“At Erste Group, we have an ESG Office, a dedicated unit focused on sustainability. We are situated within the strategy department, and our main responsibility is to implement the entire regulatory framework of the EU Green Deal within the bank. ” – interview with Karin Lenhard from Erste Group.
In a recent interview with Karin Lenhard from Erste Group, Andreas Forster, Practice Leader Financial Institutions in Austria, gained valuable insights into the world of ESG (Environmental, Social, and Governance) ratings and its profound impact on the finance industry. The interview shed light on various aspects, from the role of Erste Group’s ESG Office to the challenges of balancing environmental and social responsibilities.
Erste Group, a member of the Net-Zero Banking Alliance, has set ambitious group goals, including achieving a “Net Zero” financing portfolio by 2050 and ensuring that at least 25% of new corporate client business qualifies as “Green Investment” by 2026. Green Investments go beyond mere environmental criteria; they signify that the economic activity significantly contributes to the ESG Taxonomy.
Forster: Let’s start by discussing your role at Erste Group.
Lenhard: At Erste Group, we have an ESG Office, a dedicated unit focused on sustainability. We are situated within the strategy department, and our main responsibility is to implement the entire regulatory framework of the EU Green Deal within the bank. This includes ESG in risk management, ESG in the business, and the development of group-wide sustainability strategies that apply to all our locations, from Dornbirn to Bucharest. The goal is to develop strategies that are suitable for the entire group.
ESG, Net Zero and green investments: short and longer term goals
Forster: What are the goals for Erste Group regarding ESG?
Lenhard: As a member of the Net-Zero Banking Alliance, our primary aim is to achieve a “Net Zero” financing portfolio by 2050. By 2026, we aim to ensure that at least 25% of our new business within the corporate client portfolio qualifies as “Green Investment.” It’s important to note that “Green Investment” differs from the “Green Asset Ratio” in that it stipulates that the economic activity makes a significant contribution to the taxonomy. In practice, we often face challenges due to the limited availability of data. We must verify taxonomy compliance. A substantial amount of the criteria can typically be met because they are relatively clear regarding climate protection, climate change adaptation, and CO2 values based on specific economic activities. However, the “do not cause significant harm” aspect is more complex because it implies that the activity should meet one taxonomy goal without significantly harming others. There are currently limited quantitative assessment mechanisms for factors such as biodiversity, recycling, waste management, and so forth.
The third step is the “Minimum Social Safeguard,” which includes minimum social standards and addresses issues related to labour rights and human rights, among other things. Interpretation in this regard is somewhat ambiguous, and for a bank, conducting precise evaluations can be challenging, particularly in the context of avoiding greenwashing. Therefore, we define “Green Investments” as those that, at a minimum, make a significant contribution to a taxonomy goal, whether it’s CO2 reduction or high energy efficiency. The “do not cause significant harm” and “Minimum Social Safeguard” aspects are evaluated at a high level due to the limited data available. As a result, our goal is to have a minimum percentage of “Green Investments” within our portfolios. For commercial clients, our target is 25% by 2026, and for private clients in the mortgage financing portfolio, our goal is to achieve 15% by 2027.
The art of persuasion: convincing clients to reduce their CO2 emissions
Forster: We are particularly interested in how you approach your customers and what impact this has on financing. How do you motivate customers to provide relevant information, and have these efforts already had an impact on financing decisions? Can you outline your roadmap for this?
Lenhard: Yes, we’ve already seen impacts. We are committing to achieving “Net Zero” for our Scope 1, 2, and 3 emissions by 2050 at the latest. A significant portion of Scope 3 emissions pertains to emissions financed. We calculate how many tonnes of CO2 are associated with our financing portfolio. We assess which economic activities we’ve financed and how many tonnes of CO2 are linked to them. This is always in terms of the CO2 equivalent, as it concerns greenhouse gases. We aim to quantify how many tonnes of CO2 can be attributed to a particular customer or transaction and then reduce this figure, depending on the economic activity. In our real estate portfolio, for instance, we need to develop a pathway that takes us to “Net Zero” by 2050. The same approach is taken for industries like steel, cement, oil and gas, heating systems in the energy sector, and so on. We need different strategies to ensure we become carbon neutral.
Forster: Especially in challenging sectors like oil, gas, and cement, how do you engage with customers in those cases?
Lenhard: Communication is key. The easiest solution would be to divest from customers in portfolios related to these sectors. While it might be beneficial for us, it doesn’t change the emissions produced by these businesses – they will continue to exist. Hence, we strive to engage in dialogue with them and apply pressure, urging them to develop a decarbonization pathway. This means they should make maximum efforts to reduce their own CO2 footprint, which automatically decreases the tonnes of CO2 we finance. From a regulatory standpoint in financing applications, we’re obliged to include ESG factors. We assess whether customers and their economic activities pose climate or environmental risks and whether they have taken measures to mitigate those risks. This already affects conditions and is noticeable due to interest rate market developments. It’s integrated into the overall customer rating. Having a customer with higher risk, for example a ski lift operator, may negatively impact the terms. Eventually, we might question whether we can finance them at all.
