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Lake Baikal will soon float on the London Stock Exchange?

19 October 2017 Topics:

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“En+ Group transforms its huge clean energy resources to green metal and supplies it to fast-growing international markets.” Lord Baker. Chairman.

 

To: Donald Brydon, CBE, Chairman of the London Stock Exchange Group

To: Andrew Bailey, Chief Executive, UK Financial Conduct Authority

To: Rt Hon Lord Barker of Battle PC, Chairman of the Board, En+Group

Re: Environmental and Social Risks to be Considered When Listing the En+Group at the LSE

We appeal to You in response to the news that the En+Group Plc. plans to hold an IPO at the London Stock Exchange. We believe that the IPO process must be adjusted to incentivize significant improvements in the Group’s policies and practices on environmental and social responsibility and related governance issues (ESG). We believe that unless recognized, disclosed and properly managed, the environmental and social risks associated with operations of En+ Group industries may result in substantial material losses and underperformance.

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Fig. En+Group  components ( coal-fired plants and coal-mining subsidiaries omitted)

In 2011, when En+ and Evrosibenergo had attempted to hold an IPO in Hong Kong, NGOs discussed with the HKSE Management similar concerns. Since then, despite the relative openness of the Company to new ideas of "green development", we have not seen substantial improvement in its policies and practices related to specific environmental impacts from the key enterprises that it owns and manages. In our opinion lack of proactive ESG policies leads to substantial risks to the En+ sustainability and harms the well-being of local populations in the regions of its operations. Current advertising of the En+ Group as a "green business" is undue and premature exaggeration not supported by a responsible environmental management system, which the Group is yet to design, communicate to stakeholders and put into effect.

The greatest challenge the En+ faces stems from the fact that hydropower plants of its Angara Cascade depend on water resource management of the Lake Baikal World Heritage Site, the depository of 20% of the earth’s unfrozen freshwater and home to more than 2500 biological species, most of them endemic. During the Soviet era, the construction of the Irkutsk dam, that raised the Lake’s water level by 1 meter, and the Baikalsk Pulp and Paper Mill (previously owned by Mr. Deripaska and now closed and transferred to the Government for clean-up) have been recognized as two of the greatest causes of degradation of the Lake Baikal ecosystem. More recent addition of other stressors such as uncoordinated coastal development and severe drought has resulted in a severe ecological crisis manifested by algal blooms, decline in population- of endemic fishes and sponges, and other unfavorable changes to the Lake ecosystem. Negative changes are developing but are unnoticed due to dwindling support to ecological monitoring from the State and other parties involved in the management of Lake Baikal. Seeing the crisis, UNESCO’s World Heritage Committee in 2017 requested that the State Party develop a property-wide ecological monitoring system in order to identify the scale and causes of such changes and the responses required to preserve the ecological integrity of the property. It has not been done.

In 2017, recognizing that the natural water regime is the key driver of the health of the freshwater ecosystem, the World Heritage Committee in its decisions "notes with concern the Government’s resolution increasing the allowed fluctuation between the maximum and minimum water levels of Lake Baikal in 2016-2017 and urges the State Party to elaborate an Environmental Impact Assessment (EIA) of potential impacts of existing water use and management regulations on the Outstanding Universal Value (OUV) of the property and not to introduce any further changes in the regulations until their effects on the property are fully understood.". A similar request was made in 2016.

These repeated requests show non-compliance with the Conventions’ requirements of the current management system of the Lake Baikal World Heritage site and may\should result in change in regulations guiding the use of the Lake Baikal waters by the En+ Group power plants. The above mentioned resolutions passed without any EIA by the Government of Russia allowed more than a two-fold increase in water level fluctuations. Those changes were justified by such needs as sustaining energy production by the Angara cascade hydropower plants and safe functioning of water intakes, at least one of which belongs to an En+ coal-fired power plant. The companies of the En+ Group claim that actual water management decisions are made by state agencies; however those companies are obvious end beneficiaries of decisions made by the State in violation of the Convention. The interests of the En+Group will be directly affected when\if in accordance of the World Heritage Committee decisions the State finally cancels temporary increase in water level fluctuations and undertakes an internationally validated EIA to guide future water management policies in the Lake Baikal basin. Even without the intervention of the World Heritage Committee, continued water scarcity (likely resulting from climate change) creates tremendous challenges for the En+Group which is slow to adjust its energy generation and water intake plans to a new climate regime and to take into account the water regime requirements of the lake’s aquatic life.

