Making sustainability meaningful
“As financial policymakers and prudential supervisors we cannot ignore the obvious physical risks before our eyes. Climate change is a global problem, which requires global solutions, in which the whole financial sector has a central role to play.”
So wrote Mark Carney, the Bank of England 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 ‒ both 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 they also offer 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 2019-2021 strategic plan is its aim to be “a benchmark in responsible banking and social commitment”. As part of this commitment, the bank utilises the framework set out by the United Nations 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 banks’ 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 environmental, social and corporate governance (ESG) risks into the overall risk management framework, and minimise the bank’s own environmental impact.
Green finance initiatives
For example, CaixaBank is long-time lender to the energy sector, accounting for 37% of its project financing activity. Since 2011, CaixaBank has funded renewable energy projects with total installed power of over 23,700 MW and now 81% of its total project financings in the energy sector 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 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. And in June 2019, Acciona and CaixaBank signed the first green letter of credit in the European market. The $129 million agreement was used to supply photovoltaic panels for the Puerto Libertad plant in Mexico.
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 climate change 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.
As the bank’s CEO, Gonzalo Gortázar, says: “[CaixaBank is determined to be] pacesetters in socially responsible banking, directly contributing to the economic and social development of our customers, particularly those in a situation of vulnerability … [and] … CaixaBank's first social bond reaﬃrms our commitment to the major economic and social challenges of the United Nations’ Sustainable Development Goals".
Supporting global sustainability goals
This recognition that the financial markets have a critical role to play in promoting and funding sustainability led CaixaBank, in August 2019, to publish its framework for the issuance of bonds linked to the UN Sustainable Development Goals. The framework defines the taxonomy of projects that could be linked to the issuance of bonds and follows the recommendations established in the International Capital Market Association guidelines to boost the development of green, social and sustainable bond issues: the “Green Bond Principles”, the “Social Bond Principles” and the “Sustainable Bond Guidelines”. It also has the verification of an independent external advisor, the consultant Sustainalytics.
In September 2019, CaixaBank became the first Spanish bank to issue a social bond to support the UN SDGs. The bond will fund loans granted to fight poverty, advocate dignified employment and create jobs in economically disadvantaged areas of Spain, as well as to back lending to self-employed workers, micro businesses and other borrowers who struggle to provide guarantees or collateral.