There has been an increasing focus on sustainable finance and on the impact of the climate change for the financial stability since 2015 year. Having said that, sustainable finance and the analysis of the consequences of climate change for the financial system are still in a very nascent stage and there is still a lot of work to be done. Two leading projects that are a step in the right direction are those of the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD) Recommendations -at global level- and the creation of a European Expert Group on sustainable finance -in the EU.
The TFCD’s Recommendations aim at being adoptable by all organizations. They are expected to foster institutions’ governance, strategy and risk management while at the same time bolstering the opportunities derived from the transition to a lower-carbon economy. They will be helpful for reducing investors’ uncertainty because they will contribute to make better informed decisions. For the financial industry, they will shed some light on policymakers’ understanding on the risks and the market context. In that vein, physical, transition and liability risks have to be considered.
Physical risks refer to the impact of climate-related phenomena such as natural disasters can have on insurance liabilities and on financial assets. Transition risks could materialize if transition to a low-carbon economy occurs late and abruptly implying significant changes in the policies and in the prices of fossil fuels and linked assets. Liability risks could emerge if parties who have suffered the consequences of climate change seek compensation from those they consider responsible.
A global sustainable finance strategy should be a common goal and the EU has the potential to play a leading role in this field. The creation of an European Expert Group on Sustainable Finance is a milestone towards this objective. It was established by the European Commission (EC) in its priorities for 2017 for completing the Capital Markets Union and started its work last January. The Group will send the EC policy recommendations for mobilizing public and private capital towards sustainable projects and, at the same time, minimising the materialization of possible risks in the financial system derived to the exposure to carbon related assets.
Financial instruments and projects have to abide by some requirements to be considered sustainable. Broadly speaking, a green authentication has to be provided by an independent environmental consultant. Furthermore, it has to be granted that they comply with the Environmental, Social And Governance Criteria and that the goal of the project is specifically environmental (i.e.: for renewable energies or for energy efficiency, such as project finance for wind farms and solar parks). Last but not least, there are specific principles depending on the products (i.e.: the Green Bond Principles for bonds)
There are some sustainable financial initiatives in this domain to be to be highlighted:
- At global level, the International Finance Corporation has recently launched a program offering a broader range of investment opportunities in triple-A rated assets that meet Environmental, Social and Governance standards. Broadly, it combines its already existing Inclusive Business and Banking on Women bond programs.
- In Europe, green financial instruments are also gaining traction. Poland and France have already issued their respective Green Sovereign Bonds; and the European Covered Bond Council is working on an initiative on Energy Efficient Mortgages that has the explicit support of the European Commission, and the Centre for Climate Change Economics and Policy has recently released its agenda for stimulating private market development in green securitisation.
And what are we doing In BBVA?
We are creating green opportunities:
- The Group is developing a comprehensive global environmental and social plan of the highest standards. We are working on a framework that covers all the views towards the achievement of a fully integrated global strategy that includes sustainable finance at its core. The plan will foster the understanding of our investors, stakeholders, regulators and supervisors’ the Group’s commitment with environmental risks, the way we are integrating them into our governance and in our whole strategy and risk management. Furthermore, it will be helpful to enhance the social welfare of the people of the countries in which we perform our activities.
- We are also expanding the range of the available financial green tools. BBVA has recently signed a green loan in favor of Iberdrola for 500 million euros. In addition to being the first operation of this type for an energy sector company, this agreement involves the highest sum as of that date. Furthermore, the Group has just been designated to act as a sustainability structuring bank and bookrunner on the first sustainability bond of the Autonomous Community of Madrid. It is the first transaction of this kind by a Spanish Public Administration. The issuer has announced a 5 year sustainable bond benchmark to be issued in the short term.
- BBVA has also been active in the market for sustainable bonds. We have taken part in different structuring roles in several transactions in Europe and Latam since 2014, and with 5.3 billion euros in sustainable bonds as joint bookrunner in 2016. Indeed, we have provided our structuring and distributing capacities to clients across different sectors (corporates, financial Institutions and the public sector), such as Iberdrola, EDF, Acciona, ICO, KutxaBank, the EIB, and Engie in a 2.5 billion euro issuance -the biggest corporate green bond on the market at that time.
As recently said by someone in an expert forum on sustainable finance: “If we are engaged, we can change”.