Climate change is believed to exacerbate both hydrological extremes and the En+Group also faces potential challenges in future water-abundant years. Due to the uncontrolled growth of Irkutsk city immediately downstream from Irkutsk Hydro, the dam’s ability to safely release water without drowning city buildings is severely reduced (approximately from 6000+ cum/sec as originally designed to 3500 cum/sec). When another climatic extreme hits the Lake Baikal basin, the En+ will likely first fill the Irkutsk Reservoir to the brim, thus bringing destruction to low-lying lake banks in the Buryatia Republic and, then, to avoid risks of dam failure, it will have to increase water release and flood the low-lying portions of downstream municipalities in the Irkutsk region. This will likely result in damage to the Company’s reputation, material damage and tragic consequences for lacustrine\riparian communities. The Company may say, that managing emergencies is the responsibility of the Russian Government, but such statements do not remove these risks. Unfortunately we are not aware of any publicly accessible climate-adaptation action plan of the Company, despite its marketing strategy as a most climate-friendly enterprise.

The currently implemented attempts to renovate dams of the Angara cascade, labeled by the company as "environmental management measures", are directed primarily towards increasing production capacity of the power plants, but, to the best of our knowledge, do not include sufficient measures to improve the ability of dam operators to cope with climate extremes or protect freshwater organisms. More than that, in spring 2017 ornithologists again witnessed massive destruction of nests and killing of waterbirds chicks by the untimely increase of water release in Angara River from the Irkutsk Hydro dam during the breeding season (a similar event in 2015 was the subject of a lawsuit against "Irkutskenergo"). Environmental flow norms, used in hydropower management around the world, are not a part of the current management rules for any of En+Group hydropower plants. In addition, a new Draft Management Rules for the Irkutsk Reservoir and Angara Hydropower Cascade have been repeatedly rejected at public hearings in 2010-2016 due to a lack of environmental and social safeguards and inconsistency with the "Law on Lake Baikal".A lack of a modern management system for key aspects of hydropower management may at any time result in major negative environmental consequences and even industrial accidents.

Preservation of Lake Baikal is a top priority of Russian environmental politics. For example, in June 2016, President Putin asked the presidents of China and Mongolia to identify alternatives to dam building on tributaries of Baikal. The Buryatia Republic Government regularly opposes any increase in water level fluctuation. The Lake itself is sacred in the eyes of local communities. Local people and CSOs often organize country-wide actions to protect Lake Baikal. Therefore shortcomings of the policies of the En+Group environmental management and practices are likely to cause political, regulatory and other problems for En+Group.

En+ actively promotes its business as "green energy and metals", while its subsidiaries are widely known for creating hazards to the environment and human health both in the Lake Baikal\Angara River area and in other regions of Russia. Thus the En+ Group subsidiaries emitted at least 10% of all atmospheric pollution of the Russian metallurgy sector in 2016. For example, the UC Rusal is among the greatest polluters in Siberia, contributing to extreme pollution of Krasnoyarsk, Bratsk and other heavily polluted cities of Russia. At the same time the EvroSibEnergo’s Krasnoyarskaya Hydro located immediately upstream of the Krasnoyarsk City keeps the Yenisei River unfrozen throughout the winter, resulting in massive vapor emissions which (combined with severe air pollution) are widely believed to cause severe respiratory diseases. Solutions to these problems have been long proposed by local scientists, but did not interest the En+Group. In 2016 in the Irkutsk region, authorities listed the Bratsk aluminum smelter as among the top five chronic violators of the environmental law. According to their own 2016 Sustainability Report, the bulk pollution from UC Rusal has increased by 8% compared to 2015, while GHG emissions per ton of aluminum from smelters were practically the same as in 2013. According to the same 2016 Report, the company seeks "to achieve by 2020 air emission standards established by the law of the countries of operation ". In other words, it still DOES NOT comply with local air quality regulations. This recently resulted in the formation of strong local anti-pollution movements, which put pressure on authorities to make En+ Group pay fines and reduce pollution. In 2017 Rusal was forced to sign a pollution-reduction agreement with the Krasnoyarsk authorities.

