODUCTION AND SOURCING TO A MUCH GREATER EXTENT fourteen years of decline, Russia’s demographic be attributed to the state’s pro-children policies THAN BEFORE. Hence, those global businesses that have production sites outside of the country dynamics started gradually improving in that were adopted in the mid-2000s (including and tap the Russian customer base only via the import route without a strong local presence might 2009. Average life expectancy and population the 2007 Russian family policy reform and the be at a disadvantage. size have been growing by means of two key ‘maternity capital’ certificates), as many of those factors: immigration from other post-Soviet policies were structured in the form of monetary 22 countries and a natural increase starting in incentives. 23 Irrespective of the recent economic contraction, Russia still remains among the world’s ten largest economies 2013. However, the inflow of migrants is still the [13]. As a result, the current situation represents not only threats but also opportunities for global businesses.

FIGURE 7. RUSSIAN FEDERATION: NATURAL POPULATION GROWTH SOCIAL DIMENSION

ussia’s social performance in comparison EDUCATION to the other 141 countries is comparatively Rweaker than its economic results, as In terms of a snapshot view of the education illustrated by the IEMS Sustainability Composite indicator, Russia has one of the world’s most Index (where Russia ranked #49 compared to educated workforces, with a high percentage of #31 in the economic sub-index). However, the workers having a postsecondary education. That country is still positioned as the group leader of statistic has often allowed Russia to be included in the BRICS bloc. The human well-being dimension the list of the world’s most innovative countries*. of the Sustainable Society Index, which has been In Russia, 94% of adults aged 25-64 have completed selected as a proxy, measures the extent to which upper secondary education, which is much higher countries provide for the basic needs of their than the OECD average of 75% [14]. In terms of citizens. The strong record of social progress historical dynamics, the education indicator, recorded by Russia can be primarily attributed together with the income distribution metrics of to the Soviet legacy, as the country succeeded to the IEMS Social Sub-Index, recorded a negative build a strong social welfare state during the 20th percentage decrease between 2006 and 2014. century, having addressed the problems of infant Therefore, it can be assumed that Russia’s social mortality, hygiene, sanitation and illiteracy. performance has progressively deteriorated. Source: The World Bank (2016) [7] * Russia is ranked 12th in the Bloomberg Innovation Index.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 1. RUSSIA VS. BRICS PEERS: STRATEGIC IMPLICATIONS The composition of Russia’s population in terms of the world’s population [16]. According of urban and rural percentages has been fairly to the World Economic Forum’s Global static, as the percentage of the nation’s urban Competitiveness Index, the Russian Federation IMPLICATIONS FOR population has been estimated at a constant scores the highest amongst the BRICS countries GLOBAL BUSINESSES rate of 74% between 2009 and 2015 [15]. This for the higher education and training pillar in denotes that the degree of urbanisation is quite terms of enrollment rates, system quality and high; however, it is manageable in Russia in availability of on-the-job training. Russia has FIRST of all, Russia’s HIGHLY EDUCATED POPULATION, high level of basic education and comparison to some other emerging markets, as also succeeded in achieving gender parity in significant scientific research and technical resources base represent business opportunities for in absolute terms the size of the urban population terms of education. MNCs from two perspectives: labour force and consumers. Russia’s human capital is indisputably increased marginally from 104.9 million in 2009 a source of the country’s competitive advantage, as a healthy and educated labour force is an asset to 108.3 million in 2015. During the past 25 years, With regard to the education sector, all BRICS for any global business. Also, global businesses should customise their marketing approaches the rate of urbanisation has fluctuated around countries share some common characteristics. towards Russian consumers, who are HIGHLY EDUCATED, LITERATE AND CAPABLE OF MAKING the static level of 73-74%; however, it should be For example, elementary education remains a INFORMED PURCHASING DECISIONS. noted that Russian regions differ significantly in public service in all BRICS countries, with little terms of urbanisation, and the concentration of involvement by private providers. In terms of SECOND, Russia has made great improvements in gender equality under the Soviet system. As economic activity differs from region to region. population dynamics, China, Brazil and the a result, WOMEN, WHO HAVE HISTORICALLY BEEN ACTIVE PARTICIPANTS OF THE LABOUR Russian Federation already have total fertility FORCE IN RUSSIA, represent an asset with high potential (as both customers and employees) for rates below the replacement level, while that global businesses. COMPARISON TO BRICS PEERS level is not likely to be reached in India and South Africa before 2030 [16]. With regard to the health It should be noted that BRICS education indicators, Russia has the lowest rate of infant THIRD, the RUSSIAN STATE IN MANY CASES HAS SUCCESSFULLY ADDRESSED THE BASIC systems provide quality education to 40% mortality [11]. HUMAN NEEDS OF THE GENERAL PUBLIC. Since the public education and health systems are accessible and of reasonable quality, global businesses have less space to step in and substitute for any deficiencies via their corporate social responsibility (CSR) activities. In Russia in general there is no need for MNCs to become public service providers and allocate funds to addressing TABLE 2. PUBLIC EXPENDITURE ON EDUCATION IN BRICS COUNTRIES" the basic human needs of the local communities; this frees up CSR funding that can be channelled elsewhere. However, because of the same reason, private sector actors have LIMITED SPACE FOR 24 BUILDING VALUE-ADDED BUSINESS CASES ACROSS THE SOCIAL IMPACT SPECTRUM. 25

ENVIRONMENTAL DIMENSION

n comparison to other sustainability DECOUPLING ENVIRONMENTAL elements, measuring a country’s FOOTPRINT FROM ECONOMIC I environmental performance can be more GROWTH Source: UNESCO (2014) [16] challenging due to the lack of a universal approach to the definition of environmental Most practitioners and academic researchers sustainability. A country’s environmental claim that Russia has succeeded in decoupling The Social Progress Index assesses the success the runner-up, and Brazil (71.1), South Africa performance can be assessed through the environmental footprint from economic growth of 133 countries in the Basic Human Needs (64.6) and India (58.9) lagging behind in their perspective of its natural resource endowment, during the past two decades, as the recorded GDP dimension, taking into account countries’ social progress. environmental footprint and the quality of increase was not accompanied by a comparable progress in providing for the social needs of their its resource management and ecosystem change in ecological footprint. Due to the collapse citizens in four key components: nutrition and While most of the aforementioned factors have conservation efforts. The IEMS Environmental of the Soviet Union and its industries in the basic medical care, water and sanitation, shelter been inherited as part of the Soviet legacy, it Sub-Index represents an attempt of merging early 1990s, Russia emits less greenhouse gases and personal safety. According to the 2014 data, should be noted that in historical perspective, all three perspectives into one proxy, as the (GHGs) today than in 1990. Usually resource the Russian Federation scores the highest (74.1) indicators related to education and health systems difference between biocapacity and footprint use and carbon emissions are ‘coupled’ with the in the BRICS bloc for the country’s ability to have experienced a moderate deterioration is weighted at 30%, and the quality of gross domestic product variable, particularly serve citizens’ basic needs, with China (73.7) as during the past two decades. environmental policy performance at 70%. in developing countries, and that was true for

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 1. RUSSIA VS. BRICS PEERS: STRATEGIC IMPLICATIONS the Russian Federation during the 1990s, as a that economic growth was primarily fuelled by ENVIRONMENTAL POLICY during the decade of 2000-2010 due to worsening reduction in CO2 emissions was associated with soaring oil prices and did not originate in the air quality for human health, depletion of fisheries falling manufacturing production, low national factors related to national industrial production. Retrospectively, it can be recognised that Russian and loss of forests. High-energy intensity of GDP output and declining population. In 2012 the GDP indicator registered a 172.9% legislative and regulatory policies introduced is another environmental indicator that should increase in comparison to the 2000 level, while between 2000 and 2004 were actually consistently be mentioned, as in Russia any cyclical declines Starting from the early 2000s, Russia has succeeded GHG emissions increased by only 111.8% over the ‘de-greening’ in their impact, with the removal in GDP energy intensity usually result from in accelerating its economic performance, without same time period [17]. of policies and compliance mechanisms directed structural changes in the economy rather than as the associated cost of high carbon intensity, as at environmental protection and conservation. an impact of successfully implemented energy- During that time period, the need for economic saving measures. In terms of energy efficiency, revival totally eclipsed environmental goals. Russia still lags behind developed countries, as its FIGURE 8. BIOCAPACITY AND ECOLOGICAL FOOTPRINT: GLOBAL SUPPLY AND DEMAND DYNAMICS For example, in May 2000 the main federal current energy inefficiency is equal to the annual environmental watchdog, the State Environmental primary energy consumption of France [19]. Commission (Goskomekologi), was demolished and its responsibilities were transferred to the Ministry of Natural Resources and Environment, COMPARISON TO BRICS PEERS making the latter simultaneously responsible for both control and use of natural resources, thus Table 3 illustrates the coupling of the biocapacity diminishing the scope of environmental oversight and ecological footprint indicators for the BRICS function in Russia. Starting from the mid-2000s, countries, calculated in accordance with the Global the situation with regard to environmental policy Footprint Network methodology. The positive has started gradually improving. biocapacity reserve position measured in global hectares per person (i.e. 1.1 gha/capita) denotes For assessing Russia’s environmental policy that Russia can act in the capacity of an ecological performance from the perspective of natural ‘donor,’ as its population is less dependent on the resource management, the Environmental biocapacity of other nations due to this surplus Performance Index (EPI) can be applied position. “Russia is in an advantageous position as a valid proxy. In historical perspective, as one of the few nations in the world with a 26 Russia experienced worsening environmental solid biocapacity reserve,” according to Mathis 27 performance over time: in 2014, Russia ranked Wackernagel, President of Global Footprint 73rd, while four years earlier in 2010, it was Network. “Even in this fortunate position, it is Source: WWF-Russia and Global Footprint Network (2014) [18] ranked 69th. Another complementary index, the squarely in Russia’s self-interest to minimise the Pilot Trend Environmental Performance Index loss of its biocapacity reserve by managing its (Trend EPI), also supports that claim with time resource use wisely. If it fails to do so, Russia will FIGURE 9. RUSSIAN FEDERATION ECOLOGICAL FOOTPRINT, BIOCAPACITY AND POPULATION TRENDS series data, showing that Russia experienced a be caught in the same resource crisis that many severe decline in environmental performance other countries face.” [20]

TABLE 3. BIOCAPACITY AND ECOLOGICAL FOOTPRINT METRICS FOR BRICS COUNTRIES*

Source: Global Footprint Network (2016) [21]

* Note: Data as of 2012. Biocapacity (deficit or reserve) is calculated as total biocapacity minus total ecological footprint Source: WWF-Russia and Global Footprint Network (2014) [18] and measured in global hectares per person.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 1. RUSSIA VS. BRICS PEERS: STRATEGIC IMPLICATIONS WORLD ECONOMIC FORUM’S GLOBAL COMPETITIVENESS IMPLICATIONS FOR INDEX GLOBAL BUSINESSES According to the World Economic Forum’s Global Institutions (i.e. 3.5 on a scale of 1-7). As it can Competitiveness Index methodology, Russia be seen in Figure 10, governance-related factors FIRST of all, Russia’s ABUNDANT NATURAL RESOURCES REPRESENT UNLIMITED BUSINESS scores poorly in governance indicators such as represent the most obvious weakness of the OPPORTUNITIES for different industries and different value chain units. Global businesses property rights, public sector performance, ethics Russian business environment. can implement sustainable practices either at the upstream and sourcing stages, or become an and corruption, which are listed under Pillar 1: active market player in areas such as sustainable agriculture. While there is LIMITED SPACE FOR BUILDING VALUE-ADDED BUSINESS CASES ACROSS THE SOCIAL IMPACT SPECTRUM, THERE ARE MORE OPPORTUNITIES FOR IMPLEMENTING IMPACTFUL INITIATIVES FOCUSED FIGURE 10. GLOBAL COMPETITIVENESS INDEX: RUSSIAN FEDERATION ON ECOSYSTEM CONSERVATION.

SECOND, Russia’s current state of energy inefficiency represents untapped potential for private sector actors. Both global and local businesses operating in Russia still underutilise the potential of renewable energy sources, and there are existing market niches in many segments of ‘green’ products, such as off-grid energy efficient technologies. The importance of this particular factor is likely to grow in the future in light of the eventual increase in energy tariffs and the resulting effect on industrial enterprises. In response,GLOBAL AND LOCAL BUSINESSES WOULD HAVE TO MAINTAIN THEIR COMPETITIVE POSITION BY MODERNISING AND INCREASING ENERGY RESOURCE PRODUCTIVITY.

THIRD, Russia’s development of urban sustainability is still in its infancy, and this segment represents major business opportunities in light of the high urbanisation rate of 74% and the COP21 vision on climate change. Russia’s urban landscape is in need of ‘green’ engineering solutions. 28 In the Russian context, urban sustainability does not involve resilience to natural hazards and 29 disaster risk management, but is more focused on reducing carbon footprint, air pollution, traffic congestion, and promoting energy and water conservation. Since the country followed the ‘brown’ economic growth model in the past, TODAY THE MAIN ENVIRONMENTAL OBJECTIVES FOR RUSSIA SHOULD BE FOCUSED ON SOLVING PAST PROBLEMS AND CORRECTING NEGATIVE Source: World Economic Forum (2016) [22] EXTERNALITIES OF THE RESOURCE-INTENSIVE INDUSTRIAL DEVELOPMENT via modernisation, installation of energy-efficient technologies and restoration of degraded biodiversity. FIGURE 11. GLOBAL COMPETITIVENESS INDEX: RUSSIAN FEDERATION: PILLAR 1 - INSTITUTIONS

GOVERNANCE DIMENSION

1 2 3 4 5 ut of all four sustainability dimensions, that define a country’s level of sustainable Russia scores the most poorly in the development. While businessmen often fail to Ogovernance spectrum. The country detect the empirical evidence linking social ranks 100th out of 142 constituent countries, and environmental factors to the enterprise’s and it has the worst governance profile in financial performance, governance factors are the BRICS peer group. Such elements of indisputably treated as a source of risk for core the external environment as government business activities, as they represent the key effectiveness, regulatory quality, the rule of law, driver of the country’s investment climate and property rights and control of corruption are economic competitiveness. all included as relevant institutional indicators Source: World Economic Forum (2016) [22]

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 1. RUSSIA VS. BRICS PEERS: STRATEGIC IMPLICATIONS According to World Economic Forum research, strategies, and is based not only on historical high levels of corruption, deficiencies in the conditions but also on expectations about rule of law and lack of market competition conditions prevailing over the next five years. limit the potential of the Russian economy [23]. The research also states that, “The These results are consistent with the IEMS IMPLICATIONS FOR administrative burden caused by inefficient Sustainability Governance Sub-Index, as GLOBAL BUSINESSES or unclear bureaucratic processes increases Russia is the poorest performer out of all transaction costs within the economy, from BRICS countries with a score of 5.83. The opening a business to customs procedures results for the other four BRICS countries are or accessing utilities. Uncertainty about how the following: Brazil (6.57), China (6.39), South FIRST of all, Russia’s weak governance profile has almost certainly ‘contaminated’ the area of regulations are applied and enforced and how Africa (6.23) and India (6.08). With regard to all corporate governance. In light of this fact, GLOBAL BUSINESSES MIGHT BENEFIT FROM THE property rights are protected has an equally governance indicators, Russia is considered to TRANSFER OF CORPORATE GOOD GOVERNANCE PRACTICES established at the headquarters paralysing effect on economic transactions. lag behind its BRICS peers, with the exception level to the Russian setting. Also, multinational companies can consider enforcing corporate Corruption and undue influence are among the of civil society participation, where China fares codes of conduct and applying a zero tolerance policy towards the governance misconduct of their biggest problems for doing business in Russia, worse [11]. In comparison, Brazil, South Africa employees. according to World Economic Forum surveys.” and India all have active and constructive civil All these governance-related factors, especially society in place. weak property rights and the monopolistic SECOND, multinational companies face operational risks from unethical counterparties or position of politically influential large fraudulent and corrupt practices on the part of their suppliers. Hence, MNCS SHOULD ENFORCE corporations, diminish Russia’s attractiveness NOT ONLY ENVIRONMENTAL BUT ALSO GOVERNANCE STANDARDS ON THEIR SUPPLIERS as a market for foreign investment. AND OTHER BUSINESS PARTNERS.

Key stakeholders and decision-makers at different levels have acknowledged the THIRD, the private sector can attempt to transform the institutional environment by forming problem of Russia’s weak governance. There strategic partnerships and joining industrial associations. Global and local businesses HAVE A has been some progress in tackling some GREATER CHANCE OF IMPOSING PRESSURE ON THE GOVERNMENT AND PUBLIC SECTOR corporate governance issues, for example, via ACTORS FOR MAKING POSITIVE CHANGES IF THERE IS AN ENTITY THAT HAS SUFFICIENT 30 publishing reports on non-financial factors and CRITICAL MASS and is capable of representing collective interests. 31 the introduction of e-government initiatives.

COMPARISON TO BRICS PEERS

While the World Economic Forum’s Global Competitiveness Index is an all-encompassing metric assessing the country’s overall competitiveness, the Economist Intelligence Unit’s Business Rankings Model is a more appropriate proxy for analysis of a country’s governance profile. This particular model has been utilised for assessing Russia’s governance profile in comparison to other BRICS countries. The model measures the quality or attractiveness of the business environment in 82 countries, examining ten separate criteria or categories: (1) Political environment (2) Macroeconomic environment (3) Market opportunities (4) Policy towards free enterprise and competition (5) Policy towards foreign investment (6) Foreign trade and exchange controls (7) Taxes (8) Financing (9) Labour market and (10) Infrastructure. It is designed to reflect the main criteria used by companies to formulate their global business

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 1. RUSSIA VS. BRICS PEERS: STRATEGIC IMPLICATIONS TOOL 1. SCOPE TABLE 4. TOOL 1. SCOPE FOR SUSTAINABLE BUSINESS ACTION FOR ALL FOUR DIMENSIONS FOR SUSTAINABLE BUSINESS ACTION

ven though Brazil, Russia, India, China and South Africa are all classified as members of the BRICS, Ethis group of countries is highly heterogeneous in terms of their sustainable development progress. Depending on the country’s progress towards sustainable development, global businesses should formulate their sustainability strategies and customise them towards the specific features of a particular country’s context.

Due to Russia’s ‘transitional’ status, there are very few niches that private sector sustainability can potentially fill in Russia. In order to identify the potential ‘action space’ and formulate a national sustainability strategy, global businesses should analyse Russia’s natural resource endowments, which have been presented in some of the aforementioned country-level indices and rankings.

32 While each of the four dimensions - economic, social, 33 environmental and governance - provides space for sustainable business action, it is also important to mention that they at the same time provide space for non-action and non-prioritization of sustainability related activities. For example, affordability of natural resources and generally satisfied basic needs may result in poor efficiency of CSR initiatives in this field. At the same time, more sophisticated projects aimed at educating stakeholders and supplying resource-efficient products and processes may help a company in terms of market differentiation and building competitive advantages.

Source: SKOLKOVO IEMS

THE MOST FORWARD-THINKING CORPORATE ‘VISIONARIES’ TEND TO FINE-TUNE THEIR SUSTAINABLE BUSINESS ACTIONS AS NEEDED IN RESPONSE TO THE EMERGING OPPORTUNITIES AND THREATS THAT ARE INHERENT IN A COUNTRY’S OPERATIONAL CONTEXT.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 1. RUSSIA VS. BRICS PEERS: STRATEGIC IMPLICATIONS fter the collapse of the Soviet Union, generally act as catalysts when it comes to CHAPTER 2. the Russian Federation emerged as an driving sustainable development and leading the Aattractive new market that opened up to sustainability agenda across all markets where global businesses. Over the past 25 years, many they are active as a response to growing social MNCs have made considerable inroads into the and environmental challenges. Russian market, and for a large proportion of BEST PRACTICES: them, Russia has become one of the key sales In Russia, MNCs have always been subjected markets for products and services. The cumulative by their stakeholders (shareholders, local stock of FDI in Russia was recorded at $15 billion NGOs and Western consumers) to compliance in 2004 and $475 billion in 2014 [4]. with the corporate standards and codes which BUSINESS CASES these multinational companies have to enforce Upon their entrance into new countries, universally across all their global operations. especially the emerging economies, MNCs Throughout the 1990s, some corporate standards AND BUSINESS MODELS bring new business models and practices into of global corporations were more advanced in the local markets. However, the immediate comparison to the national regulations, and operating environment and existing ‘rules of because of that, MNC practices have shaped the game’ also shape their business performance positive developments within the sustainability and investment returns. Global corporations field in Russia.

