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Greening the financial sector

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Underinvestment, particularly in climate change, is a significant impediment in Central, Eastern and South Eastern Europe. Matteo Ferrazzi and Simon Savsek discuss climate change risks to the financial sector, regulatory and supervisory issues, decarbonisation pathways in different sectors and banks’ transition plans.

The climate finance report is based on input from the following institutions:
Erste Group Bank
Oesterreichische Nationalbank
European Bank for Reconstruction and
Development
Slovenian Banking Association
European Commission
Raiffeisen Bank International
European Investment Bank
UniCredit Bank
International Finance Corporation
World Bank
KBC Group

Image courtesy of interviewee. June 20, 2024

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This video discusses the Vienna Initiative, established during the 2009 financial crisis to protect financial stability in Central, Eastern, and Southeastern European countries. It highlights the banking landscape in these regions, where six major banking groups hold over 50% of total assets, indicating strong Western banks' presence through subsidiaries. The Initiative serves as a platform for sharing best practices among banking representatives, regulators, and institutions.

The discussion has evolved over recent years, addressing challenges posed by the COVID-19 pandemic, energy crises stemming from the Ukraine war, and the transition to green finance. In 2021, a working group was formed to tackle climate change and financial stability, focusing on data gaps, prudential regulation, and the transition of key sectors impacted by banks.

A report titled "Greening the Financial Sector" emerged from this working group's efforts, emphasizing the importance of data availability for managing and improving ESG metrics. Banks face challenges in gathering this data, compounded by the diverse and sometimes uncoordinated requests from various institutions, especially concerning climate risk disclosures.

The document also outlines the upcoming EU regulations requiring larger corporations to disclose ESG data, further highlighting the trend toward increased accountability and transparency in the financial sector. The energy transition is prioritized as essential for achieving climate neutrality goals, significantly affecting the banking sector as energy companies are major clients.

Overall, the text emphasizes the evolution of financial regulators and banking institutions in addressing climate risks, the importance of coordinated data gathering and reporting standards, and the need for a structured response to the growing demands for sustainability in the financial sector.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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I would like to speak today first about the Vienna

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initiative, which was created at the height

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of the global financial crisis in 2009, basically

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with the aim to safeguard financial stability in the

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central, Eastern and southeastern countries.

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Uh, one thing that I would like to mention first is

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that it is very interesting banking market there,

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where top six banking groups cover more than

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50% of total assets.

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What this means is basically that banks,

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western banks have subsidiaries in the region,

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which create a very great forum for the discussion.

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So, who actually is in the VN initiative?

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So you have representatives of the banking sector,

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you have regulators, so mostly these are the central banks,

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and you have the institutions.

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And again, the, the aim is really to share best practices,

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to, to keep the, to, to keep the flow,

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to discuss things.

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And it's really a nice forum

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where, where this can take place.

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Now, Vienna initiative is also very topical.

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So for example, during the pandemic, during the,

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during the height of the pandemic, we were discussing

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how the pandemic will affect the banking sector.

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During the energy shock from the war of Ukraine, we were,

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we were seeing and discussing

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how this would affect balance sheets

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and some kind of, it became natural that we need a bit more

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of the coordination also on the, on the front, on the,

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on the, on the green transition.

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And this is how, basically in two thou, 2021,

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we set up the group, the working group on climate change

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and financial stability, where we were discussing three,

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I would say major topics.

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One was the data gaps

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and to see what can we do, regarding the data,

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the green data on physical,

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but also on the transition risks.

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Then there was the second group

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where we basically were discussing,

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prudential regulation and supervision,

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and we had the third group,

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where we were discussing the, the transition

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of various biggest and most important sectors from

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the bank, bank banks.

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So this was basically a learning curriculum where we were,

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where we were showing banks the path that we currently see

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with a group of experts,

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how they should see the, the green transition.

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We were also discuss discussing the transition plans

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for the banking sector, which was also one of the aims

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of this, working group.

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We had experts from both public and private sector,

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and as I said, they were coming from various institutions,

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which are in the Vienna initiative, from the banks

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and also from the regulators.

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And, indeed, this what you have in front of you,

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the report, greening the financial sector is the outcome

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of this working group that was set up.

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So the availability of data is a very important topic

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and also an obstacle at the moment that are,

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in general, very important.

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We know that what is not measured cannot easily be managed

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or improved, and that's, in general,

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but in this specific field, banks need

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to map the transition paths.

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So where there are investment needs, which means lending

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for banks or opportunities,

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and, also to their risk management, they need to map,

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where are the stranded assets, so assets

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that will not be viable anymore, like, for instance,

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a call factory, in the future.

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So, this is very important

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and banks are also asked by supervisors

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to disclose information on ESG,

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and at the same time, supervisors need

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to assess the stability of the financial sector.

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So for all of these, you need, information in numbers,

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how banks are getting such information.

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Uh, in the report, green, in the financial sector,

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we analyze, the,

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the primary sources and secondary sources.

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So primary is when you ask directly to the companies,

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and secondary are mainly like, studies, researches,

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surveys, samples,

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or also models that may do forecast,

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or non-economic data sets, like, for instance,

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on geophysical and geographical data.

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And for, we give also an example in the report, like,

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the, what the Central Bank of Romania has done

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with a survey in which you can infer the ESG data,

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by sector, by size, and by location of the company.

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So this can, can be, let's say, extended to other companies,

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but this is, this is,

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this last point I was touching is about secondary data,

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but the, the big bunch

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of data is coming from primary sources, so can be the direct

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dialogue with the company, especially if there is something

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relevant on reputational risk, for instance.

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But most of the information, most

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of the data are coming from the questioners at the moment.

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So this is a format, a number of questions

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that banks are asking to their clients.

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Uh, what happens now that, we, we saw

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that there is a very heterogeneous approach.

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We have seen questioners with only 20 questions,

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asked maybe once, in life,

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and, questionnaires with 200 questions

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that are updated every year.

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So as you can imagine, if you are a company receiving such,

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information, such request for information can be very,

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very, very different.

