I am convinced that sustainable finance, far from being a passing fad or merely a reputational matter, has become the catalyst for an unprecedented shift in economic growth models, with far-reaching medium-term consequences for the banking sector, its customers and creditors, and society as a whole.<\/p>\n
In a very short time, sustainable finance has become a key issue for our banks, mainly because public authorities have set out to use the financial sector\u2014just as they did in the past in the fight against money laundering\u2014as an instrument to carry out the energy transition towards economic and financial models that are less carbon-intensive and more environmentally friendly. The aim is to achieve an orderly and gradual transition\u2014one that preserves financial stability\u2014from today\u2019s economic model to another in which greenhouse gas emissions are lower, over a broad time horizon, but not an endless one, and one that is tending to accelerate. Everyone\u2014governments and supranational institutions\u2014agrees on this objective, and also on the fact that the best lever to promote that gradual change, and almost the only effective one, is the financial sector, including banks and markets. <\/p>\n
International authorities\u2014both European (the Commission and Parliament) and global (the United Nations and the Financial Stability Board, or FSB)\u2014have backed banking as an agent of this change and have also decided to take action and accelerate the process. In fact, the European Commission (EC) set out to implement its Action Plan on Sustainable Finance in the 2018\u20132020 period; that is, in just two years. The Commission estimates that annual investment of \u20ac180 billion will be needed to meet the targets set in the Paris Agreement in the European Union (EU), so the measures included in its plan seek, above all, to create a favourable environment for private investors to contribute to that significant investment effort. <\/p>\n
Among the EC\u2019s short-term proposals, the taxonomy, or official classification of sustainable activities, stands out; it will be introduced progressively into EU rules. This will help clarify what is sustainable and what is not, and will provide a common language for all stakeholders. This taxonomy is important for the banking sector in particular because, in line with that classification, there is an intention to introduce the sustainability factor into banks\u2019 capital requirements, and because it will set the criteria used to measure and compare financial risks linked to climate change. In addition, it will make a decisive contribution to developing the still nascent green bond market, which requires a degree of standardisation\u2014an issue that remains controversial. On the one hand, market participants fear that public authorities\u2019 intervention in defining such an immature market could undermine the spontaneous emergence of best practices in this area. On the other, the authorities are aware of the need to introduce a common language\u2014currently lacking\u2014and transparency requirements that, far from stifling an emerging market, support its development. <\/p>\n
In any case, and precisely because this is still an immature market, it is vital that the authorities understand that this initial intervention to establish standards must be compatible with a degree of flexibility to adapt to a changing market that will continue to mature. In this field, as in so many others, dialogue between the public and private sectors will be essential to ensure the market develops properly. It is clear to everyone that the opportunities this green market will offer to access funding on better terms, as well as the chance to serve as a channel for the substantial investments required to carry out the energy transition\u2014or even the possibility of improving regulatory capital ratios\u2014represent an unquestionable business opportunity for banking institutions, which have already begun positioning themselves to compete in this world of green finance. <\/p>\n
In the area of capital requirements, there is an opportunity\u2014also not without controversy\u2014to use supporting and penalising factors, the so-called green and brown factors, <\/em>which, in my view, are fully consistent with a purely prudential risk-management perspective. To the extent that the financial sector is the lever the authorities will use to support this shift towards sustainable growth models, it makes sense to use an incentive system of bonus <\/em>and malus, <\/em>precisely to achieve a gradual transition that avoids potential risks to financial stability. <\/p>\n That transition will have an impact on all economic sectors. Depending above all on its speed\u2014especially if it occurs more quickly than expected\u2014entire sectors of the economy may see their viability jeopardised by the potential incompatibility between short-term profitability requirements and those of the medium term. For this reason, we must avoid a sudden transition, a cliff effect, <\/em>that triggers financial losses affecting the financial system and its stability. Which sector is instrumental in ensuring a transition that preserves financial stability? Once again, it is the financial sector, because through its financing decisions and its terms in terms of volumes and pricing, it can pace the rate of change by sending signals to economic agents about the investment policies that are favoured and those that will be increasingly penalised. And to the extent that incentives are aligned among governments, supervisors and financial operators, a transition that preserves financial stability will be ensured. <\/p>\n As can be seen, our banks have a key role to play in this process of change towards a new economic and financial paradigm, and at the same time they must convince their customers and shareholders of their deep commitment to the values associated with sustainable and inclusive economic development, and that those values are compatible with the medium-term profitability of their businesses.<\/p>\n