34 35 MNC PORTRAIT

his research analyses a sample of 30 multinational companies in Russia was Germany’s MNCs from five industrial sectors: Siemens, which established a representative Ttechnological; oil, gas & chemical; health, office in Russia even before the Revolution of beauty & pharmaceutical; furniture, pulp & paper, 1917. Only two MNCs out of 30 entered the and FMCG, food & beverages. These particular Soviet market for the first time during the Cold companies have been selected as ‘visionaries’ War period. PepsiCo has a very interesting story and leaders in corporate sustainability, based on of success: perhaps the undeniable success of their position in the most representative ratings Pepsi soda in the USSR became possible thanks such as Forbes 2015, Green Brands 2014 and Dow to Nikita Khrushchev, who was photographed Jones 2014. In order to cover retrospective data, having a Pepsi at an American trade exhibition in the Green to Gold 2008 ranking was also covered. Moscow in 1959 [24]. At the same time, within the ranking analysis stage, priority was given to the companies with a The majority of the selected companies, though, strong operational presence in Russia (in terms of entered the Russian market for the first time assets, number of staff, localised production, etc.). during the 1990s when Russia opened up to Table 5 presents the summary information for the foreign investors and entered its transition stage to sampled companies. becoming a market economy. The Asian companies Samsung and Toyota entered the Russian market at The selected companies entered the Russian about the same time. The ‘newcomers’ are Heineken market at different times. One of the first and IKEA, which established their Russian country offices only in the 2000s.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS TABLE 5. PROFILES OF THE 30 SAMPLED COMPANIES

36 37

* Number of countries and territories, where the product is sold * Number of countries and territories where the product is sold † As LafargeHolcim Group † Number of countries and territories where the product is sold ‡ As LafargeHolcim Group

Source: Company websites and other open sources, SKOLKOVO IEMS

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES FIGURE 12. 30 SAMPLED COMPANIES: COUNTRY OF ORIGIN FIGURE 14. 30 SAMPLED COMPANIES: RUSSIAN OFFICE ESTABLISHED FOR THE FIRST TIME

Source: Company websites and other open sources, SKOLKOVO IEMS Source: Company websites and other open sources, SKOLKOVO IEMS 38 39

FIGURE 13. 30 SAMPLED COMPANIES: CENTURIES WHEN COMPANIES WERE ESTABLISHED STRATEGIES AND PRIORITIES LOCALISATION ANALYSIS

s discussed in the previous Chapter, The Strategies and Priorities Localisation Russia is a transitional country in Analysis section aims to evaluate the localisation A terms of sustainable development degree of the strategies declared at the global and has its particularities that differentiate level for the 30 sampled companies in Russia, and it from more developed and less developed later break down those sustainability strategies countries, as well as from other BRICS peers. into building blocks that can be included in the Because of that reason, MNCs cannot simply toolkit of a sustainability strategist who plans deploy their global strategies and standardised to tap the Russian market. In order to assess approach in a market without a certain degree the degree of localisation of global companies’ of customisation and localisation. It can be sustainability agendas in Russia, the global set assumed that the local context defines how of public strategic priorities has been compared MNCs operating in Russia apply their global with the sustainability priorities and initiatives Source: Company websites and other open sources, SKOLKOVO IEMS sustainability strategies at the national level. at the national level for the same companies.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS TABLE 6. SUSTAINABILITY ISSUES: GLOBAL VS. NATIONAL AGENDA

40 41

Source: SKOLKOVO IEMS

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES This analysis has demonstrated that the For example, value chains are usually positioned FIGURE 15. WEIGHTED FREQUENCIES OF THE ISSUES IN GLOBAL AND RUSSIAN SUSTAINABILITY AGENDAS average localisation rate for the entire within the scope of influence of the FMCG and (FOR 30 SAMPLED MNCS) sample of 30 companies is 47%. This denotes furniture, pulp & paper companies, and because the difference between the global and Russian of that, sampled companies representing these sustainability agendas of the sampled companies particular industries prioritise sustainable and illustrates the fact that global sustainability packaging and sustainable transportation priorities are usually customised towards priorities both at the global and national levels. the country-based specifics of the particular For technological companies, protecting privacy operational context. & personal information must be embedded into their sustainability strategy due to the nature of There could be a number of reasons underlying their industry and core product. In contrast, this the low average localisation rate of 47%. First, issue might not be material for FMCG companies. some issues such as water are not as important for Russia as they are for other countries due to In order to look into these differences, the the abundance of resources and/or immateriality weighted frequencies of the 26 sustainability factor. Second, a company may choose to issues appearing in global and Russian agendas prioritise certain issues in Russia and pay less have been plotted on a graph* and divided into attention to other issues declared in the global four categories (Figure 15): agenda depending on its strategic interests in Russia. In this regard, it is important to note Important at both levels (frequent in that for many sampled companies, some issues global agendas, frequent in Russian appear in the Russian agenda outside of the agendas); scope of the global agenda. The majority of such strategic priorities and initiatives are related to Not important at both levels (not the issues related to local operations and local frequent in global agendas, not frequent relations with other stakeholders: environmental in Russian agendas); responsibility; reducing production footprint; 42 partnerships & associations; volunteer activity; Important at global level, not important 43 local communities and stakeholders' education at national level (frequent in global (apart from suppliers). Last but not least, agendas, not frequent in Russian agendas); multinational companies operating in Russia Source: SKOLKOVO IEMS face certain barriers for the implementation of their global sustainability agenda. As a result, Important at national level, not localisation of some global priorities is not important at global level (not frequent The following issues are important at both levels: There are two issues that are important at the feasible. in global agendas, frequent in Russian sustainable sourcing; value chain and supply global level, but not important at the national agendas). chain management; CO2 & energy; sustainable level: human rights and diversity/women The analysis of sustainability priorities at the products; local communities; staff motivation, empowerment. These issues are interconnected national level has also highlighted the presence While the majority of the issues are either development & talent retention; water, waste and the corresponding issues are very popular of industry-specific trends with regard to the important or not important in both global and & recycling; occupational health and safety; at the global level. In the Russian business materiality aspect. The sustainability agenda Russian agendas, there are some differences marketing and communication with customers; community, the problems of human rights and both at the global and national level tends to between the declared priorities of global and environmental responsibility. These issues diversity/women empowerment are, on the be largely driven by the industry in which the corporations at the global level and ones at the are applicable to the activities of any large contrary, not popular topics, likely because company operates. Russian level. responsible producer. These issues are the most the basic human needs have been successfully important overall in the declared strategies of addressed in Russia, as discussed in Chapter 1, and other social problems have not been * In order to understand the differences between the global and Russian declared strategies of 30 companies, all the corporate sustainability leaders, and the components of the global and Russian sustainability agendas (sustainability priorities) for each one of 30 sampled ‘must-dos’ for responsible companies at all levels ‘material’ for global businesses operating in companies have been divided into 26 issues, i.e. sustainability strategy building blocks. At the global level, strategic (global and national). However, the focus of these Russia thanks to the Soviet legacy. priorities have been precisely derived from the global sustainability strategies or communication plans. Depending on the company’s sustainability reporting approach, they have been completed with the data either at the pillar, priority/ issues is often different at the global and the goal or KPI level. If a company did not specifically articulate its sustainability strategy, a declared company’s general national levels. For example, while at the global Finally, there are issues that are important at the strategy has been analysed. Primary sources for this corporate information were companies’ global/English-language level the same issue of CO2 & energy primarily national level, but not important at the global online websites, however, information about the sustainability strategies of some of the sampled companies has been derived from their most recent sustainability/social or annual reports. With regard to the national level, strategy focuses on the aspect of GHG reduction, at the level: reducing production footprint; volunteer categories have been derived from the communicated country-level sustainability strategy from Russian corporate Russian level, all activities implemented under activity; and partnerships and associations. online website and/or sustainability reports, if available. If a company did not specifically articulate its strategy, or in the umbrella of the same issue concern energy With regard to reducing production footprint, case there was only a translated version of the global/English language website, company’s sustainability priorities have been derived from the available headings in the sustainability section of the respective website. efficiency. sampled companies, on average, concentrate

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS on traditional environmental protection, ‘Reducing production footprint’ issue. Although FIGURE 16. COMPARISON OF THE IDENTIFIED FREQUENCIES OF 26 SUSTAINABILITY PRIORITIES BETWEEN environmental management and local operations MNCs tend to engage in Volunteer activity and GLOBAL AND RUSSIAN AGENDAS BY FIVE SUSTAINABILITY STRATEGY BUILDING BLOCKS as their national sustainability priorities at a Partnerships and associations at both global much greater extent in comparison with the and national levels, they rarely declare these global sustainability strategies. initiatives as standalone sustainability priorities; however, at the national level these two issues It is also important to note that Russian are considered to be a part of the publicly stated sustainability strategies of the selected MNCs sustainability agenda. In Russia the ‘Partnerships from the technological sector often declare and associations’ priority relates primarily the general environmental protection of to corporate lobbying activities in the field of the territories where they operate, and such environmental legislation. strategic priorities have been placed under the

TOOL 2. 5 SUSTAINABILITY STRATEGY BUILDING BLOCKS

ll these 26 issues have different importance in 44 sustainability strategies and represent the integral 45 Acomponents of corporate sustainability. They can be classified into the following sustainability strategy building blocks:

PRODUCTS - include stages of the product life cycle: from R&D and sourcing to product footprint.

OPERATIONS - include business processes that are directly related to manufacturing and modernising production sites.

STAKEHOLDERS - include activities, which are based on an outreach component and impact external stakeholders, with the exception of consumers. Source: SKOLKOVO IEMS

FUNDAMENTALS - are normally the essential components of any core business strategy and are a ‘must-do’ for any company even before it THE LOCALISATION ANALYSIS WAS THE INSTRUMENT FOR BREAKING DOWN starts pursuing the sustainability trajectory. THE SUSTAINABILITY AGENDAS INTO THE AFOREMENTIONED BUILDING BLOCKS: FUNDAMENTALS, STAKEHOLDERS, OPERATIONS, PRODUCTS AND CSR. ONCE THE CSR - covers traditional corporate charitable and STANDALONE BUILDING BLOCKS ARE ISOLATED, IT BECOMES POSSIBLE TO DESIGN philanthropic activities. A CUSTOMISED SUSTAINABILITY ‘TOOLKIT’ FOR ANY COMPANY. DEPENDING ON The comparison of frequencies of these 26 sustainability THE NATURE OF THE PRODUCT AND INDUSTRY, THE COMBINATION OF BUILDING priorities between the global and Russian agendas by five BLOCKS IN THE OVERALL SUSTAINABILITY STRATEGY DIFFERS ACCORDINGLY. sustainability strategy building blocks is shown in Figure 16.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS FIGURE 17. TOOL 2. 5 BUILDING BLOCKS CORPORATE BEST PRACTICES

n order to identify the most transformational Uniqueness; best practices that have been successfully Iimplemented by the 30 sampled companies, Type of Action; a list consisting of 110 sustainability initiatives was compiled. Then that long list of sustainability Scale – Partnership; initiatives was assessed against the following criteria in order to derive a short list of the most Type of Result. impactful business cases. The below filtering criteria has been applied in order to measure the impact of all 110 sustainability initiatives.

TABLE 7. CASES’ IMPACT ASSESSMENT METHODOLOGY

46 47

Source: SKOLKOVO IEMS

Source: SKOLKOVO IEMS After having applied that filter, 32 business cases scope for building the most transformational and implemented by the sub-sample of 19 companies impactful business cases. The aforementioned have been identified as the best practices. All six themes have the highest inherent potential those 32 business cases have been classified into for enabling an impactful business case. Some For further analysis, only three building blocks are corporate brand image and reputation, it should the three sustainability strategy building blocks: of the thematic headings are identical to the considered, namely PRODUCTS, OPERATIONS start implementing CSR activities. products, operations and stakeholders, which were aforementioned sustainability issues; however, AND STAKEHOLDERS. For the purpose of this also split into six themes: sustainable products there are some minor variations. For example, the study, sustainability is interpreted beyond the However, only when the company is actively & marketing, sustainable sourcing, product operational efficiency theme comprises several mere concepts of corporate philanthropy, charity looking for ways to differentiate itself from its footprint, climate change & energy efficiency, of the sustainability issues: reducing production and CSR, as those normally do not present direct rivals as a sustainability leader should it apply a operational efficiency, and partnerships and footprint; waste & recycling; green buildings and business cases. In order for the company to comprehensive sustainability strategy across all associations. water. establish itself as a market player, it must install three building blocks. all components of the Fundamentals building Not all 26 components that have been identified block. Once the company decides to enhance its as part of the sustainability agenda offer equal

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS FIGURE 18. SKOLKOVO IEMS METHODOLOGY FOR CATEGORISING IMPACTFUL BUSINESS CASES INTO There are two issues identified during the analysis sustainable products are introduced by Siemens BUILDING BLOCKS AND THEMES of the sustainability strategies of the 30 MNCs in and Schneider Electric and refer to the area of the sample. These issues are related to the theme energy consumption and generation. Three of these of sustainable products & marketing: sustainable business cases relate to energy-efficient products. products and marketing & communication with customers. Both issues are important at global This fact once again supports the argument and national levels, as many sampled companies that energy efficiency is a very important topic address them in their sustainability agendas. The in Russia. The other business case refers to the localisation rates, however, differ by industry. production of components for renewable energy generation plants, and the marketing business case It is worth noting that technological companies describes Samsung’s application of the ‘Vitality implement all identified best practices. All four Leaf’ certification (for more information on this business cases placed under the category of certification refer to Chapter 3)

TABLE 8. SUSTAINABILITY STRATEGY BUILDING BLOCK 1 - PRODUCTS. LIST OF BEST PRACTICES Source: SKOLKOVO IEMS

THE FOLLOWING 13 COMPANIES ARE IDENTIFIED AS THE CORPORATE LEADERS THAT ARE INCORPORATING SUSTAINABILITY THROUGHOUT THE ENTIRE PRODUCT LIFECYCLE OR WITHIN ONE OF ITS PHASES, E.G. SOURCING OR DISPOSAL

SUSTAINABLE PRODUCTS & MARKETING 48 49 Products marketed to the consumer and the to a consumer, e.g. having a positive impact on revenues received from selling this product the consumer or natural environment. are traditionally the paramount goals of any commercial company. Companies make significant For example, it could be a product that enhances investments in designing the products attractive a consumer’s health or well-being (for the FMCG to the target consumer groups and extending their or health, beauty & pharmaceutical sectors), or consumers’ range by offering them new, improved or a product that allows the consumer through its differentiated products. Nowadays, with sustainable application to save energy or water (mostly for the development and sustainability being very popular technological sector). This particular definition is subjects worldwide, “sustainable product” is the applied in this study. Thus, for the purpose of this term that is often used, although it can be defined in research study, “sustainable product” refers strictly several different ways. to a company’s downstream activities.

First, it can be defined as a product with The main incentive for the companies to produce components or raw materials coming from a sustainable product is to sell it to specific groups sustainable suppliers. This upstream process of consumers who are attentive to their health and is described in the SUSTAINABLE SOURCING lifestyle, seeking savings of resources, or who are section. Second, a sustainable product can also concerned about environmental or social impacts be defined as a product produced in a sustainable of the products they consume. Sustainable manner. The sustainable production process is marketing, therefore, identifies specific needs of discussed in the Operational efficiency section. such consumers, attracts their attention to the Third, it can also be defined as a product with sustainable product, and then informs them and a low post-consumer footprint. This post- other groups of consumers about the advantages consumer process is considered in the PRODUCT of the use of the product. From this perspective, FOOTPRINT section. Finally, sustainable product sustainable marketing promotes sustainability can be defined as a product bringing sustainability and sustainable development. Source: Company websites and other open sources, SKOLKOVO IEMS

