Why Russia is the Land of Opportunity for Climate Action

Managers who want to lead on climate and energy should be looking carefully at Russia, where President Dmitry Medvedev has decreed a 40 percent reduction in energy intensity over the next decade.

The potential for scale is immense: Russia is one of the most inefficient countries in the world, the third-highest emitter of greenhouse gases (GHG) — both by traditional measures and in terms of exports for consumption — and its per capita emissions are on a path for the top spot by 2030. Yet Russia receives far less attention than its GHG-emitting peers, such as China and tropical rainforest countries.

Why is it overlooked? There are several reasons: Russia’s list of sustainability challenges, from nuclear waste to governance, is long, so climate change gets lost in the shuffle. Commentators focus on Russia’s struggling economy, asking things like whether “BRIC” really needs an “R,” signaling that attention is better paid where business is growing more predictably. Furthermore, non-Russians are perplexed about operating in what seems like too foreign a place — one that is European, Asian, and most of all, its own category altogether — and so give it wide berth.

Nonetheless, there are growing reasons for companies invested in Russia to proactively manage and reduce energy use in operations, by suppliers, and for customers.

The first is that Russia’s climate challenge is one that business is uniquely, and profitably, good at solving: audacious inefficiency, stemming from outdated equipment and obsolete management practices. Russia is the most energy-intensive (PDF) of the world’s 10 largest countries. Few, regardless of size, score higher, and many that do are Russia’s neighbors. Cost-effective efficiency measures could cut Russia’s energy use by as much as 45 percent (PDF), with prime opportunities in industry and manufacturing. One study has identified 60 measures representing more than $200 million in investments that can be made profitably.

Second, the government is showing increased willingness to incentivize action. In 2008, Medvedev signed presidential decree No. 889, a commitment to cut energy intensity by 40 percent by 2020. Last year he committed Russia to growing its renewables portfolio from less than 1 percent to 4.5 percent in that period. Medvedev then developed Russia’s first executive climate doctrine and began calling for action on climate change — a reversal of Vladimir Putin’s stance, symbolized by Putin’s infamous quip that climate change would be beneficial because it would mean fewer fur coats.

Now an innovation center is under development near Skolkovo, where companies such as Google and Intel are setting up research and development centers, similar to special business zones in China. In sum, there has been a change in the terms of debate in Russia, with climate change being taken more seriously by the government and productivity now a priority.

Another reason is that the drama of climate change is clearly unfolding in Russia, and so people are starting to appreciate the benefits of managing energy for sustainability. This summer, the hottest in 130 years, led to 27,000 wildfires and burning bogs, sending global wheat prices through the roof. Meanwhile, global warming is melting the arctic, where the government is leading a high-profile exploration, turning the most iconic imagery of climate change into a point of local news. Climate change is increasingly seen as real and important, making conversations more natural.

A fourth reason is Russia’s natural assets. The world’s most geographically expansive country, Russia is a storehouse of some of the world’s most significant natural assets and threats, from the greatest reserves of fossil fuels and forests to vast volumes of methane ominously locked up in tundra. If environmental markets are able to take hold in Russia — though it will be some time before the prerequisite monitoring and verification frameworks are instituted — business will have an opportunity to benefit from effective resource management on a vast scale. Heading in that direction in July, the government endorsed 15 clean-energy projects to start making use of its carbon credits.

Finally, Russia holds the key to a bigger puzzle: its 15-plus neighbors with similar ecological impacts and business environments, including burgeoning Ukraine and Kazakhstan. Succeeding in Russia also means opening possibilities for the whole region, which connects the markets of China, Europe, and the Middle East.

While these trends are encouraging, companies interested in managing climate and energy matters in Russia still must confront significant issues. Following are three key challenges that companies are likely to face and suggestions for addressing each of them.

Challenge #1: Low Awareness

Despite Medvedev’s efforts and the impact of this summer’s wildfires, there is still little social momentum for action on climate change in Russia. Many people still think that global warming will help this cold country. There is also generally a low appreciation of the impacts, risks, and opportunities that climate change creates for business. The Carbon Disclosure Project (CDP), reflecting on 2009 reports from Russia’s top 50 companies, found that climate change is often misunderstood (PDF) in the country as a purely environmental, rather than strategic, topic.