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And, since some,

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banks are asking only about climate, some others about ESG,

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so, not only climate, but also environment

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and the social and governance, factors.

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So at the end of the day, we have seen

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that clients at the moment are receiving multiple

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and uncoordinated request,

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especially in the central Eastern Europe

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because you have multiple banking groups in, in,

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in, in different countries.

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And then normally the questions are related to

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CO2 emissions, the energy intensity exposure

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to the physical risk or the social

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and governance, aspects.

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So there is quite a good number of, of, of questions.

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And then you have technical,

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you need technical expertise to answer.

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Now, what is coming now is a big revolution,

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because at least in new,

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because, you is developing the,

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new use sustainability reporting standards also

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for smaller companies.

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So next year we will start with big corporations,

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more than 500 employees reporting data ESG data on 2024,

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according to some guidance, in two years,

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we will have other large entities,

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more than 250 employees reporting other data.

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And in three years, we will have a listed million smaller

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banks that will be obliged to provide information,

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under the corporate sustainability reporting directive.

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So it's a legal obligation

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and their, number information will be also audited.

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But for me, what it is more relevant is that together

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with these new, reporting standards for listed as me

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as small banks, we will have a voluntary standards for,

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non-listed SME and my micro companies.

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This is voluntary, so it seems a paradox

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that could be even more relevant.

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But actually, if there is no, let's say,

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predefined questionnaire format, a bank

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or our company may use, these, format developed by,

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by use standards.

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So this means that there is a lot of companies that will,

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will, will use this approach,

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and we are estimating that are, that the number

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of companies under the reporting standards will,

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will be four times, higher.

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So as you can see, there are a lot of challenges

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regarding data, very,

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dis homogeneous approach at the moment.

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Very different. Also, the approach.

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Large companies are able to answer

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and they have technical expertise and small

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and medium enterprises, they have less.

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There are problems in the measurement,

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or especially in some, physical,

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quantities, that, that transforming emissions,

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on some other variables like chronic risk

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or something that is, not related

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to the economic performance.

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There is a debate about the storage of this data,

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how this data will be managed in the future.

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So there are a lot of fields of actions for the future,

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but what we have seen, that, there are big steps

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that has been done, have been done in the past years.

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The prudential authorities today have a really paramount,

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paramount role.

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Uh, it is becoming more and more clear that green transition

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and financial stability go hand in hand.

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Um, but it is still very important to mention

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that these institutions are bounded by the mandate.

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So, and this is financial stability.

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Um, so in such case, the mandate

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of these authorities seldom, for example, includes,

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setting up the green

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infrastructure on the financial markets.

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This is done by some other, authorities.

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Then, for example, also the development

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of green taxonomy is not in in their mandate,

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but still what we see that they are engaging very,

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very rapidly and strongly into, into these discussions.

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You can see that many supervisory institutions,

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including here in the region, they're really going,

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you know, now to taking parts of networks, for example,

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for greening the financial sector.

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They're running climate stress tests.

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They're taking measures to capture

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and to measure their carbon footprint.

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They're increasing even the shares of,

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sustainability bonds in their portfolios.

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So what we saw that the evolution, of,

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financial regulators in the,

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in the green agenda is really strongly

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and rapidly evolving what we have in the

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Vienna initiative region.

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It's a very interesting thing.

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So some banking groups are a part

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of the EU slash Euro area regulation.

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Some are only part of the EU regulation,

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and some banks are outside of all of those, of those.

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So this is something that is very important,

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and of course, it creates a very natural environment

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to share good practices.

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So first I would say that, and Mateo

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and myself already spoke about it,

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that the re regulation really rapidly

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evolved in recent years.

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So in few years ago, you had no climate stress tests,

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no one was really discussing climate transition

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plans from the banks.

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There was little supervision to guide the climate process,

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assessing the climate risks, bo both physical

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and, transition risks were not evaluated

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in the proper matter.

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And that, obviously, like we both already

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said, this changed a lot.

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Uh, second thing, even banks themselves changed.

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So if you just look at, look at the governance structure,

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you saw having ESG

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or climate departments mostly located in personnel in hr,

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which of course is nothing bad,

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but where do you see them today?

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You basically see them in the front offices.

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So they are really part of the decision making process,

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and I think this makes a very big difference.

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Another thing that even external internal stakeholders are

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now really looking at what the banks are doing.

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So they are really looking at

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how they're evaluating climate risks.

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Um, do they have any lending policies

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or products that are green, for example, for housing

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or for green lending to the corporates.

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Um, so they're also much more cautious on

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what they communicate, for example, on, on,

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on the, on, on the green.

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So this themselves also changed a, changed a lot,

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and maybe I will just say something about the multilateral

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development banks here, you can even see that,

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the green really became part of their DNA.

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So with Mateo, we are coming from the European Investment

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Bank, which is the Green Bank of Europe, for example,

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if you look at the lending policies, you would see

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that more than 50% of total, landing needs to go

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to the green nowadays.

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And the other part is not jeopardizing these goals.

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Uh, there are really strong commitments,

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how much they're going to land in green in,

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in next, in next years.

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Um, so all of us, I would say as a team now,

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really look at the, the, the green transition

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as the key priority.

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The mandate of the credential institutions is bounded,

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so they are interested in green transition to support it,

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to help it, to evolve it, but within their mandates.

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Second, we already said regulation rapidly evolving.

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And this sometimes create a problem for a bank

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that is really operating in various environments,

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eu global regulation, national regulation,

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and again, there is a big confusion sometimes there.

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Uh, what we also saw is that foreign owned entities

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that are having much bigger capacity to cope, you know,

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physically to cope with this kind of,

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administrative burden,

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can really support their subsidies in making this kind

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of green transition easier for them.

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Uh, as I said, climate stress tests,

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prudential regulation, prudential disclosures,

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measuring cl climate risks are the part of the banks now

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goes without saying, but what, what we see,

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and banks told us that we still need to have more,

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productivity on the supervisory side.

