Essay: Fighting Climate Change & Driving Sustainable Development (Bank)

Introduction
I work for GarantiBank BBVA which is a Dutch subsidiary of Banco Bilbao Vizcaya Argentaria (BBVA). The bank as a group has a sustainability strategy around climate change and sustainable development called Pledge 2025; it pledges to mobilize €100bn in green finance, sustainable infrastructures, social entrepreneurship and financial inclusion through 2025 (BBVA, n.d.).
This paper will briefly describe the sustainability initiative taken by the bank, its strategy, goals and challenges along with key products and achievements.  It will further discuss the project within the framework of sustainability strategy elements and touch upon challenges of sustainable business generation through green financing.
An analysis on environmental direct impact targets and metrics, stakeholders, strategy elements and governance will be made – with an aim to finally provide constructive recommendations on how the project can tag along other financial institutions for engaging in sustainable financing.
Pledge 2025 – Overall Project Description
The aim of the project is to help the bank meet the United Nations Sustainable Development Goals and is in line with the Paris Agreement on Climate Change. Accordingly, the bank intends to align its activity to a 2ºC Scenario and strike a balance between sustainable energy and fossil fuel investments (BBVA, n.d.) and is based on three lines of action: financing, management and engagement (see Figure 1).
Figure 1: Purpose of the bank in its sustainability initiative Pledge 2025
To Finance: The bank has a goal of mobilizing €100bn in green finance, sustainable infrastructures, social entrepreneurship and financial inclusion through 2025. This line of action will help to create the scale of capital mobilization to halt global climate change & attain the UN Sustainable Development Goals (SDGs) (U.N., n.d.) of (i) #7 Affordable and Clean Energy, #6 Clean Water and Sanitation and #13 Climate Action through green financial instruments and lending; (ii) #1 No Poverty, #5 Gender Equality, #8 Decent Work and Growth through lending for and supporting sustainable development; and (iii) #9 Innovation and #11 Sustainable Communities through investing sustainable agribusiness and infrastructure.
Figure 2: Line of Action – Finance Impact of Pledge 2025
To Manage: This line of action has the purpose to manage and balance the Bank environmental and social risks in order to minimize any potential negative impacts. The commitment is to work to mitigate the bank’s own environmental and social risks and as well as any negative impacts. The bank has its environmental direct impact targets for 2025 and is publish its carbon-related exposure (see Figure 3 and 4).
Figure 3: Environmental direct impacts targets 2025
Figure 4 below depicts the Carbon-related assets exposure of BBVA, considering the percentage of the exposure to the overall total asset size, 3.4% may not look significant however the total carbon related asset size is nevertheless €23bn.
Figure 4: Transparency in carbon-related assets
To Engage: The bank is aware it should in order to increase the financial industry’s contribution to sustainable development, engage all stakeholders in line with SDG #17 Partnership for Goals (U.N., n.d.). Figure 5 below depicts the classification of stakeholders and lists major institutions -including subra-nationals supporting sustainable development.
Figure 5: Line of Action – Engage: Stakeholders
Achievements & Key Issues
Roadmap
It is important to mention that Pledge 2025 is fairly young project launched in 2017, hence initial achievements and focus areas should be looked into in assessing the viability of the project. The bank has implemented many elements to ensure that sustainability is embedded in the way business is conducted, these are briefly touched upon below:
Governance: The bank took the project through an implementation road map, it has appointed board of directors to approve corporate social responsibility and sustainability policies and required quarterly oversight thereof. This allowed the bank to have a considerably good governance in place for assessing and managing climate related risks and opportunities. In 2018 it is planned to establish a global sustainability leadership team to directly report to the board of directors.
Strategy: The initial step was to quantify credit exposure to carbon-related assets and mix energy generation in utilities, it allowed the bank to identify the climate-related risks and opportunities within the organization over the short and long term. By determining the impact thereof, the strategy and potential portfolio opportunities on climate change and sustainable development have been shaped.
Risk Management: The bank determined internal processes for identifying, assessing and managing climate risks, and these are integrated into the organization’s overall risk management. For sustainability norms, new sector criteria are approved as well as due diligence processes in clients, transactions and products implemented.
