"2021, a year of structural changes towards a sustainable financial system"
Antoni Ballabriga, Global Head of Responsible Business at BBVA, analyzes in this article, published in the Sustainable Finance Observatory Yearbook 2021, a review of the key factors that have shaped sustainable finance in 2021.
2021 will certainly be remembered as a year of structural change as we climbed the third major rung towards a financial system that fully integrates sustainability.
Fundamental milestones took place in 2015 that marked a before and after. Not only did it see the approval of the SDGs or the Paris Agreement, but it was also the year of the Breaking the Tragedy of the Horizon speech, delivered by Mark Carney, Chairman of the Financial Stability Board, which positioned climate change as a systemic risk.
Between July 2017 and March 2018, a second rung was climbed with the approval of the TCFD recommendations, the creation of the NGFS as a network of central banks and the European Commission's sustainable finance plan.
Since then, a lot has happened, but 2021 was marked by milestones that heralded a third wave in this exponential development. My focus here will not be on the market growth with the mobilization of one and a half trillion dollars, but rather on the structural elements in the construction of this new financial system architecture.
To start with, 2021 was the year of the financial sector's commitment to net-zero emissions. Until early last year, only a few banks had already made such progress as BBVA in 2018 at the Katowice COP24.
In April 2021, the Glasgow Finance Alliance for Net Zero (GFANZ) was created, a coalition of 450 financial institutions with $130 trillion in assets, hosting the Net Zero banking Alliance and with banks representing 40% of the banking system. Unimaginable just a few months prior, this was a clear message to governments and companies that the financial sector is ready to finance this transformation.
Secondly, 2021 witnessed the return of the United States to the Paris Agreement, which clearly brought with it many implications. I would especially highlight the creation of the International Sustainability Standards Board with the mandate to define a global standard.
In Europe, a robust sustainable taxonomy started to be outlined, and it was also the year in which the Commission's new strategy came into being, with a new vision of transition being particularly noteworthy. For the first time, it will focus on how to mobilize not only more investment in purely sustainable activities, but also on how to support the economy as a whole.
We have three major challenges pending: the total incorporation of emerging countries, biodiversity and capital, and human rights.
Finally, a fourth structural milestone was the integration of climate change into banking supervision practices, with the ECB leading the way with the implementation of the expectations guide and its first top-down stress test. These first steps were supported by the commencement of the Basel Committee's work.
So what can we expect in 2022? Well, the realization of all those initiatives hatched in 2021, but in my opinion the circumstances will not yet be in place for the fourth wave of structural change, for which we will have to wait a few more years. And what will be the triggers at that time? I believe we have three major challenges pending: the total incorporation of emerging countries, biodiversity and capital, and human rights. Make no mistakes about it: the time will come, and it will come sooner rather than later.