International Companies Talk About ESG. Here is Why Working with Ukrainian Businesses During War Means Walking the ESG Walk

Taras Dumych

Partner, Advocate at Wolf Theiss

The Russian aggression and war in Ukraine, apart from its heroic and tragic sides, has proved to be a test for hypocrisy. And this test is applicable not only to individual politicians or entire countries, but often to businesses and companies, as well as to the general principles of doing business.

The concept of doing business based on ESG principles – the abbreviation meaning “environment, social and governance” – started developing in the global world several years prior to the war. Moreover, from the time of the famous letter of Mr. Larry Fink, the Chief Executive Officer of the global investment company BlackRock, to the shareholders of the company in the beginning of 2020, in which he stated that BlackRock would not invest in companies if their operations and development did not include ESG, the ESG factor steadily began to gain a special significance in the field of investment, production, commerce and services.

The first test for ESG was the coronavirus pandemic, and the concept seems not only to have passed this early test but to have become even more established, and, what is possibly more important, become institutionalized in its development.

The military aggression of Russia against Ukraine and the operations of Russian businesses, especially those owned and controlled by the regime, and the oligarchs who obtained their assets and ran businesses thanks to the regime, became another and even more important test for the ESG concept.

When international businesses, especially those in the European Union, after the beginning of the war continued doing business with Russian companies (there are still such cases, even though their number is diminishing), no matter how inappropriate it may be for the Ukrainian side, international businesses rather view it as a “necessary evil”. Probably, the best example here would be the European counterparties buying hydrocarbons from Russian suppliers. At the same time, unlike similar transactions by China and India, which are doing their best to exploit the new market environment, it is difficult to say that the transactions by the European businesses have taken place in an effort to grab maximum profits on the spur of the moment. Rather, they are the result of some past thoughtless policies because of which not only businesses in the EU, but also in some other countries, became hooked on the “needle of dependence” of Russia. The degree of necessity of those transactions with Russia, and the efforts aimed at breaking that dependence, is the manifestation of hypocrisy or its absence by businesses and countries located at the opposite side of relations with the “necessary evil”.

If we look at ESG from the position of current Ukrainian realities and transfer it to Ukrainian businesses and entrepreneurs, then one could assume that they have other things on their minds than ESG. But such an assumption would be wrong. The very fact that Ukrainian businesses and entrepreneurs continue working, have diversified themselves both in Ukraine or abroad, keep fulfilling their obligations to their counterparties, employees and the State, are the most vivid examples of practically implementing and following the ESG principles by Ukrainian businesses.

On the other hand, the continuation of the existing or launching of new relations and transactions with Ukrainian businesses, both wholly located in Ukraine as well as those continuing their operations in various other countries, should become one of the types of business activities that will allow international businesses and entrepreneurs to commit themselves to following ESG principles. It is no secret that the income generated by Ukrainian businesses is used, not only to support the employees of the country suffering from the war and for its reconstruction, but also to finance the ongoing and necessary fight against evil.

Doing into transactions with Ukrainian businesses, whether trade, industrial or financial, or even investment businesses, should become an iron axiom confirming compliance with ESG.

However, these activities should not be a charity. On the contrary, they should follow the principle of being mutually beneficial and providing profit to all parties. And this should also certainly be borne in mind by the Ukrainian state authorities, since the fact that a foreign investor or counterparty comes to Ukraine or deals with a Ukrainian business not – in the real world – out of the goodness of their hearts, but for the purpose of making a profit. In the current climate of war, and perhaps understandably so, this is often perceived by the state authorities as being somehow unacceptable, while forgetting that foreign businesses also have their own employees and shareholders whose interest they should mind, and states who reasonably expect tax payments from their residents.

Considering the global nature of international markets, from the point of view of foreign businesses, there should be no issue that a service or product from Ukraine is more expensive than that of a competitor from another country. Global competition, along with the Russian war, is an additional factor of pressure on Ukrainian businesses, but, unlike the war, this factor can be calculated and managed.

Implementing and following ESG is a cost, and often the returns can take a long time to become apparent, but even so there is a pretty-much global consensus that businesses should expect to incur such costs. Conducting transactions with Ukrainian businesses, purchasing goods and services produced in Ukraine should also become an accepted global consensus. After all, it should not be in vain that EU countries as well as the USA, Canada, Australia and some others have cancelled customs duties and quotas normally applied to imported Ukrainian goods. This is an invitation from those countries to their own national businesses to buy products produced in Ukraine.

And what about Ukrainian businesses? What is expected from them so that their counterparties have an incentive to do business with them and thus meet their ESG requirements? Actually, not so much.

If we look at the pre-war business history or “legacy” of Ukraine, then the requirements for Ukrainian businesses can be reduced to the following: efficiency, innovation, good faith, fulfilment of contractual obligations (by the way, contracts exist in order to predict how the respective parties should cope with the situations when either of them cannot fulfil its obligations) and fraud prevention. These requirements are not rocket science. On the contrary, it is safe to say that they are universal and apply to all businesses regardless of country of origin.

What needs to be done to make the above work so that transactions with Ukrainian businesses are considered by a foreign business as being an activity that implements ESG for such a business? Not much, in fact. As ESG once rose from the reputation of its “founding fathers”, such as the above-mentioned Mr. Larry Fink of BlackRock, in the same way Ukrainian business associations with an impeccable reputation and many international and domestic businesses among their members, must become advocates of this principle before international business. Also, it shouldn’t be difficult for organizations like AmCham, European Business Association (EBA), Union of Ukrainian Entrepreneurs (СУП), Ukrainian Venture Capital and Private Equity Association (UVCA), Ukrainian Chamber of Commerce and Industry (UCCI) and many others. And since the members and main beneficiaries of these organizations are, first and foremost, Ukrainian businesses and entrepreneurs, this is a task that lies before us all. Those issues would be also raised during the panel discussion named Impact Investing: Making Things Happen for Brave Investors and Brave Countries, which would be held during the 31 Economic Forum under Family Dairy Investments partnership.