Sustainability on the agenda: CaixaBank 05 May 2022 223

Stefan Rodia Garcia-Petit Catoir, Climate Risk Director at CaixaBank within the Sustainability Division, discusses the range of impressive initiatives that the bank is implementing to help tackle the climate crisis.

What priority steps have you taken to manage climate risk effectively?  Please mention any work in the following areas:

  • Governance

In order to make differential progress in the integration of sustainability and climate issues, the new Sustainability Department has been created and incorporated into the bank's management committee. The structure of the governing bodies has also been adapted along the same lines. The Appointments Committee has been renamed the Appointments and Sustainability Committee, which is responsible for overseeing sustainability. 

The Sustainability Committee (SC) is the highest executive body specializing in sustainability risk management, including environmental and climate risk, and its creation was approved in April 2021 by the Management Committee (MC). The SC assumes the functions performed since 2019 by the Environmental Risk Management Committee, as well as the Corporate Social Responsibility and Sustainability functions performed by the Corporate Responsibility and Reputation Committee. The Committee is responsible, among other things, for supervising the Sustainability Master Plan (SD), monitoring projects and initiatives for promoting the integration of sustainability criteria in business management, understanding and analyzing regulatory requirements in sustainability matters, reviewing and approving the information to be disclosed on sustainability, reporting to the Board on the SC's resolutions and submitting to the Global Risk Committee issues relating to sustainability risk management policies.

The Committee's functions consist mainly of knowing and analyzing regulatory requirements, trends, and best practices in sustainability, promoting the integration of sustainability criteria in business management and credit risk approval processes and in the rest of the entity's areas, reviewing the information to be disclosed internally and externally, as well as approving those aspects related to sustainability issues.

All these steps have led CaixaBank to give greater importance and prominence to sustainability, both in management and in the business.

  • Risk management

CaixaBank is making progress in managing and analyzing climate risks in accordance with the regulatory framework, the recommendations of the Task Force on climate-related Financial Disclosures (TCFD) and the European Commission's Guidelines on non-financial reporting.  During 2021, the regulatory and normative development has continued in relation to the management and reporting of climate and environmental risks and the implementation of various transversal projects within the entity has continued to ensure the alignment of its processes with the new and growing regulatory and supervisory framework. 

Environmental Risk Management Policy: In February 2019, the Board of Directors approved the Environmental Risk Management Policy. The policy, approved by the Board of Directors in February 2019, sets out the overarching framework of principles for environmental risk management. With regard to customer registration and transaction approval processes, the Environmental Risk Management Policy establishes a series of general and sectoral exclusions relating to activities that could have a significant environmental impact, establishing the requirements under which CaixaBank will not assume credit risk

Risk metrics: Credit portfolio management seeks to align the indirect impact on climate change with risk appetite and commitment to sustainability objectives. To this end, since 2018, credit exposure to economic activities considered to be intensive in CO2 emissions has been measured. In addition, in 2021 CaixaBank has deepened its analysis of transition climate risk scenarios through quantitative and qualitative analyses, and has carried out an initial assessment of the physical risks derived from climate change in its mortgage portfolio

Climate stress tests: CaixaBank has begun preparations for the climate stress test to be conducted by the ECB in the first half of 2022. The exercise will serve as the basis for quantifying exposure to climate risks

Taxonomy: In 2021, CaixaBank continued to work on two lines of action to be ready to classify its portfolios in accordance with the Taxonomy Regulation: i) UNEP FI working group to analyze the adaptation of the EU taxonomy for banking products; and ii) establishment of operational and documentary criteria for the classification of transactions in the most relevant sectors in CaixaBank's portfolio.

  • Scenario planning/stress testing

There is no doubt that climate change is a phenomenon that will have a major impact on economic activity. The financial sector, as a key cog in the economic wheel, contributes to mitigating climate change, but will also suffer its effects, both from the perspective of transition risks and physical risks.

Taking climate risks into account in decision making is key to protecting our balance sheet and financial stability. Until now, the lack of information and the lack of adequate standardization in the financial sector on the calculation and modelling of these risks has meant that they have only been considered on a voluntary basis. However, in 2022, CaixaBank and the rest of the significant financial institutions in the eurozone will have to assess our exposure to these risks through the European Central Bank's climate stress test. This will be the first mandatory exercise that will serve as a learning exercise, also for the supervisor.