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So banking groups would really like

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to hear from the supervisors,

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what can they expect from them in the coming years,

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what kind of measures they're going to implement.

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And this is super important,

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and it goes back to the working group one

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that we had on the, on the data.

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If you don't have some guidance what you're going

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to report in coming years,

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then obviously the debt data is not good.

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You're not going to to get a good supervision.

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And consequently, not a,

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not a really good financial stability.

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Uh, also, banks themselves say that the, that,

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that this coordination between them is sometimes a problem

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and they try to foster it, in the coming years. The

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Energy sector is probably the most important,

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or at least one of the most important for the transition

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because it is an input for the other sectors.

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So it'll be, utilized

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to decarbonize other sectors like transport,

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like the industry and like the buildings.

13:41.185 --> 13:42.605
And this clean energy is very important

13:42.605 --> 13:46.925
because, this will cause a, for sure,

13:47.045 --> 13:50.165
a surge in electricity demand will,

13:50.255 --> 13:52.205
lower the emissions.

13:52.625 --> 13:54.765
And, there will be, of course, all,

13:54.785 --> 13:56.645
all these is strictly connected to the,

13:56.645 --> 13:59.325
the carbonization targets, which means minus,

13:59.325 --> 14:03.165
55% in 2030 less emissions,

14:03.265 --> 14:06.205
and, having Europe climate neutral in 2050.

14:06.305 --> 14:09.205
So there is a broad, let's say general goal

14:09.395 --> 14:11.845
that is guiding, the entire transition.

14:11.905 --> 14:13.605
And that's, something relevant

14:13.605 --> 14:15.565
that is guiding the transition to the energy sector.

14:16.105 --> 14:18.685
Uh, energy companies are big clients for banks,

14:18.955 --> 14:20.845
very important clients, always.

14:20.845 --> 14:25.805
Traditionally, even now, banks will need

14:25.805 --> 14:29.925
to finance, a big number of, of new investments.

14:30.025 --> 14:31.405
So when we speak about investments,

14:31.405 --> 14:33.405
means also financing from banks,

14:33.985 --> 14:36.485
and especially in the low carbon generation in

14:36.485 --> 14:37.805
the electricity grids.

14:37.875 --> 14:39.685
When we speak about renewables,

14:39.705 --> 14:42.325
we are mainly speaking about the new investments in the

14:42.335 --> 14:44.445
solar, portable tyke and wind.

14:45.425 --> 14:46.845
Uh, energy.

14:46.875 --> 14:51.005
Renewable energy is now in, in the region around 30%

14:51.425 --> 14:53.005
of total energy consumption.

14:53.795 --> 14:57.845
This will need to go up to 50%, in 2030.

14:58.465 --> 15:01.605
So as you can see, a big increase of, the share

15:01.605 --> 15:02.725
of renewable energy

15:03.305 --> 15:07.125
and renewable energy will go to 75, up to 85%,

15:07.385 --> 15:08.445
in 2050.

15:08.625 --> 15:11.285
So the majority of energy will be produced

15:11.345 --> 15:13.725
by renewable sources, and that's very important.

15:13.825 --> 15:17.045
We are not, only talking about financing

15:17.105 --> 15:18.525
of the production here,

15:18.625 --> 15:21.525
but also the transmission, the distribution networks,

15:21.625 --> 15:23.245
and especially the grids.

15:23.825 --> 15:26.525
Uh, we were mentioning the long term objective

15:26.585 --> 15:28.605
of reducing the carbon emissions,

15:28.605 --> 15:31.325
but there is another important objective that is,

15:31.325 --> 15:32.325
the energy security.

15:33.115 --> 15:36.245
This was, this is relatively more recent,

15:36.245 --> 15:39.525
following the gas, disruptions,

15:39.635 --> 15:41.085
because of the Russian gas.

15:41.505 --> 15:44.285
So, centrally senior was very much relying on,

15:44.465 --> 15:47.725
on gas from Russia and on call traditionally.

15:48.305 --> 15:51.005
And both these pillars of the energy security

15:51.005 --> 15:54.085
of central Eastern Europe are now, fading out.

15:54.575 --> 15:57.165
There is a, there are big structural changes.

15:57.505 --> 16:00.645
So this increase of renewable is not totally neutral

16:00.745 --> 16:02.005
on a number of components.

16:02.225 --> 16:04.205
The most relevant one is the prices.

16:04.665 --> 16:08.285
So also, we as consumers will understand

16:08.285 --> 16:09.445
this and we will feel that.

16:09.985 --> 16:13.205
So we have seen a huge volatility of prices,

16:13.305 --> 16:15.845
during the year, but also during the same day.

16:16.065 --> 16:17.285
That's quite relevant.

16:17.585 --> 16:20.645
We show a very interesting chart in our report in which,

16:20.665 --> 16:23.565
you see the, we take the example of Greece,

16:23.785 --> 16:27.485
in which at the peak of the prices, it was very, very,

16:27.545 --> 16:29.085
let's say the prices were very

16:30.075 --> 16:31.805
expensive at the beginning of the day,

16:31.865 --> 16:33.805
but it, they went down up to zero.

16:34.105 --> 16:38.325
So the same day with the record, high prices, energy,

16:38.345 --> 16:40.765
prices were going to zero during the day

16:40.765 --> 16:43.925
because of a very strong renewable energy production.

16:44.265 --> 16:45.645
And then they were increasing again.

16:45.665 --> 16:48.285
So we have seen a huge volatility during the day,

16:48.345 --> 16:51.005
and this, as you can, imagine is, is,

16:51.005 --> 16:54.205
also a big incentive to, invest in storage

16:54.595 --> 16:57.165
because you can storage the energy when it is very cheap

16:57.185 --> 16:59.685
and release, release later on.

16:59.685 --> 17:02.165
The other side is volatility in prices, of course,

17:02.265 --> 17:04.925
can be used to, to spare energy

17:04.985 --> 17:08.485
and to spare money for consumers or for industrial players,

17:08.905 --> 17:11.885
but at the same time, it is also representing a barrier

17:12.105 --> 17:15.965
for investments because it's much harder to, forecast,

17:16.705 --> 17:18.365
the revenues because of course,

17:18.445 --> 17:19.885
revenues are based on prices.

