Business Plan№ 2 September 2017

Russia is facing the complex task of establishing a more sustainable manufacturing and consumption cycle, according to Sergey Donskoy, Russian Minister of Natural Resources and Environment, at the May meeting of the Nevsky International Ecological Congress-2017. This can bring both social and economic benefits, which, according to him, are backed up by the increase in the environmental industry’s turnover in the EU to more than 300 billion euros per year (2.5% of the EU’s GDP). Russia does not have similar prospects, but in 2017, the Year of the Environment, green innovation should finally go mainstream.

Motivating factors

There are several vital factors that can incentivise businesses to invest in sustainability. The first and main factor is compliance with environmental regulations. These regulations help the government control the amount of harmful substances entering the soil, air and water, and also encourage technological innovation in manufacturing and the conservation of natural resources.

In recent years, there has been a movement towards the gradual tightening of regulations, so much so that unauthorised waste disposal can cost millions in fines. There have already been some changes in the legislation, extending the manufacturer's environmental responsibility. ‘This legislation is a tool for sorting waste collection from manufacturing and will help to increase the extent of liquid waste processing by half within three years,’ believes Sergey Donskoy. ‘In Russia a reform of the regulatory system, which uses technological innovation and research and development as its main criteria for evaluation, deserves some attention. The government lists best practices, which form a comprehensive guide for further development and prompt lagging industries to upgrade their equipment by increasing payments for non-compliance,’ adds Georgy Safonov, director of the Centre for Economics of Environment and Natural Resources at the Moscow Higher School of Economics.

According to him, there is a weak point - these lists start to become irrelevant immediately after their publication, because the bureaucratic procedures for keeping them up-to-date cannot keep up with technical progress. Constant monitoring and operational adjustments are needed, but this is not easy.

However, Russia already has some good examples of innovation in manufacturing even by stringent international R&D standards. In July 2017, Metalloinvest launched a new facility for the production of hot briquetted iron (HBI-3 Plant), with a design capacity of 1.8 million tonnes per year, at Lebedinsky GOK (one of the largest facilities of its kind in the world). By government decree, the launch was listed as an R&D case study for the Year of the Environment. The plant uses the direct reduction of iron, the most environmentally friendly method for producing iron from ore available today. Unlike the production of coke, sintering ore and pig iron, HBI does not emit as much, or produce the same level of solid waste in the form of slag.

In addition, unlike traditional domain methods, the energy efficiency of HBI production is much higher, while greenhouse gas emissions are significantly lower. Since metallised briquettes contain far fewer impurities than scrap metal, steel produced using them is distinguished by the purity of the alloy, which is vital for recycling and repurposing.

Metalloinvest financed this project using green landing funds from a consortium of international banks. One of their conditions was compliance with sustainable development policies, so the company underwent regular checks by an independent auditor.

Although green investment is widespread in the world, in Russia it is still rare. The domestic financial institutions do not have preferences for innovative initiatives, which means that the funds are raised only on general lending terms. This makes innovation challenging because green projects are quite capital intensive. However, representatives of InfraONE, a Moscow investment company, hope that in the Year of the Environment, the situation could improve.

Green bonds

The use of green bonds, which assume targeted use and undergo different issuing procedures, could prove helpful. The number of green bonds in the world is growing steadily (last year they amounted to $81 billion), which demonstrates high demand.

According to the Money, Markets, Risks report by InfraONE for the St. Petersburg International Economic Forum 2017, ‘At the moment, green bonds are unavailable in Russia, but considering that this year is the Year of the Environment, it is possible that such securities will be issued for certain projects in the near future. The Central Bank is considering them together with other green financing opportunities (for example, environmental funds that would collect pollution charges).’

Economic benefits

The second important motivating factor is businesses' desire to boost efficiency. To improve efficiency, companies are willing to modernise, which usually increases the quality of products and improves environmental performance.

At Mikhailovsky GOK (part of Metalloinvest), an industrial experiment on the enrichment of oxidised quartzites is currently underway. The goal is to increase the efficiency of iron ore exploration and increase concentrate output by 10 million tonnes per year, without expanding production efforts. The facility is also equipped with recycled technical water supply systems. Industrial and domestic wastewater from its facilities is supplied to individual biological treatment stations for poor quality ore, as well as to the wastewater treatment plants at the Gorvodokanal Municipal Unitary Enterprise, and then reused in the production process.

In August 2017, Metalloinvest introduced the waste landfill facility of Ural Steel and announced the third stage of the OEMK waste landfill. Together, both projects received around 360 million roubles in investment. Both facilities were built taking into account modern environmental technology, reducing their environmental impact. All of the transport waste is automatically sorted prior to storage, making further processing more efficient.

Metalloinvest’s facilities constantly improve their cleaning equipment and install modern, environmentally friendly equipment. Auditing results carried out by our own and by independent bodies confirm that the environmental impact indicators of all Metalloinvest facilities are much lower than industry standards

Andrey Ugarov

First Deputy CEO, COO, Management Company Metalloinvest

Quite often, when trying to increase efficiency, companies are guided by international experience, but this is not always the case. ‘Among the organisations that in recent years have successfully utilised environmentally friendly technology, I would like to highlight Rusal. The company has more than halved its emissions in comparison with 1990s levels. The company uses hydro energy, which significantly reduces the amount of CO2 emissions per tonne of aluminium produced,’ commented Georgy Safonov. Hydro energy is both clean and cheap. Rusal’s usage of hydropower is not a new concept, but a revival of the method used in the USSR. Back then aluminium facilities were built adjacent to large hydropower plants. There was even a term for it: ‘Joint Energy and Steel Production Complex’.

The President of Russia, government officials and regional authorities highly appreciated the company's efforts to implement environmental technologies.