This stress test will be very useful for setting the way forward in the coming years, although in general the scarcity and the distance to go to improve the quality of climate information will not yet allow it to be sufficiently complete or representative.

With regard to internal scenario analysis, CaixaBank is carrying out both qualitative and quantitative analysis exercises for transition risk.

  • The qualitative analysis focuses on identifying the segments potentially most affected by transition risk in the sectors with material risks in the portfolio. Specifically, the analysis focuses on the energy (oil & gas and electricity), transport, and construction sectors and allows the greatest impacts to be identified by studying the main risk variables and establishing heat maps for different time periods (2025, 2030, 2040 and 2050), geographies and climate scenarios.

  • The quantitative analysis was performed for the most relevant sectors, using two different approaches based on the Oliver Wyman methodology developed within the UNEP FI (TCFD Banking Pilot) working group in which CaixaBank participated.

Qualitative physical risk analysis exercises were also started, focusing on the analysis of CaixaBank's mortgage portfolio.

  • Disclosure and reporting (e.g. TCFD)

CaixaBank is committed to complying with the transparency recommendations of the TCFD, to increase the relevance of climate risks and opportunities through reporting, in order to encourage their consideration by financial market participants.

A summary of the progress of this initiative is included annually in CaixaBank's Management Report, complying with the best reporting standards in the market to provide the bank's relevant information in an accurate and reliable manner. 

During 2019 and 2020, CaixaBank has actively participated in the second UNEP FI pilot project to implement the TCFD recommendations in the banking sector (TCFD Banking Pilot Phase II). The case study prepared by CaixaBank as part of the pilot has been included in the report "Pathways to Paris. A practical guide to transition scenarios for financial professionals". In 2021, we also took part in the third phase of the project (TCFD Banking Pilot Phase III), preparing a case study which is included in the report on best practices in customer engagement "Leadership Strategies for Client Engagement: Advancing climate-related assessments" (https://www.unepfi.org/wordpress/wp-content/uploads/2022/01/Leadership-strategies-for-client-engagement_Report.pdf)

  • Sector/client exclusion (e.g. coal mining)

We are currently working on updating the Corporate ESG/Sustainability Risk Management Policy, but the current Environmental Risk Management Policy already establishes the framework of global principles for environmental risk management at CaixaBank. Climate risk management is one of the main lines of action of the Environmental Risk Management Strategy defined at CaixaBank.

The Environmental Risk Management Policy establishes a series of general and sectoral exclusions in relation to customer registration and transaction approval processes for activities that could have a significant environmental impact, establishing the requirements under which CaixaBank will not assume credit risk. The sectors to which the specific exclusions apply are as follows:

  • Energy
  • Mining
  • Infrastructure
  • Agriculture, fishing, livestock farming and forestry

What are the biggest risks and challenges facing your organisation in managing climate change?

The main risks we face in the financial sector are the volume and acceleration of regulation and supervisory requirements, the quantification and management of climate risks, and the definition and establishment of comparable metrics.

CaixaBank is tackling these challenges through the incorporation of sustainability in the bank's governance and senior management (Management Committee), the integration of ESG criteria in its corporate policies, the integration of sustainability in the bank's strategy (Strategic Plan and Socially Responsible Banking Plan 2019-2021), the assumption of specific and ambitious commitments that help drive this strategy, such as the NZBA, for neutrality by 2050, and the PCAF, for the measurement and disclosure of financed emissions, and compliance with the regulations on disclosure of non-financial information and the main sustainability reporting standards (statement of non-financial information in the Consolidated Management Report, which includes information according to the recommendations of the TCFD and the Principles for Responsible Banking report, SASB and GRI, Global Compact progress report, etc.).

What do you consider to be the major opportunities?

With our sustainability strategy (Socially Responsible Banking Plan 2019-2021) at CABK we are reorienting our activity based on engagement and the challenges that the socio-economic transformation poses to our customers in order to align our business with their needs and expectations. These include advising and realigning financing policies with the objective of facilitating their transition to a sustainable economy, in neutrality, equity and responsibility, i.e. supporting them in their environmental, social, and good governance dimensions.

An example of this is our ability to mobilize sustainable activities and projects by providing the necessary tools for channelling the Next Generation EU Funds, for which Spain will receive €150 million, of which €56 million will be earmarked for ecological transition, and of which CABK expects to manage a minimum of 25%. To this end, CaixaBank has launched a comprehensive plan to facilitate access to these funds for its customers.

How do you see regulatory challenges evolving over the next 18-24 months, especially around scenario planning and reporting?