17:20.705 --> 17:22.005
And this creates some problems

17:22.005 --> 17:23.845
to the companies, and the banks.

17:23.945 --> 17:27.645
So what will be very important is also the market,

17:27.665 --> 17:29.845
design and to have long term regulatory,

17:30.025 --> 17:31.365
regulatory arrangements.

17:31.505 --> 17:34.365
So the, these trends are really changing, our way

17:34.365 --> 17:35.765
of life as consumers,

17:36.185 --> 17:38.485
and also the, the structure of the economy,

17:38.485 --> 17:40.925
because the energy sector is, is really the most important.

17:41.135 --> 17:44.325
40% of energy consumption is coming from the buildings

17:44.505 --> 17:46.405
and 36% of emissions.

17:46.665 --> 17:49.805
So each of us, we are consuming electricity

17:49.905 --> 17:53.845
and we are producing some emissions depending on, on the

17:54.545 --> 17:56.685
degree of cleanings of the source.

17:56.745 --> 18:00.125
We are, we are using, these are very relevant clients

18:00.125 --> 18:02.005
of the banks, of course, because we are talking about

18:02.245 --> 18:04.845
mortgages, from the retail clients, from people,

18:05.385 --> 18:08.205
but also real estate companies, construction companies.

18:08.705 --> 18:11.885
And, one of the problems is that the stock

18:11.905 --> 18:14.405
of buildings in, in Europe is very old.

18:15.265 --> 18:19.285
90%, of buildings are built before 1990.

18:20.305 --> 18:22.525
And out of this 40% is built

18:22.785 --> 18:26.605
before 1960, of course, depending on the countries.

18:26.745 --> 18:28.005
So the buildings are old,

18:28.005 --> 18:31.445
and the renovation rate is very low, around 1% per year.

18:32.185 --> 18:35.525
Uh, so as you can imagine there, the energy efficiency is,

18:35.585 --> 18:36.725
is relatively low.

18:37.025 --> 18:40.125
So we calculate in the report that we will need investment.

18:40.345 --> 18:41.965
So investment will need to double

18:42.545 --> 18:47.165
or triple in the renovation to reach the energy,

18:47.385 --> 18:51.405
savings because we know that the cheapest, the safest,

18:51.665 --> 18:53.325
the most secure, form

18:53.325 --> 18:55.925
of energy is the energy that we don't use.

18:56.105 --> 18:57.125
That's the best one.

18:57.485 --> 18:59.885
So energy efficiency is a bit,

18:59.945 --> 19:01.285
is a very important block.

19:01.305 --> 19:03.085
So we, we have a number of barriers.

19:03.255 --> 19:05.925
First of all, there is a lack of, obligation

19:05.925 --> 19:07.165
to renovate the buildings.

19:07.345 --> 19:09.805
So, that's, we are not obliged

19:10.265 --> 19:11.965
to renovate our buildings.

19:12.145 --> 19:13.965
So, sometimes we, we end up

19:13.965 --> 19:16.045
with very energy efficiency situations.

19:16.625 --> 19:18.285
Uh, then there is no harmonization

19:18.425 --> 19:20.285
of the performance certificates.

19:20.425 --> 19:21.725
Uh, this means, that,

19:21.845 --> 19:24.445
that they're not harmonized even across you members.

19:25.065 --> 19:28.125
And, it's very hard for banks, for banks, yes,

19:28.545 --> 19:31.685
or any other player to, to judge if an, an apartment

19:31.785 --> 19:34.525
or a building is, more energy efficient,

19:34.545 --> 19:35.885
energy efficient than another.

19:36.275 --> 19:39.525
Then we, we have seen also we discuss in our report

19:39.525 --> 19:44.405
that rented the buildings are less energy efficiency for,

19:44.505 --> 19:48.005
for some reason, and energy is very often subsidized.

19:48.185 --> 19:52.085
So the market mechanisms are not, fully, fully working.

19:52.105 --> 19:55.445
And then the main problem is that, we invest,

19:55.695 --> 19:57.605
money in energy efficiency today,

19:57.705 --> 19:59.805
and we see the benefits maybe in some years.

19:59.945 --> 20:03.125
So there is a relevant mismatch between the timing

20:03.185 --> 20:04.845
of investments and the benefits.

20:04.975 --> 20:06.925
First of all, I find it very interesting

20:06.925 --> 20:09.325
that given the importance of the transition plans

20:09.385 --> 20:11.485
for the banking or for the corporate sector,

20:11.655 --> 20:13.365
there is no real official definition.

20:13.985 --> 20:17.165
But, but what, what we can obviously say is these are time

20:17.365 --> 20:19.885
bound targets and actions, which corporate

20:19.905 --> 20:23.005
or a banking sector announces how it's going to transition

20:23.105 --> 20:24.325
to a low carbon economy.

20:25.425 --> 20:28.245
Um, I would say that two things and two views are here.

20:28.245 --> 20:31.005
Very important. One is that this is a tool

20:31.225 --> 20:33.605
and very important tool for the financial institutions

20:33.605 --> 20:36.605
and corporates to communicate to the public

20:36.985 --> 20:38.285
how they're going to transition.

20:38.625 --> 20:41.805
But on the other side, it's also a, for an information

20:41.805 --> 20:43.565
for regulators and other authorities

20:43.635 --> 20:44.685
that they can really see

20:45.185 --> 20:47.605
how the private sector is in fact transitioning.

20:47.625 --> 20:49.685
You know, so that's not, that is really practical.

20:49.715 --> 20:51.605
It's a really practical tool in that sense.

20:52.465 --> 20:56.045
Now, what we also found out in the report is there is

20:56.065 --> 20:58.045
no, let's say size fits all

20:58.435 --> 21:01.045
that the transition plan is really going to depend a lot,

21:01.045 --> 21:03.125
let's say, on jurisdictional expectations

21:03.465 --> 21:05.245
or on the evolving best practices.

