I would like to thank Arturo Zamarriego and José María López for offering me the opportunity to write a brief introduction to this collective book on “Sustainability and the New Institutional and Regulatory Framework for Sustainable Finance”. Over the past six years I have reflected on these issues fairly often, but it never hurts to do so again, as it helps us keep up to date with developments in this field, which is as fascinating as it is fast-changing.
Moreover, the timing for this reflection could not be more appropriate, as we are all convinced that the post-Covid world will be greener and more sustainable, and hopefully also fairer and more inclusive, than it has been to date. I would add a third reason for writing this foreword: this book is a solid attempt to bring some order to a world that has suddenly become very complex, so anything that sheds light and provides clarity is greatly appreciated and will help us to make sense of these issues. This is something that businesses in general, including of course our banks, are urgently calling for.
As President of the Spanish Banking Association, the first thing I would like to highlight is the deep commitment of Spanish banks to sustainability. In particular, our major institutions are leading the way in Spain in this transition towards a more sustainable and fair economy—one they have been working on for years and which, in a sense, culminated in the signing, at the UN Climate Change Conference (COP25) held in Madrid in December 2019, of a joint commitment to reduce the carbon footprint of their loan portfolios within a specific timeframe, in a way that can be measured using internationally recognised criteria and in line with the objectives of the Paris Agreement. In this way, our institutions aligned themselves with the “Collective Commitment to Climate Action” promoted by UNEP FI.
This agreement, in which AEB played an important role, might seem like just another “milestone” among the many along this journey, but that has not been the case at all. In fact, signing this commitment marked the starting gun for working jointly with the authorities on a framework that makes it possible to measure climate risk—physical and transition risks—borne by balance sheets and, consequently, by banks’ customers. Establishing common standards accepted by all is a key element in enabling banks to meet one of the requirements demanded of them throughout this process: supporting and accompanying their customers in their transition towards sustainable business models, acting as a lever to encourage such behaviours and actions.
Our banks and our companies are setting very demanding targets and deadlines in the field of the sustainable economy, which has emerged as the main challenge for long-term global development, seeking to achieve, in a balanced way, economic development, social development and environmental protection. It would be far too lengthy to list all the projects, progress and objectives our institutions have set, and I would probably leave many out. However, what already seems to be a resounding call across the banking sector—and, I understand, the business sector as well—is for governments to take the lead on this issue and, in a coordinated manner, begin to unify criteria, standards, rules and lines of action to make this transition faster, simpler and less costly. The EU’s so-called green taxonomy is a first step by the authorities, but however significant this progress may be, it cannot be the last. A lack of definition prevents us from moving forward with greater confidence and certainty in this complex shift in the economic model. Otherwise, we run the risk that the avalanche of initiatives and institutions, standards, indices, reporting models, audits—in short, a jungle of acronyms that is almost impossible to clear and digest—will lead us not to certainty and progress, but to confusion and stagnation. Just as an orchestra needs a conductor to play in harmony, the public sector, both national and supranational, must play a clarifying role. Without common, clear rules, progress will not be possible. And our business leaders are ready to move forward, not only because they are convinced of the integrity of sustainability, but also because they are aware that this tsunami, referred to by BlackRock CEO Larry Fink, will entail a gigantic redistribution of capital, is unstoppable, and will sweep away anyone who has not joined it or is not prepared to do so.
Therefore, it is necessary to “bring down to earth” the most urgent aspects of this transition to sustainability for businesses and markets. To begin with, we need to reach internationally harmonised standards and definitions with regard to indices, the green taxonomy—later, the social taxonomy will also need to be addressed—and, in particular, everything related to information disclosure. This is a key aspect of the new sustainable world. We need accessible, transparent, sufficient and comparable information, without which it will be very difficult, if not impossible, to allocate efficiently the resources needed to invest in this transformation.
The urgency of the task does not mean regulating in a rushed and ill-considered way. In reality, a great deal is at stake with this regulation. What is at stake is whether this transition towards a low-carbon economy that is fairer and more inclusive remains a mere attempt or, on the contrary, represents a real change that improves people’s lives in the long term and enables the conservation of the planet’s natural resources. Consequently, it is necessary to regulate well and avoid some of the mistakes made during the regulatory tsunami in the financial industry. This recent experience must help us avoid repeating the same errors. Good regulation does not mean a lot of complex regulation, because in practice it becomes impossible to apply and supervise. We need few rules—clear, simple, international in scope—so as to avoid excessive fragmentation, and we must steer clear of overly detailed implementation that could stifle innovation and private initiative.
This learning process is certainly not easy. Precisely because of its novelty, building this regulatory framework requires that companies, authorities, markets, consumers, and all the sectors and jurisdictions involved work together and learn from one another. This is all the more important given the speed at which changes in regulation and supervision are taking place in some areas, and the fact that certain requirements that were voluntary until now are becoming mandatory. The future Climate Change and Energy Transition Act, whose draft bill is currently going through Parliament, could be an excellent opportunity to set an example in this regulatory process.