One of the key issues with a circular economy is waste management. Modern technology provides a number of solutions, often with financial benefits. A factory in the village of Ferzikovo, in the Kaluga region, is the largest investment project implemented in Russia by the Lafarge Group, a French company. The plant has a production capacity of 2 million tonnes of cement per year. It uses a dry cement process, requiring 2.5 times less energy than traditional cement manufacturing. There is also a facility for an alternative fuel station, which uses public and industrial waste (such as paper, cardboard, plastic, textiles, rubber, wood and used tyres) as its energy source.

However, there are more dangerous waste materials that require special attention. Among them is radioactive waste, the disposal of which requires major research. ‘Our reactor produces molybdenum, which is then delivered in special generators to medical facilities, where it is converted into a sterile solution of the technetium isotope, used in oncological diagnoses. The reactor uses waste fr om existing uranium production facilities. This can help properly dispose of radioactive materials,’ suggests Yevgeny Nesterov, a researcher at Tomsk Polytechnic University, and director of Sibnuklon. In order to certify this technology, it needs to be processed as both medical equipment and as a medical chemical, which means double the red tape. According to Nesterov, in today’s Russia, this is perhaps the main barrier to innovation.

Looking around

The third motivating factor is associated with improving the reputation of a business through green initiatives. ‘Many companies invest considerable amounts in sustainable initiatives, such as closed water supply systems. These investments are not aimed at boosting a company's profits so much as solving environmental issues, and through this improving the situation in the regions wh ere the company operates, in this way improving its image,’ says Sergey Zhigarev, Head of the Duma Committee on Economic Policy, Industry, Innovative Development and Entrepreneurship.

The original reason for building a lean production facility for gypsum building materials in the Volma-Maikop plant was its location in a touristy area of ​​the Adygea region. According to Vladimir Ovchintsev, Volma’s director general, the company has installed a number of filters that both filter harmful substances and collect certain types of waste, which are then reused in production. The company also repurposes energy as well as various other materials: the hot gas from dryers for slabs is used to reheat water for a number of other purposes, which allows Volma to save on electricity.

The original reason for building a lean production facility in the Volma-Maikop plant was its location in a touristy area of ​​the Adygea region.

The image factor is especially relevant to companies that export their products. Volma is one of them. The company needs to comply with stringent international standards, often concern both the products themselves and production processes. Any European consumer today can request information from a company on the environmental footprint of both the company and the goods it produces. If the manufacturer refuses to provide this information or if this does not satisfy the customer, it is simpler to avoid working with this manufacturer in order to avoid costly business issues.

Today there is every reason to believe, according to Safonov, that soon such mutual responsibility will be widespread even in China (a country that is only just beginning to think about environmental issues), which still has lots of loopholes for exporters of products manufactured using out-dated technology.

When moving towards circular manufacturing, we should focus not only on the environmental impact of production and waste management, but also on the lifespan of goods and their maximum application, Sergey Donskoy noted at the Nevsky forum. But it is not enough to simply offer long-life green products. We need to think of how to introduce them to the market as a win-win for consumers.

International manufacturers often come up with new ideas, so it is worthwhile to study their experience. ‘Michelin is a good example. Through innovation in production, the company invented tyres with a 20% longer lifespan. But the management realised that selling them at a premium price would risk losing Michelin's main customers – logistics companies, for whom tyres are one of the biggest cost centres. Michelin proposed an innovative monetisation model by pricing for mileage on the tyres instead of tyre units. As a result, Michelin was able to become the most profitable company in its sector. Logistics companies also benefited greatly, reducing the costs of idle (non-running) lorries during periods of limited demand,’ says Ivan Kukhnin, Head of the Deloitte Sustainable Development Services Group.

Through innovation in production, Michelin invented tyres with a 20% longer lifespan.

Start small

Many countries long ago took action to increase production companies' corporate responsibility; this is linked to the circular economy. In Europe, over 500 of these initiatives are ongoing. In the Netherlands, France, Spain, and Denmark, initiatives have already been in place for several years to replace half of raw materials used with recycled materials, and to increase the lifespan of consumer goods.

‘China has developed a 50-year plan to achieve sustainable growth. One of the plan’s components was the establishment of a law on the promotion of a circular economy, which sets out the country’s objectives in handling municipal solid waste, saving energy and reducing emissions. Finland was the first to introduce a comprehensive guide for building a circular economy at the city level,’ observes Ivan Kukhnin.

In Russia, it is precisely the lack of a coherent policy that is often the cause of ineffective green initiatives. ‘I think that, despite the positive example that our company presents, we should not wait for businesses to solve environmental issues without large-scale support from the government. In order for this to happen, companies must have access to the necessary ready-made green technological solutions, as well as opportunities for participation in specific initiatives that could steer them towards investing into modernisation and the protection of the environment. Meanwhile, our government continues to impose ever stricter requirements, instead of encouraging manufacturers,’ says Ovchintsev. But on the other hand, says Sergey Zhigarev, companies are often motivated by quick profits: ‘Given the difficult current economic situation, it is hard to blame them. However this approach will not work to support the development of the circular economy’.

Leading industrial companies' major projects are always good, but in order for the process to become truly mainstream, he believes that the focus could be put on the SMEs, which, due to high mobility and adaptability to market changes, can quickly recoup their costs.

‘Tax breaks could stimulate SMEs to switch to circular manufacturing. This has already proven successful in China and the UK through transition to waste-free production. A good idea would be to scrap VAT for manufacturing recycled goods, as this will give businesses an incentive to direct their efforts towards recycled products. It also makes sense to incentivise environmental innovation, like recycling,’ added Zhigarev.

Russia has significant potential for green innovation. The Year of the Environment is probably the best time for the need and practicability of opportunities for green innovation to be heard across the country loud and clear.

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