The war in Ukraine increases the ESG risks of international banks

As the conflict in Ukraine continues unabated, environmental, social and governance (ESG) risks have increased by an average of 5% for international banks exposed to Russian clients, according to a recent report.

The increased risk is revealed in a Morningstar Sustainalytics report that assesses the exposure to business ethics issues of 12 international banks. Among the 12 banks, those whose ESG risk ratings increased the most are Swedbank, Deutsche Bank, BNP Paribas and UniCredit.

Source: Morningstar Sustainalytics

Sanctions evasion, the report also reveals, is a significant risk due to the business models and track record of international banks. International banks without operations or presence in Russia seem to be less affected by the conflict in the short term.

However, some international banks, based on Morningstar data, have repeatedly violated sanctions and faced criminal charges, hefty fines and settlements with deferred prosecution agreements that have resulted in regulatory scrutiny. strict.

HSBC, according to the report, has low exposure to potentially high-risk Russian customers and faces low regulatory and operational risk with respect to financial crime and sanctions evasion in the Russian-Ukrainian conflict.

Although HSBC has been involved in money laundering and breached sanctions in the past, most of its regulatory cases are now closed and the bank has improved its management significantly over the past few years. He has no recent incidents related to sanctions violations (new incidents within the last three years) like other peers, and he is not involved in ongoing investigations into anti-corruption issues. money laundering (AML).

For Chinese banks, their exposure to business ethics risk due to the Russian-Ukrainian conflict or related sanctions has not increased, as China has not officially imposed any sanctions on Russia and no Chinese banks has significant commercial exposure in the country.

Chinese banks still derive the vast majority of their revenue from the Greater China region, and they have not been involved in significant controversies over Russia-related sanctions evasion or money laundering in the past.

Theodora Batoudaki, senior ESG research analyst for banks at Morningstar Sustainalytics, says: “All of these 12 international banks are subject to stricter regulatory scrutiny than their peers (diversified banks) due to their exposure to Russian clients at high risk, as evidenced by controversy data. , as well as recent and recurring operational failures related to anti-money laundering and non-compliance with sanctions. »

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