The green transition is increasingly manifesting itself in financial flows through the concept of sustainable financing. The concept does not focus solely on return on investment but encompasses a wide range of initiatives aimed at creating a better world for future generations. For this reason, sustainable financing is not just ‘green’ financing, but a process of considering and taking into account environmental, social, and governance (ESG) factors when making investment decisions.
This increasingly important topic and how the financial sector will respond will be discussed at the Financial Investment Forum organized by Lider, which will be held on June 5 and 6 at the Westin Hotel in Zagreb, where Sandra Švaljek, Vice Governor of the Croatian National Bank, will also speak. According to her, the climate crisis and related climate policies are causing growing needs for large new investments by business entities, as well as other parts of the economy.
Investment in climate resilience
– Today, there is hardly a person or entrepreneur who does not consider investing in energy sources to reduce energy costs and their dependence on energy sources whose prices are subject to fluctuations. They are also investing in their climate resilience – that is, the resilience of their business assets to increasingly frequent stormy weather, floods, heavy rainfall, etc. In addition, business entities must invest in technology changes to meet legal obligations, the demands of business clients, or the preferences of end consumers. All these investments are associated with extremely large financing needs. For these investments to be realized, it is essential that entrepreneurs have access to financing, and in addition, that this financing is under favorable conditions, especially in the context of rising interest rates. Sustainable financing should ensure sufficient funds for entrepreneurs to transition to a carbon-neutral economy in an orderly manner and as quickly as possible – emphasizes Švaljek.
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In her lecture at the Financial Investment Forum, Švaljek will address several theses. The first is that the climate transition, alongside concerns for our collective future, also brings numerous opportunities. – From agriculture to transport and tourism, entrepreneurs can offer consumers products that meet their needs, with significantly less harmful impact on the climate and environment instead of traditional ones. Those entrepreneurs who succeed in this can achieve a significant market advantage. However, I also see the climate transition as an opportunity for banks to re-establish themselves as a source of financing for the business sector – says the vice governor of the central bank.
As she adds, today, fewer and fewer entrepreneurs are opting for financing from banks. – About 75 percent of companies that generate over 50 percent of total revenue do not finance themselves through banks; they finance themselves through other companies, in the capital market. The return of the former significance of banks as a source of financing will only be possible if banks also transform their business models, in a way that provides their clients with not only financing but also expert advisory support – says Švaljek.
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Willingness to take risks
When asked whether banks will prioritize sustainable projects, Švaljek says that banks will have to make a choice because regulatory and supervisory practices will force them to demonstrate their willingness to take on climate and environmental risks, to learn to recognize these risks in their clients and manage them. – In such a framework, it is expected that banks could be multiple motivated to prioritize sustainable projects – firstly, by financing sustainable projects, banks can attract new clients and gain advantages in financing those market segments that could be winners of the climate transition. In addition, banks will likely seek to avoid or minimize risks and associated costs of lending to larger issuers, and they could also face pressure from stakeholders, from owners to employees to clients, who could demand that banks cease financing entities and projects that threaten the climate and environment. This is directly related to banks’ concern for their own reputation in the face of increasing public pressure on economic entities that directly harm the environment and climate – claims Švaljek.
In this context, the role of central banks is also significant. Namely, central banks are institutions that, by the nature of their role and tasks, must have as accurate and complete a picture as possible of the economic environment and phenomena that affect it. They are responsible for price stability and financial stability, which are constantly influenced by this environment and dominant economic and social trends, so part of their daily work is comprehensive information and data collection on everything that affects their core tasks.
– Today, it would not be possible to conduct good monetary policy and other policies within the domain of central banks without considering geopolitical tensions, demographic changes, digitalization, and climate change. Until recently, central banks had relatively modest knowledge about climate and environmental issues. However, in less than a decade, they have significantly improved their understanding of the impact of climate on economic movements, especially those that could threaten price stability and lead to the accumulation of risks that could cause financial crises – says Sandra Švaljek.
Raising resilience
According to her, central banks, through their regulatory and supervisory activities, seek to encourage banks to recognize climate and environmental risks in their portfolios, define their willingness to take on such risks, and manage them appropriately. – Soon, banks will be required to set aside capital in an appropriate amount for climate and environmental risks associated with their assets. In this way, we encourage banks to finance sustainable projects and clients with a lower adverse impact on the environment because it is less risky for them, and that simultaneously means cheaper. In addition, central banks can include climate risks in their own portfolio management policy and thus contribute to sustainability. The Croatian National Bank has been investing an increasing portion of its non-monetary portfolio, i.e., former foreign exchange reserves, in sustainable securities in recent years – by the end of 2023, about seven percent of the total financial assets of the HNB were invested in so-called ESG investments – concludes Švaljek.