The evidence above shows that most En+ business is based on Soviet-era assets designed without environmental safeguards and the Group has largely failed to mitigate their negative impacts to acceptable levels. However, the Group’s new industrial assets also have a questionable environmental record. For instance, the 3000MW Boguchanskaya Hydropower station developed as a joint enterprise with RusHydro Co. was completed in 2013 on the Angara River even without conducting a proper EIA. It caused huge environmental damage, and forced eviction of local communities, some of them without adequate compensation. As in other cases, the En+ Group companies outsourced reservoir creation\management and resettlement issues to state agencies with poor performance records.

The facts above suggest that an "independent" En+ Group de-facto is not an independent private company, but rather a private-public partnership in which responsibility for environmental and social externalities are outsourced to government agencies, with huge unresolved environmental and social problems resulting from this "joint venture". This explains why the En+Group still does not have its own robust environmental management system and has such a poor record on most ESG issues. We hope that listing at the LSE can be conditioned by demonstration of solid action plans for overcoming this deficiency.

We suggest that, unless the En+Group stops hiding from its global responsibilities for its main energy asset – Lake Baikal, its economic performance and global reputation will be fatally harmed. This will happen due to the growing controversy between a need to protect and use sustainably this World Heritage Site and obvious mismanagement of the lake water resources stemming from lack of financing, scientific information and political will to solve piling problems. En+ Group operations in other regions are likely to have similar problems since they follow the same pattern in which the company uses government relations to avoid responsibility for environmental and social risks it creates. This cannot last forever. A recent proposal by the Ministry of Natural Resources to raise significantly the water use fee for the hydropower industry is a sign that the Group may soon pay a greater price for resources and environmental impacts.

We believe that to contribute to sustainability and to lower the high risks of the En+Group, the intended IPO should be conditioned on thorough assessment and fair disclosure (both to potential buyers and the public) of risks and mitigation plans associated with:

I. Management of Lake Baikal World Heritage Site and the Group’s policies and action plans reflecting its specific commitments to state-of-the-art environmental management of this unique freshwater ecosystem in consultation\cooperation with local communities. In particular we hope that the En+Group develops its clear policies on environmental flow (lake level fluctuation) norms that suggest solutions to eco-hydrological problems arising from functioning of Group’s hydropower facilities.

II. Possible increase in hydrological extremes due to climate change and the Group publicizes its sound Climate Adaptation Plan, that complements and verifies its already extensive efforts in climate mitigation. As one of simple essential first steps the Group could deepen (redevelop) its water intakes on Angara River to allow more flexible and timely regulation of water outflow from Lake Baikal during the current water- scarce period. This may enable to reduce outflow through Irkutsk Dam to at least 1050 m3/sec. from 1300 m3/sec practiced now.

III. Environmental health and social stability in communities impacted by the Group’s major industrial assets. In particular we hope to see the Group adopting in consultation with local communities comprehensive and transparent environmental management plans for each of its major industrial facilities.

We learned that the Company plans to use proceeds from the IPO to pay its debts. We believe that the greatest accumulated debt the En+Group has is the debt to damaged natural aquatic ecosystems and local communities affected by environmental impacts of its facilities. Therefore, substantial part of the proceeds from the IPO and other revenues should go towards systemic solutions of above mentioned environmental and social problems at Lake Baikal and lessening existing and potential environmental impacts from the Group’s industrial facilities elsewhere.

Sincerely,

Eugene Simonov,

Coordinator, Rivers without Boundaries International Coalition,

October 16, 2017

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