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS SIEMENS BUSINESS CASE: HIGH than 100 Russian production companies will Siemens were at least 60% lower than the transportation, low safety, low efficiency of supply components for ‘Lastochka’ [29]. estimate one year earlier, according to an older trains, and environmental problems QUALITY AND ENERGY-EFFICIENT announcement by RZD in June 2015 [30]. [26]; TRAINS MADE IN RUSSIA Ural Locomotives also produces other energy- The energy-efficiency of the Siemens trains Other benefits to the external environment are as efficient equipment for trains and electric results in the reduction of GHG emissions; follows: Situational analysis locomotives with a long life span. For example, the successful application of the asynchronous Localised production creates local jobs and The operation of the Siemens trains potentially supports around 100 Russian traction drive by Siemens allows achieving high In 2009 Russian Railways (RZD) signed the addresses a wide range of challenges suppliers of parts for the trains, as currently faced by the Russian railway operator: first contract with Siemens on the development traction force with estimated specific energy estimated [29]. increased passenger flow, low quality of and delivery of five-unit trains on the basis of a consumption for traction that is 15-20% lower technological platform known as Siemens Desiro than in the latest Russian models, and with a five [25], which is a family of diesel or electric multiple times longer run time between repairs for the unit passenger trains [26]. This is a very popular locomotives [29]. SUSTAINABLE SOURCING sustainable product that became very common in European cities, thanks to its flexible design, Today multinational and local companies have to Transforming the supply chain and providing which can be adjusted to different geographic Benefits and results make public commitments to control their entire sustainability training to suppliers can be feasible and infrastructural conditions. The Desiro design supply chain in response to a growing call from the objectives for most multinational companies due offers a high level of safety, reliability, energy The use of Siemens-designed and produced public for products that are produced in a socially to the asymmetric bargaining power they have efficiency, and quality combined with optimised trains by RZD and localisation of their production and ethically responsible manner. In particular, with suppliers. Global companies are in a better costs. in Russia is arguably a ‘win-win’ situation, as it is there is growing pressure on MNCs to minimise position to transform the upstream part of the a successful business case for the producer, it is their environmental impact throughout the whole production cycle rather than the downstream, The flexibility of the design has most probably a sustainable product that brings benefits to the supply chain and reflect this commitment in their which concerns responsible consumption allowed the company to develop the sustainable customer (RZD), and potentially it has positive purchasing decisions. In this context, sustainable practices. This results from the fact that they are product specifically for Russian conditions at impact on the customers of RZD and the natural sourcing is the process by which organisations often empowered to impose pressure on suppliers a reduced cost. When modifying the Desiro environment. purchase supplies by taking into consideration to upgrade their business practices in favour platform for Russia, Siemens has adapted many the following factors: of sustainability. Whenever raw materials and construction decisions from Russian experts Siemens receives the following benefits: commodities suppliers are positioned within the 50 involved in the organisation of high-speed The entire product lifecycle; scope of influence for a multinational corporation, 51 RZD is currently a large-scale customer railways in Russia, and also from the experience it attempts to integrate sustainability aspects into with even more potential, as Russia is a big Environmental aspects, e.g. use of accumulated during the development and a comprehensive internal procurement policy, country with a relatively well-developed recyclable materials and CO2 emissions; operation of the ‘Sapsan’ high-speed trains [25]. railway infrastructure; also known as a Suppliers Code of Conduct. RZD has given the new model of trains the name Social aspects, e.g. human rights, labour ‘Lastochka,’ which means ‘little swallow’ in Application of the flexible Desiro design rights, fair trade. Those companies that enforce their internal has allowed Siemens to save on production Russian. sustainability standards on suppliers usually costs; The business rationale requires sustainable ensure compliance via the audit mechanism and Localisation of the production of sourcing and procurement decisions to fit into occasionally via third-party assessment. With Activities ‘Lastochka’ has allowed Siemens to reduce the triple-bottom line framework (occasionally regard to sustainable sourcing, the best practice customs duties; even in the quadruple-bottom line framework), for key decision-makers is to apply the same Almost from the very beginning, a decision on where financial aspects represent the third principles that guide their core business choices. Purchasing components from Russian dimension and actually deliver the shareholder In that case, sustainability can become a source the localisation of production of ‘Lastochka’ in suppliers allows the reduction of costs Russia was made. One of the main incentives for at a time when the Russian ruble is value. As traceability is one of the ways to of opportunity, innovation and even competitive Siemens to localise the production seemed to experiencing volatility. advance sustainability in global supply chains, advantage. Certain companies go even further involve the reduced customs duties [27]. Today many leading brands increasingly work with and make sustainable sourcing central to the the trains are produced at Ural Locomotives, RZD as a consumer of sustainable products offered credible certification schemes in an attempt value proposition to their customers. which is a joint venture between Siemens and by Siemens receives the following benefits: to meet their sustainable sourcing goals. As Sinara Group, established in 2010 in Sverdlovsk consumers become more responsible and Out of all the business processes, the sustainability Trains supplied from Germany and Oblast. The production of the ‘Lastochka’ trains start differentiating certified products, the priorities related to sourcing, procurement and produced in Russia have an energy-efficient, supply chain management have been localised by at Ural Locomotives started in 2013 [26]. As of safe and price-effective design, specifically business case for certification directly involves June 2015, the first ten ‘Lastochkas’ made in developed for Russian conditions of harsh growing revenues. Localising procurement the sampled companies to a great extent. Whenever Russia were released and certified. Although the winter and working on a railway network and nurturing ‘sustainable’ suppliers can be sourced resources become ‘material’ for the core supply of trains from Germany will continue with a width of 1520 mm [25]; identified as two other types of business cases product, and whenever ‘material’ issues related to until 2020, Ural Locomotives plans to gradually for sustainable sourcing, which directly have these resources create high operational risks for the The ruble depreciation generated some increase the level of localisation, which will financial benefits, as the actual payments an impact on cost savings and reputational business, companies start viewing suppliers as an reach 80% in 2017 [28]. It is planned that more for technical support of the trains to gains. integral part of their core businesses.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES The ‘materiality’ concept is of high relevance for while the suppliers benefit due to the stability of as illustrated by the example of its partnership McDonald’s is a model example of a company the food and beverage industry, as it is the world’s demand for their products. Although MNCs began with Belaya Dacha. With regard to health & safety that has nurtured its long-term suppliers largest procurer of agricultural commodities. to grapple with the reality of economic sanctions standards, the company enforces rigorous compliance and created market niches that had not been Therefore, sourcing decisions represent only in 2014, localisation of their supply chains by facilitating checks along the entire supply chain: present prior to that partnership. From the very significant business risks for these companies. has been a gradual process that was initiated soon independent audits by external providers, visits and beginning, McDonald’s acted as a pioneer in Today food and beverage companies face the after the global companies entered the Russian inspections, and internal audits conducted by the the Russian market, as it imposed high safety, relatively new threat of raw materials scarcity market a decade or two ago. McDonald’s quality and control department. health and sustainability internal standards for resulting from climate change, and that makes its suppliers – including Hazard Analysis and them even more inclined to shift towards a more Another concept that the company applies is Critical Control Points (HACCP) and McDonald’s sustainable management of supplies in order to MCDONALD’S BUSINESS CASE: the ‘chair on three legs’ principle, which aims Agricultural Assurance Programme (MAAP), ensure their future viability. SOURCING 85% OF ITS PRODUCTS at building long-term cooperation with partners starting from the early 1990s, while the Russian FROM 160 LOCAL SUPPLIERS instead of organising tenders on an annual basis, legislation lagged behind and formalised some In Russia, multinational corporations’ decisions as well as maintaining sustainable price levels of the established business principles into the to extend agricultural support programmes to over the long term. McDonald’s is able to build food safety regulations only after 2010. smallholder farmers and other suppliers are Situational analysis long-term relations with its suppliers thanks primarily determined by the global headquarters’ to the longer planning horizon of 3-10 years. Even today McDonald’s Specific Requirements declared commitment to incorporate In the early 1990s, McDonald’s was at the McDonald’s also follows the vertically integrated have a much wider scope than the international sustainability throughout their supply chains. crossroads: it either had to build its own approach, organising and controlling the entire standards ISO, GFSI and SQMS. All suppliers The range of sustainable sourcing initiatives greenhouses or outsource the processes to external supply chain from the field to the restaurant are subjects of audits by independent third implemented in Russia spans from procuring suppliers. McDonald’s opted for the second option. counter. All these principles allow the company parties. McDonald’s also formed and shaped the supplies from local farmers to various multi- In 1994, four years after McDonald’s opened to implement riskier projects, which are usually market segment of iceberg lettuce, which had year training and financial support programmes its first restaurant in Moscow, the company investments with a long payback period and a not existed in Russia prior to the company’s extended to local suppliers. Belaya Dacha won the tender for the exclusive high degree of uncertainty. demand for that ingredient. In the beginning, right of supplying vegetables and lettuce to all then, the product of iceberg lettuce had to be While globally the discussion on sustainable McDonald’s restaurants in Russia and Belarus. tailored towards the McDonald’s requirements. sourcing has shifted towards the traceability After the fall of the Soviet Union, the Belaya Benefits and results Eventually, consumer demand for lettuce and aspect of raw commodities (i.e. the ability to trace Dacha enterprise was experiencing a severe crisis, various ready-made salads was shaped in 52 them throughout the supply chain), which has so McDonald’s had to make an initial investment As of 2014 the company sourced produce from Russia, and the product range was expanded 53 to be verified either by the global certification of $150,000 into the enterprise’s working capital, approximately 160 Russian suppliers, with the total and eventually offered on the shelves of Russian scheme or company’s internal sustainability code, an amount that the supplier needed in order to annual procurement amounting to 25 billion rubles retail supermarkets. In the Russian market in Russia sustainable sourcing entails primarily fulfil the tender terms. [32]. Localisation and sourcing from local suppliers McDonald’s has become an agent of change that localisation and sourcing from local farmers. have proven to be sound business models for transferred the most advanced know-how and Virtually all sampled companies from the food McDonald’s in Russia due to the following reasons: expertise and stimulated its partners and rivals and beverage sector report on the localisation Activities to raise their operational standards. percentages in the sustainable agriculture Focus on long-term partnerships vs. section of the national corporate website, and McDonald’s did not prioritise localised sourcing annual tenders; More than 20 years later after the initial entry that differentiates the local agenda from the as part of its 2020 global aspirational goals, into the Russian market, Belaya Dacha supplies Price stability for the company and its global one where the priority goals are focused as the company’s priorities included only a the following ingredients to McDonald’s: lettuce, suppliers; on reaching 100% sourcing of a given commodity few commodities that had to be sourced in a carrot sticks, fresh tomatoes, cucumbers, apple from certified sources, which do not necessarily slices and chopped onions. With time, Belaya sustainable manner, namely coffee, palm oil, Longer planning horizon (3-10 years), have to be local. and beef and fish. However, the company has which guarantees future demand; Dacha started supplying its produce to other succeeded in localising more than 85% of its restaurant chains, catering companies, IKEA and Almost all identified corporate leaders in the sourcing in Russia [31], with the exception of Control throughout the vertically- Auchan. Today representatives of both partner FMCG sector refer to the financial rationale bacon, orange juice concentrate and french fries, integrated* supply chains; companies acknowledge the fact that Belaya underlying global companies’ decisions to which are still imported. In Russia McDonald’s Dacha has grown in parallel with McDonald’s in Minimisation of foreign exchange risks; localise sourcing in Russia. The main listed applies the tailor-made vs. off-shelf approach in Russia, as the partnership has already marked a factors driving localised sourcing are cost saving its requirements towards suppliers. This denotes 20-year anniversary. Elimination of speculative price and risk minimisation, in particular, foreign supplying customised commodities and installing fluctuations throughout the year; exchange (FOREX) risks. The latter is important customised processing procedures in line with the in the light of the current economic situation of standards of the master partner – McDonald’s. Enhancement of the company’s high currency fluctuations and import sanctions. McDonald’s sets high standards for the suppliers, competitiveness, as it is less dependent on Global and local companies are able to secure requiring them to obtain certificates verifying the sanctions and various trade restrictions. price stability as a result of these long-term rational use of raw materials. The company often partnerships with the same ‘master’ suppliers, supports its suppliers throughout this process, * In this context vertical integration does not entail owning the supply operations but rather controlling them.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS disposal methodologies had not been formalised affected businesses, which would total at least PRODUCT FOOTPRINT by that date. 50-60 billion rubles without taking into account indirect costs [37]. Raised revenues should be As has been discussed in the previous section, volumes in the past decade. Also, management Such legislative novelty raised concerns channelled into the development of the solid one of the definitions of a sustainable product of this solid waste is underdeveloped in Russia, within the business community, as initially the waste recycling industry. "Regulators should is a product with a low post-consumer footprint. with only 3-4% being processed, and the rest government authorities pledged to introduce a introduce regulations and fees for individual While in more mature economies, sustainability being directly sent to landfills. Improved waste transition period and keep the fee rates at zero product groups, depending on the availability of is incorporated in all phases of the product management, mainly through better recycling, level until 2016. Russia’s Association of Trading waste collection facilities and not the processing lifecycle, reflecting the growing importance of could reduce emissions from the waste sector by Companies and Manufacturers of Consumer facilities… There is no system of separate the circular economy concept, in Russia global more than 80%. Recycling is the largest abatement Electronics and Computer Equipment considered collection of plastic and even glass. Even if the and local companies still fail to adopt a holistic measure in the waste sector. Its implementation the date of October 15, 2015, which appeared in treatment capacity is enough to process this picture with regard to the production process. could reduce annual emissions by 33 metric tons the government ruling, to be strictly technical amount of waste, you would need to make a lot This is supported by the observation recorded (MT) in 2030 and indirectly could save about [34]. Enterprises engaged in waste collection effort to collect the waste separately," according to within this research framework, as all noted 6 metric tons of carbon equivalent (MTCE) of and processing argued against the need for the the representative of the Association of Trading impactful case studies are attributable to different energy per year. transition period. These market participants Companies and Manufacturers of Consumer MNCs. So companies tend to prioritise only one see the opportunity to use 100% of their own Electronic and Computer Equipment (RATEK) or two supply chain functions, e.g. raw materials production capacities, whereas the current Anton Guskov [37]. However, there are still no sourcing or waste disposal at factories, and none Law on consumer waste utilisation rate is only 50% [35]. Eventually, appropriate government legal acts, including of the sampled companies can be recognised as a lobbying activities resulted in the postponement regulations on the disposal (of the waste from producer of a ‘sustainable’ product in accordance The Federal Law №458-FZ “On Amending the of the law’s entry into force to 2017. According production, which is subject to the necessary to the all-encompassing definition of this term. Federal Law №89-FZ ‘On Waste from Production to the new amendments, companies will have to utilisation) for different types of waste and the and Consumption’” as of December 29, 2014, which report their 2016 level of manufactured output fee rates. Depending on the existing business rationale, eventually entered into force on July 1, by February 1, 2017. certain companies opt for the minimisation of the 2015, has provoked serious disputes between environmental footprint at the product disposal manufacturers and waste processors. The new The final fee level was defined as a rate calculated RusPEC stage. That’s why they became the pioneers in legislation is primarily focused on optimising on the basis of one ton or per one unit of output implementing sustainability initiatives related to the management of consumer waste, while not without VAT. According to the Governmental Established in 2005, the non-profit association the sustainable management of consumer waste. addressing the issue of manufacturing waste. 54 Decree №284 as of April 9, 2016, the Industry for the Environment (RusPEC) aims to 55 For example, Toyota implements a sustainability Within the framework of the new legislation, environmental fee rates were set for 36 groups develop and promote proposals for the adoption initiative focused on the safe disposal of used cars producers and importers are made liable for the of products, with batteries (33,476 rubles/ton) of environmentally safe advanced packaging in Russia. In the light of the new amendment to the waste generated as a product footprint at the and electrical goods (26,469 rubles/ton) being technologies, including environmental and Federal Law №89-FZ "On Waste from Production household level. According to the new decree, assigned the highest rates, and paper products cost-effective management of product waste. and Consumption," all other companies will have Russian companies become subject to paying an (2,378 rubles/ton) – the lowest rates. The association was established by several to start investing in consumer waste management environmental fee unless they opt for one of the multinational corporations, including Coca- initiatives, otherwise they will become subject to following options: Some industrial associations have objected to the Cola HBC Eurasia, PepsiCo, Procter & Gamble, an environmental fee. On the other hand, the most methodology of calculating the environmental TetraPak and Unilever. forward-thinking companies that have already Recycle the waste themselves, using fee rate, which they claimed should have been started implementing these impactful business their own infrastructure; calculated based on the cost of product disposal, RusPEC intensified its lobbying efforts, as it cases in advance will be able to reap more financial and not as a percentage of its price, total output actively represented the views of industrials and benefits than other latecomers. Contract an external waste management or manufacturing cost. According to Yekaterina corporations in the recent discussion, concerning operator or a regional recycling Astafieva of RusBrand, “Tying the environmental the newly adopted Federal Law "On Waste from operator, or fee rate to the cost of goods sold does not motivate Production and Consumption." Since 2005, BUSINESS CASE: RUSPEC AND producers to invest in more environmentally RusPEC members have actively participated in the Consolidate efforts with other market THE PRIVATE SECTOR'S ROLE IN friendly packaging, because it automatically development of the concept of extended producer players and establish an association that CONSUMER WASTE MANAGEMENT leads to higher product prices and higher responsibility and some of the law’s provisions. signs a contract with an external waste recycling costs… manufacturers of packaging for Although the association lobbied for the law’s management operator or a regional Situational analysis some socially important products, such as milk enactment, RusPEC has not been fully satisfied recycling operator. and dairy products (PET, Tetra Pak) can become with the formalisation of the concept in the legal The waste segment is one of the most problematic subject to such environmental fees. If the prices format. Some of the law’s provisions appear The initial document stipulated that the segments in Russia. It is the only sector in Russia of these products increase, the consumer will highly ambiguous and controversial, such as set companies had to declare their level of where current emissions, comprising 3% of react very sensitively.” [36] declaration mechanisms and inherent competitive manufactured output by October 15, 2015, and Russia’s total greenhouse gases, exceed the 1990 disadvantage in comparison to imports from other pay the respective environmental fee 5 days later, level [33]. The main reason for this alarming The Ministry of Economic Development countries of the Eurasian Economic Union. even though regulatory standards concerning level is related to a sharp increase in solid waste estimated the additional cost burden for the

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS Private sector initiatives of carbon dioxide emissions during the production TABLE 9. SUSTAINABILITY STRATEGY BUILDING BLOCK 2 – OPERATIONS. LIST OF BEST PRACTICES stage. The company announced its plans to switch Even before the official enactment of the to the production of lightweight bottles of other Law on Consumer Waste in Russia, some types in the next few years. The implementation of multinational companies started introducing this initiative would save the costs associated with sustainability initiatives focused on minimising the purchases of glass material and reduce carbon the post-consumer footprint. Product footprint is dioxide emissions into the atmosphere. recognised as a material issue primarily for those industries where packaging constitutes a large In 2011 Coca-Cola jointly with the plant Plarus and proportion of the core product. That has been the the administration of the Solnechnogorsk district case for such MNCs as Tetra Pak and Coca-Cola. of the Moscow region launched a large-scale project on recycling plastic waste within one given The very nature of Tetra Pak’s product is local community. Within the project framework sustainable, as 76% of the raw materials used for there is a fully functioning system of separate cardboard packaging are made out of renewable plastic garbage collection in Solnechnogorsk, natural resources. Almost 100% of cardboard as more than 80* special containers have been packaging manufactured in Russia and Ukraine installed around the city. Plarus is an innovative carries the FSC certification logo. In line with the production site that is the first and only plant in extended producer responsibility concept, the Russia processing used plastic bottles with the use company had prioritised the goal of minimising of bottle-to-bottle technology in a clean manner, the impact from its products even before the i.e. “new-bottle-out-of-a-used-bottle” technology. new legislation on consumer waste entered into The European technologies installed at the plant legal force. In the past Tetra Pak has successfully allow processing previously used plastic bottles implemented several campaigns, such as into raw material, i.e. granulated polyethylene Source: Company websites and other open sources, SKOLKOVO IEMS collection and utilisation of used packages from terephthalate, which is used for producing liquid products on the sites of X5 retail stores packaging material. This flagship project and office premises of some companies, such as represents Russia’s first successful example of a 56 Yandex, Deutsche Bank and Danone. public-private partnership in the field of collection 57 and recycling of plastic packaging, as it actively CLIMATE CHANGE & ENERGY EFFICIENCY As for Coca-Cola, in 2014 the company carried out involves the city government, representatives of a major initiative with the intention of minimising the processing industry and one of the world’s the footprint of the company’s bottles. For example, largest soft drinks producers. Today climate change and greenhouse gas is the state programme “Energy Efficiency and the company launched an innovative eco-friendly reductions are the paramount themes in society, Energy Development for 2013–2020,” which was BioBottle (PlantBottle) production technology, including within the business community. approved in April 2013 and that was designed to which allowed for the use of up to 30% of vegetative International agreements such as the Kyoto ensure reliable provision with fuel and energy raw materials instead of oil, which is a non- Protocol and national and regional regulations resources, enhanced the energy efficiency and renewable resource. This technology significantly critically affect business through pressure reduced the environmental impact of the fuel and reduces the usage of oil and allows for the decrease from stakeholders, including governments and energy sector. The programme objective was to consumers. At this stage it is not clear whether reduce energy intensity of GDP by 40% by 2020 the Paris Agreement achieved at the United compared to 2007. Nations Climate Change Conference in December THE FOLLOWING 7 COMPANIES ARE IDENTIFIED AS THE CORPORATE 2015 would fully enter into force in Russia; The Energy Strategy of Russia until 2020 also however, the fact that agreement was reached sets an ambitious target for installed renewable LEADERS THAT INCORPORATE SUSTAINABILITY IN THE VERY CORE on the reduction of emissions is a stimulating electricity generation to reach 4.5% by 2020. OF THE CORPORATE DNA, I.E. MAIN BUSINESS OPERATIONS, SUCH AS factor for Russian business to continue focusing Reaching this target would require approximately MANUFACTURING on matters related to climate change and GHG 22 GW of new installed capacity and displacement reductions. of more than 36 million tons of CO2 per year, representing approximately $44 billion in capital While in corporate sustainability strategies at investment. Furthermore, Russia, in comparison the global level the declared priorities are more with many other countries, is significantly less focused on GHG reductions and abatement, in accomplished with regard to climate change and Russian strategies the main subject is much the Kyoto Protocol. For example, Russia has failed more often presented as ‘energy efficiency.’ One to fully utilise the Kyoto Protocol mechanisms such * Source: Communication with RusPEC of the main energy-related legislative documents as Joint Implementation and emissions trading.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS At the same time, when the companies address As business cases in Russia in the area of concern designed in accordance with the best available via a covered conveyer. It was planned that by these issues, they consider not only the financial are most often connected with lower electricity European technologies of energy saving, safety the end of 2015, the replacement of natural gas and reputational benefits from GHG reductions, bills and use of cheaper fuels, the differences in and minimisation of environmental impact. On with alternative fuel would be 15%, and by 2020 as energy efficiency presents a direct business energy intensity of the production processes of June 1, 2015 an alternative fuels shop at the would reach 45% [41]. case to the companies due to the cost savings. different sectors of the 30 selected companies Ferzikovo plant opened. It uses municipal and Energy consumption and energy generation could be the explanation for the differences in the industrial waste as fuel for the kiln plant as a Benefits and results cost money to the company, and by cutting the average localisation rates by sector. partial substitution of natural gas [38]. consumption of electricity, using alternative The project has been supported by the Kaluga fuels such as waste for energy generation, and The second issue identified during the Strategies Oblast government [42] and accomplished implementing new technologies in production, and Priorities Localisation Analysis and directly Rationale in partnership with a waste supplier. The the companies potentially reduce their expenses. connected with the theme of climate change and implementation of the business case has brought energy efficiency is the use of non-fossil fuels (e.g. The decision to open an alternative fuels shop the following material and non-material benefits That was the case for the sampled companies that waste) in energy generation. This issue, due to its was made in line with one of the company’s to the company: implemented best practices. While implementing specialised nature, is not popular at both global Sustainability Ambitions 2020 under the climate change and energy efficiency initiatives, and Russian levels. Construction companies use ‘Building the circular economy’ priority: “Non- Material savings: Improved production those companies attempted to achieve two waste materials as fuel during the process of fossil fuels. Use 50% of non-fossil fuels in our efficiency and savings on energy costs; main goals: to address the requirements of their cement production. Also, another company from cement plants by 2020 (30% of which should be head offices on GHG reductions and cut costs of the furniture, pulp & paper sector - IKEA - is biomass)” [39]. This decision is also in line with Reputational benefits: Support of operation. It should be noted that for many of the currently in the process of installing a biomass the priority of the newly created LafargeHolcim company’s Sustainability Ambitions sampled companies, the effects of energy saving boiler at its factory, which can be considered as company: “Provide Geocycle solutions and 2020, the priorities of the new joint and cost reductions have been more important use of non-fossil fuels that addresses the issue of increase the use of biomass” [40]. Most likely, the company LafargeHolcim, and the than GHG reductions. CO2 and energy. aspiration to follow the best practices in cement company’s slogan: “Building Better production, the company’s global sustainability Cities" by addressing the municipal waste According to the analysis, the issue of CO2 and Most likely the main driver for implementing policy and, possibly, the influence of the head disposal problem in Kaluga Oblast. Energy is, on average, one of the most popular initiatives related to climate change and office became the main incentives for the issues of the global corporate sustainability energy efficiency has been a signal from global company’s decision to implement the initiative The following potential positive impact on the strategies of the 30 selected companies along headquarters. In case of the construction in Russia. It should also be noted that the use of external environment can be expected as a result of 58 with the issue of Sustainable sourcing, value materials companies, addressing the global goal alternative fuels would allow Lafarge to improve the implementation of the Lafarge business case: 59 chain and supply chain management. At the of increasing the share of secondary materials economic efficiency of cement production, as national level a smaller number of MNCs address in energy generation became that very factor, energy costs account for almost one-third of the Addressing the greenhouse gas emissions this issue. and in the case of IKEA, it was a reduction in total cost of cement production [41]. The second problem, while saving non-renewable the carbon footprint of the IKEA factory. Thus, incentive was probably the one of potential fuel such as gas and coal; The sampled companies have identified the the most interesting examples of the initiatives savings. following problems with regard to climate change related to climate change and energy efficiency Addressing the waste disposal problem, and energy efficiency. CO2 emission reduction are those companies utilising energy-intensive significant for the Kaluga Oblast, by safe has been specified as one of the most challenging production processes. Therefore, the Lafarge Activities utilisation of municipal and industrial targets for companies at both levels: globally and and IKEA business cases have been selected (see waste; in contrast, using landfills would nationally. It has been emphasised that climate below). The project plan was as follows. As an alternative otherwise pollute air, water and soil; change is an immediate threat for agriculture, fuel at the plant, it was planned to use sorted and and therefore, presents a threat to activities of shredded municipal and industrial waste (paper, Serving as an inspiring example for other companies that operate in the agricultural sector, LAFARGE BUSINESS CASE: cardboard, plastics, textiles, rubber, wood), as cement plants in Russia, in particular, in including companies in Russia. On the other hand, ALTERNATIVE FUELS TO ENERGY well as used tires. The plant’s clinker kiln would Kaluga Oblast [42]. when a company does not have energy-intensive SHOP AT THE FERZIKOVO PLANT provide a complete and environmentally safe production and its own fleet, the problems of combustion destroying 99.99% of organic matter The Lafarge Alternative Fuels to Energy business greenhouse gas emission reduction are not as without the formation of ash, and without any case is a good example of an MNC’s successful pressing, and the task on energy efficiency was Situational analysis impact on the quality of the cement. All waste introduction of a sustainability initiative in the mostly related to reducing electricity bills. Also, materials would be screened against a number area of climate change and energy efficiency, normally a company does not take responsibility Launched in 2014, the cement plant in Ferzikovo of criteria (size, moistness, and calorific value), despite the underdeveloped infrastructure of for supply chain emissions, but only for its own is the largest investment project of the Lafarge ensuring environmental safety of the fuel used separate waste collection or sorting and lack of emissions. Group in the Russian market. It aims to meet the and its compliance with production specifications. other examples of similar initiatives. demand of the construction sector of Moscow, Raw materials would be selected and controlled Another finding of the Strategies and Priorities the Moscow region, Kaluga, Tula and Serpukhov. by the supplier, and sorting would be made at Localisation Analysis is that the localisation rates A modern processing line with a capacity of the plant. Alternative fuel would be stored in a of the issue of CO2 and Energy differ by sector. two million tons of cement per year has been closed warehouse and fed into the furnace clinker