Sweetening the pot: rewards for those taking positive action
Forster: So, ESG ratings are already factoring into conditions. Is this noticeable, particularly considering rising interest rates?
Lenhard: Yes, it’s noticeable. We’ve adopted a path of “green incentivisation”. This means that customers who choose to engage in activities compliant with the taxonomy or aim to reduce their CO2 footprint receive more favourable terms. In other words, they are rewarded for positive climate transformation behaviour.
Lightening the data entry load
Forster: Let’s look at tools and reports, ESG data is in demand across multiple sectors. How can this data be integrated to streamline the process and prevent customers from repeatedly entering the same information?
Lenhard: When it comes to financing, each bank typically employs its own questionnaire, which may share some similarities but often varies in structure. In response to this, we collaborated with OeKB (Austrian Control Bank) last year to develop the ESG Data Hub. OeKB provides companies with a platform to upload their data for free. This service is available for companies of all sizes, but it’s especially relevant for larger corporations. Smaller and medium-sized enterprises, partly due to their size fall outside regulatory requirements, and so have not been a primary focus. They may be relieved about this, given the bureaucratic effort required, however, many of them are part of the supply chain for larger enterprises. If they don’t start working on their data, they risk losing significant contracts, potentially leading to an unsustainable business model or requiring them to relocate their business.
With the ESG Data Hub, we now have a standardised questionnaire. Business owners, depending on their size, can answer around 20, 40, or 120-140 questions at no cost. Customers have control over who they share their data with, in compliance with GDPR regulations. This data can be shared with us, the Erste Group, or any other party they choose. It’s important to note that all banks use the same questionnaire. To allow for benchmarking, companies can also share this information with their business partners, such as their auditors, tax consultants, or financial advisors. They can see how they rank in terms of ESG sustainability within their industry and size category. This offers insight into whether they are leading the way, in the middle, or need improvement.
The delicate ESG balancing act
Forster: How does this balance between E (Environmental), S (Social), and G (Governance) reflect within the bank? Could you provide insights into how each of these aspects is managed within the institution?
Lenhard: We talked a lot about E already. Alongside that, we have colleagues in Social Banking who are responsible for the S, focusing on initiatives like the second savings bank and various social projects. For instance, we run a group-wide project called “affordable housing,” aimed at providing affordable housing for the socially vulnerable. This initiative is mainly driven by Ceska Sporitelna and addresses the significant need for affordable social housing in Eastern Europe. Social aspects are also integrated into our workforce and managed within our HR department. This encompasses areas such as diversity and gender, workplace agreements, and whistleblower policies. We also consider factors like the number of employees with special needs, those with migrant backgrounds, or belonging to ethnic minorities.
The G in ESG stands for Governance, which involves regulatory compliance, competition law, antitrust regulations, compliance matters, and embargoes. We have established a robust framework for all three aspects.
In our financing process for larger clients, we assess ESG ratings. This involves evaluating how the E, S, and G components are separated and scrutinized by the major rating agencies. Essentially, we examine whether there have been incidents or issues in the past related to any of these three categories. If there were such incidents, we consider their severity, how long ago they occurred, and the reputation aspect. We also consider whether we want to be associated with a client who has had such incidents.
Forster: There’s a delicate balance between the environmental (E) and social (S) aspects of ESG, and a sense of social responsibility comes into play. How do you weigh these factors against each other?
Lenhard: Achieving environmental goals without considering the social aspects is not a viable approach. It simply doesn’t work that way. If we were to prioritise the climate, the best course of action might be to close a company like OMV. However, we must also consider the implications for all the employees and individuals who depend on such companies for their livelihoods. The transition to more sustainable practices must be orderly, inclusive, and considerate of everyone involved. But it should also be ambitious and implemented as quickly as possible. This is where the challenge lies.
The knock-on effects of high risk industries on internal ESG reporting
Forster: Is there a connection between internal ESG reporting and higher risk industries? How does the bank address this aspect?
Lenhard: Yes, we are already required to disclose this information as part of our Pillar 3 reporting obligations. It involves identifying which CO2-intensive sectors we have financed, as they are subject to transition risks. Activities that are highly CO2-intensive are at risk of being affected by future regulatory changes that could potentially prohibit their operation in their current form. Considering the long-term nature of some loans, this presents a certain level of probability where we must take corrective action. Therefore, when assessing new business, I will simply refrain from providing financing to clients who lack decarbonization plans. This is due to the increased risk associated with such clients.
On the other hand, I must explore how to mitigate this risk and reduce our carbon footprint. This often requires engaging with our clients to encourage them to transform their business models not only for new ventures but also to address climate change within their existing operations. This approach applies to various sectors. In Austria, we have some excellent examples in the steel and cement industries, with large companies already taking measures. However, some industries are nearing their limits and cannot further reduce emissions. For this reason, we made the decision to discontinue new coal financing. Coal financing carries a transition risk. Existing customers must present a plan by 2025 for their exit from the coal segment. Otherwise, measures will be enforced by 2030 to discontinue their financing with us.
Andreas Forster
Practice Leader Financial Institutions GrECo Austria
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