21:05.355 --> 21:08.165
What we see is that also standards reporting standards

21:08.225 --> 21:09.445
are very fastly evolving.

21:09.745 --> 21:12.645
And of course, this is informing in some sense the

21:12.645 --> 21:15.885
transition plans of the banking or of the corporate sector.

21:16.705 --> 21:19.765
Uh, also, something that we would like to highlight is

21:19.765 --> 21:24.605
that large institutions are already, very rapidly,

21:24.695 --> 21:25.965
developing such plans.

21:26.425 --> 21:29.005
In fact, in the net zero banking alliance members,

21:29.335 --> 21:33.165
where the banks and banking groups are part for,

21:33.165 --> 21:37.565
and they constitute 40% of the global banking assets, most

21:37.565 --> 21:41.725
of them already have this kind of, targets for up

21:41.725 --> 21:43.485
to 2050,

21:43.545 --> 21:45.725
and we see much more of the banks actually joining.

21:46.345 --> 21:48.685
And finally, I would like to say that,

21:49.015 --> 21:50.805
there are few things that are very important

21:50.865 --> 21:52.405
for a good transition plan,

21:52.665 --> 21:55.205
and that is that they need to be clear, they need

21:55.205 --> 21:58.285
to be very concrete, they need to be achievable,

21:59.065 --> 22:02.525
and that there should be a mechanism behind where investor

22:02.785 --> 22:05.485
or even general public can see that the bank

22:05.485 --> 22:08.085
or the corporate is actually following what it wrote.

22:08.535 --> 22:12.245
We've been analyzing, three main, blocks.

22:12.585 --> 22:14.045
So the availability of data

22:14.225 --> 22:16.085
and ESG metrics, the information

22:16.085 --> 22:19.725
that the banks can get from clients, the, role

22:19.785 --> 22:22.605
of supervisors, and also central banks

22:22.625 --> 22:24.805
and authorities in the green transition.

22:25.105 --> 22:27.445
And, the transition of the sectors.

22:27.665 --> 22:31.005
So especially with a special focus of the energy sector,

22:31.145 --> 22:32.845
energy efficiency and buildings,

22:32.845 --> 22:34.365
these sectors are key clients of banks.

22:34.825 --> 22:38.405
The three, blocks of analysis are connected

22:38.485 --> 22:40.445
to each other because of course, when, for instance,

22:40.705 --> 22:43.445
you impose disclosure requirements by regulators,

22:43.465 --> 22:45.325
you increase the supply of information,

22:45.905 --> 22:48.685
and this is matching the supervisory expectations.

22:48.985 --> 22:51.805
So you may imagine that the three are connected.

22:52.265 --> 22:53.525
So the, regarding the data,

22:53.715 --> 22:56.485
data are becoming very important,

22:57.385 --> 23:00.125
and, that's a key factor.

23:00.465 --> 23:03.965
Uh, there is a quote that says, in God, we trust,

23:04.145 --> 23:05.965
but all others must bring data.

23:06.265 --> 23:08.245
And, and in this case,

23:08.245 --> 23:09.525
we are talking about climate data

23:09.745 --> 23:12.485
and banks are bringing climate data in, more

23:12.485 --> 23:13.725
and more,

23:13.745 --> 23:16.925
but still, of course this is a big burden for companies

23:17.115 --> 23:18.845
that receive multiple requests.

23:19.385 --> 23:22.045
And, and of course also for banks that are, evolving

23:22.385 --> 23:26.205
and, and, and let's say having a number

23:26.205 --> 23:29.245
of problems in analyzing the data, storing the data

23:29.385 --> 23:32.605
and so on, on the other, on one side is a big burden

23:32.665 --> 23:34.605
for, for companies, as I said.

23:34.625 --> 23:37.005
But on, on, on the other side, we should compare

23:37.105 --> 23:38.205
how fast we are going.

23:38.385 --> 23:40.965
So we are going very fast in getting new data

23:41.475 --> 23:43.325
with a relatively good quality.

23:43.585 --> 23:46.925
If we compare with the history of accounting that dates back

23:46.985 --> 23:49.485
to the ancient civilizations, that's very important.

23:49.565 --> 23:52.525
I will not annoy you on, on, the role

23:52.545 --> 23:55.205
of accounting in, in, in Mesopotamia.

23:55.225 --> 23:57.485
But this was evolving across the centuries,

23:57.665 --> 24:00.925
and the first standards were developed in the US in,

24:01.265 --> 24:02.525
in 100 years ago.

24:02.625 --> 24:06.205
And audit came only after the crisis in 1929.

24:06.745 --> 24:08.765
So you can imagine how fast we're going now with the,

24:08.765 --> 24:12.125
with the green data compared to the, to the other stuff.

24:12.585 --> 24:14.325
And u is having a special role.

24:14.345 --> 24:16.885
But on the other side, the u standards are having some

24:17.065 --> 24:18.645
interoperability, they call it,

24:18.645 --> 24:20.365
with other international standards.

24:20.385 --> 24:22.805
So there are almost coinciding

24:22.805 --> 24:25.085
with international standards in, in many aspects.

24:25.385 --> 24:27.965
The second block was about the Prudential authorities.

24:28.105 --> 24:29.845
So the role of regulators is new.

24:29.845 --> 24:32.325
They are also learning the job is a relatively new job.

24:32.795 --> 24:36.485
Sometimes they're relatively shy in their mandates.

24:36.545 --> 24:40.365
So, they, they, they still have the old mandates,

24:40.625 --> 24:42.405
and, some of them are evolving.

24:42.625 --> 24:45.645
We, we give the example of the National Bank

24:45.645 --> 24:48.005
of Hungary in our report,

24:48.545 --> 24:51.765
and the third block was about the key sector and the,

24:51.765 --> 24:53.685
and the role of the energy sector for banks.

24:53.905 --> 24:56.685
So, it is not only banks that are evolving,

24:56.685 --> 24:58.805
they are having a special role also

24:59.355 --> 25:01.965
written in the article two of the Paris agreements.

