➤ Pandemic recovery needs to be linked to green and social investment

➤ Data gap on climate exposure critical for risk management

➤ Fossil fuel transition needs medium-term approach

Antoni Ballabriga is global head of responsible business at one of Spain's largest banks, Banco Bilbao Vizcaya Argentaria, SA, which also owns Mexico’s biggest bank, Grupo Financiero BBVA Bancomer SA de CV. He also serves also co-chair of United Nations Environment Programme Finance Initiative Global Steering Committee and is chair of the European Banking Federation’s sustainable finance committee.

BBVA has been named as one of the European and global leaders in climate change. The World Resources Institute identified BBVA as one of the top five European banks with the strongest commitment to sustainable finance in January.

BBVA announced a new five-year strategic plan in February, and sustainable finance is one of its two key priorities for clients. The bank is maintaining its environmental, social and governance roadmap despite the COVID-19 crisis, Ballabriga told S&P Global Market Intelligence in an interview.

The following transcript is edited for length and clarity. Listen to audio from the interview on ESG Insider, an S&P Global podcast.

Antoni Ballabriga, BBVA global head of responsible business Source: BBVA

S&P Global Market Intelligence: How has BBVA's focus changed during the pandemic?

Antoni Ballabriga: The roadmap is still there. Obviously we have an emergency phase now, but we have done a lot in this emergency phase in terms of supporting clients and also employees. We are fully convinced that we need a green and resilient recovery. Sustainability is going to be there. We need to reshape our world promoting sustainable businesses in general so the agenda hasn't changed a lot.

How much greater an emphasis are you seeing on the 'S' in ESG?

In the crisis we have seen more appetite for social bonds in the capital markets. Green bonds are quite flat, but social bonds have increased significantly. Topics like employee engagement, safety and providing support to SMEs are becoming mainstream.

We don't just need a green recovery. We need an inclusive recovery. This crisis is a shock, which affects the most vulnerable people, companies and government. Our role is to provide liquidity, funds and financing for investment. We need to take into account how we can plan with governments to [improve] the situation of these vulnerable people and companies. In the recovery we should embed in the government support plans investments connected to specific green and social targets. That should be mandatory in a moral sense.

What role should banks play in the recovery?

We have to channel funds from savers to lenders to see how we can provide funds to the most impactful projects for companies and householders. In the emergency, the measures have been focused on liquidity. Lending is the most important lever that we have and we should see how we can promote investments and lending in activities creating the greatest impact in terms of job generation but also in sustainable activities.

When we talk about green, why not imagine a great plan for investment in energy-saving buildings? And why don't we propose a mega plan to promote green and renewable buildings to achieve higher energy efficiency and use that mega flow of investments [to align with] climate goals? Banks can play a relevant role there.

On social, we have a mega challenge, which is the digital divide among people and SMEs. Government, banks and investors could channel funds to digitize and provide incentives for business to digitize.

Oil prices have dropped significantly during the crisis, which some have described as a climate stress test for the banking sector. How has that impacted your fossil fuel investments?

We have to look at the medium term. Obviously in the short term you have to look at how it will affect the nonperforming loans, but in the medium term the crisis has put on the table that there are some activities that will be stressed.

We are totally convinced that despite the crisis the pressure for climate will come back again in a few months. Is there anybody out there who believes that any supervisor will not take into account this risk after the pandemic? Or will they put even more pressure because the risk is evident that these kind of physical shocks are possible? Is there anybody who doubts that investors will have to see how to manage this climate risk in their portfolios once they see how they can be affected by crisis?

The pressure there will be even greater. Our strategy is to align our lending portfolios with the Paris Agreement. We are members of the Katowice agreement along with ING Groep NV, BNP Paribas SA, Standard Chartered PLC and Société Générale SA. We are working with them and [the 2 Degrees Investing Initiative, a think tank,] to develop a methodology and metrics to set targets in all our sectors. One of them obviously is oil and gas. We plan to set targets in key sectors by the end of this year. We will see how to align our activity in this sector. We want the right balance between the different technologies used in oil and gas. It's different whether it's upstream or downstream and has to be considered very carefully.

What reputational risks are there in remaining in fossil fuels?

The pressure will be there from certain groups. If you use the sustainable development scenario from the International Energy Agency, considered aligned with the Paris Agreement, you see a trend in the medium term. You cannot expect to reduce your weight in three months — you need to make this shift in a few years. The point is to have the right target and make an annual assessment on how you are performing in accordance with the target and we think this is the best approach, [rather] than saying 'let's divest from tomorrow.' All banks should have this pathway to align and help our clients transition.

Data has been a huge challenge in assessing climate risk for banks. What kind of improvements have you seen?

This is a huge challenge and there are a lot of noise and initiatives there. In Europe, there is a specific consultation on the nonfinancial reporting directive. We think that it should apply to more companies and it should integrate better data. This is a critical milestone. We need comparability, we need access to data from our clients, and we need some synchronicity and better coordination among different supervisors.

We cannot expect banks [to disclose] information about climate risk of their portfolios if our corporates, our clients, don't report. We have to have a step-by-step approach, focusing on corporates and sectors, and in time amplify the scope. The data gap is a critical issue for risk management.

READ MORE: Read interviews with sustainability leaders at Barclays in the U.K. and BNP Paribas in France. Listen to interviews with ESG executives from JPMorgan Chase, the largest U.S. lender, and DBS, Southeast Asia's biggest bank. Sign up for our weekly ESG newsletter here, and read our latest coverage of environmental, social and governance issues here.