Debunking myths about sustainable finance
In this article, Antoni Ballabriga BBVA's Global Head of Responsible Business, analyzes the decisive moment for the company in terms of sustainability and debunks eight commonly believed myths surrounding sustainability and the financial sector.
As our chairman, Carlos Torres Vila, “recently stated, “humanity has never had as much responsibility as it does now” in the face of the planet’s social and environmental challenges. Within such an environment, he highlighted that “the future of banking is to finance the future, a future with a capital F.”
We are at a time when we can define the future we want, and the great mantra of sustainable development has always been on the table. But it is since 2015, with major milestones on the sustainability agenda, that these issues have become global, of real relevance, and have marked a turning point in the industry.
I believe that there are five great global forces that are shaping this change and making sustainability a central issue in the business models of certain banks. These forces have to do with the global agenda, market developments, increasing pressure on the part of investors, an increasingly important and active role on the part of regulators and supervisors, and technology as a catalyst for this change.
All this has led me to reflect on the need to debunk eight myths that usually come to mind when we talk about sustainability and the financial sector.
The financial sector should steer and allocate financial flows and financing according to sustainable criteria.
The first myth in very basic: "The global agenda, the Sustainable Development Goals (SDGs) and the Paris Agreement, only apply to the state". The reality is that all the framework agreements adopted in 2015 also involve companies, the financial sector and society as a whole. In fact, the Paris Agreement specifically reflects the role that the financial sector must play, inasmuch as it should drive and allocate financial flows and financing according to sustainability criteria. An agenda that is not simply environmental. It has been said that climate change is our most urgent threat, but it is also urgent to make progress on an agenda for social development, sustainable infrastructure, inclusiveness, etc. In short, we have a major challenge ahead of us if we are to meet the SDGs.
The second great myth stems from arguing that “this challenge requires a large transformation, which, in any case, is manageable, as we have proven on other occasions”. The reality is that we have never faced a change as large as the one ahead of us. This is the discussion that must be had among all industries, businesses, citizens, as well as the financial sector, in order for us to be prepared and to adopt a different mentality
The third myth lies in the idea that "sustainability is a remarkable business opportunity for companies working on energy issues and energy transition". But that is not the case, at least exclusively. In 2017, a study by the Better World, Business & Sustainable Development Commission, carried out in partnership with the United Nations, measured the value that the SDGs would suppose for the market. According to this study, brand-new, currently inexistent markets valued at USD 12 billion are to be generated by the year 2030, involving multiple sectors such as mobility, the circular economy, health, among others, in addition to energy efficiency and renewable energies. What we are dealing with today, therefore, is thinking about how to address this transition, which is going to reach different sectors in a cross-cutting form and which must be carried out in an orderly manner. The financial sector is becoming increasingly mobilized. But there is still more to do.
“The financial sector is becoming energized in the area of sustainability but is doing so without reference standars and with a risk of ‘greenwashing’”. In contrast to this notion, the market itself has been driving regulatory standards such as the ‘Green Bond Principles’, the Social Bond Principles and the Sustainability Linked Loan Principles, among others. These standards, without a doubt, still have room for improvement, but they have enabled orderly progress in boosting sustainable finance, which has grown exponentially, both in the issuance of green bonds and in sustainable corporate loans. However, there is a need for regulation to better define what sustainable finance is, in order to boost the level of mobilization on the scale needed.
"Sustainability is indeed profitable, and it piques the interest of investors"
“Investors are increasingly, yet still barely, interested in a company’s sustainability performance”. That would be the fifth myth. It is true that much remains to be done, but interest is increasing rapidly. Simply recall BlackRock's annual letters, which point to the need for companies to be oriented in the long term toward the transition to sustainable finance and the fight against climate change. At BBVA, we sense that investors are increasingly interested in understanding how the company can integrate sustainability opportunities and risks into its business models. According to the 2018 Global Sustainable Investment Review, sustainable investment grew to USD 30 billion during that year.
There is increasing evidence of the positive correlation between companies' sustainability performance and their financial performance. The Oxford University y Arabesque Partners, meta-study, based on more than 200 studies on return on responsible investments or investments following ESG criteria, concluded that companies with better sustainability performance have a lower cost of capital. Sustainability is indeed profitable, and it piques the interest of investors. This gives particular relevance, therefore, to the Task Force for Climate-related Financial Disclosures (TCFD), initiative, which provides recommendations for companies on informing the market about how they combat climate change, what strategy they follow, what their risk model is, and which metrics they use.
What is the sixth myth? “The regulation of sustainable finance has no significant impact.” A myth that quickly falls apart upon analyzing the work of the European Commission and its Action Plan, which last year set a highly ambitious roadmap with three very clear objectives: to redirect capital to sustainable investments, to incorporate sustainability into risk management, and to engage in transparency and long-termism.
The big change will come when sustainability is incorporated into customer solutions.
It is said (and so goes the seventh myth) that “the risks linked to sustainability are predominantly reputational”. This is debatable to say the least. According to the Network for Greening the Financial System (NFGS) -a network that encompasses central banks and supervisors, climate change is a source of financial risk, and as a result, regulators are incorporating it into their regulatory environment. In this regard, the European Commission has already urged the European Banking Authority(EBA) to assess how banks should address this challenge. Indeed, there most likely will be a stress test linked to climate change within the medium term. Much remains to be done, but, ultimately, the level of acceleration seen in these areas is remarkable.
Finally, in my view, there is one final myth: “Clients don't demand these changes and it's not a priority for them”. However, the big change will not come about because we are financing large companies or enabling the issuance of green or social bonds. The big change will come about when sustainability is incorporated into solutions for clients, both for large companies and for individuals and SMEs. Younger generations are already demanding it.
"Our aspiration is to have a sustainable alternative for all our products"
What are banks doing? How are we responding to these challenges? BBVA, like some other large international banks, has an approach that is not only strategic and timely but is comprehensive in nature, based on our ‘Pledge 2025’ which consists of three pillars: financing, management and engagement.
For the first pillar (finance), beyond our goal of mobilizing EUR 100 billion in sustainable financing between 2018 and 2025, our aspiration is to have a sustainable alternative for all our products. An aspiration that, as recently confirmed by our chairman, the bank expects to achieve during the year 2020 for the main products offered in Spain. The first examples of this are green promoter credit and credit for hybrid and electric vehicles, aimed at retail customers.
For the second pillar (management), I would like to share the greatest challenge posed, not only for BBVA, but also for all other banks: to develop methodologies that allow us to better understand these risks and to be able to manage such risks properly. Here we see the need to work with other entities and even with supervisors. We are focusing our efforts on two major initiatives: the first, promoted by the United Nations and 16 other banks, is a pilot group within the framework of UNEP FI and the recommendations of the TCFD on transition risks and physical risks. . The second is the Katowice Commitment reached with ING, BNP Paribas, Société Générale and Standard Chartered, under which we will all progressively align our activity with the Paris Agreement.
In the last pillar (engagement) lies a very important initiative: the Principles for Responsible Banking. A set of principles that define the way we wish to conduct our banking, where the commitment of the signatories is key. Signing up to these principles shows a significant effort on the part of the banks, as it involves, among other things, developing solutions for clients, setting goals and measuring how we are achieving them.
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