What banks mean when they talk about transition

At a time of increasing awareness the role sustainability plays in our lives, it has become crucial to transform our economies and societies towards greener, more responsible models.

This profound change, known as transition, seeks to reduce the impact on the environment, mitigate climate change and promote more sustainable development. Transition involves a process of transformation towards a sustainable, resilient, fair economy that not only adopts cleaner technologies, but that also takes a fresh approach to production and consumption.

One of the building blocks behind this change is decarbonisation, namely, a drastic reduction in greenhouse gas emissions. Decarbonisation is essential for attaining long-term sustainability, as it deals with one of the main factors that contributes to climate change. In this context, sustainability is not limited to protecting the environment, but also implies creating an economic system that is able to sustain itself over time, whilst at the same time not depleting natural resources or compromising the well-being of future generations.

The Green Deal: connecting decarbonisation, sustainability and finances

The European Green Deal (or the European Climate Pact ) is an ambitious plan launched by the European Union in 2019 with the goal of leading the transition towards a carbon-neutral economy. This plan has established a roadmap so that Europe becomes the first continent to reach carbon neutrality by 2050, which means that net greenhouse gas emissions are the same or surpassed by the actions to remove them, such as reforestation and carbon sequestration.

The Green Deal places great relevance on the role decarbonisation has on sustainability, as it establishes that economic growth must disassociate itself from the intensive use of resources and carbon emissions. In order to attain these objectives, the plan includes measures that encompass aspects from energy to farming, through to refurbishing buildings to upgrade their energy efficiency and promoting sustainable transport. In summary, the Green Deal is a roadmap for sustainability that has decarbonisation as its core premise.

In order to attain these ambitious targets, there must be cash flows that are earmarked for businesses that favour decarbonisation and help the main economic stakeholders to become the driving force behind more sustainable models, not just from an environmental point of view, but also towards ways of managing them that are in line with the expectations of new generations.

The role of financial institutions in the transition

Financial institutions play a key role in the transformation towards a sustainable economy, and their involvement is crucial for the success of initiatives such as the Green Deal.

Some of the ways in which these institutions are contributing to this change are:

1. Financing of sustainable projects. Banks are in a unique position to support the growth of projects aligned with the Green Deal, such as building green infrastructures, investing in renewable energies and modernising industries to reduce their carbon footprint. Through loans, green bonds and other financial instruments, banks can steer capital into key sectors that encourage sustainability.
2. Integration of environmental, social and governance (ESG) standards. The assessment of the risks and opportunities related to climate change and sustainability are increasingly becoming part of investment and financing decisions. Banks that adopt ESG standards can mitigate long-term risks and promote responsible business practices that respond to the needs and expectations of their customers. Furthermore, the Green Deal is encouraging the creation of regulatory frameworks that force banks to take these standards and their customers’ preferences on board in their decision-making and monitoring processes.
3. Innovation in financial products. Banks are developing new products and services that facilitate this transition, such as green loans, sustainable mortgages and green savings accounts. These products not only support their customers in their efforts to be more sustainable, but they also raise awareness about the importance of the transition and align their personal and corporate finances with the targets of the Green Deal.
4. Financial advice and education. Beyond financing, banks can play a fundamental role in educating their customers about the importance of sustainability and how their financial decisions can have a positive impact on the environment. This includes advising businesses to adopt more sustainable practices and educating consumers about responsible investment. In the context of the Green Deal, the capacity of banks to guide businesses through the complexities of regulations and the opportunities of green financing is essential.
5. Transparency and accountability. Transparency in the management of climate risks and the impact of investments is key to promoting trust and a commitment to sustainability. Banks that report the progress that have made in terms of sustainability clearly and transparently contribute to a more secure and responsible financial environment. The Green Deal also sets standards for the disclosure of environmental information that financial institutions and, in general, any business that operates in Europe, must follow to ensure that their operations are aligned with climate targets.

For a big challenge, big responses

The transition towards a sustainable economy is a global challenge that requires cooperation between all sectors, and banks play a fundamental role in this process. By freeing up resources, innovating products and services, and promoting sustainable practices, banks are not only helping to mitigate climate change, but they are also paving the way towards a more resilient future.

The European Green Deal is a clear example of the significant role the economy plays in backing businesses that contribute to this transition towards sustainability. Therefore, financial institutions have an underlying role in this transformation by working alongside their customers, business partners and society in general to construct a world more closely aligned with the practices that contribute to the sustainability targets set.

Without a doubt, the path to sustainability is a challenge, but it is also a unique opportunity to transform the economy and protect the planet and societies insofar as the well-being of future generations is concerned.