25:01.965 --> 25:04.605
So all financial flows must be compatible with Paris.

25:04.865 --> 25:06.925
So that's why the banks are so relevant.

25:07.425 --> 25:11.325
But also, of course, the various sectors are very important,

25:11.425 --> 25:12.805
and these are key clients of banks.

25:13.025 --> 25:16.405
So, let's say the transition must happen,

25:17.005 --> 25:19.645
altogether, and this is happening relatively fast.

25:19.925 --> 25:23.525
I think I'm, I'm rather optimistic also about the future

25:23.535 --> 25:23.885
steps.

00:00 - I would like to speak today first about the Vienna initiative, which was created at the height of the global financial crisis in 2009, basically with the aim to safeguard financial stability in the central, Eastern and southeastern countries. one thing that I would like to mention first is

00:16 - that it is very interesting banking market there, where top six banking groups cover more than 50% of total assets. What this means is basically that banks, western banks have subsidiaries in the region, which create a very great forum for the discussion. So, who actually is in the VN initiative? So you have representatives of the banking sector, you have regulators, so mostly these are the central banks, and you have the institutions.

00:43 - And again, the, the aim is really to share best practices, to, to keep the, to, to keep the flow, to discuss things. And it's really a nice forum where, where this can take place. Now, Vienna initiative is also very topical. So for example, during the pandemic, during the, during the height of the pandemic, we were discussing how the pandemic will affect the banking sector. During the energy shock from the war of Ukraine, we were,

01:09 - we were seeing and discussing how this would affect balance sheets and some kind of, it became natural that we need a bit more of the coordination also on the, on the front, on the, on the, on the green transition. And this is how, basically in two thou, 2021, we set up the group, the working group on climate change and financial stability, where we were discussing three, I would say major topics. One was the data gaps

01:34 - and to see what can we do, regarding the data, the green data on physical, but also on the transition risks. Then there was the second group where we basically were discussing, prudential regulation and supervision, and we had the third group, where we were discussing the, the transition of various biggest and most important sectors from the bank, bank banks.

01:56 - So this was basically a learning curriculum where we were, where we were showing banks the path that we currently see with a group of experts, how they should see the, the green transition. We were also discuss discussing the transition plans for the banking sector, which was also one of the aims of this, working group. We had experts from both public and private sector, and as I said, they were coming from various institutions, which are in the Vienna initiative, from the banks

02:23 - and also from the regulators. And, indeed, this what you have in front of you, the report, greening the financial sector is the outcome of this working group that was set up. So the availability of data is a very important topic and also an obstacle at the moment that are, in general, very important. We know that what is not measured cannot easily be managed or improved, and that's, in general, but in this specific field, banks need

02:53 - to map the transition paths. So where there are investment needs, which means lending for banks or opportunities, and, also to their risk management, they need to map, where are the stranded assets, so assets that will not be viable anymore, like, for instance, a call factory, in the future. So, this is very important and banks are also asked by supervisors to disclose information on ESG,

03:20 - and at the same time, supervisors need to assess the stability of the financial sector. So for all of these, you need, information in numbers, how banks are getting such information. in the report, green, in the financial sector, we analyze, the, the primary sources and secondary sources. So primary is when you ask directly to the companies, and secondary are mainly like, studies, researches, surveys, samples,

03:50 - or also models that may do forecast, or non-economic data sets, like, for instance, on geophysical and geographical data. And for, we give also an example in the report, like, the, what the Central Bank of Romania has done with a survey in which you can infer the ESG data, by sector, by size, and by location of the company. So this can, can be, let's say, extended to other companies, but this is, this is, this last point I was touching is about secondary data,

04:20 - but the, the big bunch of data is coming from primary sources, so can be the direct dialogue with the company, especially if there is something relevant on reputational risk, for instance. But most of the information, most of the data are coming from the questioners at the moment. So this is a format, a number of questions that banks are asking to their clients. what happens now that, we, we saw that there is a very heterogeneous approach.

04:47 - We have seen questioners with only 20 questions, asked maybe once, in life, and, questionnaires with 200 questions that are updated every year. So as you can imagine, if you are a company receiving such, information, such request for information can be very, very, very different. And, since some, banks are asking only about climate, some others about ESG, so, not only climate, but also environment

05:19 - and the social and governance, factors. So at the end of the day, we have seen that clients at the moment are receiving multiple and uncoordinated request, especially in the central Eastern Europe because you have multiple banking groups in, in, in, in different countries. And then normally the questions are related to CO2 emissions, the energy intensity exposure to the physical risk or the social

05:43 - and governance, aspects. So there is quite a good number of, of, of questions. And then you have technical, you need technical expertise to answer. Now, what is coming now is a big revolution, because at least in new, because, you is developing the, new use sustainability reporting standards also for smaller companies. So next year we will start with big corporations,

06:09 - more than 500 employees reporting data ESG data on 2024, according to some guidance, in two years, we will have other large entities, more than 250 employees reporting other data. And in three years, we will have a listed million smaller banks that will be obliged to provide information, under the corporate sustainability reporting directive. So it's a legal obligation and their, number information will be also audited. But for me, what it is more relevant is that together

06:43 - with these new, reporting standards for listed as me as small banks, we will have a voluntary standards for, non-listed SME and my micro companies. This is voluntary, so it seems a paradox that could be even more relevant. But actually, if there is no, let's say, predefined questionnaire format, a bank or our company may use, these, format developed by, by use standards. So this means that there is a lot of companies that will,

07:15 - will, will use this approach, and we are estimating that are, that the number of companies under the reporting standards will, will be four times, higher. So as you can see, there are a lot of challenges regarding data, very, dis homogeneous approach at the moment. Very different. Also, the approach. Large companies are able to answer and they have technical expertise and small

07:38 - and medium enterprises, they have less. There are problems in the measurement, or especially in some, physical, quantities, that, that transforming emissions, on some other variables like chronic risk or something that is, not related to the economic performance. There is a debate about the storage of this data, how this data will be managed in the future. So there are a lot of fields of actions for the future,