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS To address the ecological sustainability Reduction in electricity and water OPERATIONAL EFFICIENCY targets assigned by the head office for consumption and waste generation PepsiCo in Russia; leading to reduced GHG and traditional The process of production is all about operational PEPSICO BUSINESS CASE: LEED- pollutants emissions and discharges, efficiency. The companies have the following To reduce consumption of electricity, CERTIFIED BUILDING OF THE including emissions and discharges from incentives to improve operational efficiency: water and waste generation, and AZOV SNACKS PLANT landfilling of waste; to reduce the costs or production; to meet the therefore, to reduce the corresponding bills; requirements of headquarters (in the case of The Azov snacks plant serves as a MNCs); to comply with existing legislation; and Situational analysis To demonstrate leadership inside the leadership example inside PepsiCo, and to be ahead of future changes in legislation in PepsiCo company. among other Russian companies. order to hold a leadership position when the Launched in 2014, the cement plant in legislation is introduced. Ferzikovo is the largest investment project of the Lafarge Group in the Russian market. It Activities Waste & Recycling, Water, Green Buildings and aims to meet the demand of the construction “We are proud of our new venture. This Reducing Production Footprint are the issues sector of Moscow, the Moscow region, Kaluga, The Azov snacks plant was a greenfield project for identified during the analysis, which are related will be PepsiCo’s first “green” plant in Rus- Tula and Serpukhov. PepsiCo. As of 2010, the company invested more to the Operational Efficiency theme. All four than $100 million into the construction of the sia, which sets a new level of production issues are significant in the Russian agenda of LEED (Leadership in Energy and second plant producing snacks in Russia, which standards. I am glad that commissioning the selected companies. With regard to global Environmental Design) is a green building commenced in 2007 and was completed in 2010. agendas, Reducing Production Footprint and of this plant will make a positive impact certification programme that recognises best- According to the company estimates as of 2010, Green Buildings are not frequent issues, while in-class building strategies and practices. the total investments into all plant development on the lives of hundreds of families in Waste & Recycling and Water are also important This certification system covers energy projects, including a programme of supporting Azov via job creation.” there. It is important to note that only the conservation, efficient water consumption, local farmers, were around $170 million. — Ramon Laguarta, President of PepsiCo technological companies from the entire sample reduction of CO2 emissions, and an have a priority within the Reducing Production Eastern Europe Region [45] * improvement in internal environmental During the construction stage, PepsiCo Russia Footprint issue at the global level, and all of indicators and practices that promote reduced applied PepsiCo’s Global Sustainable Engineering them address this issue in Russia. Despite the consumption of resources. The first project Guidelines (SEGs), which are based on LEED fact that companies from other sectors do not 60 that was awarded the LEED certificate in standards. In accordance with the Federal Law UNILEVER BUSINESS CASE: ZERO 61 have a declared global priority specifically with Russia was the factory of Sweden’s SKF group "On Energy Efficiency," in 2012 PepsiCo conducted NON-HAZARDOUS WASTE TO regard to Reducing Production Footprint, many (Gold certification), which produces railway energy audits and certification of facilities, and as LANDFILL of them introduce the initiatives on footprint bearings in the Tver region. The project one of the results, the Azov snacks plant achieved reduction outside of the scope of the global was fully designed by the foreign developer LEED certification. Rationale agenda. (AECOM), and it included natural lighting in 90% of the entire floor space during daylight Following the introduction of the Unilever Green Buildings are a part of the operational hours and achieved 100% reuse of all water. Benefits and results Sustainable Living Plan (USLP) in 2010, efficiency theme, although it is also related Another manufacturing site outside of Moscow the company committed to halving the to the theme of climate change & energy that has also been LEED-certified is the plant The project has resulted in significant reductions environmental footprint of its products by 2020. efficiency, as one of the main requirements of Hamilton Standard-Nauka (which received a of electricity, water consumption and waste While the goal of reducing environmental impact for green buildings in most certification Silver certification). generation. LEED certification accomplishment included targets related to different natural schemes is energy efficiency. However, the has also been very beneficial for a company resources and material issues, such as requirements often also focus on reduced from a PR point of view, as well as from the greenhouse gases, water, waste and sustainable water usage, decreased waste generation Rationale point of view of positioning of PepsiCo Russia sourcing, each of Unilever’s country offices was and improvement of other environmental within the whole PepsiCo group. The business granted a certain amount of liberty in selecting indicators. In Russia there are examples of PepsiCo is committed to saving energy through case has become a win-win situation, and even focus areas from the global agenda that it opted companies that demonstrate leadership in green building and design worldwide, and its with a rather unfavourable external regulatory to prioritise at the national level. the area of Green Buildings, both within the head office encourages all PepsiCo’s facilities environment, it was possible to demonstrate an company and worldwide. The research has to meet LEED standards, which are among the example of operational excellence. In relation to the environmental footprint demonstrated that the companies have the most rigorous benchmarks for green building priority, the regional Unilever business unit of following rationale for implementing green design, construction and operation in the world The following potential positive impact on Russia, Ukraine and Belarus decided to focus on building initiatives: to demonstrate leadership [43]. In 2012 the Azov snacks plant (in the the external environment can be expected as a the ‘zero waste to landfill’ approach, as there within a company at the global and country Rostov Region) became PepsiCo’s first Russian result of implementation of the business case: was significant potential for corporate waste levels, as well as among other market players; facility to achieve LEED certification [44]. to save energy costs; and to satisfy the The company had the following incentives to requirements of a parent company. launch the green building initiative: * - IEMS translation of the quotation originally published in the Russian language.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS management activities to generate value-added to-landfill’ initiative, Unilever had rigorously FIGURE 19. 5R FRAMEWORK as a bottom-up measure, and, in general, the complied with the Russian regulations on waste-related target was more relevant and industrial waste treatment, and disposed material for developing markets, such as Russia. all its waste accordingly. Within the USLP framework, some preliminary work with regard Although initially the company set 2020 as the to optimising the waste amount had been done official deadline for achieving all sustainability even before 2014. For example, between 2011 targets set in the Unilever Sustainable Living and 2013, the company introduced basic waste Plan, with regard to switching to the ‘zero sorting procedures (plastic and cardboard) and waste’ model, the company globally revised began recycling some of the waste, but still the deadline, setting a new threshold at the sent most of it to a landfill. The revised USLP end of 2014. At the beginning of 2014 the required the Russian country team to step senior management of the Russian country up efforts and impose even more stringent office adopted the revised deadline and requirements with regard to industrial waste. communicated it to all production units. The continuity of all manufacturing sites was Source: Academic research adapted by SKOLKOVO IEMS conditional on the achievement of the zero The 5R vision waste to landfill levels by the end of 2014. The first project phase consisted of a two- claims about switching to the ‘zero waste to The project was based on five key milestones* week audit of the industrial waste structure, landfill’ model. The ‘just-do-it’ requirement was imposed on that defined the applied methodology: which was conducted by the Working Group in all Unilever country offices without much accordance to the 5R approach. Therefore, as the pioneer in that field, Unilever had adjustment to the local reality, including Reject/Eliminate – Complete to identify the appropriate players and potential the Russian country team, which had to act elimination of this type of waste from business partners from scratch. The company promptly and innovatively in order to find the the manufacturing process; Activities and finance had to search for regional waste operators that solution to meet the global target. The KPI specialised in recycling waste into new products related to achieving the ‘zero waste to landfill’ Reduce – Reducing waste through the The first production site that implemented the or energy. Based on the company’s experience, target was assigned to the supply chain team modernisation of the manufacturing ‘zero waste’ approach in Russia was Unilever’s finding the appropriate operators proved to be of the Russian country office. 62 processes; tea-packing factory in St. Petersburg on January a challenging task, as the landscape of waste 63 1, 2013. As a result of the newly-introduced operators was not homogeneous, and depending Reuse – Reuse of waste in production; waste management procedures, tea waste and on the type of waste, certain recycling companies Situational analysis tea powder (4% of the factory’s total waste) predominated over others. For example, there Recycle – Recycling; were to be sent for recycling into pavement were more waste operators recycling packaging The waste segment has historically been tiles, while residual material from tea bags cardboard than food, so Unilever had to seek the source of environmental distress as Recover/ Incinerate – Waste disposal (33% of the factory’s total waste) would be alternative solutions for certain types of waste measured by the high emissions level from with the maximum generation of energy sent for processing into alternative solid fuels, and in certain regions. Nevertheless, in general, the Russian waste sector. Even today, most and extraction of necessary substances; which would then be used in cement production. the tendering process for all six factories was of the infrastructure related to recycling of Additionally, any residual waste items generated marked by the participation of few bidders, as not industrial and household waste is severely during the manufacturing process – including many Russian companies specialise in offering underdeveloped in Russia. The key objective Before the setting of the five key milestones, cardboard, film, scrap metal and wood pallet - services in waste recycling. Nevertheless, a of Unilever Russia was to introduce the there was one additional element - Rest/ were to be recycled for reuse. limited supply of waste operators was not the culture of ‘zero waste’ in its own system of Landfill – that required sending waste to a most pressing barrier for the company, and by production and logistics across the network of landfill, if there are no alternative means of The total investment cost of that project September 2014, the key service providers had six production sites. For Unilever, the concept disposal. This option is no longer acceptable exceeded 20 million rubles, and the Russian been contracted. of ‘zero waste to landfill’ denoted that all under the ‘zero waste’ model. country office did not have an allocated budget industrial solid waste was to be processed and for that initiative at that time. So, in order to Depending on the type of waste produced recycled into secondary raw materials rather achieve the target in a timely manner, the by each of Unilever’s six Russian production than being dumped as before. Russian team first had to raise financing from sites*, the tendering process for the recycling Even prior to the launch of the ‘zero-waste- the global team. Secondly, the team encountered companies was either more or less challenging, the challenge of the limited availability of waste and eventually the entire business model of operators in the country, since prior to Unilever, selling waste proved to be either more or less no other Russian company had made public profitable.

* Landfill is positioned outside of the 5R framework. * Unilever operates a network of six factories in Russia: two factories producing personal care, home care and cosmetics, two factories producing ice cream, one factory producing tea and one factory producing food (spices, sauces, etc.).

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS Benefits and results whether the company’s waste is recycled in TABLE 10. SUSTAINABILITY STRATEGY BUILDING BLOCK 3 – STAKEHOLDERS. LIST OF BEST PRACTICES accordance with the sustainability standards. In Russia it took approximately 2 years in order to achieve that sustainability target, as In terms of cost-benefit analysis, the Unilever by January 2015 all Russian production sites country office has not fully claimed all the of Unilever had switched to the ‘zero waste to potential financial benefits generated by the landfill’ approach. ‘zero waste to landfill’ business case in Russia. While new legislation has been recently In general, ‘zero waste to landfill’ has become a introduced in relation to consumer waste, no sound and impactful business case for Unilever considerable fees and penalties are imposed on Russia, as selling waste is currently another the producers of manufacturing waste in Russia. peripheral income source for the company. The Once such legislation is introduced, only then average gross profit margin for all six factories would it become more beneficial for businesses is 16%. to recycle waste rather than send it to a landfill. Once such penalties are raised - and it is likely to On average, the income from selling waste be a question of ‘when’ rather than ‘if’ pioneers produced by the production sites in Tula is twice such as Unilever would be in a more favourable as much as the project costs. The application position due to their forward-thinking approach. of the ‘zero waste to landfill’ business model proved to be less profitable at the Kalina factory Russia’s country office has contributed to the in Yekaterinburg due to the higher costs. In this early achievement of the ‘zero waste to landfill’ region, there are no waste operators located target, and in January 2015, Unilever made an within close proximity to the production site, official announcement that the company had and the factory has to transport waste, thereby achieved the goal of sending zero non-hazardous generating a carbon footprint in addition to waste to landfill from its entire global factory higher financial costs. network. In the same corporate press release, the company reported that eliminating waste had Source: Company websites and other open sources, SKOLKOVO IEMS 64 Furthermore, the opportunity cost of sending resulted in more than 200 million euros of cost 65 waste to landfill is often a fraction of the costs savings globally [46]. The next phase of ‘zero associated with waste recycling. The company waste to landfill’ process will involve Unilever’s sets expectations for all procured waste offices and warehouses, which are also expected operators to provide services in a sustainable to implement the waste recycling business manner, i.e. to recycle waste appropriately. practices. This defines the next ambitious target The company’s supply chain team organises for Unilever Russia to address in the near future. PARTNERSHIPS & ASSOCIATIONS audit inspections every three months to verify Irrespective of the nature of the existing In Russia stakeholder engagement is even barriers, global, regional, national, sub- more vital for success, as virtually all impactful THE FOLLOWING 7 COMPANIES ARE IDENTIFIED AS THE CORPORATE national and local multi-stakeholder initiatives must be fine-tuned manually due to the LEADERS THAT INCORPORATE SUSTAINABILITY IN THEIR EXTERNAL partnerships for development have proven to underdeveloped state of the business environment. be the most effective elements of a roadmap Therefore, multinational and local companies need OUTREACH ACTIVITIES WITH BUSINESS PARTNERS, COMMUNITIES AND for implementing sustainability strategies. to collaborate and form partnerships in order to PUBLIC AUTHORITIES These partnerships create win-win situations generate the critical mass for transforming the for all partners and maximise the impact. Local corporate landscape towards greater sustainability. and global business performs a significant Sampled MNCs form partnerships with external role in this type of partnership, ensuring stakeholders, including Skolkovo (Unilever) and business-wide standards of work and inflow other academic institutions, FSC and WWF (Ikea) of investments. At the same time, MNCs also to UN agencies (Nestle) and state authorities benefit from forming alliances with other (Schneider Electric). Additionally, some MNCs organisations – both public and private – become members of various industrial associations, enabling them to build new types of business such as RusPEC* (Tetra Pak), in order to participate models in their key markets. in joint lobbying activities.

* More information about RusPEC is presented in the case study “BUSINESS CASE: RUSPEC AND THE PRIVATE SECTOR'S ROLE IN CONSUMER WASTE MANAGEMENT”

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS Industrial associations

The following associations have been identified as While RSPP is focused primarily on representing following industrial segments: food, tobacco and Siemens, Holcim, Bayer Material Science, Colliers the most active players in the Russian sustainability the interests of Russian businesses, international alcohol industry manufacturers; beauty products International, Philips, Jones Lang LaSalle, Ikea, Tata arena and strategic partners of MNCs in this field. companies operating in Russia combine their efforts and health care products manufacturers; home Steel, etc. Some of the membership benefits include under the umbrella of the Foreign Investment care products manufacturers; clothes and footwear access to latest green building news, research and Established in 1990, the Russian Union of Advisory Council (FIAC). Established in 1994, FIAC manufacturers; household appliances manufacturers; information about rating systems. Industrials and Entrepreneurs (RSPP) is probably functions on the basis of direct dialogue between pharmaceuticals, and telecommunications. RusBrand the oldest association that has been operating in the chief executives of investor companies and the lobbying and awareness-raising activities focus The non-commercial partnership League of Waste modern Russia. The union was established as a non- Russian government with a focus on the crucial on establishing a constructive dialogue with Paper Processors was established in 2012 in order political organisation, which aimed at representing aspects of fostering a healthy investment climate. all market stakeholders, as well as key state to represent interests of the Russian companies that and protecting the interests of Russian business. Chaired by the Prime Minister of Russia, the council authorities. RusBrand priorities are positioned in are engaged in the collection and recycling of waste Today RSPP brings together about 130 sectoral includes 53 international companies and banks [48]. the following areas: promoting competitive media paper. The creation of the self-regulating organisation and regional associations of employers [47]. RSPP FIAC has several dedicated working groups that are market development, contributing to constructive has been governed by the Federal Law № 458 committees and commissions are considered by of relevance for this research scope, namely, working collaboration between branded goods manufacturers “On Production and Consumption of Waste.” The the government authorities as key platforms for groups on efficient use of natural resources in Russia and retailers, supporting legal and administrative association unites 80 companies (as of 2016), which debate on the most significant issues of economic, (as coordinated by Exxon Mobil Corporation) and reform, and educating both the public and decision- represent 85% of the waste paper processing industry environmental and social development. Several energy efficiency (as coordinated by Siemens and makers on the positive value of brands. RusBrand is in 6 federal districts of the Russian Federation. Some RSPP committees and commissions were actively Saint-Gobain). These working groups are composed a member of the European Brand Association – AIM. of the international companies have also joined the involved in the promotion of the sustainability of FIAC member company officials and the heads League of Waste Paper Processors, such as Knauf, agenda among Russian corporations, in particular, of the respective ministries and agencies. In 2013 Another association that is of relevance for one of SCA Care of Life and Huhtamaki. The lobbying the Committee on Corporate Social Responsibility FIAC published a research paper, “The Impact of the sustainability-related elements of the Russian agenda of the association has included the following and Demographic Policies, the Committee on Foreign Direct Investment on the Socio-Economic business environment is the Russian Green objectives: the introduction of a temporary ban on the Environmental Management and the Committee Development of the Far East of Russia.” Building Council (RuGBC), which is a not-for-profit export of waste paper, cancellation of the VAT and on Energy Policy and Efficiency. The Committee on industry organisation dedicated to accelerating personal income tax, putting into practice by-laws Corporate Social Responsibility and Demographic One of the largest FMCG associations in Russia is development and adoption of market-based green (e.g Federal Law № 458), extension of monitoring Policies played a significant role in supporting the RusBrand, which is the Association of Branded building practices. Established in 2009, RuGBC is a and analytical activities with regard to the industry evolution of non-financial reporting in the Russian Goods Manufacturers. The association was founded member of the World Green Building Council - the coverage, and strengthening collaboration with other business community, while the Committee on in 2002 by more than 20 leading consumer goods world's largest Green Building movement. RuGBC’s associations and unions. Partially as a result of the Environmental Management serves as a prominent manufacturers. Today the association unites 55 structure has two membership levels: individual and lobbying activities, the government resolution № discussion platform with regard to climate change, Russian and international leading companies, and corporate, and corporate members include several 1372 “On the introduction of a temporary ban on the 66 waste management and other operational efficiency- their investment into Russia exceeds $18 billion. multinational corporations that operate in Russia, export of waste paper from the Russian Federation” 67 related issues. RusBrand member companies represent the such as Mott MacDonald, the Dow Chemical Company, was signed in December 2015.

