By Teresa Ribera, Minister for the Ecological Transition of Spain

The significant financial risks from climate change are well understood. Now the financial sector must seize the strategic opportunity to drive the net-zero-carbon transition, supported by government through clear policy signals and regulatory frameworks, says Teresa Ribera in this post for the Sustainable Finance Leadership series.

The transition towards a net-zero-carbon, climate-resilient and sustainable future is offering a unique strategic opportunity for the financial sector to reconnect with the needs of the real economy while ensuring its financial viability in the medium and long term. That climate change poses significant financial risks, endangering the stability of the global economy, is understood. The good news is that the signals coming from financial actors are very positive and show a clear direction of travel, in line with climate goals. Clear policy signals, such as those given by the Spanish Government through its Strategic Framework for Energy and Climate, are key to realising this transformation and to promoting the alignment of policies and investment decisions with the decarbonisation of economies.

Sustainable finance provides a strategic opportunity to the financial sector

The ecological transition is advancing worldwide, although at a slower pace than desired. More needs to be done if we want to win the race and meet the 1.5°C target established under the Paris Agreement. This process of change will enable the modernisation of economies, and promote new growth and employment opportunities as well as environmental sustainability.

Combining forces and accelerating action is now critical. According to the Organisation for Economic Co-operation and Development, the world needs around US$ 6.3 trillion of investment in infrastructure by 2030 to limit global warming to below 2°C. Public finance alone is not enough. The financial sector has a key role to play; boosting private capital is essential for supporting the transition. And the transition provides the financial system with an unprecedented strategic opportunity in terms of economic returns and financial sustainability, and also to renew its overall purpose. The myth that projects that support sustainability are less profitable than traditional ones has been exposed: in fact, most have proven to be more profitable and sustainable in the long term.

Now is the time to reconnect the financial system with the needs of the real economy, which is undergoing a deep transformation that must take into account social and environmental factors if it is to succeed. The sector needs to assimilate this process and redirect financial flows towards sustainable activities, steer capital away from high-carbon assets and provide itself with a long-term strategic green view that reduces its exposure to climate risks.

Integration of climate change as a systemic risk is key for global economic stability

The sector has understood that climate change poses significant financial risks which threatens the stability of the global economy. These risks range from physical ones, which can potentially impact on asset values or financial liability in the insurance sector, to fiduciary ones, embodied in the increasing number of climate-related lawsuits, to transitional ones, which can lead to ‘stranded’ assets.

The Network for Greening the Financial System is sending strong signals on these risks. In its first comprehensive report, from April 2019, this Network, which brings together 36 central banks (including the Spanish Central Bank) and supervisors from around the world, acknowledges clearly that climate-related risks are a source of financial risks. The NGFS has issued four recommendations that seek to translate commitments to act on climate-related financial risks into collective, concrete actions.

This is not the only example. At the Spring Meetings of the International Monetary Fund and the World Bank, finance ministers from 23 countries, Spain among them, launched the Coalition of Finance Ministers for Climate Action, committing to align their policies and practices with the Paris Agreement commitments through their policy, tax and spending decisions. The Coalition endorsed the Helsinki principles, a very significant step for the financial sector that should also be a wake-up call for other countries.

Involving actors besides the ‘usual suspects’ of climate action is a really important aspect of these coalitions, which have been formed by finance ministries, central banks and supervisors: this is key to ensuring a real shift in the fight against climate change. Doubtless there will be difficulties along the way and we are unlikely to see an immediate shift in countries’ financial agendas but the climate change debate is now part of that agenda. Certainly the increasing interest and strong support to initiatives such as these seems to mark a point of no-return, part of a broader shift that is already very significant.

It is governments’ responsibility to ensure these cooperative initiatives deliver on time if we are to put in place concrete and replicable experiences that can support a new sustainable future.

Of course, for the ecological transition to succeed we must think beyond the economic or financial impact of climate change risks to the social and environmental dimensions, because climate change poses a series of systemic risks across the board. We need to advance towards a new development model that is climate-neutral but also socially beneficial and inclusive because if we want the ecological transition to succeed it needs to be designed to maximise its opportunities for all, leaving no one behind. In this context, the financial sector needs to understand that it must build on the green transition by ensuring strong, sustainable, balanced and inclusive growth in the long term.