Metrics & Targets: The bank determined and published metrics to assess climate-related risks and opportunities in line with its strategy and risk management processes. It has also assigned targets for the performance against these, e.g. mobilizing €100bn 2018-2025, renewable energy use at 70% for client utilities and 68% reduction in direct GHG emissions.
Achievements
The bank’s current (as of December 2017) credit exposure on sustainable finance is €22.1bn, and in addition sustainable green bond intermediation amounts to €10.6bn. Figure 6 below depicts the breakdown of the sustainable credit exposure in line with the Green Bond Principles (ICMA, 2018) and Social Bond Principles (ICMA, 2018).
Figure 6: Sustainable Credit Exposure
The bank active as one of the most active bookrunner in 2017 and has become a key global player through the provision of green bond advisory, placement and structuring particularly with 11 transactions in Latin America and Europe.
The bank has done a €1bn green bond issue in May 2018, the largest ever of its kind in Europe, sparked tremendous interest among investors. “We are committed to sustainable finance, and this issue is yet another example” the bank’s CEO Carlos Torres Vila said (BBVA, 2018).
Sustainable loans and sustainable bonds are green financing instruments for channeling financial resources toward financing projects in sectors such as renewable energy, energy efficiency, waste and water treatment and access to essential needs and services such as housing and finance (BBVA, 2018). Accordingly, the bank has developed a framework for SDG-linked sustainable bonds under which green, social or sustainable bonds can be issued. Such an underlying framework solves many of the characteristic elements of sustainable financing issues (see Figure 7 below).
Figure 7: Environmental and Social SDGs through BBVA Framework
The following transactions are results of sustainable financing strategy of the bank and the project:
– Refinancing of Hera Gruppo, Italy (largest multi-utility company) through first sustainable revolving credit facility, an operation valued at €200m. This is the first sustainable transaction of these characteristics in Italy. BBVA has acted as the sustainable agent. In line with development of green instruments, the new facility benefits from a price adjustment mechanism linked to the progression of three sustainable indicators: reduced CO2 emissions; increased waste recycling and reduced energy consumption. The sustainable indicators are verified by the environmental consulting firm Vigeo-Eiris (BBVA, 2018).
– Financing the Valencian distribution cooperative Consum with the first green loan deal in the Spanish distribution sector for €5m. The green category has been certified by the consultants KPMG as compliant with the ‘Green Loan Principles’ published by the International Loan Market Association (LMA, 2018). Sustainable financing elements consist of opening of “new supermarkets fitted with energy efficiency mechanisms; the implementation in existing supermarkets of facilities and fridges with more climate-friendly refrigerants; and the replacement of fridges with more energy-efficient equipment” (BBVA, 2018).
– €1bn transformation of its syndicated credit facility by MAPFRE insurance into sustainable finance with the cooperation of BBVA, acting as sustainable agent. The sustainable financing transaction has an innovative characteristic: interest rates are set by taking into account, not only MAPFRE’s credit rating, but also the parameter that the performance of the insurer according to sustainability criteria (BBVA, 2018). This means that if there are improvements in MAPFRE’s sustainability assessment, the interest rate for the credit facility will be reduced to be assessed by environmental consultant Vigeo Eiris  annually based on MAPFRE’s environmental, social and corporate governance (ESG) performance.
Opportunities
The bank holds an annual Sustainability Finance Forum, and the following statements of the bank’s chairman, Francisco González, emphasizes global milestones for the social effect and the role of banks in sustainable development opportunities (BBVA, 2018):
(i) “In first place, the global agenda, that binds not only countries, but also companies. This agenda includes the Paris Climate Agreement and the UN SDGs.
(ii) In second place, the huge market opportunity created by the SDG. In 2030, a $12 trillion market will require annual investments totaling from $5 to $7 trillion, of which 70% will concentrate in emerging markets.
(iii) Third, increasing pressure by institutional investors, which demand information on how companies integrate environmental and social aspects into their operations, as well as a long term vision.
(iv) And fourth, regulations and recommendations issued by international organizations.”
In this presentation, it is also announced the bank would form part of a new initiative promoted by the sustainable finance forum of the United Nations (UNEP FI) on defining the Principles for Responsible Banking. This collaborative project, in which 24 banks across five continents will take part, is in line with the existing Principles for Responsible Investment and Principles for Sustainable Insurance (BBVA, 2018).