BUSINESS CASE: RESPONSIBLE were FSC-certified [49]. More than a decade later, cooperation and sustainable forest management systems for tracking wood origin with mandatory FORESTRY AND THE PRIVATE that figure is close to 42 million hectares, which in the 2000s. In the mid-1990s, some Finnish verification (via an audit) in accordance with the SECTOR’S ROLE IN THE EVOLUTION constitutes 23% of all leased forests [50]. The timber companies, such as Stora Enso and UPM- ISO standards by an independent third party. OF THE FOREST STEWARDSHIP FSC certification process took off in 2005-2006* Kymmene, were heavily criticised for logging of COUNCIL CERTIFICATION IN – ten years after the first systems of timber the old-growth forests in the Republic of Karelia. In 2005-2010, foreign timber companies that traceability had been introduced in Russia. That resulted in the market campaign driven leased forest land in Karelia completely switched RUSSIA by the Russian NGO coalition – the Forest to the sustainability trajectory in relation to Foreign timber companies started entering the Club, which focused on European business and the old growth forests, as they opted for the Russian market in the early 1990s, and from individual consumers that used to purchase FSC certification with compulsory preservation Forest Stewardship Council (FSC) certification the very beginning, their forest management wood from those companies and eventually of high conservation value forests, especially serves as a verification of timber traceability and supply chain practices in leased forest areas forced the business players to change their intact forest landscapes. In addition, in 2007- from sources that are compliant with responsible have been closely watched by international practices. For example, the Finnish company 2008 within the framework of FSC certification forest management practices. Out of all existing and Russian environmental NGOs. During the Tehdaspuu was one of the first to terminate its companies started wide consultations with local international eco-certification standards, Forest past two decades the history of corporate forest relations with a logging company working in communities aimed at identifying social value Stewardship Council (FSC) is the most prevalent management practices in Russia has shifted, the disputed ‘green belt’ in Karelia. As a result forests and implemented social programmes one in Russia, with a logo that is instantly from forest exploitation and confrontation with of the market campaign, Finnish companies that contributed to the infrastructure of the recognisable by many Russian producers and civil activists in the mid-1990s to constructive declared a moratorium on logging in intact local forest settlements. consumers. In 2004, only 1.5 million hectares forests of the Karelia Republic, Arkhangelsk Oblast and Komi Republic. Later those Finnish The development of the voluntary forest * It should be noted that the first FSC certificate was issued in 2000, and the initial development of the FSC standard companies developed and implemented the certification in Russia has been primarily commenced in Russia in 1997-1998.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS driven by environmental organisations (WWF- Rationale for the private sector Business role. IKEA example critical sub-suppliers by providing free FSC Russia, Greenpeace, the Socio-Ecological Union, consultancy services. In addition, the company Wildlife Conservation Centre). In 1998 they Pressure from consumers in Western markets From the very beginning, multinational also supports the development of FSC voluntary established the Russian initiative on voluntary acted as the main driver behind Russian companies have been very active at promoting certification in Russia, Ukraine and Belarus forest certification, and the Forest Stewardship companies’ decision to apply forest certification the forest certification agenda in Russia. Apart through its two flagship partnerships with the Council was chosen as the most appropriate in their supply chains, starting from the early from providing sponsorship contributions, some FSC and the WWF Forest Programme. For many standard for the Russian conditions. In 2000 2000s. As Western businesses and individuals representatives of multinational companies sit years, IKEA has worked to increase the supply of the National Working Group emerged on the became more mature and informed about the as members of the Economic Chamber on the wood from responsibly managed forests, and the basis of the Russian initiative on voluntary negative aspects associated with illegal logging FSC Coordination Council, for example, IKEA. In company became one of the founding members forest certification, having the goal to develop and trafficking of forest products, problems Russia timber exporters demonstrate a greater of FSC Russia. the national standard of FSC certification for related to the preservation of rare animal and degree of commitment to FSC certification due Russia. That National Working Group between plant species during timber harvesting, deficient to the stringent requirements imposed on them Some of the most significant achievements that 1999 and 2007 developed the Russian national reforestation which causes damage to soil and in the external markets. The state of the Russian IKEA has delivered in collaboration with its FSC standard. The National FSC initiative was water courses during logging, and companies’ domestic market is less advanced. In 2012, WWF partners WWF and FSC include: accredited by the international secretariat of the failure to comply with social commitments in partnership with FSC Russia and a number Forest Stewardship Council in 2006. in relation to local communities, timber of private sector companies, such as Tetra Pak Established high-level discussion on the consumers started taking steps to encourage and Avon, launched the second FSC campaign in legislative initiatives and participation The following reasons have been listed as Russian suppliers to adopt the voluntary forest Russia, which aimed at raising the level of FSC of NGOs and responsible forestry the drivers of the rapid evolution of forest certification. Western markets can be labeled brand recognition among corporate consumers. companies in drafting of national forest policy; certification in Russia: as being ‘environmentally-sensitive,’ hence requiring products with compliance to green For IKEA, the world’s largest furniture retailer, Established dialogue on the topic of Export orientation of the forestry standards must be verified by the globally promotion of the FSC certification presents a illegal logging among government and industry (given that the traditional recognised certification logos. This driver for direct business case, as more than two-thirds* representatives of the scientific and foreign markets for timber products have forest certification has become a determinant of the company’s products are made from wood- business communities; transformed into more environmentally- in the Russian market, as the Russian based materials, and the company is one of sensitive markets); timber industry is currently export-oriented: the largest consumers of timber in the world Advanced the responsible forest approximately 2/3 of all Russian forest output (about 1% of global consumption). Russia is an management concept in Russia; 68 Lobbying activities of international and is exported, and only 1/3 is sold in the domestic important market for IKEA, as around 7% of the 69 Russian NGOs; market [49]. wood used in the IKEA range is sourced here Increased application of the responsible [51]. IKEA has set a global goal of becoming forest management principles by the Willingness of forest producers and Another factor is timber market saturation, the “forest positive” and ensuring that 100% of practitioners. traders to safeguard their business predominant feature of which is the presence the wood used by the company is sourced in through the certification requirements; of many large timber companies in Russia that compliance with its forestry requirements by IKEA is currently in the second phase of a compete with each other. As a result, forest 2020. However, in countries where the risks partnership with FSC Russia and in the fifth Presence of companies that have the certification becomes an additional competitive related to illegal timber are high, such as phase of a partnership with WWF Russia. means and scope for certification; advantage for them. Russia, the goal of reaching 100% FSC-certified During the second phase of partnership sourcing is set for September 1, 2016†. between IKEA and FSC, which commenced in Compliance of the Russian traditional Sourcing from sustainable suppliers who can 2014, organisational efforts are focused on the forest management practice with verify traceability with the corresponding forest Currently, IKEA products are supplied by 23‡ development of a new national standard and a international certification requirements; certificates generates the following benefits for local suppliers, including four company-owned new national risk assessment for controlled wood companies: factories. From September 1, 2016 all IKEA in Russia. Another objective involves improved International consumers’ awareness suppliers are required to use timber that is management of intact forest landscapes within about ‘bad’ forest management practices marked as 100% FSC or FSC Mix Credit. As the boundaries of leased forest areas. The issue in Russia and abroad, and resulting Stability in supply chains and, as a of January 1, 2016, 55% of all products from of intact forest landscapes management is also pressure [49]. result, stability in production processes; Russian suppliers are delivered with relevant covered by the agenda of IKEA’s partnership with FSC claims. Because of that, the company the WWF, which is currently in its fifth phase The combination of these factors has contributed Transparent pricing; promotes better forest management throughout planned for 2014-2017. All these collaborative to the rapid evolution of the forest certification its entire supply chain by encouraging suppliers activities have been designed with the purpose in Russia. No other segment of the Russian Risk minimisation whenever to source raw wood materials from responsibly of enhancing the availability of FSC-certified economy can be compared with the forest the products are exported to managed forests. IKEA assists suppliers and raw materials for IKEA suppliers. industry in terms of the coverage scope of environmentally sensitive markets. international certification standards. * Source: Communication with IKEA-Russia † Source: Communication with IKEA-Russia ‡ Source: Communication with IKEA-Russia

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS "For IKEA sustainable forest manage- public raising awareness about sustainable milk and potatoes producers and supports supporting the organisation of thematic forest management. NGOs organise conferences, Russian higher educational institutions that seminars and conferences, language courses ment is fundamental for providing the roundtable events and meetings where joint train specialists in the fields of agriculture, for faculty members, supporting academic and resources and guaranteeing the suppliers’ recommendations are formalised in relation to processing and engineering since 2008. PepsiCo scientific mobility, and organising summer traceability, and for WWF it ensures the the improvement of forest policy and legislation. was one of the companies that highlighted schools. The programme runs in partnership the critical state of the underqualified with approximately ten educational institutions, conservation of forest biodiversity and The Association of Environmentally agricultural workforce in Russia. Based on such as Don State Technical University (DSTU), other environmental and social functions Responsible Producers of Forest Products a needs assessment, PepsiCo has tailored its Kuban State Agrarian University (KubGAU), of forests. This partnership has led to (GFTN-Russia) was established in 1999 under sustainability agenda towards the operational Russian State Agrarian University - Moscow the umbrella of WWF Russia. Initially the reality instead of simply localising the global Timiryazev Agricultural Academy, Omsk State very important positive changes in sus- association brought together 13 companies. sustainability strategy. Agrarian University, Novosibirsk State Agrarian tainable forest management and serves Today it connects approximately 25 companies, University and others. including the leading industrials, such as Ilim PepsiCo’s initiatives directed at the students as a ‘model’ example for many companies Group, Mondi Group and Arkhangelsk PPM. of Russian agricultural institutions are Russia- Starting from 2013, the company launched an that are concerned about their social and The strategic goal of the Association is to specific. The rationale for launching the international summer school for university environmental responsibility. Joint efforts promote environmentally responsible, socially structured programme of supporting tertiary students in partnership with Kuban State oriented and economically sustainable forest education in the Russian agricultural sector was Agrarian University in Krasnodar. So far there of businesses and environmental organi- management that will maintain Russia’s natural the following: have been three student intakes in the summer sations can generate important practical heritage for future generations. Association school. In addition to standard lectures delivered members believe that corporate environmental Shortage of qualified and applied by Russian and foreign professors, practical results." policies and voluntary forest certification agricultural specialists that represented workshops and study visits to local farms and — Nikolay Shmatkov, Head of the Forest contribute to improving the companies’ image the potential workforce for the company industrial enterprises, school participants gain itself and its business partners, including and enhancing their competitiveness, ensuring the opportunity to develop their own dairy Programme, WWF Russia [52]. suppliers; better access to investment resources, and product or design a project focused on improving also serving the interests of environmental Competitors’ poaching (‘headhunting’) the efficiency of an agricultural enterprise. protection, biodiversity conservation and forest certain suppliers after PepsiCo had IKEA has developed and applied in practice reproduction. The Association actively promotes invested in their development. 70 its own internal ‘forest policy,’ which is based forest certification in Russia. Benefits and results 71 on two key documents: “The IKEA Position on The main objectives of the programme are the Forestry” and “IWAY standard”. IKEA employees All the lobbying activities in the format of following: triggering students’ interest in the By 2015 PepsiCo’s total investments into the and home furnishing products suppliers are business-NGO collaboration have resulted in subject of agricultural and technical occupations, programme exceeded $1 million. Between required to follow the legal statements stipulated two landmark legislative developments, namely equipping universities with a technical base, 2008 and 2015 the programme delivered the in these documents in the area of procurement the Forest Code, which was enacted in 2007, and and motivating young university teachers. following results: 19 grants for equipment, of wood-based raw materials. IWAY standard the National Forest Policy, which was adopted in 170 scholarships for students, grants for eight demands are similar to the requirements of the 2013. Representatives of the Russian business scientific conferences, seminars and language FSC-STD-40-005 standard. community had continuously participated in Activities courses for students and faculty members, the high-level working group discussions that organisation of five scientific summer schools led to the development of those new policies on Because the company intended to create a (each attended by 25-40 students), grants NGO role responsible forest management. sizeable pool of qualified agricultural specialists covering internship expenses of 75 people, that it could tap for recruitment, it decided to including undergraduate and Ph.D. students, One of the essential components of the focus its efforts on working with students. and university professors, and three awards voluntary forest certification schemes, such as PEPSICO BUSINESS CASE: Launched in 2008, the programme consists granted for the best student projects. Because FSC, is transparency and openness to the public. EDUCATION FOR AGRICULTURE of three action domains: raising interest of the programme is structured in a multi-year The FSC certification also follows a tripartite potential students in agricultural degrees, format, PepsiCo can gradually achieve its structure: certification scheme-certification providing additional incentives to attract young objectives, while simultaneously transforming body-society. Rationale professors to lecture in national agricultural the Russian business environment and the institutions, and developing the agricultural agricultural sector as a whole. In Russia there are many strong environmental Being a socially responsible company, PepsiCo institutions’ infrastructure to improve the organisations that have been at the forefront of is committed to sustainable growth by investing quality of teaching. the forest certification development since 1990s. in a healthy future for people and the planet. In Environmental organisations act in the capacity its capacity as one of the largest processors of The main activities implemented as a part of of stakeholders in the forest certification agricultural products in the country, PepsiCo PepsiCo’s agricultural programme are providing process. Environmental organisations interact has launched the Leaders of Agroindustry academic scholarships for students, equipping with public authorities, business and general programme that delivers support to local raw institutions with necessary equipment,

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS TOOL 3. TABLE 11. TOOL 3. CATEGORISATION OF IMPACTFUL BUSINESS CASES BY 3C IMPACT CATEGORISATION OF IMPACTFUL BUSINESS CASES BY 3C IMPACT

ll the identified six sustainability themes enable global businesses to make an impact. AAn overview of these themes makes it possible to define three major areas of corporate sustainability impact within a ‘3C’ framework that can be tracked by company management and communicated externally as an important part of sustainability efforts:

‘CONSUMERS’ - with related policies on products and sustainable marketing;

‘CHAINS’ - including improvement of internal production processes and industry standards setting, as well as localising supply chains and local nutrition producers;

‘COMMUNITIES’ - covering broader stakeholders engagement, high quality jobs 72 creation. 73

All case studies presented as best practices have been successful at transforming the MNCs’ immediate operating environment and the local market in Russia. AS MNCS ADOPTED THE LONG-TERM APPROACH TO THEIR LOCAL OPERATIONS IN RUSSIA, THEY REALISED THAT THE MOST SUCCESSFUL TRANSFORMATIONAL BEST PRACTICES REQUIRED A GENEROUS TIMELINE TO ALLOW FOR EXPERIMENTATION, TESTING AND ADJUSTMENTS.

It has taken some of the companies more than a decade to transform the 3C beneficiaries through several channels: lobbying activities and collective pressure on policy makers via membership in partnerships and associations, community empowerment, education of consumers and suppliers and many others.

Source: SKOLKOVO IEMS

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 2. BEST PRACTICES: BUSINESS CASES AND BUSINESS MODELS CHAPTER 3. CHALLENGES AHEAD

hereas country specifics structured as the lack of sufficient infrastructure, either within the four dimensions (social, in the form of human capital or accessible Weconomic, environmental and technologies, creates additional costs for governance) define the operational context businesses. It means that businesses have to in terms of strengths and weaknesses of the invest in the development of ‘soft’ infrastructure local market from the perspective of scope or import technologies from abroad instead of for corporate sustainability strategies and sourcing for them locally. The second group sustainable business actions, and the corporate of barriers identified asINSTITUTIONAL, best practices offer insights into the ‘what’ refers to either institutions that are absent subject matter, Chapter 3 focuses on the local in Russia or issues concerning institutional business environment and answers the ‘how’ governance. Notably, Russia scores the most question, presenting the Russian playing field poorly in the governance dimension of the 74 for sustainability strategists. IEMS Sustainability Composite Index. The third 75 group of barriers, named INFORMATIONAL, The analysis of global and national sustainability is related to either informational asymmetry agendas implemented by 30 sampled MNCs has about sustainability or insufficient awareness generated the localisation rate of approximately on the part of certain stakeholders. 50%, and there could be two reasons underlying such result. First, each market is featured OVERALL THE RESEARCH HAS by certain factor endowment and sources of IDENTIFIED TEN MAIN BARRIERS distress, hence requiring the country offices to THAT MNCS ENCOUNTER DURING THE prioritise certain sustainability objectives and IMPLEMENTATION OF SUSTAINABILITY customise the global sustainability strategy INITIATIVES IN RUSSIA. Some of the accordingly. Second, not all the practices corporate best practices illustrate successful which have a successful record of execution in solutions designed in order to address these other countries can be implemented as easily barriers, as the Russian context defined the in Russia. The experience of sampled MNCs pressing needs for solutions. Other business has suggested the presence of certain barriers cases have been examples that were realised that impede the implementation of certain irrespective of these external barriers. impactful business cases in Russia. That has SKOLKOVO IEMS considers these ten barriers led to the development of the 3i framework, to be the most pertinent and pressing for the which assumes that certain weaknesses evolution of corporate internal sustainability that are inherent in the Russian external in Russia at the moment; however it should be business environment can be classified into noted that the Russian business environment is INFRASTRUCTURAL, INSTITUTIONAL very dynamic and is currently in a transitional AND INFORMATIONAL BARRIERS. stage. AS A RESULT, THE SITUATION MIGHT EVOLVE QUICKLY. The first group of barriers –INFRASTRUCTURAL one denotes significant business implications,

