What is ESG, and why is this term critically important for Ukraine's future recovery?
Interview
Why businesses that adhere to ESG principles will have a better chance of attracting development funding.
Let me start by answering the question in the title. The ESG acronym stands for Environmental, Social, and Governance – specific qualitative and quantitative factors that assess the impact of business on the environment, society, and the quality of company management.
These indicators determine the sustainability and ethics of a business. These criteria are used by investors to make decisions about investing in businesses or supporting individual projects.
Environmental principles are about the extent to which the company cares about preserving the environment. Social principles demonstrate the company's attitude towards its staff, suppliers, customers, partners, and consumers.
To meet these standards, businesses must work on the quality of working conditions, promote employee development, monitor gender balance, and invest in social projects. The last group of principles concerns the quality of governance: transparency of reporting, remuneration policy, shareholder relations, business ethics, and anti-corruption measures.
At first glance, how can we talk about the importance of ESG criteria when Ukrainian cities are under enemy fire almost every day? But this is only at first glance. Destroyed cities will need to be rebuilt, and this requires funds, including from our international partners.
Access to financing will be difficult without the implementation of ESG standards. And this is a requirement not only for Ukraine, but also for all countries that actively attract funding from international organizations.
Policies and relevant criteria are a requirement for cooperation with many (if not all) foreign partners, including DFC, EBRD, IFC, and the World Bank. Without this, the Ukrainian economy will not see a significant portion of foreign aid.
Even if you are dealing with a fully commercial organization that provides a loan, having implemented ESG standards can reduce the interest rate on the loan. That's why Oschad, like many other Ukrainian businesses, is actively developing this area of activity defining its own strategy for implementing ESG criteria, formalizing them and gradually implementing them in its work.
The area of environmental sustainability is the newest for our financial institution and for the Ukrainian banking sector as a whole. Foreign banks are more “advanced” in this area. I know from my colleagues that some Ukrainian subsidiaries of foreign banking groups carefully calculate the amount of heat used to heat their branches and the origin of this heat – coal or clean energy.
They also record how many kilometers employees traveled on business trips during the year, what kind of transport they used to travel by and how many emissions it generated. This data is then aggregated at the level of the banking group, and the group receives a corresponding rating, which has a significant impact on the cost of borrowing for a particular financial institution.
It's no secret that a financial institution's environmental credentials are not just about how much waste it produces and how much paper it uses per day. It is important for a bank to implement environmental protection principles in its loan products and assess the ESG risks of its clients.
In other words, to prevent financing of environmentally harmful enterprises, but rather to create more favorable financing conditions for more environmentally responsible businesses.
Donors who help the Ukrainian economy survive during the full-scale war are even willing to teach Ukrainians what ESG criteria are and how they should be implemented in the policies of banks and companies.
For example, our colleagues from the Deutsche Sparkassenstiftung für internationale Kooperation (German Sparkassenstiftung for International Cooperation) helped us work in this area.
We started cooperation in implementing entrepreneurship support programs (the German government provided cashback for business loans of up to 30% of the cost of projects). Later, our German colleagues offered to help us implement ESG standards.
We studied the best practices, understood which of them could be implemented at Oschad, developed and approved the relevant documents. As a result, we created a policy for managing environmental, social and economic risks when financing Oschadbank's micro, small and medium-sized business (MSME) clients.
After its adoption, we have better prospects for cooperation not only with Sparkassen, but also with many other similar institutions. Another initiative is that the World Bank recently organized training for Ukrainian bank employees on environmental and social standards in lending at a special seminar in Chisinau. In particular, representatives of Oschadbank took part in the seminar. The event was held in partnership with the Entrepreneurship Development Fund.
To implement ESG criteria at the bank-wide level, we have developed an environmental and social management policy. For example, it states that Oschadbank is committed to using resources such as water, electricity, and heating in a cost-effective and responsible manner, and to paying special attention to waste sorting.
Sustainable development is a powerful long-term trend. Its implementation requires the involvement of a significant part of the bank's team, which could structure the developments and build a clear path for the implementation of sustainable practices.
The implementation of ESG standards in the work of Ukrainian businesses in general and financial institutions in particular is a must for those institutions that plan to actively cooperate with international donors and investors to rebuild Ukraine.
At the same time, the implementation of ESG standards requires substantial expertise and knowledge, as well as a willingness to change the way we do business. Therefore, I urge my colleagues from Ukrainian business to carefully study the opportunities currently offered by international partners so that ESG standards can finally be implemented by Ukrainian companies.
We all have a lot to learn. As long as we have the chance to learn from the many international partners who are willing to help Ukraine during this time of war, it would be a sin not to take advantage of it. Without this, rebuilding Ukraine will be much more difficult.
Interview
Oschadbank Press Center