Challenges in Sustainable Finance
The main challenge is stakeholder involvement is engagement and competition. Most of the banks in developed countries have a sort of formal sustainability statement with purposes and objectives of the of climate change and sustainable finance. However tangible benefits and trade-offs of not being able to compete with conventional financing models, such statements could only stay in the annual reports and not be any more than simple corporate social responsibility issues.
Business Challenges: General challenges to sustainable financing comes from insufficiency of public financial sources to finance the green transformation in magnitude. From this angle, a significant amount of private capital is needed. However, private green finance is still scarce due to a range of microeconomic challenges, including information asymmetry and inadequate analytical capacity of issuers and investors, a lack of generally accepted green definitions and maturity mismatches (G20, 2016).
In order to overcome these challenges banks should accelerate their green finance instruments, notably priority-lending requirements and capital adjustments. Banks and financial institutions should report and disclose their systemic environmental risks (Alexander, 2014). From the metrics & targets and risk management roadmap items, BBVA seems to be in the direction to match financing needs of green investments.
Environmental & Social Challenges: Although many emerging markets have eagerness to produce renewable energy, mostly they lack adequate policies in support of the business initiatives. Beginning to look from BBVA’s large presence in Latin America, environmental and social challenges appear as lack of commitment from concerned authorities and stakeholders in order to build up a green economy in similar emerging markets. To solve these issues, green financing activities need to be aligned with the environmental state policies, so that sustainable financing can be channeled in an environmentally friendly and transparent manner.
Below in the paper, sustainability strategy elements of BBVA’s Pledge 2025 project and stakeholder analysis will be provided in more detail.
Analysis on Sustainability Strategy Elements
BBVA is an whole service bank, through its extensive global network and business capabilities, and as of 2018 with the Pledge 2025 its eagerness to implement sustainable finance norms into its way of doing business can transform the bank into a major actor in climate change and sustainable development. Below is the strategy diamond of Hambrick and Fredrickson concerning the five major elements of strategy (Hambrick, 2005) for BBVA’s sustainability initiatives.
Figure 8: Five Major Elements of Strategy
Arenas: This element refers to where will the bank be active through its sustainability initiatives. For the purposes of green financing and sustainable development projects, most impactful outcomes are received in emerging markets. It is essential to ensure that green capital flows finance long-term projects in emerging markets where growth is most carbon intensive. As emerging markets come with environmental and social challenges the target arenas for the bank would be geographically reaching emerging markets through global companies with high sustainability awareness.
Additionally, micro finance, agri-developmental projects can be target segments for the bank, considering availability of straightforward governmental stakeholder support. Infrastructure and renewable energy technology focus also has a direct link with the strategy and targets of the bank’s initiatives.
Vehicles: These depict how the bank reaches its sustainability objectives and targets. Stakeholder engagement is the essential path to establish wide understanding of environmental and social issues can be important drivers of long-term investment value. Setting up joint initiatives, task forces and industrial panels can be listed as a part of the element.
The bank fulfills such task in a significant manner by organizing BBVA Sustainable Finance Forum, bringing together investors, businesspeople, institutional representatives and sustainable finance experts. It also built a framework for SDG-linked sustainable bonds to be issued which bring together industry players and facilities green financing.
Differentiators: The efforts of sustainability and environmental risk mitigation looks as though they are non-profit activities, however it is a key achievement to interlink the elements of profit with sustainability measures. The bank’s transformation of MAPFRE’s loan syndication with a pricing link to performance of the insurer according to sustainability criteria is a good example of a differentiator which takes sustainability efforts into more concrete form and link with economic results.
Staging: This element refers to the speed and sequence of movement for the purpose of sustainability initiatives. BBVA seems to at a rate to ensure that it acts in line with its major role in engaging stakeholders but not slower to lose competitive edge in creating commercial benefits through the initiatives.
Economic Logic: Sustainable development initiatives particularly through green financing instruments form a completely new platform of funding and doing business. Many companies become eager to use green financing as funding costs therethrough come down to ordinary financing costs. This way  all parties can have additional incentives either monetary or environmentally to pursue more sustainable ways to do business.
On top of the cost perspective, BBVA -and other banks can focus on emerging markets and seek out opportunities to meet growing global energy demand by providing financing for low-carbon and climate-resilient development.
