Maya Hennerkes, ESG Sector Lead for Financial Intermediaries
Dimitris Pontikakos, Analyst, Green Economy Financing Facility (GEFF)
"EBRD ON SUSTAINABLE BANKING & FINANCE"
Greening the financial system
EBRD’s Sustainable Finance approach is rooted in the concept of ‘Green Economy’ which continues to provide the basis for a comprehensive and consistent approach grounded in the Bank’s business model and building on its track record. Taking account of its mandate and operating principles, the EBRD defines the ‘Green Economy’ as follows:
A green economy is a market economy in which public and private investments are made with a specific concern to minimise the impact of economic activity on the environment and where market failures are addressed through improved policy and legal frameworks aiming at accounting systematically for the inherent value of services provided by nature, at managing related risks and at catalysing innovation.
The green economy is now of central importance, reflecting both the priorities of EBRD countries of operations, as well as the attention given to environmental sustainability at international level, leading to the adoption of the Sustainable Development Goals, the Paris Agreement and policies such as the EU’s Green Deal. In addition to climate change issues, there is increasing priority given to improve air quality, water pollution and water scarcity, biodiversity, waste management and the circular economy; as well as a “do-no-harm” approach extending to social issues.
EBRD’s ESG approach is two-fold and consists in the full integration of environmental, social and governance issues in its risk management approach coupled with an ambitious impact approach. Through the latter, the EBRD has recently proposed to scale up its own green financing to 50% of overall financing by 2025 and supports Impact Investing, Green Bond issuances, and ESG/Sustainability ratings. It also provides a sound platform for the Bank’s strategies and targets that aim at supporting projects that result in positive ESG impacts. The Green Economy Transition (GET) approach is the most significant of these, followed by gender and economic inclusion, digitalisation and others.
Greening the financial system
The financial system faces a number of systemic issues in the context of climate change:
- Financial systems need to support investments consistent with a low-carbon and climate resilient future in order to achieve sustainable economic development
- Financial services must fully integrate environmental and social risk management in their operations. That includes starting to plan their risks / returns and capital allocation to reflect climate risks and opportunities. Risk frameworks and methodologies need to be updated to reflect environmental risks, including physical and transition climate risk, as well as social risks.
- Financial institutions need to build scale and apply better standards to meet sustainable finance needs and to tap green capital markets. Access to funding will become more driven by the underlying standards of new assets.
- Banks will seek opportunities to pursue sizeable portfolios of smaller transactions that are drivers of the low-carbon transition and that support access to green capital markets (e.g. portfolios of low carbon technologies for SMEs).
The financial sector will be essential to scale up sustainable finance and needs to be equipped for the next stages of the low-carbon transition towards a sustainable economy:
- Financial regulators start to see climate-related risks as a leading threat to financial stability and support the integration of climate scenarios and risk models into portfolio management and business operations.
- Capital markets and impact investors increasingly expect financial institutions to demonstrate active management of E&S risks and to integrate sustainability factors into investment decisions. Financial institutions in return will expect the same from their corporate clients.
- Credit rating agencies are categorising the financing of non-sustainable or carbon-intensive business models, investments assets or operations as high risk and are starting to demand disclosure of corporate exposure to investments potentially at risk of obsolescence due to climate-related risks.
- Shareholders and the executive management of financial institutions themselves need to understand their exposures to environmental and specifically climate-related risks as well as social risks and to manage portfolios accordingly.
- Risk management needs to incorporate climate-related information into scenarios to help reduce financial risks and give greener projects an edge over carbon-intensive operations.
- Businesses need more support from financial institutions to identify and finance innovative investment opportunities in line with low-carbon development pathways.
- Demand for Non-financial reporting and disclosure from regulators, investors and clients is increasing and requires a sound reporting and data infrastructure in financial institutions and corporations alike.
Under the new Green Economy Transition strategy, the EBRD will work with the financial institutions to:
- integrate climate and other environmental considerations in their business planning and risk management processes;
- apply necessary standards and methodologies on green investment, that will also ensure access to funding from investors becoming increasingly focussed on climate; and
- respond to the requirements coming from regulators and rating agencies as they become increasingly aware of potential risks and disruption to markets from climate change.
Under its recently updated Environmental and Social Policy, EBRD works with financial institutions to:
- Establish adequate Environmental and Social Risk Management Systems that are fully integrated into risk management and core operations.
- Enable their active management of environmental and social risks in its portfolio, with a differentiated approach according to E&S risk categories.
- Apply international best practices to its own operations in regards to labour and working conditions and occupational health and safety, especially in dealing with the current COVID19 crisi