ESG Risk Management | OTP Bank

OTP Bank's approach to ESG risk assessment in lending

To ensure compliance with EU regulatory requirements and to enable the appropriate and timely management of potential ESG risks associated with our clients, OTP Group introduced its ESG Risk Management Framework in June 2021.

Building on this framework, OTP Bank developed its Order of ESG risk management in corporate and SME lending, which sets out the general requirements for ESG risk management in lending and loan monitoring processes, as well as in leasing operations, ensuring a consistent approach and common principles for risk management.

The objective of ESG risk management in lending is to identify risks arising from environmental and social factors associated with financing Bank’s clients and to minimise their potential impact.

Currently, ESG risks are managed within the Bank’s corporate and SME credit risk management framework, with a particular focus on environmental risk.

To identify and categorise ESG risks, we use a sectoral ESG Risk Heat Map, which provides information on ESG risk categories for each type of economic activity in accordance with the NACE classification (corresponding to KVED-2010 classification of economic activities). ESG risk categories are assigned based on the environmental and social impact of a particular industry. Industry-specific physical and transition risks are also taken into consideration.

We apply four ESG risk categories:

Low
Medium
Medium-High
High

The ESG risk category assigned to a transaction depends on both the client’s ESG risk category (based on its business activity) and the transaction’s residual maturity. Where a transaction exceeds the threshold established by OTP Group and the client is classified as High or Medium-High ESG risk category, an ESG Due Diligence questionnaire is applied as an additional assessment tool. This approach enables a deeper understanding of the factors of potential ESG risks and, where necessary, supports the planning of preventive corrective measures.

As a first step, we screen our clients against OTP Group’s Exclusion List. Activities and practices included on this list are not aligned with OTP Bank’s values and principles. Therefore, we do not enter into financial or any other business relationships with counterparties engaged in activities covered by the Exclusion List.

Accordingly, a zero-tolerance approach to lending is applied to new clients.
At the same time, existing term loans granted to current clients are subject to natural amortisation, while short-term loans may be renewed for a specified period upon the consideration of specific ESG and reputational risks, ensuring a smooth exit from the business relationship.

Our Environmental and Social Exclusion List is available below.

OTP Bank Environmental and Social Exclusion List

A list of activities and practices that are not eligible for financing by OTP Bank, as their nature and associated impacts are inconsistent with OTP Group’s values, including its commitment to human rights and sustainable development.

1. Clients towards which risk assumption is excluded by international treaties, EU acts and international laws.

2. Clients carrying high risk from a compliance perspective.

3. Clients who can be connected, directly or indirectly, with criminal activities or the willful violation or circumvention of legal regulations.

4. Activities which are likely to be against public morals or social ethics or is connected to crime.

5. Transactions with the purpose to violate legal regulations of the host country or the international law (like illegal arms trade, prohibited gambling, illegal trading in drugs).

6. Production of or trade in Controversial weapons (anti-personnel landmines, biological, chemical and nuclear weapons etc.).

7. Financing of contracts for manufacturing of / trade in weapons when the buyer is located in a territory of civil war or international armed conflict.

8. Transactions with the purpose to violate legal regulations of the host country or the international law, like:

Production or trade in products containing PCBs (Polychlorinated biphenyls are a group of highly toxic chemicals);

Production or trade in pharmaceuticals, pesticides/herbicides and other hazardous substances subject to international phase-outs or bans;

Production or trade in ozone depleting substances subject to international phase out ;

Trade in wildlife or wildlife products regulated under CITES;

Transboundary movements of waste prohibited under international law ;

The keeping of animals for the primary purpose of fur production or any activities involving fur production;

The manufacture, placing on the market and use of asbestos fibres, and of articles and mixtures containing these fibres added intentionally;

The export of mercury and mercury compounds, and the manufacture, export and import of a large range of mercury added products.

9. Activities prohibited by host country legislation or international conventions relating to the protection of biodiversity resources or cultural heritage.

10. Drift net fishing in the marine environment using nets in excess of 2.5 km in length.

11. Shipment of oil or other hazardous substances in tankers which do not comply with IMO requirements.

12. Trade in goods without required export or import licenses or other evidence of authorisation of transit from the relevant countries of export, import and, if applicable, transit.

13. Mining, exploration and upgrading of shale gas in Europe.

14. Coal mining using Mountain Top Removal technique.

15. Production or activities involving harmful or exploitative forms of forced labor and/or harmful child labor.

Climate Risks Materiality Assessment

To ensure the timely identification of climate-related threats, their effective management, and the Bank’s financial resilience, OTP Bank conducts an annual assessment of the materiality of physical and transition climate risks.

Given that climate risks may materialise through traditional risk categories, we apply the Parent Bank’s methodology to assess the impact of physical and transition risk drivers on credit, operational, market, reputational, liquidity and concentration risks.

In line with the EBA Pillar 3 disclosure requirements and as a member of OTP Group, we also report on clients' physical climate risks at the portfolio level. The Bank identifies material physical climate risks based on the geographical location of key assets, their vulnerability to environmental hazards, as well as the current and expected impact on clients' financial position.