MANAGEMENT OF ESG RISKS IN THE PROCESS OF CORPORATE LENDING

Abstract

In the current context of globalisation, climate change, and the growing importance of sustainable development, the management of ESG (environmental, social, and governance) risks is becoming a decisive factor for the stability and competitiveness of financial institutions. This article focuses on researching the mechanisms and practices of integrating ESG risks into the corporate lending process. It provides a detailed explanation of the nature, structure, and classification of ESG risks, emphasising their multidimensional impact on credit quality, borrowers’ reliability, banks’ reputational standing, and overall resilience of the financial sector. Particular attention is paid to the way ESG-related factors increase the probability of defaults, impair the value of collateral, and shape long-term portfolio sustainability. The paper examines the role of international frameworks and standards, such as the Equator Principles, the EU Taxonomy for Sustainable Activities, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and other global “green” initiatives, which serve as benchmarks for domestic adaptation and the development of bank-specific ESG policies. Modern instruments of ESG risk assessment and mitigation are analysed, including borrower ESG scoring systems, sustainable loan classification models, continuous monitoring of clients’ ESG profiles, the introduction of ESG-linked covenants into loan agreements, and the determination of institutional ESG risk appetite. Furthermore, the article identifies key challenges, such as insufficient and fragmented data, the absence of unified international or national standards, low levels of transparency and reporting among corporate borrowers, and the additional costs of compliance. At the same time, promising prospects are outlined: harmonisation of Ukrainian legislation with European directives, the establishment of a national ESG scoring methodology, the stimulation of sustainable lending practices, and the creation of incentives for businesses to improve their ESG performance. The study concludes that the systematic and consistent integration of ESG considerations into corporate lending is not only essential for ensuring financial stability and effective risk management, but also constitutes a strategic source of competitive advantage for Ukrainian banks in the global financial arena.