Ukraine-Russia war: We need to talk about ESG
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Ukraine-Russia war: We need to talk about ESG

ESG has been an intense focus for banks in recent years – not least for their communications teams. But with war in Ukraine, ESG has hit its first real test – and the talking has stopped.


“Sorry, but we’re not talking Russia.”

It may be very low down on the priority list of things that Russia’s invasion of Ukraine has upended – but the enthusiasm of banks’ press departments for talking to journalists about environmental, social and governance has recently experienced a handbrake turn.

Of 16 European and US banks I recently contacted on this topic none would talk on record. A few issued statements and some spoke strictly off the record, but the majority simply refused to engage.

Even a polite query about “the evolution in banks’ ESG policies given changing energy and defence policies within Europe” was met with the same response: “As I said, we’re not talking Russia.”

To be fair, it is still very early days, and few banks have a firm understanding of how their ESG policies will change – though change they will.

The first order of business for these banks is to formulate a strategy in respect to their own business in Russia.

“Frankly, we should have issued a statement saying we’re leaving because we will have to – we may as well get the good PR,” mused one Europe-based bank corporate communications executive following Goldman Sachs's and JPMorgan’s public statements that they were to exit their Russian businesses.

Several large European lenders have now pledged to do the same.

However, with Russian threats to nationalise the asset of any foreign business that pulls out of the country, it is a question of scale: not just the size of the banks’ own operations, but their clients’, too. Should they quit or try to run skeleton businesses and retain recovery values in the future?

Fit for purpose

The difficult decisions that banks that are active in Russia are now wrestling with show how many current ESG policies are not fit for purpose.

Firstly, shouldn’t Putin’s invasion of Crimea in 2014 have already triggered an exit from Russia by responsible investors?

To what extent can they continue to focus on specific companies and ignore the macro-political context of the country or countries in which they operate?

For now, the focus of any fundamental shift in ESG policy is around changing energy policy within the EU.

To what extent can banks continue to focus on specific companies and ignore the macro-political context of the country or countries in which they operate?

“Irrespective of the war in Ukraine,” says a spokesperson at one German bank, "we take a very critical view of fossil fuel-related transactions and business relationships. We have recently demonstrated this with the stricter requirements formulated within the guideline for fossil fuels."

He says that the war “highlights the importance of transformation towards sustainability even more clearly – not only for sustainability reasons but also to reduce security dependencies.

“We are greatly accelerating the coal phase-out by 2030 and have significantly lowered the thresholds for companies that are active in the coal sector.

"While updating our coal guideline and developing a new fossil fuel guideline, we therefore exited some business relationships to clients with a high coal share, of course taking our contractual obligations into account. Customers in the oil and gas sectors are also regularly assessed with regard to environmental and social aspects.”

But of course, it’s more complicated than that.

If Russian hydrocarbons could be replaced quickly by renewable power, then the situation would be far more straightforward. But these projects take time, and acceleration will create capacity challenges in manpower and input commodities.

In the meantime, banks need to decide whether or not to finance natural gas facilities that may enable Middle Eastern shipments to replace Russian supplies.

Will they also finance new nuclear facilities? Will they be willing to adapt previous net-zero pledges to extend credit to new thermal power plants in Europe? Will transition finance plans carefully laid down for European coal companies be scrapped because the need for any non-Russian oil trumps concerns about carbon emissions?

There are no answers – yet.


War at the edge of the European Union also poses urgent questions about security. For most ESG mandates, defence companies have been an anathema.

But the ‘S’ in ESG is open to interpretation, and as the humanitarian crisis unfolds in a European state, the argument can be made that pushing back against Russian aggression is a social good.

One month into the war, the winds of change are evident. A German lobby group for the defence industry, BDSV, is pressuring the EU to include defence companies in the taxonomy of the ESG-compliant companies being determined by The Platform on Sustainable Finance.

The list of blacklisted companies, to date, includes cigarette companies and goods produced by forced labour.

The partnering of responsible investment and defence companies, while once unlikely, could become a reality

So far, the group hasn’t ruled on defence or arms manufacturers, but the swift announcement that Germany plans to spend €100 billion on modernising its army shows that – at a national policy level at least – the partnering of responsible investment and defence companies, while once unlikely, could become a reality.

Mairead McGuinness, the EU’s financial services commissioner, has cited the “enormity” of the bloc’s task in working through all the stages of its ESG legislation, and a final draft is probably at least two years away.

In the meantime, how likely are banks to include weapons manufacturers in their ESG-compliant client rosters?

“I just don’t see it – I understand the argument, but it’s not as if banks exclusively finance ESG companies – we have many clients who fit outside that criteria; and while we are trying to make these companies a smaller proportion of overall lending, there will always be non-ESG relationships,” says one ESG-focused banker, who adds that large tickets could be achieved through large syndications or channelled through governments or national development banks.


The markets have already moved – shares in two German weapons manufacturers jumped over 50% following the announcement by Germany’s chancellor, Olaf Scholz. And this is another fact that will drive change in banks’ ESG policies.

Banks and investors have long fallen over themselves to finance companies that have committed to sustainability targets and that have embraced the wider goals of good corporate governance. Such companies have often performed well, justifying the virtuous circle of ESG investment.

However, there’s another way to look at many ESG-compliant companies, and that is as tech firms.

These mostly young organizations have naturally fitted the ESG agenda because of their younger workforces and customer bases. They are also relatively ‘infrastructure-lite’ and have little in the way of troublesome legacy systems with which to contend.

Banks have eagerly courted unicorns and fast-growing global tech players – and their ESG credentials are an added benefit to the underlying tech story.

Will weakness in growth tech stocks test banks' commitment to sustainability?

Now, will weakness in growth tech stocks test that commitment to sustainability? Commodities firms, long shunned by ESG investors for digging stuff out of the ground or burning stuff to make electricity – are the investment stories of 2022.

It is initially a question for investors rather than the banks themselves. But if they are quick to ditch ESG-mandates to finance fossil fuels, for example, then will banks be happy to follow suit?

“ESG will change – and I think that it is time it did,” says one ESG banker. “The S and G are clearly problematic, but as far as the E is concerned, we’re just starting.”

The war in Ukraine has raised far more questions than answers about where ESG investing sits in an emerging new world order. Being 'ESG-focused' may now involve embracing nuclear power and financing the pivot to a natural gas supplier as part of the transition.

The one silver lining of the war is that, for Europe, energy security will ultimately mean renewable power.

Financing this rapid build-up in renewable energy will be a considerable challenge – but it is at least one that banks’ ESG teams will have no trouble getting behind.

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