So wrote Mark Carney, the Bank of England’s governor, and François Villeroy de Galhau, the governor of the Banque de France, in support of their recently published open letter and the launch of a report from the Network for Greening the Financial System (NGFS), an international group of central banks and financial regulators, outlining the steps necessary for financiers to tackle climate change.
This is not simply about responding to external pressures to ‘do the right thing’. As Carney and de Galhau point out, climate change creates long-term financial risks for banks; resilience requires a long-term, strategic approach to sustainability that embeds climate risks into business-as-usual governance and risk-management frameworks. This includes re-evaluating counterparty and credit exposures to sectors subject to – positively and negatively – carbon valuations and footprints. Changing strategies, regulations and valuations in sectors such as food and agriculture, technology, automotive and aerospace, pharmaceuticals and healthcare, and energy and utilities presents significant challenges.
But it also offers business opportunities. Banks seen to be ‘green’ may attract more customers than those that are not – reputation and brand are key differentiators; green bonds and loans are a rapidly growing segment of the capital markets; and banks that make early gains in the new growth sectors, such as renewable energy, will benefit.
To respond to these trends, banks need to take sustainability into strategic planning. For example, at the heart of Spain’s leading retail bank CaixaBank Group’s new 2019-2021 Strategic Plan is its aim to be “a benchmark in responsible banking and social commitment”. As part of this commitment, the bank utilizes the framework set out by the UN Sustainable Development Goals (SDGs) in the 2030 Sustainable Development Agenda, including its goals on responsible production and consumption and climate action.
Those strategic goals then need to translate into actions on the ground – directing financing to sustainable businesses (and avoiding the opposite), the promotion of new ‘green’ capital markets instruments, and reducing the bank’s own carbon footprint.
Most banks are at the very beginning of this journey, but CaixaBank has a head start: its commitment to a pro-social and environmentally sound banking model goes back to the founding of “la Caixa” Group, over a century ago. More recently, in 2018, the company launched a new environmental strategy with three main action lines: boost green business, manage climate risk by integrating ESG risks into the overall risk management framework and minimize the bank’s own environmental impact.
Green finance initiatives
For example, CaixaBank is a long-time lender to the energy sector, with 37% of its project financing activity there. But since 2011, CaixaBank has funded renewable energy projects with total installed power of over 23,700 MW and now, of its total project financings in the energy sector, 81% are renewable energy projects.
The bank is also a key intermediator of European Investment Bank (EIB) green funding. In 2018, it signed an agreement with the EIB consisting of a line of credit amounting to €30 million to fund investments in SMEs, individuals and the public sector to combat climate change (e.g., electric cars, modifications to facilities and home improvements). CaixaBank also works to intermediate EIB funds related to renewable energy projects. For example, in 2018, the bank was involved in the €35 million financing of a wind farm.
With this is mind, given that some of the sectors in which many banks operate could have significant environmental impacts, CaixaBank believes it is essential to identify, assess and manage the environmental risk associated with its activity. In 2018, CaixaBank developed an environmental risk management policy to regulate the financing of certain projects and sectors that pose a potential ESG risk, such as those related to energy, mining, infrastructures and agriculture.
Promoting green financing
As a largely retail and SME institution, CaixaBank focuses on ecoLoans and personal ecoMicrocredits to finance purchases of environmentally friendly vehicles and appliances and on providing financing for home improvements to raise energy efficiency.
Also, through the ecoFunding (“ecoFinanciación”) for the agricultural sector, CaixaBank finances projects concerning water efficiency, renewable energies, waste management, energy efficiency, ecological agriculture or rural development.
MicroBank, CaixaBank’s vehicle for entrepreneurs and the self-employed, also offers ecoMicrocredits for businesses in order to finance investments or working capital for self-employed persons or microenterprises that produce or market ecological services through organic farming, recycling, waste-treatment companies or renewable energy, among others.
From buzzword to boardroom
According to the OECD and other reports, an estimated $100 trillion of investment is needed in new green infrastructure over the next 15 years to provide a 66% chance of meeting the goals set at the UN conference in Paris in 2015. Banks have a critical role to play in financing, managing and shaping the transition to a low-carbon, more socially inclusive world.
CaixaBank is determined to play its part. Its strategic commitment to sustainability has already led to a wide range of activities from big-ticket financings to eco-based microfinance. It is just the beginning.