Why does Oschadbank have its own ESG Center?

From mid-September, Oschad started its own ESG Center within the structure of the Department of Strategy and Development. I recently spoke about this at the panel discussion «Climate Risk Management in the Banking Sector», organized with the assistance of the German Society for International Cooperation (Gesellschaft für Internationale Zusammenarbeit, GIZ), the Ukrainian Climate Office (UCO), and the Independent Association of Banks of Ukraine (IABU). During the event, economic opportunities arising from climate change, the role of climate risks in the financial sector, related challenges for the banking industry, and practical steps to integrate climate risks into strategic decision-making and major banking operations were discussed.

It is clear that the establishment of a new unit is an additional cost that all institutions and organizations without exception must avoid during a full-scale war. However, in my opinion, the creation of the ESG Center, which is responsible for environmental issues, social responsibility, and proper governance (Environmental, Social, Governance, ESG), is fully justified. Moreover, I believe that every Ukrainian bank should have such a unit. Why?

Perhaps the most important aspect now is that investors and partners of Ukrainian banks expect the introduction of ESG policies by Ukrainian banking institutions. If this does not happen, there is a high risk that they just won't cooperate with us. No one needs to explain what will happen to the Ukrainian economy without external assistance. The participation of ESG-responsible banking institutions in sustainable development projects also weighs heavily. Such participation helps to obtain cheaper financing, for example, to improve the energy efficiency of housing.

At the same time, compliance with the relevant rules and regulations on the part of banks primarily consists in the fact that they will require the fulfillment of ESG standards on the part of their business clients if they need financial services, because the banks themselves are not engaged in production and do not manufacture goods. The tools for these changes are environmental criteria in credit policies, as well as the priority of supporting «green and sustainable» projects. Banks are starting to screen applicants for ESG‑criteria loans and, in some cases, refuse if the customer does not meet certain criteria. International financial organizations (IFIs) demand that partner banks carry out ESG assessments of borrowers.

Some foreign banks refuse to finance industries that pollute the environment (such as coal mining) or harm society (such as gambling). It is also sometimes required that the companies in which they invest take into account climate KPIs in the executive payment system. There is also a practice of interest rate on the loan depending on the execution of ESG metrics (for example, in the case of reducing water consumption or reducing pollutant emissions).

The principles of ESG are not limited to the environmental sphere; this abbreviation has two more letters. The letter S—Social—should primarily focus on the inclusiveness of the banking sector. There is also something for Oschadbank to be proud of here, but this is not the topic of this column. Attitudes towards customers (transparent and fair terms of cooperation), financial assistance to small and medium-sized businesses (which often lack the knowledge and experience to obtain bank financing), as well as decent treatment of their own staff (this factor has gained special importance during the current crisis in the labor market) are also important.

As for the last letter G, here we are primarily talking about transparent corporate governance, which, according to many experts, is at the appropriate level in state-owned Ukrainian banks. The integration of ESG risks into the bank's general risk management system, strict compliance with international and domestic legislation on money laundering, etc., are also important here.

There are regulatory requirements for mandatory ESG reporting in many countries. If there is no such reporting or its quality is unsatisfactory, respectively, then there will be sanctions for non-compliance with the rules or limited access to financial resources. Foreign partners welcome speeches at specialized public events (like the one I mentioned at the beginning of this column). There are also many employee trainings on this topic (which our international partners currently agree to finance), as well as for clients: to comply with the relevant rules, they must know them.

As in other countries, the regulator, the National Bank of Ukraine (NBU), plays an important role in the process of introducing ESG standards in the banking sector of Ukraine. In June of this year, the NBU approved the «White Paper on Environmental, Social, and Governance (ESG) Risk Management in the Financial Sector». It contains a roadmap for building an ESG risk management system in the financial sector. Before that, in 2024, the NBU introduced the Policy for the Development of Sustainable Financing, one of the priorities of which is the management of non-financial risks in general and climate risks in particular.

The activity of the National Bank in this area deserves high praise, because the uncertainty regarding specific norms and the lack of methodology for the qualitative assessment of ESG risks complicate the planning and implementation of ESG policies by Ukrainian banks.

Resource constraints also complicate the process. For Ukraine, the term ESG is relatively new, and therefore there is a lack of relevant specialists. It is very important to use any opportunities for training people in this field at the expense of international donors.

But the main barrier to the introduction of ESG policies into the life of Ukrainian banks remains a full-scale war. Whether you like it or not, it is the war that mainly shapes the agenda of the Ukrainian economy and determines work priorities. Despite this, I believe that even now ESG practices should be the focus of banks' work. Eventually the war will end. Our decisions today will determine whether future generations will suffer from the negative effects of climate change or whether they will receive a more perfect world, a world of active sustainable development.