The European Central Bank (ECB) will lead in 2022 the design and launch of the first climate risk stress test for significant institutions in the banking union. This test represents a new challenge for the sector, which will have to make a major effort to identify climate risks and integrate them into the stress tests, while it will be necessary to develop methodologies adapted to the supervisor's requirements.

In turn, the main regulatory challenges in the medium term will be marked by the conclusions obtained from this test in two areas:

  1. Challenges generated by the result of the assessment of the resilience of institutions to transition risks and physical risks.

  2. Challenges arising from the development and improvement of the methodology used to conduct the test, which will focus on the ability of institutions to identify relevant information related to the climate impact of their investment and funding portfolio.

Furthermore, the integration of climate risks into stress tests will be another of the regulatory challenges to be faced in the medium term, either by maintaining a specific climate exercise such as the one to be launched by the ECB in 2022, or by incorporating climate risks into comprehensive stress tests to identify vulnerabilities to macroeconomic and financial scenarios, on the one hand, and environmental ones, on the other, and identifying possible cross effects.

Finally, one of the biggest challenges will be the availability of the data needed to respond to the main regulatory requirements.

Would you say you have a green portfolio?  Can you give examples of specific areas where you have developed green products and services (e.g. bonds, SLLs, mortgages, ESG investment options)?

CaixaBank is the leading Spanish bank in sustainable financing in Europe in the first half of the year, according to the Refinitiv ranking, which places the bank fifth in Europe in this type of financing. 

The bank has mobilized more than 21.9 billion euros in sustainable financing in the first half of 2021, with more than 7.3 billion euros formalised in green and ESG financing. CaixaBank has also participated in the issuance of 13 green, sustainable or social bonds for a value of €14,600 million.

CaixaBank granted EUR 7.2 billion in sustainable financing in the first half of the year, 45% more than the volume financed in 2020, consolidating its position as one of the bank's focal points of activity.

The bank also participated in ESG bond issues in Spain and Portugal for EUR 14,600 million in the first half of the year, doubling those carried out in 2020 as a whole.

CaixaBank is also the bank with the largest volume of own issues of green and social bonds in euros.

How much progress are you making in terms of Scope 1, 2 and 3 GHG emissions? What are the main barriers, especially around Scope 3?

Since 2009, CaixaBank has been calculating its carbon footprint as part of its commitment to minimize and offset the bank's CO2 emissions. CaixaBank has been carbon neutral since 2018.

In 2020, work was carried out with the CaixaBank Group's subsidiaries to calculate their main environmental impacts and carbon footprint, with the aim of unifying the calculation methodologies and making the data public in 2021, following integration with Bankia, in order to facilitate year-on-year comparisons of emissions.

In 2020, emissions were reduced by 23% compared to the previous year. The variations in emissions were generated by the effect of the impact of Covid-19 on our activity (reduction of emissions associated with corporate travel or increase in emissions due to the provision of computer equipment necessary to cover the new teleworking needs) and the improvements implemented in recent years (reduction of emissions of refrigerant gas leaks due to the renewal of climate equipment or reductions in the consumption of materials such as paper).

With regard to Scope 3 emissions, the fundamental challenge is to be able to obtain the necessary data to monitor the level of emissions and their rate of reduction, but from a prospective point of view (not only from historical data through current reports), i.e. to determine whether we are ready to face the transition to neutrality and to get the decarbonization strategies right. To this end, the climate stress exercise in the financial sector to be carried out in 2022 will be very useful, and will serve as a management tool to draw conclusions about the quality of the data and the methodologies applied to obtain and manage them. 

During 2021 we have calculated Scope 3 category 15 emissions (financed emissions). Taking as a reference the guidelines defined by PCAF in its accounting and reporting standard (The global GHG accounting & reporting standard for the financial industry), CaixaBank has calculated the emissions associated with the outstanding portfolio, at 31 December 2020, of mortgages and CRE, listed and unlisted shares, bonds and loans to large companies (non-specialised financing). 

Using a bottom-up approach, the emissions associated with the mortgage portfolio were calculated based on the estimated energy consumption for each of the mortgaged properties, while in the case of shares, bonds and loans, the calculation was based on the carbon footprint information (scope 1, 2 and 3) reported by the companies financed, or on sector proxies (when this data was not available). In all cases, the allocation of emissions financed by CaixaBank was made on the basis of the attribution factor defined by PCAF for each type of asset.

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