Solution: In working with Russian partners new to the subject, emphasize the links between climate action, energy management and modernization, a political priority likely to draw more government resources. Medvedev has said that his country’s subpar economic influence is due partly to the fact that “energy efficiency and productivity of most of our businesses remain shamefully low.” He has made becoming “a leading country measured by the efficiency of production, transportation, and use of energy” the first of his five pillars of modernization.

With that in mind, connect with partners on the ways that energy hits the bottom line and discuss opportunities to modernize. This can lead to discussion of how action on climate change can create other benefits, from carbon credits to attracting more international investors.

Challenge #2: Governance Obstacles

A second challenge is that energy waste in Russia is rooted in systemic, sometimes dysfunctional governance, and companies will typically find government difficult to engage because if is needed on larger projects.

For example, IKEA was recently stymied by Lenenergo, the electricity utility, in simply hooking up to the grid, and has thus tabled new investments in Russia. This is a problem not only for companies, but the government itself, since it is unlikely to effectively address climate change without policies that instill confidence and encourage investments.

Governance obstacles also come in the form of entrenched non-transparency in companies. After China and Hong Kong, Russia has the largest share of Global 500 companies that don’t disclose to the CDP. Of the mere six firms among Russia’s top 50 that did respond to the CDP last year, only two reported emissions or energy reduction goals. Low transparency is a substantial constraint, since measurement and governance are considered cornerstones of effective climate and energy management.

Solution: Focus in the near term on capacity building rather than precise data disclosure. Given BSR’s experience in China, there should be substantial opportunities to help companies identify energy-saving opportunities and train energy managers, and to assist them with developing action plans and understanding their economic decisions.

Although these activities don’t address transparency directly, they can build trust with suppliers and create results that they will want to be transparent about. Even if you don’t start with a discussion about disclosure, companies that succeed on climate and energy management will have an incentive to communicate their results over time. For those that are ready, show how the process of disclosure can lead to learning about risks and opportunities and create a basis for management. For projects connected with government contracts, encourage standardized, effective processes on how the government will decide tenders by doing an integrity pact with bidding peers.

Challenge #3: Slow Going in the Policy Realm

Although Medvedev appears serious about leading his government toward modernization, he is the first to admit that progress will be gradual. Ultimately, the challenge of modernization is to cultivate, unleash, enable, and protect the innovative potential of the Russian people — and that will take time.

On climate in particular, there is no unifying policy, and the government does not appear motivated to curb emissions soon. The country’s climate negotiator, Alexander Bedritsky, says Russia should be judged on progress since 1990, like other countries. The problem with that, however, is that emissions plummeted with the economy in the 90s, and when it bottomed out in 1998, emissions were far below the 1990 level. Russia’s current proposal (PDF) to reduce emissions by around 20 percent from 1990 actually means letting them rise today until they are fully 20 percent higher than their low point. Therefore, even if energy intensity decreases under Medvedev’s plan, total energy use and GHG emissions are likely to rise.

Solution: Focus on voluntary business actions that generate tangible savings in the near term. Improvements in energy efficiency offer direct and virtually immediate cash savings, give companies a better view of their processes, and enjoy support by the government. In the context of other CSR issues, this is a relatively straightforward starting point. In doing so, watch other organizations that are invested in energy modernization, such as the World Bank, the European Bank for Reconstruction and Development, and the International Finance Corporation, which may be able to offer signals and even more direct support.

To summarize, Russia holds vast potential for business action on climate change and should start to become a higher priority in managers’ minds. Doing sustainability work there is difficult because of low awareness, governance obstacles, and slow going in the policy realm.

Yet these challenges are surmountable, and conditions are increasingly favorable for climate and energy management. Companies have opportunities to start on practical initiatives that can make big impacts now, growing their efforts as policy and consumer behavior evolve.

First posted at GreenBiz.

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