The Conference on the United Nations Convention on Climate Change is currently taking place in Bonn, from Nov. 6-17. At a side event hosted by the Inter-American Development Bank (IDB), BBVA was invited to share its approach to green finance.
Where we came from, where we are and where we’re going
In the struggle to combat climate change, two milestones stand out: the Kyoto Protocol and the Paris Agreement. The Kyoto Protocol, which entered into force in February 2005, incorporated mandatory obligations for developed countries to lessen their greenhouse gas emissions. It was followed in November 2016 by the Paris Agreement, whose 195 signatory countries made a legally binding commitment to keep the increase of the global average temperature to less than 2ºC above the levels of the pre-industrial period.
Today, the world is at a turning point in climate change and more broadly, in sustainability issues. It´s crucial to seize the opportunity to integrate both concepts into the financial system, from both an economic and a financial perspective. International organizations, regulators, policy makers, investors, markets and financial institutions are actively working to achieve just that.
One example is the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD). A significant group of investment managers recently sent letters to 60 of the most prominent banks (BBVA among them) encouraging them to disclose climate-related information, according to the TCFD’s recommendations.
Similarly, the European Commission will adopt an Action Plan on sustainable finance in the first quarter of 2018, based on the final recommendations of its High-Level Expert Group (HLEG). This document will receive input from the public consultation on institutional investors and asset managers’ duties regarding sustainability, which opened on November 13.
Three major events are going to take place in the short-term, two of them in Paris: on December 11, Climate Finance Day; and on December 12, the high-level Climate Change Summit. Also during December, the EU’s High Level Expert Group is expected to announce its final recommendations on making sustainable finance an important part of the Capital Markets Union and the EU financial system. Climate Finance Day would be an optimal date for that announcement.
What are the main challenges?
On the one hand, the UN has recently warned of the need to narrow the existing gap between the emission reductions required to achieve the 2ºC goal and the pledges made by governments. For this reason, it also seems necessary to foster National Determined Contributions.
On the other hand, the fact that each country’s requirements differ seems to be positive. It allows for different speeds for emerging and developed countries and makes it possible to achieve agreements more easily. Indeed, it can act as a catalyzer for a higher degree of overall engagement, as each country complies according to its possibilities.
At least four key short-/medium-term goals should be highlighted:
1) A common international and well-accepted classification system. It has to allow for comparisons, for measuring risks, opportunities and their impacts, both on companies’ results and on the social welfare of the countries where they operate.
2) A robust and consistent legal, regulatory and supervisory framework, agreed to by governments, policy-makers and international organizations. It should enable stability and certainty in the long-term perspective. It has to develop an adequate incentive system that efficiently internalizes the negative externalities from the possible materialization of climate change risks". As such, cooperation and coordination among all the actors are of the utmost importance to avoid overlaps and undesirable after-effects.
3) A less volatile price for carbon dioxide emissions would help achieve stability, especially given the fact that China’s emissions are again on the rise.
4) Rational expectations are key to a successful long-term strategy – making the best decisions to achieve future goals, while using currently available information to avoid repeating past mistakes.
What about BBVA?
Our purpose is to bring the age of the opportunity to everyone. We strongly believe that sustainability is an opportunity to help our customers and connect with their values. For that reason, the Group participated in the abovementioned event held by the IDB.
Antoni Ballabriga, Global Head of Responsible Business, said that “halting climate change will require an ambitious collective effort by the financial sector. Banks have a key role to play, given their unique position in facilitating the capital flows through their lending, investment and advisory roles."
BBVA is one of the sixteen banks participating in the United Nations Environment Programme Finance Initiative (UNEP FI) TCFD pilot project. As such, it will be among the pioneers in following the TCFD’s recommendations and in implementing practiced that will directly affect the bank´s governance, strategy and risk management.
As Former U.S: Vice-president Al Gore recently stated “...this is a revolution. We must change, we can change and we will change...” towards the full integration of sustainability values into the real economy, and into the financial system.
Arturo Fraile is a Senior Economist for Regulation & Public Policies in BBVA Research