Sustainable banking is coming of age
The CEO of one of the world’s largest banks said recently that institutions “risk losing their licence to operate”, if they fail to make green finance a priority. At a recent annual general meeting of another global bank, there were many questions about sustainability, leaving little time for discussion of more traditional financial matters. Momentum has been building for years, but now sustainable banking is coming of age.
With customers, investors and employees pushing for a greener agenda, banks must begin to show their support for environmentally friendly initiatives and projects that contribute to preventing and mitigating climate change, encourage the transition to a low-carbon economy, and boost social development. There are many ways to do this, but one of the most direct is through the provision of finance linked to recognised sustainable development goals.
One of the most prominent institutions in this field is Spain’s largest bank, CaixaBank. In 2020, the bank created a sustainable finance division to provide global coverage for clients wanting funding linked to environmental, social and governance factors. A pioneer in innovative ESG funding solutions, the bank is the largest European bank issuer of euro-denominated ESG bonds in 2019-21, and in sustainable lending, it ranked 5th in Europe and 9th worldwide in green and sustainable lending by volume in 2020, according to Refinitiv.
Leading by example
In 2019, CaixaBank developed its Sustainable Development Goals (SDGs) Framework, for the purpose of issuing green and social bonds, fostering different United Nations SDGs, with the aim of having a positive impact on the future of the planet. As of May 2021, CaixaBank itself had issued seven bonds – four green bonds and three social bonds – worth more than €6.5bn.
The proceeds of the bank’s four green bonds will be used to address and support environmental sustainability issues, such as reducing greenhouse gases, preventing pollution, adapting to climate change, and promoting the UN’s SDG 7 (on affordable and clean energy) and SDG 9 (on industry, innovation and infrastructure). A total outstanding amount of €3.6bn of green bond proceeds have been allocated to these green assets.
The bank has also issued three social bonds, totalling €3bn. In these cases, funds are allocated according to SDG 1 (to end poverty), SDG 3 (on good health and well-being), SDG 4 (on quality education) and SDG 8 (on decent work and economic growth), granting loans to micro-enterprises and SMEs and funding projects that help combat poverty and promote access to essential services such as education and welfare. As of March 2021, a total of €5bn in eligible loans have been identified.
Committed to transparency, CaixaBank issued a pioneering impact report of its inaugural social bond made with an external consultant, incorporating an independent limited assurance report by PwC. The report stated that the proceeds of that bond had resulted in 160,945 loans being granted, helping 147,868 families, 13,077 self-employed and SMEs, and creating 8,207 jobs.
According to an ESG investor: “In our opinion, CaixaBank’s social bond's impact report goes beyond ICMA’s [International Capital Market Association] reporting guidelines and is among the best social bond reports we have reviewed so far, especially for non SSA [sovereign, supranational and agency] issuers.”
Helping business innovate
In addition to its own issuance and transition, CaixaBank is at the forefront of helping its corporate customers transition to more sustainable business models. In 2020, the bank participated in the issuance of 13 green, sustainable, or social bonds, for a total amount of €7.5bn, including Red Eléctrica’s inaugural bond and EDP’s green bond.
CaixaBank has also closed a total of 56 transactions recognised as green and sustainable loans, worth more than €5bn, with a particular focus on renewable energy.
Moreover, MicroBank, CaixaBank’s social bank and a leader in microfinance in Europe, financed 105,378 projects worth a total of €900m in 2020, contributing to the creation of more than 8,730 jobs and 5,416 new businesses.
Among these deals were several pioneering transactions that extended ESG-linkages into new areas. One of these was the first incorporation of sustainable criteria into factoring agreements in Spain, with Endesa and Siemens Gamesa. The inclusion of ESG criteria allows companies to improve the terms of the factoring agreement according to its sustainability rating improvement.
Our commitment to the promotion of sustainable development and the improvement of our planet is irrevocable
CaixaBank has also pioneered loans linked to even more innovative ESG targets. For example, Portuguese business group Sonae recently completed a €150m refinancing that is indexed to its ESG performance, including specific performance indicators for female leadership. The financing comprises a €50m bond placement via BPI-CaixaBank Group, and a loan from CaixaBank amounting to €100m.
According to Moody’s Investors Service, worldwide issuance of bonds linked to the economic empowerment of women, or to increasing female representation on company boards, will grow beyond the current $9.2bn total and prove “credit positive” for issuers. However, right now, financings linked explicitly to SDG 5 (on gender equality), or to the mentions of gender in the ICMA definitions of both social and sustainable bonds, are still rare and mostly confined to supranational issuers.
Investors and issuers want more
Last year, the global sustainable debt market grew 29% to a record $732bn, pushed in particular by a seven-fold jump in social bond issuance, as governments and companies borrowed for relief from the pandemic. Issuance of sustainability bonds, which allow issuers to use proceeds for both green and social projects, rose 81%.
Banks themselves are also accelerating their own commitments to a transition away from the most problematic assets. For example, at the end of April 2021, CaixaBank joined the Net Zero Banking Alliance (NZBA), a new initiative promoted by the UN Environment Programme Finance Initiative (UNEP-FI), as a founding member. This commits the bank, along with the other 42 signatory banks from 23 countries, to achieve net zero emissions by 2050, in line with the 1.5°C target, and to establish a 2030 decarbonisation target for its most polluting portfolios, within the next 18 months.
On the day of the announcement, Gonzalo Gortázar, CEO of CaixaBank, noted that: "Financial institutions can and must play a key role in driving the world towards net zero. And we, at CaixaBank, want to be leading this effort. Our commitment to the promotion of sustainable development and the improvement of our planet is irrevocable”.