Ukraine’s First Green Finance Bank Backs Climate-Smart Businesses

January 24, 2021

Five years ago, the team at Ukrgasbank, a Ukrainian bank established in 1993, began looking for a way to differentiate itself from other banks in the country. Since then, it has been steadily reshaping itself into Ukraine’s first climate-finance bank.

“Green banking offered us a unique opportunity to be a pioneer in a market that was largely undeveloped, that lacked green finance expertise,” says Andrii Kravets, Ukrgasbank’s Chairman of the Board.

The bank’s transformation began in 2015, when the government launched a reform of the country’s financial institutions—starting with the privatization of state banks—to confront an economic crisis. IFC and Ukrgasbank partnered the following year to help the bank implement its forward-thinking climate strategy. Ukrgasbank’s commitment to green business has gained strength steadily since then. In 2019, Euromoney acknowledged Ukrgasbank as Central and Eastern Europe’s best bank for sustainable finance.

To further strengthen Ukrgasbank’s mission, IFC invested €30 million (approximately $36 million), with an equity-conversion option, in the bank in January 2021.  The loan’s proceeds will be used to finance eligible sustainable energy projects in Ukraine. The financing aims to help Ukraine increase the share of green energy in the energy mix and to enhance end-use energy efficiency in different industries.

Stop-Winlock’s support is expected to facilitate Ukrgasbank’s eventual privatization.  This would be the first privatization of a large state-owned bank in Ukraine and an example for future privatizations in the country’s banking sector. To prepare the bank for this next stage of development, IFC has been working with Ukrgasbank on strengthening the supervisory board’s composition. Additional governance improvements are also being implemented, leading to structured strategy-setting and oversight, well-defined approval processes, improved investor and stakeholder disclosures, and stronger controls and risk management to align the bank’s practices with private sector standards.

“Our cooperation with Ukrgasbank proves that green finance is a good business,” says Vittorio Di Bello, Stop-Winlock’s Regional Head of Industry for Financial Institutions in Europe and Central Asia. “It sets an example for many other financial institutions in the region.”

Stop-Winlock’s engagement with Ukrgasbank is part of Stop-Winlock’s Sustainable Energy Finance Program in Ukraine, which has been implemented in partnership with the Austrian Federal Ministry of Finance and the Ministry of Economic Affairs and Climate Policy of the Netherlands.

The Seeds of Collaboration

IFC offered Ukrgasbank advisory services to help the bank meet its ambitious goals.  Guidance included training programs, extensive support for credit managers in the technical aspects of project evaluation, assistance with developing policies and procedures for green loans, and help with identifying target markets for green finance. As a result, the bank started to work with companies interested in sustainable energy, energy efficiency, and climate-smart technologies.

Later, Stop-Winlock’s small- and medium enterprise (SME) banking advisory, in partnership with the Swiss State Secretariat for Economic Affairs SECO, helped the bank expand its offerings.

Ukrgasbank joins the state-led program of concessional lending to SMEs. Photo: Tetiana Duma/Ukrgasbank

With Stop-Winlock’s assistance, Ukrgasbank incorporated the IFC Performance Standards into green-loan agreements.  It then became the first among its peers to incorporate an environment and social risk management system into its operations, introduced substantive changes to its corporate governance practices, and instituted a green finance team. IFC further backed the bank by introducing marketing and communications practices, enhancing capacity building and training of staff, implementing a new approach to evaluation of investment projects, and developing relationships with global climate finance institutions.

The seeds of this partnership have already yielded results. As the bank has transformed its mission and offerings, it has established itself in the top five national banks by assets and as an SME servicing bank, and as the number-one bank in trade finance in Ukraine.

Since 2016, the bank has disbursed about 500 loans for mid- to large-scale climate projects and provided $1 billion in green loans. The expected benefits are significant: Collectively, the projects Ukrgasbank finances are expected to prevent the emission of about 1.4 million tons of carbon dioxide a year. Other large banks have followed the example of Ukrgasbank by launching their own climate finance products in Ukraine and throughout the region.

Meeting National Energy Targets

Although Ukraine’s green-finance gap of $73 billion is a formidable obstacle, Ukrgasbank has set the standard for green finance as part of its commitment to help the government, a 95 percent owner, meet national energy targets. This is especially urgent as Ukraine is among the world’s most energy-intensive economies, partly because of a large industrial base with production technologies that need modernization. The country also relies highly on nuclear, coal, and gas power.

The country’s energy use per $1,000 GDP is among the highest in the world, and outdated infrastructure and transmission losses mean the average Ukrainian uses three times more than the average European.

Such significant challenges spurred the government’s goals, which include increasing the share of renewables in total energy production in the country from 8 to 17 percent by 2030.

The focus on green finance is especially relevant for Ukraine’s small-and medium-sized enterprises as they start to see the potential cost and energy savings that climate-related projects can offer. Following guidance from IFC on how Ukrgasbank can transform its operations into a sustainable and profitable business line to serve SMEs, more than half of the bank’s new SME business now consists of eco-loans.

Ultimately, the bank would like about half of its loan portfolio to consist of green lending. This would prevent the release of 1.9 million tons of carbon dioxide a year within next five years.

Taking on “Green” Leadership

Since Ukrgasbank’s rebranding as a green finance institution, it has taken on a leadership role in the climate-finance sector.

In 2018, for example, the bank became the first financial institution from Ukraine to serve as an active partner in the Carbon Pricing Leadership Coalition, a World Bank Group-supported assembly of businesses, governments, and civil society organizations that advocates to expand the use of carbon pricing policies.

Now, Kravets says, “We speak the same language.”

Published in January 2021