Tuesday, July 5

The ECB criticizes the ‘greenwashing’ in the financial system and questions the effectiveness of green bonds

Sustainability and the fight against climate change has been gaining space in the debate on the future of the financial sector. Moves have been made although, for some participants in this industry, not enough. ‘Greenwashing’, that term to indicate behaviors that seem to be aligned with the new green wave but that hide others that go in the opposite direction, has been the label used on occasions to criticize some of the announcements that large entities have made in Spain and in Europe. Now, the European Central Bank also makes it their own to point out some advances in financial groups that are not reaping the results they were after.

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Specifically, the body led by Christine Lagarde uses it when analyzing the strong growth that the so-called green bonds are having. These are debt issues that companies make in order, as they commit themselves, to use it to finance environmentally sustainable projects. In a report published in recent days by the ECB, it is stated that its relationship with the reduction of CO2 emissions “is not clearly established”. “The green labeling of debt has had a mixed impact on carbon reductions to date, suggesting that ‘greenwashing’ continues to be a problem,” says the agency, which estimates its debt emissions at $ 500 billion. type with annual growth of 20 and 30%. He asks, to avoid this problem, “a robust framework” both in the labeling of these emissions as green, and in the monitoring of the destination of these funds.

The ECB’s doubts about green bonds appear in a report on climate risks and the effects on financial stability, with which the organization aims to shed light on an issue that has begun to take center stage in recent years and on which has repeatedly assured that it cannot be quantified due to the lack of public data on the entities. In addition to the greenwashing that it denounces around the fashion for green bonds, the ECB details both in banking, investment funds and insurance companies, the need to reduce their exposures to productive sectors that are either large issuers, or they will be affected by the physical risks of climate change. In each of these three sectors it concludes that there is still a high weight of these industries in the financial institutions of the continent.

With regard to the banking sector, the ECB concludes that almost a third of all the credits granted by European banks to non-financial companies are exposed to the different physical risks derived from the climate crisis, notably floods, droughts, waves heat and fires. And, at this point, the only express mention of the Spanish banking system in the report appears. Specifically, it cites it together with Portuguese and Greek as the banking sectors with the greatest exposure of the entire continent to this kind of risk in their respective loans to companies.

Although there is also another indirect reference that could be understood as a warning for Spanish banks. The ECB finds a connection between less solvent entities and the weight of financing to companies located in areas with greater exposure to physical risks caused by climate change. Recurrently, the ECB indicates that Spanish banks are among the least solvent and with the greatest profitability problems on the entire continent. Thus, the agency ensures that, for entities with less capital, their exposure to these companies can translate into greater vulnerabilities.

Another of the conclusions drawn by the EU financial supervisor is that the 25 largest entities on the continent account for more than 70% of their exposure to the sectors most linked to the physical risks of climate change. Finally, it warns that there is not only a problem about exposure to sectors that can be exposed to the consequences of disasters linked to the climate, but also due to the transition to a cleaner economy. In fact, the ECB points out that more than half of the euro zone’s banking system credits are in sectors that will be affected by ecological transition policies, such as construction, transport or energy, which may have consequences on the quality of these credits.

Investment funds, highly exposed to climate change

Where the ECB is particularly concerned and critical is with regard to mutual funds. It should be remembered that this is a business strongly linked to banking and has an important interdependence, as different organizations have warned. In this case, the agency denounces its “strong exposure” to polluting industries and figures that in just six years its investments in these sectors have gone from 700,000 million to 1.3 trillion euros, almost double, representing almost a third of the total. total.

To this would be added another 22% of its assets, which are exposed to what are known as transition risks. That is, the price of which can be affected by the implementation of measures for the ecological transition. The report emphasizes that companies linked to higher issues are those that have a greater weight in the balance of investment funds. The ECB goes further and defends that only 1% of the assets of investment funds fall within the green taxonomy of the European Commission.

This level is not much higher when it comes to insurance companies, the third of the sectors within the financial system. This sector is very active in investments but only 1.7% of all its assets would fall within this framework established by Brussels on sustainable finance. In addition, with regard to the insurance business, the ECB points out that in the past only 35% of the damages caused by climate change were insured, which shows that there is a “lack of protection”.

The ECB concludes in its study that significant progress has been made in measuring climate risks in the financial sector because “much remains to be done.” Among the pending tasks for financial institutions, the lack of detail regarding the exposure at the national and regional level stands out, as well as the doubts that exist about the quality of the available data. The ECB considers it “essential” that there be consistent data on climate risks and that they be translated into long-term strategies that are aligned with the objectives of the Paris Agreement for the reduction of polluting emissions.

The report, which includes a multitude of scientific references and models to measure this type of information, also claims the new effort exercises that are being designed linking the resistance of entities to climate risks. The main of these tests, traditionally known as ‘stress tests’ will be carried out next year by the European Banking Authority (EBA, in its acronym in English) and aims to become an exercise to measure which European banks are the ones that will have a worse resistance to the effects of climate change.