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD FIGURE 20. 3I FRAMEWORK: THREE TYPES OF BARRIERS: INFRASTRUCTURAL, availability of ‘traditional’ suppliers, corporate standards by educating and investing in INSTITUTIONAL AND INFORMATIONAL but lack of sustainable suppliers of them manually. a given product or service, which basically means that companies have SKOLKOVO IEMS outlined companies’ efforts with to work with the most advanced among regard to nurturing long-term ‘master’ partners and ‘traditional’ suppliers on a case by investing in local suppliers, channelling their initial case basis and nurture sustainability expenditures into working capital and modernisation, patterns. It takes years and pays back e.g. advance financing of seed purchases against in a long run. future harvests. Russian practice also allows for a multinational company to act as a guarantor in scarcity of sustainable suppliers, transactions executed by its suppliers. The research although a few are present. This is the has found out that multinational companies are most ‘ideal’ scenario among all, but it willing to invest in suppliers, whenever there is an also means that companies might face underlying business model for such investment, i.e. monopolistic price policy. large scope and large quantity demanded of sourced commodities. Still for some companies it may take up to 6-8 years to build up the suppliers’ critical mass One example of FMCG companies for which before the production site can be built in Russia. local sourcing is one of the most important issues involves Russia’s farmers. According Source: SKOLKOVO IEMS Nevertheless, a lack of sustainable suppliers definitely to some industry experts, almost half of all impedes the evolution of corporate sustainability in Russian agricultural producers are subsistence Russia. In Western markets, companies are able to farmers who are not included in FMCG or tap the market of plentiful sustainable suppliers very retail supply chains. At the same time, global easily, and they even have a choice during the tender corporations are often not able to find any process, as suppliers compete among each other for INFRASTRUCTURAL suppliers of certain commodities in Russia, ‘master’ contracts. In contrast, in Russia the landscape BARRIERS and finding sustainable suppliers is even a of such suppliers is sparsely populated. This denotes 76 more challenging task. A lack of necessary food that global companies have to spend time identifying 77 processing equipment which would enable the suppliers that are capable and willing to transform farmers to slice, dry and process the fruits their operations and then assist them with their and vegetables in line with the company’s ‘greening’ transition, and that can be very costly. technical standards is another supplementary barrier which contributes to the problem of absent suppliers of a given product in the On-going trends Russian agricultural market. LACK OF SUSTAINABLE SUPPLIERS Out of all business processes sourcing is the functional As MNCs emphasise the importance of area which is localised by the sampled companies at sourcing from sustainable certified sources, the greatest extent. In Russia all sampled companies their strategy will evolve. In the absence representing the food & beverage, as well as furniture, of certified suppliers, these companies will pulp & paper industrial segments have national Context Implications opt for importing commodities rather than sustainability priorities in the sourcing area, and the sourcing them from local unsustainable localisation rate reaches 100% for them. MNCs’ work suppliers. Although this strategy enables in addressing this particular barrier has been probably MNCs regard the existing lack of suppliers that With regards to sustainable procurement, the companies to meet their commitments with more successful in comparison to other nine barriers, are willing to transform their practices into more situation can be described along the lines of regard to sourcing from 100% certified as global companies have succeeded to enhance sustainable ones as one of the most pertinent three scenarios: sources, the import of commodities generates sustainability standards and educate Russian suppliers barriers in Russia. As MNCs declare public certain negative externalities, such as low during the past two decades. These companies have commitments to incorporate sustainability absence of suppliers of a given product impact on the local economy and high carbon created a new type of demand, and certain suppliers into their supply chains, their main challenge or service which makes companies footprint resulting from the longer supply compliant with the sustainability requirements involves finding the suppliers that meet the import components or services, chain. Longer supply chain presumes higher either have emerged or transformed their practices internal standards on environmental, social, increases costs and risks within the transportation costs, which increase the cost in response, thus transforming the local market and ethical and safety issues. Ideally, the supplied supply chain as well as contributes of goods sold and, as a result, the final price. industry. raw materials or products should be certified by to product footprint due to extended A lack of sustainable suppliers requires MNCs an internationally recognised certification body logistics; to raise their own suppliers’ network up to that verifies their traceability.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD In Moscow more and more office buildings Future cost efficiency. According to INACCESSIBILITY OR EXPENSIVENESS are constructed not only in line with ‘green’ some estimates, cost savings on utility OF SUSTAINABLE INFRASTRUCTURE, guidelines. In addition, they are actually certified bills in certified buildings can be up to in compliance with either BREEAM or LEED 30% [53]. TECHNOLOGIES AND SOLUTIONS standards. Several Russian standards are also applied in the construction industry, including Although the concept of ‘green’ building Sustainable GOST R 54964-2012 “Compliance Assessment. products Environment Requirements For Real Estate certification is still considered to be in a & marketing Sites,’ which was approved in 2012, and is nascent phase, the evolution of this type “GREEN” OFFICES the residential one. With regard to the ‘green currently recognised as the national standard of certification encounters the following buildings’ certification, there were 43 BREEAM for green buildings. Another national standard challenges in Russia: (BRE Environmental Assessment Method) and which is compliant with ISO international Context LEED (Leadership in Energy and Environmental standards is STO NOSTROY 2.35-2011 ‘Green Design)* certified projects in Russia, with Lack of knowledge base and small Building. Residential and Public Buildings. number of market professionals. In Russia ‘green’ technologies are still not around 58% of those sites representing the office Sustainable sourcing Rating System Assessing the Sustainability of Industry experts report the problem widely used in the construction industry; segment and industrial premises accounting for the Environment.’ of an acute shortage of practitioners however, they are more likely to be found in approximately 23%, as of Q3 2014 [53]. of all levels (from public employees to the commercial real estate segment than in engineers) who have sufficient expertise Implications and working knowledge of the Green Development concept and certification Product footprint FIGURE 21. RUSSIA LEED AND BREEAM CERTIFIED PROJECTS BY TYPE In general, office spaces built in accordance process. with ‘green office’ standards make extensive use of modern engineering solutions that save Controversial role of the government. water and energy, allow the best use of natural Climate change Russian state construction standards & energy efficiency lighting, ensure comfortable air quality and (i.e. GOST) are regarded insufficient in temperature, include facilities for separate terms of full coverage of all ecological storage and disposal of various waste types, requirements and aspects of energy 78 offer comfortable working conditions (e.g. via efficiency. For example, ‘green’ GOSTs 79 Operational human-centric lighting [54]) and access to are still not mandatory for obtaining an efficiency transportation (e.g. bicycle parking facilities). operational permit.

Industry experts have identified four drivers Capital expenditures vs. cost savings Operational contributing to the recent rapid acceleration in still questionable for Russia. Building efficiency ‘green’ certification in Russia [53]: developers still do not have the business case to invest in green development, Source: Mundy, T. et al. (2014) [53] as it is associated with higher initial Environmental regulation. Some new capital expenditure linked to specific amendments to the Tax Code outline the technologies, materials and procedures. Partnerships possibility of lowering the tax burden FIGURE 22. LEED AND BREEAM CERTIFIED OFFICE PROJECTS IN CEE CITIES & associations Developers are also discouraged by for businesses which use energy- the longer payback periods, as ‘green’ efficient appliances. construction projects offer the average payback period of 8-15 years in Russia. Growing demand from tenants. In the Moscow commercial property market offices with LEED and BREEAM For MNCs, inaccessibility or expensiveness of Partnerships certificates have proven to be the most ‘green offices’ becomes a barrier whenever the & associations popular among international companies. global headquarters sets the transfer to green offices and construction of green production Brand recognition. ‘Green’ building sites as its global sustainability priority, as the certification gives developers and Russian country office is not able to localise landlords a ‘selling point’ in comparison that global requirement due to the absent to buildings that are not certified, and infrastructure. For such companies, as Siemens, sophisticated tenants recognise the Decathlon, Shell and Deutsche Bank compliance Source: Mundy, T. et al. (2014) [53] value of such certificate. with the environmental standards became

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD the determining factor for selecting office TRANSPORT INFRASTRUCTURE ALTERNATIVE ENERGY Implications premises [53]. Whenever that happens, the property owner has to adapt the office space While it is most likely that MNCs would also oppose toward the tenant’s requirements and make Context Context gaining access to alternative energy solutions if significant investments into the building’s it meant higher electricity bills, the nonexistent ‘greening.’ Very often, the company gains Many of the world’s leading civil aviation Thanks to the abundance of coal, oil and natural supply of renewable energy products and services financial benefits, as more efficient solutions companies offer the service of carbon-neutral gas resources, Russia has traditionally been one does not allow global companies to transfer some tend to lead to cost savings on utility bills and travel to passengers. For example, Air Canada of the major energy exporters in the world. Such of their best practices and comply with global increased staff productivity. launched the Travel Carbon Neutral programme competitive advantage also creates a challenging commitments on climate change. For example, Novo in 2007, which offsets produced CO2 emissions environment for the development of alternative Nordisk’s production site in Koriyama, Japan is now released during the passengers’ travel by energy sources. supplied with renewable energy from biomass On-going trends implementing forest restoration, landfill gas and wind, while at a number of breweries located recovery and organic waste composting projects. Nevertheless, because of its size and wide range in Brazil and Vietnam, Heineken has switched to The ‘green building’ is probably the most of geographic features, Russia has enormous the power of biomass fuels, decreasing reliance on advanced segment within the sustainability potential for developing renewable energy fossil fuels, in order to reduce CO2 emissions in playing field. The sustainable building Implications sources. In many sparsely populated and remote production. In Russia all these solutions seem to be development has been experiencing a strong areas, people are not connected to the electricity infeasible at the moment. uptrend. While in 2010 there were two LEED As MNCs attempt to minimise their carbon grid, thus showing the existence of enormous and BREEAM-certified projects in Russia, footprint by reducing business travel and opting potential demand for off-grid electricity systems, in the summer-autumn 2014 the number of for conference calling and videoconferencing based on renewable energy. This view is also On-going trends certified projects reached 43 [53]. options, the need for services offering the shared by some experts who do not recommend calculation of carbon emissions increases. potential renewable energy generators to In 2013 the Russian government introduced a In Russia the international NGO Greenpeace Global companies have to monitor their carbon compete with the centralised energy network, state support programme aimed at ‘greening’ has been implementing the “Green Office” footprint in order to be able to report and offset but instead, point out the opportunities arising the power industry, which the market players project since 2008, raising public and business it. from the missing electricity grid in a large actively opposed. Both producers and consumers awareness about the benefits of ‘greening’ part of the country’s territory. Researchers presented a united front against the new office space and providing advisory services to In order for the Russian offices of MNCs to be from Lappeenranta University of Technology initiative, as the shift to renewable energy could 80 interested parties. able to meet their commitments with regard to (Finland) have modelled a renewable energy raise power costs, a burden that would have to be 81 minimising carbon footprint related to business system for Russia and Central Asia, and their borne either by power generating companies or Irrespective of some positive developments, travel, there is a need for carbon footprint results showed that renewable energy can passed on to final electricity users. The opponents the companies report that present Russian calculators to be available for all modes of make Russia a very energy-competitive region estimated that the total ‘price tag’ attached to legislative and regulatory environment in transportation, including small airlines and rail. in the future [55]. According to the research, the support of the renewable energy could reach the area of green construction is focused on In the absence of valid technological solutions a 100% renewable energy system would cost 85 billion rubles by 2020 [56], and that would penalties rather than on incentives, and is for monitoring its carbon footprint, a company approximately 50% less than a system based lead to a critical increase in electricity prices so far unfavourable for developing the area experiences difficulties declaring public on the latest European nuclear technology or for consumers and impaired competitiveness of of green buildings: for certification of the commitments with regard to implementing full- carbon capture and storage technology. Russian exporters in the global markets. existing facilities and for new green building scale corporate policy on climate change. Quite and green infrastructure development. In simply, the company is not able to set realistic many cases, under current legislation, it can targets and KPIs. be more cost-effective for a company to build a cheap and environmentally unfriendly production facility and pay penalties, rather On-going trends LACK OF AVAILABLE LABOUR FORCE than to invest in costly environmentally-safe WITH EXPERTISE IN SUSTAINABILITY construction, and that it is mainly because In December 2015, leading Russian airline of the current water-related legislation and Aeroflot launched an Online CO2 Emissions regulations. Leading MNCs do not normally Calculator, which enables passengers to assess enter into such practices because they value the environmental footprint of their flight route their reputation and because of the pressure based on the relevant statistics and data, as a Context partners within the supply chain. While senior from the headquarters, not because of the part of the company’s environmental protection executives are much better aware about profit and loss (P&L) analysis. policy. In the future, passengers will be offered Implementation of sustainable business corporate sustainability goals, regular staff the option to make a voluntary donation towards practices in the local market requires appropriate members especially those that work outside environmental conservation in Russia as an training and forward-thinking mindset from the of the strategy, PR, CSR and communication offset measure. executive team, as well as positive corporate functional areas often need to be convinced and culture across the whole company and qualified motivated.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD Implications all four dimensions of sustainability, namely industrial placements at the production sites and Strategic Management in Energy’). Furthermore, economic, social, environmental and governance are familiar with the corporate requirements. In the Moscow School of Management SKOLKOVO Basically companies experience: as well as lack business perspective. the long run, these investments in educating has launched a three-day intensive course for the new generation of sustainability experts are senior executives, strategists and sustainability By way of contrast, in other BRICS countries expected to address the barrier and transform officers, providing them with knowledge and a lack of staff with sustainability-related academic programmes are better adapted to the Russian landscape. practical tools for building sustainable business expertise and sustainability-oriented graduate specialists who are fully equipped to models in Russia. mindset, in general, which denotes perform sustainability-related functions within a management challenge, whenever the organisation without additional training. On-going trends local offices have to go through the For example there is the MSc Sustainable As for the lack of technical expertise in implementation of sustainability Energy Technology programme, which is a joint Quite recently leading Russian universities sustainability, MNCs started implementing practices, especially in the Russian effort between Xi’an Jiaotong and Liverpool and business schools have started offering solutions that focus on forming partnerships regions; University in China or the MBA in CSR offered sustainability-related academic courses between agricultural and forestry educational by the Institute of Corporate Sustainability designed to prepare sustainability officers institutions and business schools, and a lack of industry-specific technical Management in India. and corporate social responsibility managers establishing educational programmes that expertise in sustainability – e.g. in Russia. For example, MGIMO University equip students with applied knowledge on precision farming. The problem of At the same time sustainability-related subjects launched a dual degree program with St. the sustainability topic. For example, WWF in inadequately-trained labour force is are not included in the curricula of traditional Andrews University (UK) which awards a partnership with IKEA published the university especially critical for industries that are Russian academic institutions. For example, Master’s degree in Sustainable Development textbook “Sustainable Forest Management based on sourcing natural resources, currently traditional ‘forestry’ institutions (programme ‘Sustainable Development and Basics” in 2014. such as agriculture or forestry where have a limited offer of practical courses in such sustainability implies predominantly subjects as forest certification, which would aspects related to operational efficiency. be of great practical use for future employers, i.e. pulp and paper companies. There is also a Hence, the problem of an inadequately-equipped shortage of qualified agricultural specialists in labour force materialises at three levels: limited Russia, for example, lawyers with specialisation INSTITUTIONAL mindset of mid-level management, untrained in land relations or food technologists. Sampled BARRIERS 82 sustainability and CSR officers, and limited companies have highlighted the problem of 83 expertise of manual workers and staff working a shortage of graduates from Russia’s leading at the manufacturing sites. institutions, who are adequately equipped in order to install sustainability-related CSR as a professional occupation which requires procedures at production sites. This problem specialised qualification is still at the stage of does not only affect the quality of candidates formation. Russian CSR officers shaping current that the companies are able to recruit, but LACK OF EXTERNAL FINANCING sustainability landscape have been in many also staffing in partner companies, including MECHANISMS cases pioneers who have built their expertise suppliers. Partially because of this issue of an and professional skills in response to new underqualified labour force, it is challenging to corporate challenges. find suppliers that meet the corporate standards for quality, health and safety, and sustainability. Up until recently Russian business education has not included the sustainability modules. Companies attempt to address the barrier of Context In Brazil, the food company BRF issued the Still it should be noted that the traditional insufficient labour supply in a number of ways, country’s first green bond in June 2015 in order environmental education has a long history in however, the return from their investment in While Russian credit and capital markets remain to refinance or fund new projects focused on Russia, for example, Moscow State Institute of talent development is much lower than it could comparatively underdeveloped and difficult to energy efficiency, renewable energy, sustainable International Relations (MGIMO University) have been under the best-case scenario. The access for ‘green’ funding, environmental finance forests, water management, packaging, raw offers a programme called “International targeted investment in employees’ development has evolved drastically in many emerging material use reduction and waste management. Complex Problems of Environmental often does not generate expected social returns, economies in recent years. In February 2015 The demand for such financial instruments as Management and Ecology” in the School as the companies start competing for experts India became a pioneer in Asia’s nascent green green bonds is driven by the needs of ethical of Applied Economics and Commerce. At in the sustainability field and often attempt bond market, as the country’s fourth-largest investors, who focus on investing in projects Lomonosov Moscow State University there is to recruit them from other organizations. private sector bank - Yes Bank - issued India’s with higher sustainable benefits. In China a few the Environmental Management Department Because of that, partnerships with universities first green bond, with proceeds to be used by the green bond sales also tested the market in 2015, within the structure of the Faculty of Geography. enable global companies to cast the net much issuer to finance green infrastructure projects as Xinjiang Goldwind Science & Technology Co. However, these programmes are not customised wider, as the company can tap a larger pool of implemented by its borrowers in renewable and Agricultural Bank of China Ltd. issued green to graduate specialists with expertise across trained graduates who have completed relevant energy. bonds. Chinese companies have intentions to

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD continue tapping the green bond market, as IFC established the Russia Sustainable Energy In general, JI was based on a sound business ERUs had to be reinvested into energy efficiency several commitments to “boost the $100 billion Finance Programme in 2005, and to date, over $242 model: JI allowed an industrialised country with a and/or environmental projects. green bond market for renewables” have been million in credit lines have been extended through surplus carbon position to sell emission reduction declared publicly [57]. 12 partner financial institutions [58]. As of the mid- units (ERUs) to carbon markets. Hence, within Russia’s participation in the JI scheme ceased prior 2012, more than 270 energy efficiency projects in the framework of the JI scheme, the Russian to the Kyoto Protocol’s second commitment period the SME sector have been financed via this IFC Federation could have sold those offsets to other of 2013-2020, as the country was no longer able to Implications scheme, and those projects were expected to result governments trying to meet their Kyoto targets carry over the surplus carbon units from the first in electricity savings of 1,805 GWh per year [59]. or to firms participating in the European Union to the second commitment period as a part of the Limited access to green finance in Russia is The EBRD’s Sustainable Energy Initiative (SEI) was Emissions Trading Scheme to a much greater Doha agreement. The country’s decision, which considered to be an immediate barrier for designed to finance sustainable energy projects by extent than it actually did. was joined by New Zealand, Japan and Canada, Russian companies, as state-owned and private combining investments with technical assistance was partially determined by the situation in the sector financial institutions fail to offer attractive and policy dialogue with stakeholders. Within the Between 2010 and 2012 JI project approval was carbon market, which featured a surplus in carbon financing terms for industrial modernisation SEI framework, the EBRD has invested EUR 2.4 accomplished through a tendering process led credits and a fall in the price of carbon credits projects. This is especially true in light of the billion in 102 Russia-based projects across such by the operator of carbon units – Sberbank, below 1 euro. current economic sanctions, as banks themselves sectors as manufacturing and services, municipal which solicited bids from clean energy project have limited access to medium- and long-term infrastructure energy efficiency and power and developers for 30 million Kyoto Protocol carbon funding. Almost 65% of all Russian companies energy, as of Q1 2013 [60]. The institution has credits. During that time period ERUs were issued On-going trends cite their lack of available financial resources also launched the Russian Sustainable Energy for 86 projects, with the total number of issued to be the main barrier for modernising obsolete Financing Facility (RuSEFF) aimed at channelling ERUs amounting to 263.4 million units. Of that It has become evident that, in the current market infrastructure and implementing various energy up to $300 million as long-term credit lines to amount, 237.5 million ERUs from 74 projects were conditions of the credit squeeze, public sector efficiency projects [19]. The average payback commercial banks for further lending [61]. transferred to purchasers [63]. The overwhelming actors, including state-owned banks, might have period of such energy efficiency projects is two to preference was given to Associated Petroleum to step in and inject the deficient funding in order six years, hence this should match the maturity Some of the regional financial entities that also Gas (APG) utilisation projects (over 40% of the to stimulate green economic growth in Russia. of the loans offered by Russian commercial banks. have the status of development institutions declare ERUs sold) and projects involving capture and The Tatarstan Cleantech Fund (TCTF), which energy efficiency as one of the priorities in their destruction of the most hazardous greenhouse represents a joint initiative between the Republic As some of the previously available green finance mandates, including the Eurasian Development gases – HFC23 and SF6 (23% of sold ERUs). of Tatarstan and Wermuth Asset Management, mechanisms are currently inaccessible for the Bank and the state-owned bank Vnesheconombank Energy efficiency, energy saving, renewable is one of the first milestones along that “green” 84 majority of Russian private sector companies, there (State Corporation "Bank for Development and energy and biofuel projects together accounted trajectory. Set up in early 2012, the 200-million 85 is demand for new innovative products. These Foreign Economic Affairs)". It is still too early to for less than 13% of sold ERUs. Over 70% of sold euro fund targets companies that produce waste new products would deliver financing for clean speculate whether the newly established New ERUs, including 100% of sold ERUs from major to energy technology, biodiesel fuel and fracking energy and other low-carbon projects that can help Development Bank of the BRICS (NDB BRICS) projects, were purchased by just one foreign buyer technologies, conditional on their operational countries adapt to and mitigate climate change, could be considered an alternative funding source – Vitol S.A., a Swiss-based crude oil and other presence in Russia, in particular, in Tatarstan. while giving lenders and investors high-quality easily accessible by private sector borrowers, hydrocarbon trader. Revenues from the sales of credit and fixed-income investment opportunities. in particular, subsidiaries of multinational corporations in Russia. As of April 2016, the BRICS While the coverage of green finance instruments bank approved the first group of loans worth $811 can be extended to addressing a plethora of million investment in renewable energy projects environmental needs, including environmental for bidders from Brazil ($300 million), China ($81 LIMITED APPLICATION OF FISCAL conservation of biodiversity, in Russia, most million), South Africa ($180 million) and India practitioners limit the scope of the term ‘green ($250 million). Currently, there are no Russian INSTRUMENTS AS SUSTAINABILITY finance’ strictly to those mechanisms that are projects in the pipeline at that stage [62]. INCENTIVES structured to finance low carbon and resource- efficient projects. In terms of the climate finance Another green finance mechanism that became evolution, multilateral development institutions available to Russian industrial and corporate In order to achieve its environmental goals, a country targets. In Russia, coercive regulatory tools, such as have played a major role as the source of dedicated actors for a short period of time was one of the normally applies economic instruments – including environmental standards, quotas, fines and product funding for energy efficiency investments in Russia. Kyoto Protocol mechanisms known as Joint fiscal policy - in order to tackle the problems of bans, traditionally prevail over fiscal instruments, and Both the European Bank for Reconstruction and Implementation (JI). While the Kyoto Protocol climate change and environmental protection. especially over incentives, such as subsidies. Within Development (EBRD) and the International Finance entered into force in February 2005, the Russian Different fiscal tools can be complementary to each the scope of the research, only two types of fiscal Corporation (IFC) have established sustainable Federation, although having ratified the Protocol, other and instrumental for achieving environmental instruments are discussed: taxes and subsidies*. energy efficiency programmes in Russia, which did not launch any large-scale JI approvals until have been brought to a halt, starting from mid- 2010. Because of such sluggishness in the creation 2014, as the institutions stopped undertaking any of a comprehensive system for official JI approval, * The application of some other economic instruments for environmental protection is not examined, as those are not new business, continuing to support only existing the Russian Federation has failed to capitalise on commonly used in Russia, e.g. deposit and refund schemes, accelerated depreciation of assets, tradable permits, etc. projects and clients in Russia. the full potential offered by the JI mechanism. Temporary participation in the Joint Implementation mechanism of the Kyoto Protocol mechanism is outlined in the Green Finance section of this report.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD ENVIRONMENTAL TAX SYSTEM recycle waste; encourage efficient use of water, TABLE 13: APPLICATION OF FISCAL INSTRUMENTS IN ENERGY AND WATER EFFICIENCY energy and material resources; and promote green innovation. Context A high ranking in the Index implies that the KPMG Green Tax Index report (2013), which respective government is more active than others analysed the application scope of fiscal in using its tax system to drive sustainable instruments in 21 countries, including Russia, business and achieve green policy objectives. shows underutilisation of the environmental The Index covered numerous tax penalties and task system in Russia [64]. The report illustrated incentives, including carbon tax, tax credits with the growth of tax as a green policy tool that is green-specific, tax penalties with direct green increasingly used by governments in response application, carbon cap-and-trade system, etc. to lower carbon emissions; reduce, reuse and

