How do you know if a banking product is sustainable and contributes to the protection of the environment? In 2020, 26 banks including BBVA, tested how the European Union's taxonomy on sustainable activities could be applied to core banking products. Common criteria for determining which products are sustainable could allow banks to drive sustainable financing for the entire economy.
European Banking Federation (EBF) and The United Nations Environment Programme Finance Initiative the United Nations Environment Programme Finance Initiative (UNEP FI) have presented a report on the application of the EU taxonomy to core banking products. The report shares key insights on the benefits and challenges for banks in adopting common criteria, and at the same time, proposes principles and recommendations for applying this taxonomy to retail banking, SME lending and corporate banking, as well as trade, export and project finance.
Between March and August 2020, 26 banks, seven banking associations and observing organizations such as the European Commission and the European Banking Authority, among others, carried out tests to apply the taxonomy in more than 40 transactions. As a result of this exercise, a total of 26 case studies have been published, including two developed by BBVA: a green bond and a sustainable loan linked to compliance with a series of indicators.
The report includes a quote from Carlos Torres Vila, BBVA’s executive chairman, who maintains that “helping our clients in the transition towards a sustainable future is a strategic priority for BBVA. The bank is called upon to play a key role in advising and channeling funds to large corporations, as well as to SMEs and households. The EU taxonomy represents a key step in this direction and the pilot project promoted by UNEP FI and EBF is an excellent way to start testing and enhancing its applicability."
Recommendations for applying the taxonomy
In addition, the report contains eight recommendations to address the challenges identified in the implementation of the taxonomy, directed both at the banks themselves and at legislators, regulators, owners of environmental and social standards and frameworks, labels and certification schemes used by banks.
One of the most important recommendations according to Antoni Ballabriga, Global Head of Responsible Business and co-chair of the UNEP FI Steering Committee is “to recognize the specificity of banks vis-à-vis investors when implementing this taxonomy. On the one hand, our activity goes beyond corporate clients and is necessary to define how to use it to finance SMEs or families. On the other hand, banks are increasingly promoting products such as loans linked to sustainability indicators. All of this will require the development of common criteria in order to apply the taxonomy to them as well.”
Antoni Ballabriga, Global Head of Responsible Business and co-chair of the UNEP FI Steering Committee, during the presentation of the report.
The other recommendations call on legislators, for example, to facilitate data uniformity, alignment and synchronization with the taxonomy and ask the banking sector to establish sector level guidelines to implement and apply the taxonomy to the main banking products. UNEP FI and the EBF are confident that the report will increase the level of confidence in the EU taxonomy and facilitate its widespread adoption by the banking industry.
Benefits and challenges of a common nomenclature
In general, banks view the EU taxonomy as a positive initiative and a clear guide that will help them strengthen their sustainable finance strategies, thanks to improvements in the uniformity and transparency of terms it offers. They also feel that its application will help to improve the sector’s reputation, mitigating possible perceptions of a lack of honesty, or ‘greenwashing’ in its activities, and to develop policies designed to promote activities that are more respectful of the environment and sustainability.
However, the application of the EU taxonomy poses a series of challenges, as it was especially complicated in retail lending segments, transactions financing commercial operations and products for the general public (the latter represent an average of more than 50 percent of banks’ balance sheets). Nevertheless, participating banks managed to develop appropriate methodologies and mechanisms to address these complications.
This initiative was proposed as an initial opportunity for the participants to engage with the complexities of applying the EU taxonomy to their banking products. Once this stage has successfully concluded, in the next phase, the banks will work on developing detailed guidelines, standardized templates and models for action focused on the main banking products. For Antoni Ballabriga, “This report represents a fundamental contribution to the work that the recently created European Commission’s Platform on Sustainable Finance must carry out to define the framework to use the taxonomy for banking products. It is an essential component, as the taxonomy will be the dictionary that supervisors will use to evaluate banks on sustainability and climate change.”
This report comes in the middle of an unprecedented transformation in the banking industry. On a global level, banks are progressively committing to accelerate the transition to a carbon neutral economy. Thus, individually or collectively, banks are establishing sustainability targets and aligning their operations and commercial strategies with the SDGs and the Paris Agreement, as demonstrated by the 200 signatories of the Principles for Responsible Banking, for example. The decisions that banks and their clients make today will impact the economy over the coming years and will mark societies and the quality of the environment for future generations.