The financial sector has understood the climate change challenge

Since the Bank of England’s Mark Carney talked about the ‘tragedy of the horizon’ for the first time back in 2015, we have seen change at a significant pace. From a discussion by a minority of pioneers in the financial sector, we are now facing a time in which sustainability is an integral part of investment decisions and where finance and green products, such as green bonds, are growing year on year, creating liquid and profitable sustainable markets.

An increasing number of initiatives also reveal the increasing interest in sustainable finance. From stock exchanges to central banks, the UN, the asset management industry and the insurance sector, all of these have mainstreamed sustainability into their strategies. Shell’s recent announcement setting out the initial steps it will take to deliver climate change commitments, made in a joint statement with investors participating in the Climate Action 100+ initiative, is a strong sign that something is changing.

Meanwhile, the European Union is leading globally by promoting and integrating the principles of sustainable finance into the core of its policies, moving from vision to regulation. Timely action on the different legislative proposals that are currently under debate, especially those setting out clear disclosure requirements and the development of a taxonomy of sustainable economic activities, will be fundamental for the EU’s delivery of its own climate objectives and its leadership in this debate. The added value of the taxonomy will lie in the clarity and environmental integrity of the definitions underpinning it, which will close the door on any attempt at green-washing. Critically, the taxonomy must prevent investment decisions that lock in emissions that are inconsistent with achieving climate-neutrality (or ‘net-zero’ emissions) by 2050 – and thus investments that result in stranded assets.

All of these examples show that there is a common understanding that any discussion of economic growth must pay heed to planetary boundaries, the same way that nobody questions these days that financial stability is intrinsically linked to environmental sustainability. The progress we have seen so far is just the start. In the recent words of Mr Carney: “the task is large, the window of opportunity is short, and the stakes are existential.”

A strategy for decarbonisation and sustainable growth in Spain

Robust long-term signals are key to ensuring that investment decisions are aligned with the Paris Agreement and the 2030 Agenda for Sustainable Development. For markets to anticipate and facilitate the transition to a 1.5°C world, they need adequate information, proper risk management, and coherent, credible public policy frameworks. Regulation is an incredibly powerful tool in this regard, and governments have a fundamental role to play by establishing frameworks that provide stability and predictability.

In this light, the Spanish Government has presented a Strategic Climate and Energy Framework which aims to set the basis for decarbonising the Spanish economy while promoting economic growth, employment and a just transition for all. The Framework provides certainty and confidence for all actors, while making a strong call for private investment, innovation, modernisation of the industrial sector, and job creation.

Around €236,000 million will be mobilised via the Framework in public and private finance, and public–private partnerships. One measure the Government is considering is the issuance of green bonds through the Treasury to finance some of the public investment required, in its conviction that this instrument will be key to persuading the private sector to invest in financing the ecological transition.

Spain already has some positive examples to share, such as the successful issuance in early April of green bonds worth €500 million by state-owned bank ICO. This shows the increasing interest of investors in financial products that provide financially sound debt while generating positive returns.

To ensure active participation by the financial sector, the Framework aligns Spanish regulation that promotes sustainable finance with the type of policies that are already in place in other European countries, on the basis of the recommendations of the Task Force on Climate-related Financial Disclosures. As well as encouraging climate-related financial disclosure, these measures include integrating climate risks into finance decisions, or the assessment of the risks to the Spanish financial system caused by climate change, and the policies to tackle it.

Spain wants to play its part in moving towards greening the financial sector at the global level and making sustainable finance the transformative tool we in the Ministry for Ecological Transition believe it to be.

The recent presidential elections in Spain have confirmed the support to our policies in favour of the ecological transition. Not only this, the Socialist Party has gained votes in coal mining regions where the Government, trade unions and the coal industry struck a major deal last October to shut the industry down.

The views in this commentary are those of the author and do not necessarily represent those of the Grantham Research Institute on Climate Change and the Environment.

A Spanish translation of the Grantham Research Institute’s investor guide to climate change and the just transition is now available: El cambio climático y la transición justa: Guía para la toma de decisiones de los inversores


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