Sustainable finance: a winning combination for decarbonizationg
Interview to Francisco J. Garayoa, Director General of Spainsif: “It’s not a trend: unsustainable investing carries many risks”
The Sustainable Development Goals (SDGs) are having a growing influence on financial activity, and making room for what is known as ‘sustainable finance.’ Now, investors are more focused on companies that care about the environment. ESG principles, green bonds, inclusive finance… as consumers in today’s world, it’s important to know what all these terms mean so that we are able to demand more sustainable products that create a fairer economy, both for the environment and ourselves. We spoke with Francisco J. Garayoa, Director General of Spainsif, the Spanish sustainable investment association, to find out all about it.
How would you explain sustainable finance to someone who had never heard of it?
It means investing with sustainable criteria, taking into account the level of concern that companies have for the environment, social aspects and good governance. Mutual funds seek out companies aligned with the SDGs (Sustainable Development Goals) and Agenda 2030, who have their own policies for environmental development, reducing emissions, implementing environmentally friendly alternatives, domestic consumption and so forth.
They also invest in green bonds, public or private debt for green development projects, corporate transformation projects and other initiatives that benefit the environment.
And who are sustainable investors?
While the majority of sustainable investors in Spain are large institutional investors, anyone can become one. Anyone with a small or medium amount of savings can request a sustainable product, although it’s true that the most significant ones here are employment pension plans, insurance companies and large mutual funds with sustainability criteria.
Ultimately, sustainable investors are aiming to maximize profit using criteria aligned with environmental protection.
When did this type of investment become so important?
In recent years, these investments have grown exponentially because it has become clear that, in addition to having a positive impact on the environment and society, it is much more profitable to invest in these types of companies than in those whose objectives lie elsewhere. Sustainability is linked to better financial returns (the percentage of profit or loss for each euro invested).
Ten years ago, sustainable companies were not well represented. There was talk of sustainable investing, but a lack of clarity surrounding whether or not it was risky.
So it’s not just a trend, it’s here to stay…
At Spainsif, we focus on promoting this type of investment. In 2009, we found that sustainably managed assets were worth 35 million but ten years later that figure has become 235 billion. It’s not a trend: investing in an unsustainable way carries a heavy penalty in terms of risk and social recognition. And that means less profit.
What are the criteria for distinguishing sustainable companies?
Environmental, Social and Governance (ESG) criteria. Indicators based on ESG criteria are analyzed to score companies’ financial information and compare them to one another. There are a lot of different indicators that also vary between sectors. That’s why, in 2018, the European Commission issued two directives to advance its action plan for sustainable finance over the course of the next three years and to establish a common language that helps investors, companies and society.
Is it important for society to be financially educated? The latest survey from the CNMC (the Spanish National Commission of Markets and Competition) showed that a large percentage of the Spanish population was not familiar with relatively simple financial concepts.
This really is essential. If you don’t know what a savings account, checking account or a fixed interest loan are, you can’t weigh up your options. Furthermore, if you have personal ideals related to sustainability—protecting the environment, recycling, fair consumption—and you want to apply those, for example, to the products you sign up for at the bank, you have to have a certain level of knowledge to be able to say: “Look, I have an account with this bank and I want to develop a savings plan… but I want it to be sustainable.”
That will then prompt companies to work on delivering more and more sustainable products…
Financial education is essential if demand is to truly exist. In France, for example, demand is very high because it is addressed from childhood. In Spain, we have a long way to go and that’s one of Spainsif’s lines of work: three years ago, we started the Back to School program where our associates visit their old schools and explain sustainable investment to children.
We also work with financial schools and universities with free and open classes taught by our partners, and we also have a guide to sustainable investment where we explain everything in detail to give consumers guidelines for action.
Can being more financially educated help a country cope with economic crises?
Without a doubt. Everyone agrees that having a higher level of education helps us to better manage a crisis, although it depends on the type. What it gives us is a greater ability to distinguish which solutions are the most effective and how we can contribute to them.
The SDGs also focus on eradicating poverty to achieve a fairer society, which will lead to a more egalitarian economy. What is inclusive finance?
Inclusive finance seeks to promote financial education and inclusion in financial services for those with fewer resources so that they can cross the poverty line. Its goal is to invest in projects that channel resources for inclusion initiatives in developing countries. This concept is much more established in Latin America than in Spain, although it is also applied in developed countries by looking at social aspects such as integrating women, conciliation and labor reform.
Inclusive finance also includes services such as micro-insurance, which protect people with limited resources at a price that is commensurate with their income level.
This is linked to financial inclusion. Micro-insurance is not “small insurance.” Rather, it seeks to provide cover for entrepreneurial initiatives so they are not ruined by risk scenarios resulting from their vulnerability. Craftspeople, for example, need a minimum amount of coverage to do their work, and micro-insurance is an affordable option to help them protect their financial presence.
This, again, is more common in Latin America than in Spain. Here, micro-insurance is underdeveloped, although it’s true that there are companies that offer microloans to help with this type of inclusion.
And how can they benefit the economy?
Covering the risks for this type of vulnerability helps to strengthen entrepreneurial initiatives.
Ultimately, it seems to me that we could do more to improve the economy by boosting equality than by encouraging business growth at the expense of many…
At this point, unlimited investment and short-term profitability are hardly economically, environmentally or socially sustainable. However, even though we’ve planted the seed, there is a long way to go. There will be speculators and investors in search of the long shot with no regard for the environment, that’s for sure. That’s why, in addition to education and training, we also have to instill sustainable finance values in individuals and states.