Responsible finance - Finance for all: Sustainable finance – Now more than ever!
Financial Education Day was held on 5 October. The theme this year was “Responsible finance - Finance for all”. But how is that idea expressed in the relationship between customers and banks? It is expressed in the need for all of us to manage our finances responsibly.
We have already addressed in this series the responsibility of banks and customers in arranging loans or credit. We now wish to talk about responsible finance, which involves going much further.
The COVID-19 crisis has forcefully led us to strengthen the path towards sustainable finance. This is no passing fad, but rather a transformation process from one economic model to another one that values social, governance and environmental aspects highly. Financial institutions are being called on to play a key role in environmental issues, because they are essential for ensuring that credit flows towards environmentally friendly projects.
What specific actions are being taken to meet this goal? We describe some of these below:
- During the COP25 conference held in Madrid in December 2019, more than 20 banks, representing more than 95% of the Spanish financial system, signed an agreement to reduce the carbon footprint on their balance sheets, in line with the Paris Agreement.
- The European Green Deal, published by the European commission in December 2019, aims to make the economy “climate neutral” by 2050. This will involve mobilising at least €1 billion in sustainable investments over the next decade.
- There is a large market for green bonds. Green bonds issuance over the first eight months of 2020 amounted to $135 billion.
- The ECB has launched a public consultation on its guide on climate-related and environmental risks. It has also included instruments linked to sustainability performance targets as assets eligible as collateral and is working with the national central banks and the European Systemic Risk Board in designing stress tests that will help to understand how climate change-related risks affect the financial system.
- The Banco de España is a member of the Network for Greening the Financial System (NGFS). In line with this initiative, it has already approved the inclusion of sustainability and responsibility criteria in the investment policy of the reserves portfolio it manages and it participates in the green bond investment fund launched by the Bank for International Settlements (BIS).
However, there are still significant challenges to overcome, such as:
- Establishing a common language for sustainable finance that enables us to improve transparency, rendering it easy to identify whether a given economic activity is sustainable and appropriately labelling green financial products. The Taxonomy of Green Activities, recently approved by the European Commission, is part of this project.
- Developing quantitative tools enabling us to adequately assess the financial risks posed by these factors from a macro- and microeconomic viewpoint.
- Enhancing awareness of customers and banks regarding these aspects so that sustainability factors are increasingly taken into account when making investments.
Moving towards sustainable finances will largely depend on consolidating actions aiming to achieve a green economy and on successfully overcoming the challenges raised. Now, more than ever, we must aim to achieve this goal.