08:06 - but what we have seen, that, there are big steps that has been done, have been done in the past years. The prudential authorities today have a really paramount, paramount role. it is becoming more and more clear that green transition and financial stability go hand in hand. but it is still very important to mention that these institutions are bounded by the mandate. So, and this is financial stability. so in such case, the mandate

08:32 - of these authorities seldom, for example, includes, setting up the green infrastructure on the financial markets. This is done by some other, authorities. Then, for example, also the development of green taxonomy is not in in their mandate, but still what we see that they are engaging very, very rapidly and strongly into, into these discussions. You can see that many supervisory institutions, including here in the region, they're really going,

08:58 - you know, now to taking parts of networks, for example, for greening the financial sector. They're running climate stress tests. They're taking measures to capture and to measure their carbon footprint. They're increasing even the shares of, sustainability bonds in their portfolios. So what we saw that the evolution, of, financial regulators in the, in the green agenda is really strongly

09:20 - and rapidly evolving what we have in the Vienna initiative region. It's a very interesting thing. So some banking groups are a part of the EU slash Euro area regulation. Some are only part of the EU regulation, and some banks are outside of all of those, of those. So this is something that is very important, and of course, it creates a very natural environment to share good practices.

09:43 - So first I would say that, and Mateo and myself already spoke about it, that the re regulation really rapidly evolved in recent years. So in few years ago, you had no climate stress tests, no one was really discussing climate transition plans from the banks. There was little supervision to guide the climate process, assessing the climate risks, bo both physical and, transition risks were not evaluated

10:08 - in the proper matter. And that, obviously, like we both already said, this changed a lot. second thing, even banks themselves changed. So if you just look at, look at the governance structure, you saw having ESG or climate departments mostly located in personnel in hr, which of course is nothing bad, but where do you see them today? You basically see them in the front offices.

10:30 - So they are really part of the decision making process, and I think this makes a very big difference. Another thing that even external internal stakeholders are now really looking at what the banks are doing. So they are really looking at how they're evaluating climate risks. do they have any lending policies or products that are green, for example, for housing or for green lending to the corporates. so they're also much more cautious on

10:57 - what they communicate, for example, on, on, on the, on, on the green. So this themselves also changed a, changed a lot, and maybe I will just say something about the multilateral development banks here, you can even see that, the green really became part of their DNA. So with Mateo, we are coming from the European Investment Bank, which is the Green Bank of Europe, for example, if you look at the lending policies, you would see that more than 50% of total, landing needs to go

11:24 - to the green nowadays. And the other part is not jeopardizing these goals. there are really strong commitments, how much they're going to land in green in, in next, in next years. so all of us, I would say as a team now, really look at the, the, the green transition as the key priority. The mandate of the credential institutions is bounded, so they are interested in green transition to support it,

11:49 - to help it, to evolve it, but within their mandates. Second, we already said regulation rapidly evolving. And this sometimes create a problem for a bank that is really operating in various environments, eu global regulation, national regulation, and again, there is a big confusion sometimes there. what we also saw is that foreign owned entities that are having much bigger capacity to cope, you know, physically to cope with this kind of, administrative burden,

12:19 - can really support their subsidies in making this kind of green transition easier for them. as I said, climate stress tests, prudential regulation, prudential disclosures, measuring cl climate risks are the part of the banks now goes without saying, but what, what we see, and banks told us that we still need to have more, productivity on the supervisory side. So banking groups would really like to hear from the supervisors,

12:50 - what can they expect from them in the coming years, what kind of measures they're going to implement. And this is super important, and it goes back to the working group one that we had on the, on the data. If you don't have some guidance what you're going to report in coming years, then obviously the debt data is not good. You're not going to to get a good supervision. And consequently, not a,

13:11 - not a really good financial stability. also, banks themselves say that the, that, that this coordination between them is sometimes a problem and they try to foster it, in the coming years. The Energy sector is probably the most important, or at least one of the most important for the transition because it is an input for the other sectors. So it'll be, utilized to decarbonize other sectors like transport, like the industry and like the buildings.

13:41 - And this clean energy is very important because, this will cause a, for sure, a surge in electricity demand will, lower the emissions. And, there will be, of course, all, all these is strictly connected to the, the carbonization targets, which means minus, 55% in 2030 less emissions, and, having Europe climate neutral in 2050. So there is a broad, let's say general goal

14:09 - that is guiding, the entire transition. And that's, something relevant that is guiding the transition to the energy sector. energy companies are big clients for banks, very important clients, always. Traditionally, even now, banks will need to finance, a big number of, of new investments. So when we speak about investments, means also financing from banks, and especially in the low carbon generation in

14:36 - the electricity grids. When we speak about renewables, we are mainly speaking about the new investments in the solar, portable tyke and wind. energy. Renewable energy is now in, in the region around 30% of total energy consumption. This will need to go up to 50%, in 2030. So as you can see, a big increase of, the share of renewable energy

15:03 - and renewable energy will go to 75, up to 85%, in 2050. So the majority of energy will be produced by renewable sources, and that's very important. We are not, only talking about financing of the production here, but also the transmission, the distribution networks, and especially the grids. we were mentioning the long term objective of reducing the carbon emissions,

15:28 - but there is another important objective that is, the energy security. This was, this is relatively more recent, following the gas, disruptions, because of the Russian gas. So, centrally senior was very much relying on, on gas from Russia and on call traditionally. And both these pillars of the energy security of central Eastern Europe are now, fading out. There is a, there are big structural changes.

15:57 - So this increase of renewable is not totally neutral on a number of components. The most relevant one is the prices. So also, we as consumers will understand this and we will feel that. So we have seen a huge volatility of prices, during the year, but also during the same day. That's quite relevant. We show a very interesting chart in our report in which, you see the, we take the example of Greece,

16:23 - in which at the peak of the prices, it was very, very, let's say the prices were very expensive at the beginning of the day, but it, they went down up to zero. So the same day with the record, high prices, energy, prices were going to zero during the day because of a very strong renewable energy production. And then they were increasing again. So we have seen a huge volatility during the day, and this, as you can, imagine is, is,

16:51 - also a big incentive to, invest in storage because you can storage the energy when it is very cheap and release, release later on. The other side is volatility in prices, of course, can be used to, to spare energy and to spare money for consumers or for industrial players, but at the same time, it is also representing a barrier for investments because it's much harder to, forecast, the revenues because of course, revenues are based on prices.

