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Lindsey Hall: I'm Lindsey Hall, Head of thought leadership at S&P Global Sustainable1.   

Esther Whieldon: And I'm Esther Whieldon, a senior writer on the Sustainable1 Thought Leadership Team   

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy. 

Earlier in March, the Intergovernmental Panel on Climate Change issued its Synthesis Report, and that report brings together all the IPCC's findings since 2018. It warns that the world needs to act fast to reduce emissions. We heard UN Secretary General, António Guterres, say limiting global warming to 1.5 degrees is "achievable but it will take a quantum leap in climate action.  ... In short, our world needs climate action on all fronts: everything, everywhere all at once." The IPCC report also reiterated the role of the financial sector in facilitating the low carbon transition.

Esther Whieldon: Now this is a theme we've explored many times on our podcast. And today, we're returning to it again with an interview with Carlos Torres Vila. He is current Chairman and former CEO of BBVA, which is one of Spain's largest banks with about EUR 713 billion in total assets at the end of 2022. BBVA is based in Spain and also has positions in a number of other countries, including in South America, Mexico, Turkey and the US. 

I sat down for an interview with Carlos during S&P Global's CERAWeek in early March. This is a big energy conference held in Houston, Texas, each year. And if you'd like to learn more, I'll include a link in our shown notes to the recent podcast episode that we released about CERAWeek key takeaways. 

Carlos and I talked about a range of topics, including BBVA's role in the low-carbon transition and how you see certain policies affecting the countries where the bank operates. For example, Carlos talked about the potential impact of the recently passed U.S. inflation Reduction Act or the IRA for neighboring Mexico, which is where BBVA is the largest financial institution. As a reminder to our listeners, the IRA dedicates nearly $370 billion in federal spending to decarbonization efforts over the next decade. 

And Lindsey, as I said in our recent episode on CERAWeek, there was a lot of buzz at the conference about the opportunities that investors and companies from around the world see coming from IRA. In explaining how the IRA could benefit Mexico specifically, Carlos mentions a trend called near-shoring. In simple terms, near-shoring refers to the way that many countries tend to trade more often with their neighbors or nearby countries rather than with countries that are located oceans away. 

OK, here's Carlos. 

Carlos Torres Vila: Well, Mexico was already well positioned to profit from the near-shoring trend with production flows coming closer to home. It clearly has a long border with the US market, which is a very large market and has competitive abundant labor that is quite skilled and the US is lacking labor. So all those things were already coming together to provide Mexico a good growth perspective. 

Mexico is also quite strong already in the auto industry. They're the largest exporter of automobiles to the United States. They're the fourth largest exporter of autos in the world. And now we are seeing with the IRA that those advantages, the near shoring, their position in auto, coupled with the incentives is driving a lot of foreign investment into Mexico in things like battery production or EVs production, et cetera. 

And then the advantage in Mexico is that it has so much resource, renewable resource. It's sunny in Sun in Mexico. So they're investing a lot in that part as well. I think the potential is huge to continue to invest. The good thing is that Mexico is part of the North American market after the free trade agreement that was renewed with Canada and the United States and Mexico. So the production there qualifies for the IRA. And that's why those, all those forces combine to give such a positive perspective and really, Mexico is going to be a clear winner from what's going on.

Esther Whieldon: There's been a lot of talk in Europe about trying to sort of replicate or compete with the IRA. Do you think they'll be able to do it?

Carlos Torres Vila: The approach has been different, but Europe has a long-standing trajectory of having this in the agenda as a major priority. What happened with covid and with what happened in Ukraine and it's happening still in Ukraine. This has given it further force. 

Now we can also learn in Europe, I believe, from what the U.S. has done. So the power of incentives I was saying earlier is very clear. So when you have a 10-year horizon, which gives stability and predictability that you're going to have that incentive for 10 years. It is quite technology neutral. So it's across a variety of technologies that you can get the incentive, if you do decarbonize. That is driving so much investment that we can learn from that in Europe. 

Now we have some disadvantages. It's a fragmented market. We have not 1, but 28 different member states. We have also not been able to put together. So that's on the energy side. We don't have an energy union, but also we don't have a capital markets union. And if you want to finance investments having a capital market that has the sufficient scale for the originators of the financing to really distribute it to other people is essential.

And that's a major drawback that we have in Europe. But I believe that things are going, as I say, well, in both sides of the Atlantic, and they couple to have some spillover effects to the rest of the world. So I was saying earlier that in emerging markets, the emerging markets need help. Well, I think by driving investment, incentivizing investment in new technologies, both in the US and Europe, we are going to reach scale faster. We're going to help scale the technologies that are needed to decarbonize and those could then be deployed in the emerging world. Yeah. 

Esther Whieldon: So from your perspective, how is BBVA managing the energy transition? And specifically, like in Mexico and South America, I imagine it's different than in Spain, right, where you have the EU and other things sort of helping push it along.

Carlos Torres Vila: Yes. But the needs are the same and the potential is immense as we were just talking about Mexico and how big the potential is. Clearly, some of the countries in the emerging world don't have the resources that the developed world has. And there, I do believe that the developed world has to make a bigger effort to support. There's a lot of opportunity, but the projects sometimes have too many risks because you have country risk, political risk, and we need some frameworks that can reduce that risk for the investors that have the capital that typically are in the developed world. 