TABLE 12. APPLICATION OF TAX INCENTIVES AND TAX PENALTIES: COUNTRY RANKINGS

OVERALL RANKING TAX INCENTIVES ONLY TAX PENALTIES ONLY Source: KPMG (2013) [64]

China 6 China 3 China 5 Tax relief incentives for the most efficient Tax rebates allow investors to deduct a

India 1 India 4 South Africa 9 technologies, such as industrial boilers, can part of the equipment costs from profits; help to increase the financial viability of these investments for market participants and foster Tax exemptions typically reduce or South Africa 13 Brazil 12 RUSSIA 17 the replacement of old equipment with the best eliminate custom taxes on energy 86 available options. efficient equipment [19]. 87 Brazil 18 South Africa 12 India 17 On-going trends PERVERSE SUBSIDIES AND RUSSIA 21 RUSSIA 20 Brazil 19 RENEWABLE ENERGY SUBSIDIES Russian taxpayers are currently entitled to a 3-year exemption on corporate property tax for Source: KPMG (2013) [64] newly introduced energy efficient assets such as Context air conditioners and elevators [64]. The Russian government also provides a Policy makers commonly use subsidies to According to the KPMG methodology, Russia is Taxes/penalties on water use (national capital allowance for approved energy efficient promote technologies and shift the balance positioned at the bottom of the ranking, in the pollution control & ecosystem fixed assets for corporate tax purposes. The of incentives towards more environmentally same quartile as Brazil, Argentina and Mexico as protection); capital allowance amount can be doubled sound products and practices. Greening the least active countries in using tax as a green for certain assets. Investments in energy growth also means eliminating the subsidies policy tool. Also the country rating suggests that Grants/loans (non-tax incentives). efficient equipment also qualify for accelerated for environmentally harmful resource use, so- Russia utilises fiscal penalties at a much greater depreciation at twice the standard rate for tax called perverse subsidies. A prominent example extent than tax incentives, and on a cumulative Russia is positioned comparatively better in purposes. of perverse subsidies is support for fossil-fuel basis, Russia has the lowest ranking out of 21 two policy categories: energy efficiency and production and consumption, which contribute sampled countries in the overall rating. water efficiency, where the country utilises Tax relief can also be one of the most effective to the growth of greenhouse gas emissions. fiscal instruments in a more comprehensive fiscal incentives, which can stimulate purchase manner for achieving green economic Implications of energy efficient equipment. It can be According to the IEA Fossil Fuel Subsidy objectives. It should also be noted that out of structured in one of three following ways: Database, Russia’s fossil-fuel subsidies totalled The 2013 KPMG Green Tax Index report the 21 countries analysed for this index, all $47 billion in 2013, thereby laying the foundation outlined the application of the following green except two (Argentina and Russia) have some Accelerated depreciation improves for the country’s position as the world’s third- tax incentives and penalties in Russia: sort of tax incentive and/or penalty related to largest subsidiser of fossil fuels together with green vehicles. companies’ cash flows by allowing for Purchase of energy efficient equipment a faster write-off of the equipment cost India ($47 billion), trailing only Iran ($84 billion) (energy efficiency incentives); against their taxable profit; and Saudi Arabia ($62 billion) [65].

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD TAX RELIEF FOR CHARITABLE AND fight corruption, but in terms of sustainability, At the 2009 summit in Pittsburgh, G-20 On-going trends PHILANTHROPIC ACTIVITIES the legislation is not supportive of corporate members, including Russia, committed CSR activities. themselves to “rationalise and phase-out over As the usage of fiscal incentives has traditionally the medium term inefficient fossil fuel subsidies been skewed towards the provision of perverse Context that encourage wasteful consumption.” [66] subsidies due to the abundance of fossil fuels On-going trends According to Russia’s implementation strategy in Russia, there has been very limited usage of In many countries, companies are able to gain to rationalise and phase-out inefficient fossil-fuel subsidies in the renewable energy segment until tax relief on their donations. Such donations Irrespective of the unfavourable tax regime subsidies that encourage wasteful consumption, recently. On May 28, 2013 the government of are usually deductible from the total profits with regard to food donation, some of the the G-20 Pittsburgh Summit commitment “will the Russian Federation adopted Decree №449 when calculating the corporate tax. In Russia, sampled companies from the FMCG industry be implemented in Russia within the framework on “The Mechanism for the Promotion of the Tax Code does not contain any special tax partner with Food Bank Russia, which is a of its Energy Strategy of Russia For the Period Renewable Energy on the Wholesale Electricity exemptions for commercial organisations charity fund responsible for collection and to 2030 and the Concept of Long-Term Social and Capacity Market.” That legislative document engaged in charity work. The donation made by distribution of food, personal hygiene products, and Economic Development till 2020 [67]. Given became the most significant milestone towards a legal entity does not reduce the tax base for household chemicals and other essential goods the magnitude of existing fossil-fuel subsidies the creation of a regulatory framework designed calculating the income tax [69]. on a charitable basis to socially disadvantaged in Russia, their reform would definitely be an to promote clean energy production in Russia. groups of the population [70]. Food Bank Russia important contribution to the international Decree No. 449 tasks the Administrator of the helps Russian companies to deal with business process of internalisation of environmental Trading System (a subsidiary of the NP Market Implications waste, as the companies are able to donate externalities and decarbonisation of the world Council) with organising a competitive selection residual product stock to them, which would economy. of renewable energy investment projects each In Russia, because of the existing legislation otherwise end up in a landfill. year and for each type of renewable energy donating products to a charity is more costly To summarise all the aforementioned points, The WWF-IISD study analysed the degree of covered by the scheme (i.e. wind, solar PV and than sending them to a landfill. When the the obsolete ‘command-and-control’ system state support extended to the Russian oil and small hydropower*). Project developers who company writes the products off and destroys often impedes many business processes, as gas sector. In doing so, it identified 17 schemes sign Agreements for Capacity Supply commit to them, it can be reported as part of a company’s the Russian fiscal system does not offer many that can be classified as perverse subsidies constructing and commissioning the installations income, while the charitable activities do not incentives for industrial modernisation and to Russian oil and gas producers, and those concerned within a certain period of time, and in give the company any tax relief. The donation waste, emissions and discharges’ reduction totalled $8.1 billion in 2009 and $14.4 billion return they are guaranteed a return of the capital should be reported as an expenditure/losses, and and avoidance, as well as financial stimuli for 88 in 2010 [67]. Some of the applied perverse investment expenditures into these projects cannot be reported as income. Most likely, the corporate philanthropy. 89 subsidy measures were the relief from the by the state, conditional on the high degree of legislation is designed in this way in order to mineral extraction tax and export duties, both localisation of procured equipment. of which accounted for the majority of the identified subsidies. Other types of Russian In 2013 and 2014 Administrator of the Trading government support to oil and gas producers System completed two tenders which aimed at were the reduced tariff for oil transportation, disbursing state subsidies for the period of 2014- deduction of research and exploration costs 2018, with solar energy projects winning most of IMPERFECT LEGISLATION AND from taxable profits, accelerated depreciation the bids, as those projects represented 904 MW of allowance and federal budget spending on oil the 2020 target solar capacity of 1520 MW [56]. REGULATION and gas exploration. The tenders also attracted foreign investors. For example, the subsidiary Solar Systems of China’s Amur Sirius became one of the selected project Implications developers, as the company indicated investment plans to start building a solar panel plant with the Context intensive technologies, creating "green" jobs and offices The current structure of energy-related capacity of 175 MW in Russia in 2015. Although and by implementing many other measures. One cannot subsidies does not offer many fiscal stimuli wind energy was allocated the largest proportion of Today one of the main trends observed in many underestimate the importance of enabling a legislative to support the shift of the global and Russian the capacity that was subject to state support (i.e. parts of the world involves high expectations and regulatory environment for the evolution of producer companies away from the reliance on the 3.6 GW out of the total capacity of 6 GW), very few for national governments to act as enablers of and consumer behaviour toward more sustainable and traditional energy sources. Coupled with the project developers have submitted their bids, and sustainable development and green growth. To responsible patterns. barrier of limited access to green finance, a lack winning bids totalled only 156 MW of capacity. In drive green growth, governments must align of government subsidies becomes a significant 2014 out of 57 applicants, 53 bidders sought solar economic and environmental priorities in a With regard to Russian environmental legislation, there constraint, hindering the implementation of generation, three participants bid for hydropower meaningful manner by adopting laws, national are two extreme views on it. While the Organisation for renewable energy projects in Russia. and a single bidder sought wind capacity [68]. strategies and various federal programmes, Economic Co-operation and Development (OECD) states shaping policy and institutional settings, that environmental laws and regulations now address encouraging investment in natural and human most of the priority environmental issues in Russia [71], capital, introducing innovative, less resource- opponents claim that Russian environmental policy * Biomass is not listed as a renewable energy source that is subject to this state support measure.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD is of a highly declarative nature. Policy, they impact) are exempted from paying a fee for pollution. In terms of the application of coercive Industrial, and Nuclear Supervision Service. The say, features the formal implementation of the a negative impact on the environment. This regulatory instruments, fines are predominant. compliance assurance functions are delegated ‘polluter pays’ principle due to the existing classification of industrial enterprises or entire They are becoming more stringent but their to two federal authorities: Rostekhnadzor, implementation gap. 80% of environmental industries has been designed to determine the collection rates are still unsatisfactory. Damage accountable to the Prime Minister since June laws adopted in Russia have never been applied, degree of the environmental impact in order to compensations are imposed but hardly levied. 23, 2010 [74], and Rosprirodnadzor, which according to the head of the Public Council of use it as a determinant of the future proportional For example, in 2014 the amount of imposed is subordinated to the Ministry of Natural Rosprirodnadzor, Alexander Malyshevsky, who measures of state regulation. This classification fines totalled 1.2 billion rubles, but the fines Resources. Another oversight body, which is made a statement at the roundtable entitled can also be considered as a preparatory measure levied amounted only to 872.6 million rubles becoming increasingly important especially “Environment and Large-Size Business: How for the introduction of a recycling fee. [73]. As a result, authorities make frequent for multinational corporations operating in to Reduce Environmental Impact” that was recourse to such radical tools as the temporary Russia is the Federal Service for Surveillance organised by the RBC Daily newspaper on April The Federal Law №416-FZ “On Water Supply closure of enterprises or withdrawal of permits. on Consumer Rights Protection and Human 10, 2012. Some experts and academics claim and Wastewater Disposal” from December 2011 Wellbeing (Rospotrebnadzor). For example, that the insufficiency of state environmental and requires all large industrial enterprises to either This imperfect state of environmental legislation four McDonald’s restaurants in Moscow were energy policies is one of the key factors in the set their own local systems of sewage treatment and regulation causes the following implications temporarily closed in 2010 due to sanitary low environmental performance of the Russian or pay a higher fee for discharge. The initial for global businesses working in Russia. First of violations, following a Rospotrebnadzor order economy [72]. versions of both Federal Laws №219-FZ and all, MNCs struggle with continuously changing [75]. In 2015 Rospotrebnadzor restricted sales of №416-FZ required enterprises to start paying legislation and regulatory requirements with household-chemical goods produced by Procter In Russia two adopted strategies have become environmental fees, starting from January 1, regard to issues related to sustainability. & Gamble, Colgate-Palmolive and Henkel AG the most definitive milestones for the national 2015 and January 1, 2016, however most of the Corporate legal departments have to monitor the over safety concerns [76]. landscape on ‘greening’ the economy: "Basic new amendments as of mid-2015 postponed the issuance of new laws and amendments in order Principles of State Environmental Development date when the new developments were to enter not to miss the newly announced transition Policy of the Russian Federation To 2030" and into legal force until January 1, 2019. period and lead time, and ensure compliance. the State Programme “Energy Efficiency and Foreign companies also report the presence Energy Development for 2013–2020.” Between of the ‘red tape’ as one of the most pressing 2010 and 2015, several federal laws have been Implications barriers. adopted which were designed as a support measure for environmental protection in Russia. With regard to environmental regulation in Occasionally unforeseeable changes in the 90 Russia, it can be assumed that very often it is not legislation might diminish the return on 91 The Federal Law №219-FZ of July 2014 amended the absence of environmental legislation, but previously-made capital investments, and the Federal Law "On Environmental Protection" rather, a failure in law enforcement, that poses companies might have to duplicate them in №7-FZ (from January 2002), as it redefined the the major barrier for sustainability evolution order to comply with new requirements. Such fees levied on enterprises, corporate entities in Russia. Newly adopted environmental instances related to the regulatory environment and individual entrepreneurs for their negative strategies and policies require a significant have major cost implications for the companies. environmental impact in several categories. improvement in the quality of regulations. It should also be noted that MNCs often refer As a follow-up, resolution №1029 (September In Russia environmental management relies to the absence of mandatory requirements 28, 2015) “On Approval of the Criteria for primarily on the application of several for households and consumers, as the current Classifying Objects that Have a Negative Impact regulatory instruments, namely environmental legislation and regulation only addresses the on the Environment to the Objects of I, II, III quality standards, permits and emission limit issue of producers’ environmental and social and IV categories” classified all enterprises into values, and environmental liability. The most responsibility. In Russia, households do not four groups depending on the degree of their common of these are environmental charges become subject to fines for failing to sort garbage environmental impact: from I to IV. covering a very large number of air and water and waste or operating obsolete vehicles that do pollutants and solid waste generation, as well as not meet environmental standards. In Western Category I refers to objects that have the fines for environmental offenses and claims for countries, there is a more balanced application most negative impact on the environment or environmental damage. of regulatory instruments on producers and emitters with discharges containing chemicals consumers. or compounds that are the most hazardous Pollution charges in Russia are levied to human health and the environment. This universally on all ‘nature users’ that are subject category includes enterprises operating in to environmental permits. They are currently On-going trends ferrous metallurgy, producers of enriched imposed on air and water pollutants [71], as iron ores, sulphur-containing hydrocarbons, well as on ‘placement’ (storage and disposal) Today, the key authorities responsible for chemicals, pesticides, and other pharmaceutical of four categories of hazardous waste (based formulating and implementing environmental substances. Legal entities and individual on toxicity) and two categories of non-toxic policy and law at the federal level in Russia entrepreneurs operating in the facilities that are solid waste. Among mobile sources, enterprise- are the Ministry of Natural Resources and the classified as category IV (minimal environmental owned transport vehicles are charged for air Environment and the Federal Environmental,

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD and Greenpeace. All these organisations act as areas of activity of these public organisations the most active lobbyists of the climate change include the elimination of landfills, promotion LACK OF POTENTIAL PARTNERS SUCH AS agenda in Russia, and “it is this coalition that of separate collection and awareness campaigns INTERNATIONAL AND NATIONAL NGOS put forward the idea and successfully lobbied [72]. Some of the other national NGOs that for the adoption of the Climate Doctrine, its are active in environmental conservation are Implementation Plan, decisions on JI projects the All-Russia Society for Nature Protection, and Russia’s participation in the Clean Air and the Social and Ecological Union, the Russian Context and services. In Russia, most NGOs operate Climate Coalition (CCAC)… It could be argued Green Cross, the Russian Ecological Union, the locally within a given territory or only in a few that Russia’s climate coalition can be able to alter Kedr Environmental Public Movement, and the It is often suggested that domestic NGOs are an regions, and do not have extensive regional some decisions by criticizing them in public, but Russian Ecological Movement [71]. integral part of the institutional environment in coverage. Because the Russian NGO landscape lacks recognition as an additional stakeholder emerging markets in the scope of institutional tends to skew towards watchdog and lobbyist group in the Russian decision-making system.” One of the major recent trends which affects analysis on MNC behaviour [77]. Academic type of players, multinational companies are [80] With regard to the waste disposal issue, the Russian NGO community in a negative way research suggests that the NGO community in often not able to find partners for joint activities the following international and Russian non- is the Russian ‘foreign agent’ law which was Russia, as well as in India and China, has not focused on raising consumer awareness or governmental organisations have joined efforts adopted in 2012. Many national NGOs report imposed substantive pressures on MNCs until transforming their own production processes to promote proper waste disposal: Greenpeace, that the new law subjects them to additional the early 2000s [78]. Although green NGOs may with the NGOs’ assistance. Occasionally global Musora.Bolshe.Net, the PRO Waste coalition, audits and limits their ability to execute the have little influence on a firm’s environmental businesses have to start performing ‘alien’ Separate Collection and the ECA. The main mandate. activity in Russia [79], they have been playing functions that are more typical for the state a significant role in civic monitoring of or not-for-profit actors in their work with local environmental violations. In Russia NGO communities. activism has also played an important role in driving the public consultation process as LACK OF AND LIMITED APPLICATION a part of environmental impact assessment On-going trends OF INTERNATIONAL AND NATIONAL for sensitive infrastructural projects [71]. In the Russian development landscape, with the In the past the NGO community has successfully CERTIFICATION AND/OR ECO-LABELLING exception of Oxfam International and WWF, mobilised all the available resources and joined SCHEMES 92 virtually all the international NGOs, such as efforts in their campaign against the Russian 93 Save the Children, Plan and Action Aid, are not oil and gas company Transneft, which intended present. to build an oil pipeline within 800 metres of Lake Baikal, a UN World Heritage site. That Context been released into the environment at any stage of environmental campaign led by an NGO the product lifecycle: manufacturing, processing, Implications coalition called “For Baikal” which united more Companies’ participation in voluntary self- reprocessing and recycling. than 50 organisations from different regions regulation and market mechanisms such as In terms of business implications, most of the was probably the most controversial one in environmental certification can potentially sampled MNCs refer to the lack of traditional Russian history. Because of the public pressure maximise shareholder value, as these instruments ‘Vitality Leaf’ certification partners in the Russian market, as virtually all and extensive media coverage, President Putin generate significant benefits for the company: As developed countries currently tend to be very international NGOs which MNCs partner with had to intervene, and in 2006 the decision was improved access to capital, better stakeholder wary of Russian certification bodies due to a lack in other emerging markets, are not present. For issued that required the pipeline to be re-routed relations, access to new markets, greater customer of faith in their verification procedures, today example, globally Oxfam International works 400 kilometres away from Lake Baikal. loyalty and higher sales and lower operational and the only internationally recognised Russian with the private sector on transforming their strategic risks. voluntary certification system that meets the business practices and implements projects It is possible to classify the ‘lobbyist’ category of ISO 14024 standard is ‘Vitality Leaf,’ which was in the fields of ethical trade and smallholder NGOs which can be further split into two major introduced by the national NGO St. Petersburg supply chains. Hence, some international NGOs large sub-categories or so-called coalitions, ‘Free from Chlorine’ logo Ecological Union in 2001. In 2007 the St. have sufficient expertise which Russian (global according to the focus of their activities: Petersburg Ecological Union (renamed as the and local) businesses could benefit from should climate change and waste disposal. NGOs In Russia, the Greenpeace logo ‘Free from Environmental Union in 2013) was admitted as such partnerships become feasible. Because of operating in these particular playing fields can Chlorine’ became the first example of a member in the Global Ecolabelling Network. In this reason of limited NGO presence, global be considered the most effective civic lobbyists. environmental certification that was approved 2011 after an external audit of the ‘Vitality Leaf’ companies are not able to transfer some of In the field of climate change activism, the by the state standards body Gosstandart in 1998 scheme, the programme was accepted into the the projects that they implement jointly with following non-governmental organisations are (GOST Р 51150-98) [72]. The logo was recognised Global Ecolabelling Network´s Internationally reputable NGO partners in other emerging the most active: WWF, the Social and Ecological as Russia’s first domestic eco-label; however it Coordinated Ecolabelling System (GENICES). markets. The extensive grassroots network Union, the Russian anti-nuclear organisation has never been actually applied. The presence The ‘Vitality Leaf’ programme has developed enables MNCs to extend their outreach to the Environment Defence, which works in close of the ‘Free from Chlorine’ logo on the products standards for the following products and services: most remote areas in their provision of products cooperation with the Boell Foundation, Bellona guaranteed that no chlorine-based pollutant had

