Sustainable finance, critical to the financial industry of the future
Even though sustainable finance has been a fundamental issue in the social agenda for many years now, thanks to the 2015 Paris agreement on climate change, the world became aware of the environmental risks and economic impact resulting from the effects of climate change. However, it is not just society that is increasingly more aware. The financial industry is also contemplating climate change and the Sustainable Development Goals (SDGs) as relevant factors to determine their investment strategy.
In fact, in Europe, the European Commission has been implementing an Action Plan over the last decade whose main objective is to provide citizens more credible and transparent information regarding the energy transition, in addition to financing a variety of initiatives for this purpose. In parallel, a group of experts from this institution published a report (Technical Report 2019) to establish the rules on what constitutes sustainable finance in order to avoid companies portraying themselves or their products as more environmentally friendly than they really are, which is known as “greenwashing”.
On a strictly financial level, the future President of the European Central Bank (ECB), Christine Lagarde, has already expressed that the central bank must do more to combat inequality and climate change. She therefore plans to increase the portfolio of green bonds, in addition to other measures. Lagarde recently insisted that although the ECB’s “Primary mandate is price stability, of course. But it has to be embedded that climate change and environmental risk are mission critical.” She is a strong advocate of transition to a low carbon economy on a large scale. A commitment that ECB Vice President Luis de Guindos also defends. In fact, he has already mentioned that he will suggest including climate change risks in the next round of bank stress tests.
Europe is not alone in its awareness of the global importance of sustainable finance. The International Monetary Fund (IMF) recently published an analytical document entitled, “Macroeconomic and Financial Policies for Climate Change Mitigation: A Review of the Literature”. The report stresses that “Climate change is one of the greatest challenges of this century” for which “fiscal tools are first in line and central, but can and may need to be complemented by financial and monetary policy instruments.”
Impact on financial profitability
It seems increasingly evident that the next regulatory changes in the financial industry will focus on investors and asset managers integrating climate change in their strategies and risk management. And this is not exclusively the result of a global increase in society’s awareness, but because they are investments that are at least as profitable as those in other fields.
For example, a study by Oxford University and Arabesque Partners found that the companies with the best performance in terms of sustainability, also have a lower capital cost. And there are more and more initiatives emerging like the Task Force for Climate-related Financial Disclosures (TCFD), which includes recommendations for companies to inform the market of how they combat climate change, what strategy they follow, what their risk model is, and what metrics they use.
On a regulatory level, the impact of sustainable finance on the financial industry will not only be very important in the years to come; it is already having an impact today. According to the Network for Greening the Financial System, which includes central banks and supervisors, climate change is a source of financial risk, thus regulators should include it in their scope of regulation.
BBVA takes a comprehensive approach to sustainable finance, rooted in its Pledge 2025 and based on three fundamental pillars: financing (mobilizing €100 billion in sustainable finance by 2025 with the goal of all products having a sustainable alternative), management (developing methodologies that make it possible to better understand the risks and how to address them) and engagement (among other initiatives this includes joining the Principles for Responsible Banking, which define how BBVA wants to do banking for the coming years).
Pledge 2025 is part of BBVA’s efforts to contribute to the Sustainable Development Goals. Adopted by the United Nations, they are a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity. These 17 goals include new fields like climate change, economic inequality, sustainable consumption and peace and justice, among other priorities. Given the wide range of business activity in the Group, BBVA contributes to all the SDGs, both with its global presence and the many activities of the BBVA Microfinance Foundation.