How is BBVA approaching this? Well, we are already mobilizing a lot of resources to help our clients be more sustainable. One number that summarizes as well is the EUR 50 billion of sustainable capital that we mobilized in 2022. That's a big increase from EUR 35 billion that we had mobilized in 2021. And if we look back, we had originally set a goal of EUR 100 billion to be mobilized between 2018 and 2025. We have now tripled that objective. So it's going to be $300 billion because we have already surpassed the EUR 100 billion. We are at EUR 136 billion since this started in 2018. 

Not all of that is related to the carbonization or even the environment, so about 20% of that number has to do with sustainability on the social side. It's very interesting in the emerging world because that's where we have a lot of people who are very vulnerable and they don't have even access to the financial system. 

So what we're doing is directly from the bank and also through other vehicles like the BBVA Microfinance Foundation. We're mobilizing capital to support productive activity in those regions, targeting the most vulnerable. The foundation provides micro credits, productive micro credit to vulnerable people, mostly women also. So that's why it has been now for a few years, ranked by the OECD as the #1 nonprofit institution in terms of development aid for gender equality. 

Esther Whieldon: Earlier in this episode, I mentioned BBVA has operations in Turkey. Well, if you recall, powerful earthquakes hit Southeastern Turkey in February 2023, killing more than 57,000 people in Turkey and neighboring Syria. And according to the UN the earthquakes caused an estimated $34 billion in direct physical damages, destroyed nearly 300,000 buildings and left tens of thousands of people homeless. I asked Carlos what steps BBVA took in the immediate aftermath of the disaster. Here he is.

Carlos Torres Vila: Actually, I was visiting the epicenter just a couple of weeks ago, very emotional...

Esther Whieldon: It must have been hard. 

Carlos Torres Vila: Very emotional, very emotional in March. Very emotional because the teams of volunteers of the BBVA from other regions that have gone there to keep some branches open, mobile branches, of course, because the real ones we cannot open. -- or to even keep security on the existing branches because we have security boxes, et cetera, so to stop the looting but very emotional to see our team evacuated from the region with their families and how appreciative they were of all the support that the bank has given. Overall, we have made a donation of EUR 32 million, and we have also different fundraising among our clients and among our employees also to support. But it has mostly been to try to get people to safety as quickly as we could.

Esther Whieldon: Yeah your workers and keep the security of the finance. The ones who are there, right?

Carlos Torres Vila: Right, right, right. Also to provide the service, we the continuity of the service.

Esther Whieldon: Access to money in general must be so important with all the chaos. 

Carlos Torres Vila: Yes, exactly.

Esther Whieldon: And so you mentioned the micro finance fund or foundation. What are some other financial products you're developing to help with the transition?

Carlos Torres Vila: Within the $50 billion that is a lot of green bonds, social bonds, general quality bonds. We also have ESG-linked finance to corporates. So those are the type of products. 

But what we're really trying to do is to capitalize on the opportunity because clearly, the carbonization is a big challenge for everyone for the world, and it's going to take a long time. But what it is, is a big opportunity because it will require so much investment. And that investment has to be economically attractive. Otherwise, it won't happen. 

And typically, what happens is that there is a need for CapEx, but then the attractiveness, economic attractiveness comes from the reduction in OpEx that comes when you do that CapEx. So energy efficiency would be a good example or an EV would be a good example. So things that might be more expensive, but then they have a lower running cost afterwards. And that's where bank comes in to finance that CapEx and then sort of get paid off of the savings. It's what our business is about is financing investments and decarbonization requires a lot of investments. 

So what we're doing is on the low-hanging fruit, the examples I mentioned, energy efficiency, solar, solar installations at the home or at commercial enterprise companies, those would be areas where we are channeling financing already to our clients so that they can start reducing their carbon footprint. 

Now for the larger emitters, what we're doing is helping them with financing of the transition plans. We have big clients in oil and gas. We have big clients in power generation. We have big clients in auto and so on. So for each one of those sectors, steel, cement, et cetera, we have said an intermediate target for 2030 in terms of our ambitions, where we want our portfolio to be, which means the average of our clients, yes, the clients that we're financing. 

What we're doing is supporting our clients in that transition through financing the CapEx they need to transition. That would be a summary of what we're doing. So it's mobilizing capital through green bonds, ESG-linked bonds, et cetera. It's channeling products that make a lot of sense financially for our clients, retail, commercial as well in terms of energy efficiency, in terms of solar and then setting targets for 2030 in terms of emissions in the highest emitting sectors.

Esther Whieldon: So how might inflation and sort of the economic issues that are going on right now affect -- you're obviously very active on this, but how might it affect the transition and the financing for that for you guys or in general?

 Carlos Torres Vila: Well, inflation -- what inflation is driving is the response from the central banks. So central banks have raised rates, and they will maintain rates high or even increase it further until they get inflation in check, which is very important because we don't have price stability.

Esther Whieldon: Right. You can't have it flying all over ... 