On the other hand, regulation must incentivise not only the financial sector—whose importance in this process, while significant, remains instrumental—but also the productive sector, where the changes must actually take place. It will also be advisable to focus on the weaker parts of the productive system, such as the most polluting and carbon-intensive industries, or those with fewer possibilities to undertake the transition, such as small and medium-sized enterprises. There is little point in legislating for the most advanced, because the aim is to bring the laggards along. This must undoubtedly be a gradual process that will not happen overnight, which will require working with companies over the long term and with a degree of flexibility. This gradual approach is perfectly compatible with taking firm and swift steps in regulating the different taxonomies, indices or disclosure requirements—prerequisites for triggering the rest of the process.
I have referred to SMEs, and I do not want to fail to add something more about this group of companies, which represent 98% of our productive fabric. This percentage gives an idea of their importance in our economy, so it is clear that we cannot leave them out of this project. It will not be easy, because the last thing our small businesses need right now is additional regulatory burdens, as they are focused on surviving the crisis unleashed by the COVID-19 pandemic. Clearly, they are the ones that need the most help to join this sustainability project, and they are where the financial sector associations have focused the activity to be developed by Finresp. The Financial Centre for Sustainability in Spain (Finresp) was created in 2019 by the main financial sector associations—AEB, CECA, Inverco, Unacc and Unespa—and thus became the twenty-seventh member of the International Network of Financial Centres for Sustainability (FC4S) promoted by the United Nations Environment Programme, whose aim is to exchange experiences and undertake joint actions to accelerate the expansion of green and sustainable finance. Based in Madrid, this centre was created with the aim of addressing, in particular, the difficulties and needs of small and medium-sized enterprises in adapting to the requirements of the forthcoming Climate Change Act and to the regulatory proposals on sustainable finance presented by the European Commission.
As for the COVID-19 crisis, which I have just mentioned, interestingly, far from slowing down the global project to move towards a more sustainable economy, it has done just the opposite, largely thanks to the European Commission’s firm determination to relaunch the recovery of the Union’s economy on the basis of three pillars: digitalisation, social inclusion and sustainability. This is reflected in the recovery plan known as Next Generation EU, a €750 billion programme whose main purpose is to repair the damage caused by the health crisis by investing that amount in “a green, digital, social and more resilient European Union”, thereby once again prioritising sustainability in building Europe’s future. In my view, this makes perfect sense, because if we are going to build something new, let us do so on foundations fit for the future, not on elements that have already become obsolete.
It goes without saying that the size of the programme—under which Spain is set to receive €44 billion in 2021 and 2022 alone—represents a huge opportunity to make a qualitative leap in modernising our productive fabric, an opportunity we cannot afford to waste. The key to success will lie in using these funds wisely, with the greatest possible granularity: what matters most is the multiplier effect achieved with that 2% of annual GDP in terms of investment, employment and increased long-term competitiveness. And it does not necessarily all depend on complex projects: for example, renovating homes to improve their energy efficiency can be a simple initiative, one that creates jobs in SMEs, and a key element in the fight against climate change, since approximately 40% of CO2 emissions into the atmosphere come from buildings. The fight against climate change starts at home, here and now. We must look for more silver bullets like this one.
What can the banking sector contribute to the development of the European programme? First, its commitment to sustainability. As became clear at COP25, we have stepped up our efforts and, in less than a year, the Spanish banking sector is already seen as a leading sector on a par with other pioneering banking systems, such as the French, the Dutch or those of the Nordic countries. Second, few sectors have the granularity and efficiency to roll out policies more quickly. Consider that, in just a few months, and with the invaluable collaboration of the Treasury and the ICO, we were able to provide financial relief to 560,000 companies (the vast majority of them SMEs). Or that our credit moratoria have eased the burden for 1.5 million families and self-employed workers. I reiterate: Spanish banks are a guarantee of efficiency and an example of agility across Europe.
Third, banks know their customers and can help them and the Spanish economy. Consider that the commitment to measure and reduce the carbon footprint of our balance sheets will require us to accompany our asset-side customers—mainly households and SMEs—along that path towards a more sustainable future.
However, it will be necessary to draw on all the financing mechanisms available to us. In this regard, we must not forget capital markets in their role as facilitators of change. Ultimately, markets are another fundamental arena for allocating the funds needed to shift our current economic model towards a more sustainable one that respects environmental, social and governance needs. It is true that the regulation and supervision of markets are undergoing an accelerated process of change, driven by the European Commission in various areas: labels, social, governance, green, etc. We should take advantage of this momentum to definitively complete the construction of the Capital Markets Union, which is essential to facilitate and sustain this financing process over the long term.
In short, the pandemic has brought, in addition to pain and uncertainty, elements of hope and change that would have seemed unthinkable just a few months ago. It seems clear that we have moved from sustainability 1.0 to 2.0—or, in other words, from studying and raising awareness to measuring and acting. There is no doubt that anyone who wants to be part of the economy and business will have to be part of the world of ESG criteria. There is simply no other option.
José María Roldán, President of the Centre for Responsible and Sustainable Finance (Finresp) and the Spanish Banking Association (AEB)
