2022 April-May Analysis

Georgia’s banks seek out sustainable finance

Geopolitical turmoil and environmental crises have sent global markets reeling in recent years, pushing central banks and financial institutions to search out reliable, sustainable investments. Investor.ge takes a look at the state of sustainable finance in Georgia and how the NBG is taking steps to secure the country’s financial future.

Those staying up to date on the developments of the Russian invasion of Ukraine have surely taken note of the mass exodus of Western companies and financial institutions in recent weeks that are ceasing operations or divesting from the Russian market. Credit rating agencies have downgraded Russia’s investment status to ‘junk’, and MSCI announced on March 9 that it had relegated Russia’s ESG (environmental, social, governance) standing to the lowest possible level, indicating that investments in the country’s market are deemed risky for the sustainability of an investor’s portfolio.

Many have expressed surprise at the rate at which major global corporations are withdrawing from the country, with debates igniting over whether these companies are motivated by ethical considerations, logistical complications, or legal concerns over the mounting number of sanctions being levied against Russia. Regardless of these corporations’ motivation, be it moral indignation or corporate self-interest, this swift exit has provided a wake-up call for financial institutions and central banks around the world that they may need to re-evaluate their sustainability safeguards.

So, where does Georgia stand on the path to sustainable finance?

Steps to sustainability

The impact of Western sanctions in the wake of Russia’s invasion has had a relatively small impact on Georgia’s financial markets. According to G&T’s Head of Research, Eva Bochorishvili, “The country’s financial linkages to Russia are limited to VTB Bank Georgia, which accounts for only 4.5% of the country’s total banking assets.” Soon after sanctions were announced in late February, the National Bank of Georgia (NBG) stepped in to facilitate the transfer of VTB’s consumer portfolios to other Georgian banks, expressing its readiness “to protect the depositors’ interests by using instruments envisaged by international standards and [Georgian] legislation.”

However, the country’s financial system is exposed to other social and environmental risks like climate change, and the assumption that Georgia’s capital market will develop further in the years to come means that it could be more heavily exposed to future disruptions in global markets.

In order to mitigate these potential risks, the NBG has joined a growing number of central banks around the world incorporating sustainable finance practices into its financial framework and regulations. The term sustainable finance, which first emerged in the 1980s as European law sought to restrict banks from investing in projects that caused air, water, or soil pollution, has since grown to encompass a range of factors under the umbrella of three primary categories of consideration: environmental, social, and governance (ESG).

The NBG’s sustainable finance journey began in 2017 when it joined the Sustainable Banking and Finance Network (SBFN), a collective of regulators and central banks from emerging markets that was created by the International Finance Corporation (IFC) to advise and facilitate the implementation of ESG best practices.

The head of the NBG’s Macrofinancial Modeling and Analysis Division, Salome Tvalodze, says the central bank’s decision to join the SBFN primarily concerns safeguarding the sustainability of Georgia’s financial system: “Sustainable finance is about both risks and opportunities. The world has already acknowledged that climate change and other sustainability issues are sources of financial risk, which is why financial institutions need to address them. There is also the opportunity side. They have the chance to finance projects that have a positive environmental and social impact. For emerging markets like ours, there is also the prospect of getting more financial resources for sustainability projects from IFIs.”

The NBG’s first task in enhancing the sustainability of Georgia’s financial sector was to raise awareness about what ESG standards are. Tvalodze notes that out of fifteen commercial banks that make up 95% of total assets in the sector, only a few had their own ESG risk management practices implemented before the central bank began mandating reporting in 2021. “For many of the smaller banks, ESG is completely new to them. However, they have expressed a readiness and interest in developing ESG policies, and they are open to receiving our guidance, recommendations, and support in this process,” says Tvalodze.

To push the sector forward, amendments were made to the Corporate Governance Code for Commercial Banks in both 2018 and 2021, with the latter stipulating that supervisory boards incorporate ESG considerations into banks’ strategies and risk management frameworks. It also requires banks to report annually on their achievements in relation to Key Performance Indicators (KPIs).

How are Georgia’s largest financial institutions faring?

So, what exactly are the KPIs that the central bank is monitoring? In 2020, the NBG, in cooperation with the OECD, developed ESG reporting and disclosure principles that aim to inform the reporting of commercial banks on indicators like GHG emissions, screening for green loans, diversity in the workplace, employee education, customer protection, and anti-corruption management.

Furthermore, the NBG is slated to release two taxonomies later this year that outline precise classifications of what activities and categories are considered socially and environmentally sustainable.

A glance at ESG disclosures from their first year of reporting seemingly indicates that Georgia’s commercial banks have a lot of room to grow in reporting and promoting green finance. Many banks reported in their 2021 ESG disclosure that that data regarding the number of green loans issued in the last year was “not available”, with a handful reporting figures around one to three percent of their total portfolio. However, the NBG’s 2021 Status Report warned that low levels of reporting do not reflect the market accurately because the central bank has not yet released its taxonomy, meaning that many institutions only disclosed investments in renewable energy.