Carlos Torres Vila: Yes, then you have too much uncertainty, and then it's really damaging to everyone, especially the most vulnerable by the way, inflation there's quite a bit of attacks on the most vulnerable. So we absolutely need to get inflation in check, which will require higher rates. And when you have higher rates, and we're talking about investments and CapEx, that reduces its attractiveness. But I don't think it's -- and I was saying this in the panel yesterday, I don't think it is such an important element because the attractiveness of these investments have more to do with the correct regulation and the incentive. 

For example, carbon pricing, if we have good carbon pricing, that is a strong signal to decarbonize even when you have high interest rates. Or if you have good demand signals or you have mandated signals that regulation mandates that you cannot emit in certain sectors, then that will drive the investments and the attractiveness of the investments, economically even when rates are higher. I don't see that they are higher than the historical averages in any case, but we have just been used to low rates for so long that now having 3, 4, 5 percentage points of interest rates seem like a big number, but it's not really so.

Esther Whieldon: BBVA in October 2022 announced a goal to reduce emissions from its oil and gas portfolio by 30% by 2030. But at CERAWeek, I heard a number of oil and gas CEOs say they'll be providing fossil fuels to the world for decades to come. And I wanted to get Carlos' reaction. So I asked him, was he surprised to hear those statements?

Carlos Torres Vila: It's very natural because this is such a massive shift from a fossil fuel-based economy to one that needs to stop emitting CO2, that is going to take a long time. We know that it's going to take a long time.

Esther Whieldon: So it doesn't surprise you? 

Carlos Torres Vila: It doesn't surprise me. It doesn't surprise me. In fact, if we look back today, still fossil fuels represent 80% of the total energy supply. And in 1990, it was 80% of the total energy supply. So even though we have had a lot of growth in electricity and then within electricity, renewable sources going up, but also the fossil fuel side has grown. 

So clearly, we're going to need time to phase it out, but there's many things going on that can help reduce the weight of that sooner rather than later so that we can meet our 2050 targets. It's a tough tradeoff that we need to make between the short-term profits and the long-term sustainability of their own business. It's only natural that they're trying to optimize that equation. 

And sometimes, I do have that feeling. The feeling that they're trying to optimize that equation of let's milk the cow while we can -- it's good business right now because the energy prices have been good and it's good business. So let's sustain it as long as we can, but they recognize more and more that it's not sustainable that they will need to phase down their fossil fuel in order to -- or somehow find ways to compensate the emissions. And they talk a lot about carbon capture and storage, that could be. Certainly one of the big things that could happen that have a higher weight than what is currently expected. 

So if you look at the 2050 projections from the IEA, carbon capture will represent only about 2% of total energy supply equivalent. That's relevant, but it's 2%. -- fossil fuels is 80% as we we're saying. So that's sort of the scale of what's expected, but there could be a big surprise there, a positive one, that would be great. And then they would not need to change the business so much because we could capture from the air and the CO2, even when it's being burned or directly from the atmosphere. There could be other positive surprises coming. 

Also, I just thought of nuclear fusion, for example, which is far away in terms of the commercial application, but there is so much innovation. This is another good thing in that we see. At BBVA, we do have some investments in venture capital Green Tech in order to have some insights as to what the technological solutions that might be changing the world. 

And there, I see a spectacular wave of positive innovation, including very interesting startups that are having a different approach to nuclear fusion. And one of them or a few them might actually find a better way faster than we expected. Even in the panel today, I heard someone prodnosticating that by 2030, it will be a commercial reactor using fusion. So that will completely change the equation. And then we could phase out the fossil fuels much faster.

Esther Whieldon: Yeah. I think for me, I'm realizing over time that we always assume sort of the status quo is going to be our options for the future. But we really don't know what innovations will come that could solve this much faster does potentially...

Carlos Torres Vila: We don't know... we don't know

What we do know is that the ingenuity of the human endeavors really find solutions to hard problems. It could be going to the moon or it could be decarbonizing the world. And if you put the right incentives, and this is a noble purpose because we're fighting for the planet. So if you combine the normal purpose with the right economic incentives, which are absolutely necessary, otherwise, it's just not a sustainable effort. Then that combination unlocks innovation. It's something that we have to have faith on. Maybe I am an optimist by nature, but I do see that we will get there because one or the other of solutions will eventually mature.

Esther Whieldon: So Lindsey, today, we heard Carlos say, he expects the IRA to prove beneficial to Mexico, especially related to electric vehicles and battery production. Carlos also talked about how BBVA is moving to lower the carbon profile of its portfolio in high emissions intensity sectors, such as oil and gas, and it is mobilizing capital for the low carbon transition, including through microfinance credits for vulnerable people 

Lindsey Hall: Yes. And especially like what Carlos said there at the end about how humanity is capable of huge ingenuity and innovation in creating solutions to these hard problems. 

Esther Whieldon: Exactly, I think it's also worth noting that he said that level of ingenuity will require 2 things. One is a global sense of "noble purpose" and the other is the right economic incentives. Please stay tuned as we continue to track how financial institutions and industries are finding solutions to these big challenges ahead on the low carbon transition.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.   

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