17:20 - And this creates some problems to the companies, and the banks. So what will be very important is also the market, design and to have long term regulatory, regulatory arrangements. So the, these trends are really changing, our way of life as consumers, and also the, the structure of the economy, because the energy sector is, is really the most important. 40% of energy consumption is coming from the buildings

17:44 - and 36% of emissions. So each of us, we are consuming electricity and we are producing some emissions depending on, on the degree of cleanings of the source. We are, we are using, these are very relevant clients of the banks, of course, because we are talking about mortgages, from the retail clients, from people, but also real estate companies, construction companies. And, one of the problems is that the stock of buildings in, in Europe is very old.

18:15 - 90%, of buildings are built before 1990. And out of this 40% is built before 1960, of course, depending on the countries. So the buildings are old, and the renovation rate is very low, around 1% per year. so as you can imagine there, the energy efficiency is, is relatively low. So we calculate in the report that we will need investment. So investment will need to double or triple in the renovation to reach the energy,

18:47 - savings because we know that the cheapest, the safest, the most secure, form of energy is the energy that we don't use. That's the best one. So energy efficiency is a bit, is a very important block. So we, we have a number of barriers. First of all, there is a lack of, obligation to renovate the buildings. So, that's, we are not obliged

19:10 - to renovate our buildings. So, sometimes we, we end up with very energy efficiency situations. then there is no harmonization of the performance certificates. this means, that, that they're not harmonized even across you members. And, it's very hard for banks, for banks, yes, or any other player to, to judge if an, an apartment or a building is, more energy efficient,

19:34 - energy efficient than another. Then we, we have seen also we discuss in our report that rented the buildings are less energy efficiency for, for some reason, and energy is very often subsidized. So the market mechanisms are not, fully, fully working. And then the main problem is that, we invest, money in energy efficiency today, and we see the benefits maybe in some years. So there is a relevant mismatch between the timing of investments and the benefits.

20:04 - First of all, I find it very interesting that given the importance of the transition plans for the banking or for the corporate sector, there is no real official definition. But, but what, what we can obviously say is these are time bound targets and actions, which corporate or a banking sector announces how it's going to transition to a low carbon economy. I would say that two things and two views are here. Very important. One is that this is a tool

20:31 - and very important tool for the financial institutions and corporates to communicate to the public how they're going to transition. But on the other side, it's also a, for an information for regulators and other authorities that they can really see how the private sector is in fact transitioning. You know, so that's not, that is really practical. It's a really practical tool in that sense. Now, what we also found out in the report is there is

20:56 - no, let's say size fits all that the transition plan is really going to depend a lot, let's say, on jurisdictional expectations or on the evolving best practices. What we see is that also standards reporting standards are very fastly evolving. And of course, this is informing in some sense the transition plans of the banking or of the corporate sector. also, something that we would like to highlight is that large institutions are already, very rapidly,

21:24 - developing such plans. In fact, in the net zero banking alliance members, where the banks and banking groups are part for, and they constitute 40% of the global banking assets, most of them already have this kind of, targets for up to 2050, and we see much more of the banks actually joining. And finally, I would like to say that, there are few things that are very important for a good transition plan,

21:52 - and that is that they need to be clear, they need to be very concrete, they need to be achievable, and that there should be a mechanism behind where investor or even general public can see that the bank or the corporate is actually following what it wrote. We've been analyzing, three main, blocks. So the availability of data and ESG metrics, the information that the banks can get from clients, the, role of supervisors, and also central banks

22:22 - and authorities in the green transition. And, the transition of the sectors. So especially with a special focus of the energy sector, energy efficiency and buildings, these sectors are key clients of banks. The three, blocks of analysis are connected to each other because of course, when, for instance, you impose disclosure requirements by regulators, you increase the supply of information, and this is matching the supervisory expectations.

22:48 - So you may imagine that the three are connected. So the, regarding the data, data are becoming very important, and, that's a key factor. there is a quote that says, in God, we trust, but all others must bring data. And, and in this case, we are talking about climate data and banks are bringing climate data in, more and more,

23:13 - but still, of course this is a big burden for companies that receive multiple requests. And, and of course also for banks that are, evolving and, and, and let's say having a number of problems in analyzing the data, storing the data and so on, on the other, on one side is a big burden for, for companies, as I said. But on, on, on the other side, we should compare how fast we are going. So we are going very fast in getting new data

23:41 - with a relatively good quality. If we compare with the history of accounting that dates back to the ancient civilizations, that's very important. I will not annoy you on, on, the role of accounting in, in, in Mesopotamia. But this was evolving across the centuries, and the first standards were developed in the US in, in 100 years ago. And audit came only after the crisis in 1929. So you can imagine how fast we're going now with the,

24:08 - with the green data compared to the, to the other stuff. And u is having a special role. But on the other side, the u standards are having some interoperability, they call it, with other international standards. So there are almost coinciding with international standards in, in many aspects. The second block was about the Prudential authorities. So the role of regulators is new. They are also learning the job is a relatively new job.

24:32 - Sometimes they're relatively shy in their mandates. So, they, they, they still have the old mandates, and, some of them are evolving. We, we give the example of the National Bank of Hungary in our report, and the third block was about the key sector and the, and the role of the energy sector for banks. So, it is not only banks that are evolving, they are having a special role also written in the article two of the Paris agreements.

25:01 - So all financial flows must be compatible with Paris. So that's why the banks are so relevant. But also, of course, the various sectors are very important, and these are key clients of banks. So, let's say the transition must happen, altogether, and this is happening relatively fast. I think I'm, I'm rather optimistic also about the future steps.

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