Towards sustainable finance: there will have to be a path

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If we review a bit of history, the origin of ethical investment is in the United States, where after the Vietnam war students demanded - for the first time - that universities and companies halt their military spending.

In the late 1990s, sustainable investment was a fact and the Dow Jones Index decided to launch the DJSI (Dow Jones Sustainability Index), which defines sustainable development as a long-term value-creation approach for shareholders, covering the opportunities and managing the risks of the present that arise at an economic, social or environmental level.

The UN also launched the Principles for Responsible Investment and in the European sphere, the Green Deal sets the goal of transforming Europe into the first climate-neutral continent by 2050.

But really, what does an investment require to be viewed as responsible? It is likely that some of us, talking about sustainable finance, have heard the term greenwashing, coined by the hotel industry in promoting the reuse of towels as an environmental strategy, when in reality it was a cost-optimising exercise.

For an investment to be considered sustainable, it must meet certain environmental, social and governance criteria denominated ESG (Environmental, Social and Governance), which encompass, firstly, the environmental factor to take decisions according to how the activities of companies affect the environment.

Then the social factor, to take into account the impact on the community of the activities carried out by the company, for example in terms of diversity, human rights or healthcare.

And lastly, the governance factor, which studies the impact of the shareholders themselves and the administration, and is based on issues such as board structure, shareholder rights or transparency.

"The main business levers banks are activating are green lending and their investment strategy, highlighting green and social bonds that serve to finance environmentally sustainable projects."

However, from an ethical point of view we are looking at others, where we highlight Socially Responsible Investment (SRI), which includes investments whose purpose is to generate social and environmental impact and financial return.

Here it is the Nordic banks that top the rankings and, for example, DNB has pioneered the blue economy with its DNB Future Waves Fund.

There is also the ethical bank, which carries out its activity according to the criteria of transparency, democracy and sustainability alongside classic banking financiers.

In Spain, one example of this type of banking is Triodos Bank, whose vision is to build a better world for people and the planet.

Lastly, microfinance, which will serve to provide financial services for groups in a vulnerable situation. Another example we know well is that of the BBVA Fundación Microfinanzas which, in addition to fighting poverty in Latin America, aims to promote sustainable and inclusive economic and social development through multiple entrepreneurship programmes and financial inclusion.

In one of its reports (“Financial innovation for a sustainable economy”, 2019 - Andrés Alonso and José Manuel Marqués), the Bank of Spain also analyses the innovations that are emerging on the path to more sustainable finance.

It analyses a range of issues such as the emergence of new suppliers and services, the creation of new financial products or adapting risk management policies.

However, what we are most interested in is the analysis of technological advances applied to climate change, highlighting some in the areas where we have already been collaborating.

This is the case with the application for natural language processing (NLP) and artificial intelligence to track sustainability metrics or measure the environmental reputation of companies, interpreting texts, articles and reports. In addition, massive data management is applied along with advanced analytics techniques.

Another interesting use case is the measuring of physical risk resulting from climate change where, thanks to machine learning techniques together with Open Data, we can analyse the risk an extreme weather event poses for a real estate asset.

Although not mentioned in the report, many digitisation projects in banking have been carried out to reduce carbon footprint, some of them in the paperless area, reducing physical documents in a banking process, for example digital on-boarding or the online mortgage, and some as simple and complex as teleworking, which have been imposed by Covid-19.

Another of the social objectives we are looking to achieve thanks to digitisation is the deployment of the financial services network in a depopulated Spain since owing to operating costs bank branches no longer make sense, making way for other relationship formats between bank and client.

Looking ahead, we must not lose sight of the fact that consumer habits are changing with the new generations and the appropriate inclusion of ESG elements within the business strategy to improve the image and reputation that has been so greatly damaged after the last crisis.

This will provide a competitive advantage in terms of engagement with millennials and, more importantly, with Generation Z, both of them digital natives.

Following the impact of Covid-19, we have already seen examples of banking responding to global challenges that go beyond the day-to-day, and certainly in this new paradigm, they must play a key role given that sustainable finance is here to stay.