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD thermal insulation, cleaners and detergents, PVC So far four offices have received the right to use to consumers’ low awareness. Because of all consumers who prefer to act responsibly are floor covering, wall gardening, LED lamps and the “Vitality Leaf” logo: Ingosstrakh´s building in this, certain companies are able to exploit the not offered sufficient choices of certified lights, shampoos and soaps, gypsum plasterboard, Sochi, the Strelka Institute of Media, Architecture sustainability theme and use “greenwashing” products. It is also not evident whether Russian dry building mixtures, flat glass, laminated floor and Design in Moscow, Pricewaterhouse Coopers' methods in communication with customers consumers themselves have enough critical covering, offices, hotels, shops and agricultural office in Krasnodar and the Olympic Organising who are not able to differentiate ‘eco’ and mass to drive the emergence of national production [81]. TARKETT, Saint-Gobain, Splat, Committee´s office in Sochi [72]. ‘organic’ labels from ‘sustainable’ as well as certification bodies and a Russian version of Samsung, Corinthia St. Petersburg hotel and some ‘quasi-sustainable’ products. the ‘Fairtrade’ brand. other Russian companies have been audited and have been granted the right to apply the “Vitality FSC certification On-going trends Leaf” logo to their products and services. One of the global certification logos that is very In the absence of recognisable and reputable In 2010 the “Vitality Leaf” programme expanded well-recognised by Russian consumers is the nationwide eco-labels, those Russian its coverage into the certification of office buildings. Forest Stewardship Council (FSC) logo.

FIGURE 23. THE FSC LOGO: HOW MANY INFLUENCERS CAN RECOGNISE AND EXPLAIN THE LOGO? INFORMATIONAL BARRIERS

LOW CONSUMER DEMAND FOR SUSTAINABLE PRODUCTS AND SERVICES 94 95

Context environmental protection, improving heart health, removing trans fat and reducing disease In 2014 according to the Unilever request, through hand washing. Another major research Synovate conducted research on the importance finding involved the demographic profiles of Source: Tetra Pak (2013) [82] of sustainable business and socially responsible the surveyed respondents, as interviewees with initiatives among Russian consumers. Within higher education and residing in Moscow and At the moment, 40.91 million hectares of timber and also banned illegal reprocessing of the research framework 1,178 interviews Moscow region placed greater importance on forests are covered by the FSC certification in wood in 2010. were conducted in 18 cities across Russia. issues related to social and environmental Russia, 206 Russian companies have received Respondents were asked to assess the importance responsibility. a certificate for Forest Management, and 496 of the following socially responsible business companies for Chain of Custody [83]. The most Implications practices: health and hygiene, healthy nutrition, While in its research Synovate Comcon mass-marketed FSC-certified products that greenhouse gases, water, waste, sustainable assessed consumers’ attitude towards corporate are available to the Russian end consumer This particular barrier has implications sourcing and inclusive business. sustainable business practices, the Nielsen are office paper, packaging and Tetra Pak. It for several fields. It is closely related to firm provides market research about consumer is most likely that, in the foreseeable future, ‘Sustainable sourcing’ and ‘Low consumer Health and hygiene and healthy nutrition were preferences and decision-making in relation to FSC certification of all products would become demand for sustainable products and services’ identified as the most important priorities for ethical consumption. According to Nielsen’s a ‘business-as-usual’ trajectory for most wood, barriers. While multinational companies Russian consumers, as 82% and 87% of all 2015 Global Corporate Sustainability Report, timber, pulp and paper exporters in Russia, require suppliers to go through the certification respondents assessed these two focus areas which was based on an online survey of 30,000 in light of the more stringent legislation that process in order for the sourcing process to as either very important or rather important. consumers in 60 countries, 61% of all Russian has been recently adopted in some Western qualify as sustainable, Russian consumers Greenhouse gases scored at the bottom of that consumers are willing to pay more for the countries. For example, in 2008 the United are still not able to differentiate various list, as only 63% of all respondents recognised products of companies acting in a responsible States adopted a special amendment – the certification logos whenever they are marked that area as very important or rather important. manner towards the environment and society, revised Lacey Act – concerning illegally logged on the packaging. Companies become hesitant Within these seven sustainable business an increase from the 2014 level of 38% [84]. Russian timber. The EU also decided to close about investing in eco-certification, as the practices the following initiatives were identified its markets to illegally logged or processed returns on such investment tend to be low due as the most important: safe drinking water,

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD FIGURE 24. FACTORS DETERMINING PRODUCT SELECTION DECISIONS OF RUSSIAN CONSUMERS* FIGURE 25. BEHAVIOUR PATTERNS OF RUSSIAN CONSUMERS VS. THOSE IN OTHER BRICS NATIONS

96 97 Source: Nielsen (2015) [84] Source: Tetra Pak (2013) [82]

Some of the multinational corporations have to China and India, and across most of the Implications products. Russian consumers have passed the also analysed demand for environmental categories in comparison to Brazil. The reported stage when responsible consumption concerned labelling among Russian consumers as a part behaviour patterns of Russian consumers are As consumers adopt more sustainable attitudes and solely purchasing authentic, non-counterfeit of the worldwide environmental surveying more or less comparable to South Africa out of transform their lifestyles to incorporate various products. Today their purchasing decisions are exercise. For example, Tetra Pak has conducted all the BRICS countries, and Turkey performed social and environmental concerns, they are primarily driven by health, well-being and safety environmental research on a bi-annual basis much better in terms of ethical consumption raising their expectations for corporations when it features of the product content, but not by the since 2005. The 2013 survey polled over 7,000 and ethical lifestyles. In particular, Russia lags comes to purchasing. By integrating sustainability issues related to responsible production and consumers and more than 200 food industry behind other emerging countries in terms of into their business models, global companies can environmental impact. stakeholders in a total of 13 countries, including household recycling practice, with a reported increase goodwill toward their brands. the U.S., Brazil, UK, France, Germany, Belgium, rate that was alarmingly low (13%). The most Once Russian society matures further, the Netherlands, South Africa, Turkey, India, optimistic observation was related to the consumers will be more vocal in their demands Russia, China and Japan. The survey results reasons behind the decision of purchasing On-going trends for environmentally friendly products that highlighted a significant difference in the environmentally friendly products, as Russian are compliant with the standards of a circular behaviour patterns of Russian consumers vs. consumers reported the highest response rate In Russia ethical consumption is still in its economy and sustainable product lifecycle. In the other BRICS countries. Russian consumers have (58%) for the option “because they are higher infancy, however the ‘green’ movement is meantime, there is still an intention-action gap performed a lower number of sustainable actions quality than ‘regular’ products.” growing stronger, especially in metropolitan among Russian consumers who are not always across all mentioned categories in comparison areas, where there is currently an upward trend willing to pay a price premium for sustainable for everything that can be characterised as being and/or certified products. In the absence of active ‘eco’, ‘bio’ and ‘organic.’ Although Russian not-for-profit sector that traditionally works consumers are highly educated and able to in this field, global business has to work on make an informed decision, they still experience educating and raising consumer awareness in *Surveyed consumers were asked the following question: “How much did the specified factor affect your decision to Russia. purchase a product last week?” difficulties differentiating genuinely sustainable

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD from certain markets and had to divert their national and regional government, private supply chain to new markets. sector and individuals. In Russia the system of PREVALENCE OF SHORT-TERMISM strong institutions is underdeveloped, hence the continuity of certain initiatives is often On-going trends dependent on favourable relations with key decision-makers and company’s lobbying power. Renowned Russian entrepreneur Ruben This is especially pertinent at the regional level, Context Vardanyan emphasizes the importance of as any turnover of elites and regional authorities long-term thinking as a success factor [86]. He leads to a need to rebuild relations in order for a This is probably the most challenging barrier to argues in favour of long-term planning with the certain initiative to resume. tackle, as external short-termism is not within time horizon of 20-25 years at different levels: the control of MNCs, and they can do very little about it.

FIGURE 26. PLANNING HORIZON OF GOVERNMENT DECISION MAKERS

98 99

Source: Auzan, A. (2016) [85]

Implications MNCs report that their long-term planning ability has been impaired by the challenging Any company faces this type of barrier from geopolitical situation. As national governments two perspectives, as short-termism is present reciprocate in the geopolitical crisis by freezing internally (as a part of corporate strategic business relations, companies have to adjust to approach and mindset of senior management), the new business reality very promptly, often but also externally (on the side of all external in a matter of days. That resulted in localising stakeholders and business partners). sourcing at a much greater extent as a part of contingency planning and risk management, This barrier has become more pressing for global as some MNCs experienced the situation when and local businesses during the past two years. they were no longer able to source products

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES TABLE 14. TOOL 4. GLOBAL AND RUSSIAN EXPERIENCE OF ADDRESSING THE TEN BARRIERS

TOOL 4. GLOBAL AND RUSSIAN EXPERIENCE OF ADDRESSING THE TEN BARRIERS

mpactful business cases presented in the Chapter 2 show that the barriers can become a source of Ibusiness opportunity and competitive advantage if the company succeeds to address them. That is not a general way to practise corporate sustainability, but an approach that allows companies to become leaders in transitional business environment.

Among ten barriers identified in the research six were successfully addressed by the sampled MNCs. The remaining four barriers are traditionally considered to be positioned within the scope of influence of the state authorities. At the same time, a brief observation of international best practises suggests that there are 100 some alternative solutions which MNCs apply globally, 101 but have not found a proper format for implementation in Russia yet.

Source: SKOLKOVO IEMS

GLOBAL EXPERIENCE ILLUSTRATES THAT IRRESPECTIVE OF THE NATURE OF THE EXISTING BARRIERS, MULTI-STAKEHOLDER COOPERATION AND LOCAL PARTNERSHIPS FOR SUSTAINABLE DEVELOPMENT HAVE PROVEN TO SERVE AS THE MOST EFFECTIVE ROADMAP FOR IMPLEMENTING CORPORATE SUSTAINABILITY STRATEGIES, AS THEY CREATE WIN-WIN SITUATIONS FOR ALL PARTNERS AND MAXIMISE THE IMPACT.

Global and local businesses perform a businesses do benefit from forming alliances significant role in this type of partnerships with other organisations – both public and ensuring business wise standards of work private – building new types of business models and inflow of investments. At the same time in emerging markets.

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES CHAPTER 3. CHALLENGES AHEAD CONCLUSIONS

the impactful business cases into the three tackled. This gives hope that the ten external As Russia is ranked 50th in the IEMS emerging countries’ pack, catching up with the areas for maximising sustainable impact: barriers which are presented in Chapter 3 will Sustainability Composite Index, its level of sustainability leaders. The four-dimensional chains, consumers and communities. Today become irrelevant in the foreseeable future. sustainable development surpasses that of analysis of Russia’s sustainability profile a comprehensive sustainability strategy more than other 90 constituent countries. demonstrates the country’s enormous potential cannot have a narrow focus and prioritise During the 2000s, thanks to high oil prices and to become the sustainability leader, driving GLOBAL EXPERIENCE SUGGESTS only a few issues. It has to be structured as Russia’s endowment in fossil fuels, the country the global agenda and introducing the most a complex matrix and be balanced across THAT MARKET LEADERS ARE NEVER has accumulated large federal government innovative solutions to the global problems of all these blocks and areas. A company has revenues which could be channelled into poverty, social inequality and environmental THOSE WHO WAIT FOR GUIDANCE to aspire not only to become a responsible social and environmental programmes, e.g. degradation. FROM AUTHORITIES, BUT RATHER producer, but also act as a catalyst of ethical ‘maternity capital’ certificates. In terms of the consumption. It has to educate suppliers and THOSE WHO FORESEE EMERGING main sustainability challenges which Russia Russia’s factor endowment has been a raise consumer awareness. In this research faces today, offsetting the environmental major determinant of the global businesses’ MARKET OPPORTUNITIES AND sampled business cases illustrate the presence 102 damage and industrial footprint generated as a sustainability strategies, as the companies 103 of financial rationale and sound business EXPLORE UNCHARTED TERRITORIES. result of the past resource-intensive industrial have always been able to tap a pool of educated models underlying social and environmental development is the most pressing priority and healthy labour force without having to investments. Most initiatives implemented as a Indisputably, sustainability itself is that very to be addressed. Minimising environmental invest in basic training, localise production part of the Operations building block, especially business opportunity, and not a barrier. In this footprint at the household and individual and supply chains, divert funds from investing the ones linked to energy efficiency, lead to cost process various stakeholders can be engaged for levels is another challenge at the country level. in basic ‘hard’ and ‘soft’ infrastructure, such savings. At the same time, sustainable products realising the corporate sustainability strategy The high level of disposable income implies as roads and ports, as all those facilities are in have an impact on brand loyalty and corporate as ‘change agents’, e.g. think tanks, media or unsustainable lifestyle at the individual place. In Russia global businesses do not have revenues. In the sustainability context a price opinion leaders. To summarise, various forms level, while the various marketing research to launch full-scale development-oriented CSR tag of corporate inaction has already been of collaborations and partnerships are the studies give some indication of the premature programmes aimed at raising the standard of quantified, and because of that visionaries key enabler for the evolution of corporate stage of ethical consumption and potential living of local communities, however there is refer to the PNL and cost-and-benefit analysis sustainability in Russia, as well as anywhere appetite for sustainable products. As Russian some other space outside of the scope of the basic in their discussion about sustainability. in the world. citizens need just a ‘nudge’ in order to grow needs’ satisfaction, which the private sector, in into responsible and active consumers which particular, global businesses, can fill in. Due to its ‘transitional’ nature Russian act as a sustainability driver themselves, the business environment is dynamic, and because sustainability strategy at the country level can This guide has generated a comprehensive of that it offers many business opportunities focus on raising consumer awareness required ‘toolkit’ consisting of four key instruments, to the market leaders. Certain MNCs which to minimise the environmental footprint of all of which point to the possible frameworks adopted the long-term vision upon their entry individual consumption. From the viewpoint which MNCs can utilise for identifying their into the Russian market have been successful of SKOLKOVO IEMS, only by shifting to the key priorities and assessing their performance. at transferring the global best practices and sustainable vision, Russia can capitalise on Tool 2 of the ‘toolkit’ has identified the transforming the sustainability landscape. all its strengths, such as developed ‘hard’ three main building blocks of any corporate Thanks to their social investments in Russia, infrastructure and high level of human sustainability strategies: products, operations some of the past barriers have been successfully capital, and become the best performer in the and stakeholders, while Tool 3 categorises

SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES APPENDIX. IEMS SUSTAINABILITY COMPOSITE INDEX METHODOLOGY.

Economic dimension (25%):

Source: Economic Wellbeing Dimension, Sustainable Society Index (2014 data); Indicators: Organic Farming, Genuine Savings, Gross Domestic Product, Employment and Public Debt

Social dimension (30%)

Source: Human Wellbeing Dimension, Sustainable Society Index (2014 data); Indicators: Sufficient Food, Sufficient to Drink, Safe Sanitation, Education, Healthy Life, Gender Equality, Income Distribution, Population Growth and Good Governance 104 105

Environmental dimension (25%)

Source: Composite of Environmental Performance Index (2014 data) and Biocapacity Reserve/Deficit, WWF/Global Footprint Network* (2012 data);

Indicators: Endowment of natural resources (ecological footprint and biocapacity) - cropland, grazing land, forest land, fishing areas, built-up land and carbon emissions; quality of ecosystem protection and resource management - health impacts, air quality, water & sanitation, water resources, agriculture, forests, fisheries, biodiversity & habitat and climate & energy

Governance dimension (20%)

Source: World Bank’s Worldwide Governance Indicators (2014 data); Indicators: voice & accountability, political stability & absence of violence/terrorism, government effectiveness, regulatory quality, rule of law & property rights & judiciary independence, control of corruption.

* The main limitation of most existing environmental metrics such as EPI or the environmental wellbeing dimension of the SSI is their focus on the countries’ environmental management of natural resources and environmental policy developments. These indices disregard countries’ natural resources endowment and biocapacity reserves. Because of these reasons, it has been decided to adjust the 2014 EPI scores by the constant factors, which were determined by the 2011 biocapacity reserve/ deficit values, as calculated in accordance to the Global Footprint Network methodology.

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SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES Moscow School of Management SKOLKOVO Institute for Emerging Market Studies Sustainable Business Lab

Novaya ul. 100, Skolkovo village, Odintsovsky district Moscow region, Russia, 143025

tel: +7 495 539 30 03 fax: +7 495 994 46 68

E-mail: [email protected] Website: www.skolkovo.ru

Established in 2006, the Moscow School of SKOLKOVO Institute for Emerging Market Studies Management SKOLKOVO is the largest private addresses the fields of strategy and innovation, business school in Russia. SKOLKOVO trains global markets and institutions, «soft power» and business leaders to apply their professional digital technology. The mission of the institute is to skills in dynamically developing markets, promote Russia’s multi-dimensional and seamless training leaders who will set up and run their integration into the world economy. The institute 112 own businesses and lead the development helps the international business community better of the Russian economy. SKOLKOVO offers a understand Russia as a market and as a global player, range of academic programs, including a full- and supports the eff orts of Russian businesses to time international MBA, an Executive MBA, attract investors and enter international markets. corporate executive education programmes, the SKOLKOVO Startup Academy for young SKOLKOVO Sustainable Business Lab is a centre entrepreneurs, and the SKOLKOVO Practicum. of expertise aimed at conducting problem-oriented The SKOLKOVO community brings together interdisciplinary research, with a focus on business those who believe that an entrepreneurial models that combine economic, environmental and approach and proactive attitude are the key to the social dimensions. Its primary goal is to promote a successful development of the Russian and global sustainability agenda in Russian and CIS markets economies. This includes representatives of the through extensive outreach of research results and largest Russian and foreign companies, small education of a new generation of responsible business and medium businesses, and public authorities. leaders.

For more information please contact: [email protected]

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SKOLKOVO INSTITUTE FOR EMERGING MARKET STUDIES