SWOT Analysis
In light of the above discussion, BBVA sustainability initiative Pledge 2025 is strong project, as it aims for specific measurable targets on economic, environmental and social dimensions. Sustainable financing is a financial industry-wide model and comprise majorly environmental and social elements, it improves goodwill and belief of a better future, hence BBVA’s initiative’s strength.
Potential to build upon and high industry/market growth appear as opportunities along with creation of additional revenue sources with decreasing long-term costs (and increasing subsidy support). Whereas investment to an unknown market is the main threat with high initial costs and potential additional financial problems. Additional costs come referring back to MAPFRE transaction, from the additional expenses incurred for the environmental assessment and consultant fees.
Weaknesses are mainly lack of stakeholder support and engagement, particularly sustainable financing requires governmental involvement and support. Lack of awareness and potential cost increases due to the nature of target incentives, such as interest rate increase due to not being able to meet certain environmental criteria.
Conclusion & Recommendation
In concluding the paper, it is safe indicate embedding an industry-wide understanding of environmental and social issues which can create opportunities for long-term investment value is the main purpose of sustainable finance. In my view, BBVA’s initiative tries to show such value by taking a stance in global leadership on climate change and sustainable development.
It is tremendously big undertaking for financial institutions to invest in understanding and assessing climate change and environmental risks as well as opportunities they create.  As a means to improve its sustainability practices, BBVA can, going forward, look for ways to address the gap between financial products and sustainability measures and metrics.
It can provide to its clients with support of international environmental institutions, recommended standardized metrics and strategies that these companies can consider disclosing with more transparency. This approach would improve clientele awareness on the bank’s sustainability initiatives and be spread-out in all the industries wherein the bank provides its services. The information would decrease cost for the bank in assessing and quantifying these measures and metrics.
* * *
 
References (in order of appearance)
BBVA (n.d.). BBVA Corporate Website. Retrieved from https://www.bbva.com/en/bbva-to-mobilize-e100-billion-by-2025-to-fight-climate-change-and-drive-sustainable-development/
U.N. (n.d.). Sustainability Development Goals. Retrieved from United Nations Sustainability Development Goals: https://www.un.org/development/desa/disabilities/envision2030.html
ICMA. 2018. Green Bond Principles. Available at https://www.icmagroup.org/green-social-and-sustainability-bonds/green-bond-principles-gbp/
ICMA. 2018. Social Bond Principles. Available at https://www.icmagroup.org/green-social-and-sustainability-bonds/social-bond-principles-sbp/
BBVA. 2018. BBVA issues Eurozone’s largest ever senior green bond. Available at https://www.bbva.com/en/bbva-launches-first-green-bond/
BBVA. 2018. BBVA catalyzes sustainable development and the fight against climate change. Available at https://www.bbva.com/en/bbva-catalyzes-sustainable-development-fight-climate-change/
BBVA. 2018. BBVA publishes sustainable bond issue framework. Available at https://www.bbva.com/en/bbva-publishes-sustainable-bond-issue-framework/
BBVA. 2018. BBVA leads first sustainable revolving credit facility in Italy with Hera. Available at https://www.bbva.com/en/bbva-leads-first-sustainable-revolving-credit-facility-italy-hera/
LMA. 2018. Green Loan Principles. Available at http://www.lma.eu.com/news-publications/press-releases?id=146; also at www.icmagroup.org/resourcecentre.
BBVA. 2018. BBVA opens up green loan market to Spanish distribution sector. Available at https://www.bbva.com/en/bbva-opens-green-loan-market-spanish-distribution-sector/
BBVA. 2018. BBVA closes the first global sustainable transaction by an insurance company. Available at https://www.bbva.com/en/bbva-closes-first-global-sustainable-transaction-insurance-company/
G20, Green Finance Study Group. (2016). G20 Green Finance Synthesis Report.
Alexander, K. (2014). Stability and sustainability in banking reform. Are environmental risks missing in Basel III? Cambridge: University of Cambridge, Institute for Sustainability Leadership.
C. Hambrick, Donald & W. Fredrickson, James. 2005. Are You Sure You Have a Strategy?. Academy of Management Executive. 19. 51-62. 10.5465/AME.2005.19417907.