One bank that stood out among the crowd with noticeably higher reporting of green loans was ProCredit bank, which estimated that 16.6% of its portfolio falls into the categories of investment in energy efficiency, renewable energy, or having a beneficial impact on the environment. The bank also boasted in its 2021 disclosure that all loans awarded undergo a general screening for risk management purposes, with a quarter of those then undergoing a more complex ESG screening.

ProCredit Bank Georgia’s Head of Environmental Management, Alexander Jashiashvili, says that the bank, which is a member of the Germany-based ProCredit Holding parent company, has its own taxonomy for evaluating investments as well as ambitious goals for its future levels of sustainability: “We’ve got an internal taxonomy that our parent company has developed based on best European practices, and we use it to evaluate the social and environmental impact of our loans. We also have a goal that 20% of our portfolio will be made up of green loans by 2025.”

Jashiashvili notes that the company approaches sustainability through three pillars that include looking at the impact of its financing for regular clients, promoting loans that are considered green, and evaluating the footprint of its internal operations. “We are proud to say that our head office is the first in Georgia to be certified as energy efficient by EDGE. We’ve installed solar panels on our roof as well as a rainwater system, and our fleet is made up of 100% electric vehicles. We’ve also installed electric charging stations outside of our office, which we subsidize, so that the general population will feel encouraged to use electric cars as well.”

Despite not having their own predefined green or social taxonomies, both Bank of Georgia and TBC also have years of experience with ESG risk management, in part due to their presence on the London Stock Exchange, which has made them compliant with the UK Corporate Governance Code. As of 2021, both were represented in the FTSE4Good Index Series for companies “demonstrating strong ESG practices.” They’re also AA rated by MSCI’s ESG index, indicating that Bank of Georgia and TBC are considered “leaders” among their global peers.

And as leaders, they’re both developing ESG initiatives that go far beyond what the NBG is mandating. At Bank of Georgia, Head of Environmental and Climate Risk Management Ketevan Mumladze says that the bank is developing its own climate risk assessment. “We’ve had environmental and social (ES) considerations integrated into our existing credit risk management structure since 2012. This means we monitor the business activities of our clients to make sure that they meet national standards as well as the EBRD and IFC ES policy requirements. Now, we are in the process of developing a climate-related risk assessment to further measure the impact that our financed businesses may have on indicators like GHG emissions.”

TBC has also had ES considerations built into its risk assessments since 2012. Maka Bochoroshvili, TBC’s ESG Coordinator, says that currently about 50% of TBC’s 1 billion GEL portfolio has been screened for ES compliance. And following approval of an ESG strategy in November 2021, the bank has set its own sustainable portfolio growth targets for the coming years. She also notes that TBC’s sustainable goals go far beyond environmental issues. “These goals also include social components, like financing women-led or women-owned companies. In 2021, we adopted the UN’s women empowerment principles and developed a gender policy. This is not only for financing but also internally within our organization. TBC’s staff is currently 70% women, so it’s important to see them in managerial positions. And in fact, currently more than 50% of Executive Committee direct reports [managers who directly report to the executive management] are women.”

Why now?

While TBC, Bank of Georgia, and ProCredit have demonstrated their commitment to upholding ESG principles and continuing to incorporate best practices, the NBG has stressed that many other commercial banks will need a great deal of assistance in incorporating ESG risk management into their governance structure.

However, the NBG’s Tvalodze notes that now is the time to implement sustainable practices into Georgia’s financial system: “Sustainable finance is developing very fast and is gaining more importance among investors, financial institutions, consumers and policy makers alike. At the same time, regulations, guidelines, and principles are being introduced that define standards for sustainable finance. We, at the NBG, are closely following the ongoing developments and creating our sustainable finance framework in accordance with the best international practices.”

Asked if she’s seen examples of greenwashing or virtue-signaling in Georgia, she says, “No, not yet. But this is part of the reason why we are developing our taxonomy. Once we have it, we can very clearly label what is a sustainable investment and what is not.”

TBC’s Bochorishvili agrees that the taxonomies will help to eliminate some of the ambiguity around what constitutes sustainable finance. “Beyond investments like renewable energy that clearly decrease GHG emissions, calculating how ‘green’ a loan is can be complicated. Take construction, for example. Say a building is constructed using energy efficient standards. This is green- but how green? You don’t want to report it unless you can measure it. That’s why having a taxonomy will be so important. We will be able to better measure our impact and progress this way.”

She says that she hopes having these defined metrics will spur similar initiatives from other sectors of the economy and widen public discussion about sustainability, a sentiment that Mumladze at Bank of Georgia concurs with: “Part of this goes to the Association Agreement. Georgia as a country is expected to harmonize its sustainability initiatives with EU practices. The financial sector, which is quite a significant portion of Georgia’s economy, needs to do its part. Therefore, we welcome this initiative of the NBG.”