Sustainable finance is the set of financial regulations, standards, norms and products that pursue an environmental objective. It allows the financial system to connect with the economy and its populations by financing its agents while maintaining a growth objective. The long-standing concept was promoted with the adoption of the Paris Climate Agreement, which stipulates that parties must make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” In addition, sustainable finance had already a key role to play in the European Green Deal and in other EU International agreements, but since the COVID-19 pandemic its role is even more important.
Sustainable financing and its necessity.
Sustainability is much more than just the buzzword. It is the goal towards which the world is headed. Even the UN has set a date: in 2030, the planet must be a safe and livable home. In other words, by 2030 we must have achieved sustainability.
The UN involves us all in the achievement of that 2030 agenda. This includes governments, companies and civil society. We must all pitch in to achieve such an ambitious goal in such a short time. Including banking entities and those organizations capable of providing the necessary financing to undertake such a transformation. Providing funds is essential to achieve this goal.
However, before allocating resources to the fulfillment of any objective, it is necessary to define it. Make it understandable and comprehensible. How do you achieve something as ethereal as sustainability? What can be done to make society and the planet sustainable? To answer these questions, the UN identified 17 crucial objectives for the fulfillment of its 2030 Agenda. These are the Sustainable Development Goals (SDGs) and they have become the beacon of sustainable financing.
What is Sustainable financing
The sustainable financing can be defined as one whose resources are allocated and to support green projects / or socially responsible, i.e., those with clear benefits to the environment or society. It is linked to the SDGs set by the UN.
It is one of the tools of the so-called sustainable finance. They are those that include a strong ecological component and, at the same time, are aimed at supporting economic growth. Its goals include reducing environmental impact, dealing with the greenhouse effect and pollution, minimizing waste, and optimizing the use of natural resources. All this, respecting the principles of transparency and awareness.
What makes sustainable financing different from the traditional one? Basically, in that it requires the institutions that aspire to benefit from it to meet certain standards related to sustainability. This means that it is awarded to public or private organizations that demonstrate solid policies and performance in environmental and social matters. Also, those who allocate part, or all the funds received to this type of project.
Companies that receive sustainable financing reap several benefits. In the first place, access to favorable conditions, such as reduced interests or longer terms to achieve your objectives. On the other hand, they make visible their commitment to sustainability, an impact that can be very positive for their image in the market.
Question of principles
For a financial instrument to be considered sustainable, it is necessary to have a series of parameters that make it possible to establish this quality. For this reason, in 2014 the Green Bond Principles (GBP), updated for the last time in June 2018, and the Social
Bond Principles (SBP) in 2017 were released. Published by ICMA (International Capital Market Association), they are from voluntary application and establish the four points that bond issues must meet to be considered green or social. Sustainable loans also have their own document, Green Loan Principles (GLP), which is based on the same key components.
Basically, these principles are related to the use of the funds, which must be used for projects with clear environmental and social benefits evaluated by the issuing entity.
Regarding the project selection and evaluation process, whether it is an issuer (bonds) or a borrower (loans), the sustainable objectives pursued and the eligibility criteria, among others, must be clearly communicated.
The management of financing, whose funds must be separated from the rest and timely information on the use of these funds are also principles applicable to sustainable financing.
This is what sustainable loans and bonds look like:
In the case of Caixa Bank, the entity supports through its activity those initiatives and projects that are more respectful of the environment and that contribute to preventing, mitigating and responding to climate change and the transition to a low-carbon economy. To achieve this, it has articulated different financial instruments.
Among them are the so-called green loans, which are used for projects related to environmental sustainability. This includes financing for projects related to water management, waste treatment, renewable energy, infrastructure and clean transport. All those granted by the entity have obtained the Green Certificate based on the criteria set out in the GBP.
Another type of instrument is loans linked to ESG (Environmental, Social and Governance). This financing is associated with indices that measure social, environmental and governance responsibility.
This means that the conditions of these loans are linked to the recognition of the good impact of the sustainability strategy of the organizations that receive them. For this, indices are used by independent entities, such as MSCI (energy loans) or GRESB (real estate market).
In these cases, the entity that receives the loan can dedicate the funds to its corporate activity, not necessarily to projects directly related to sustainability. Of course, it is required to prove its commitment to this sustainability, as well as a series of benefits associated with it and resulting from its management.
Green bonds are another possibility. Caixa Bank has been a signatory of its principles (GBP) since 2015. Since then, it has participated in the placement of this type of financial instruments, the amount of which has been dedicated to projects with a positive climate impact.
Last year, Caixa Bank allocated 1,448 million dollars to green loans, those granted to initiatives that respect the environment. It offers a specific offer of eco-Loans and personal eco-Microcredits to finance individuals interested in acquiring efficient vehicles and appliances, as well as in carrying out reforms to their home to improve its energy efficiency. It also has eco-financing formulas for the agricultural sector and has opened a line of credit, through an agreement with the European Investment Bank (EIB), aimed at financing investments by individuals, SMEs and the public sector to combat climate change. The entity also markets the green fund Micro-Bank Fondo Ecológico, managed under ESG criteria.
In addition, Caixa Bank is at the forefront in the search for financial instruments with a sustainability seal. It has issued the first green Letter of Credit in the European market and, also for the first time, has been appointed sustainability agent in a corporate operation that has involved 20 other financial entities.
Caixa Bank is one in all the leading money establishments within the fight against global climate change at a world level. It is the first Ibex 35 bank to completely neutralize its calculated carbon footprint, including the entity’s indirect emissions. The CDP organization has included it, for the fifth consecutive year, in the index of leading companies in the fight against climate change.
The role of financial entities is fundamental for the fulfillment of the 2030 Agenda. Sustainable financing is one of the tools available to them to help citizens, companies and the public sector to achieve this goal.