No one likes to be the bearer of bad news. At the recent United Nations climate conference, COP26, bankers and asset managers waxed lyrical about the opportunities for stakeholders of all stripes to profit from the energy transition. Costs were only mentioned in the context of the need for modest amounts of public-sector financing to ‘catalyze’ vast flows of investment from the private sector.
Bernd Spalt, chief executive of Austria’s Erste Group, has little time for such rose-tinted views.
“There will be on the transition journey win-win situations where everybody will benefit, where newer and greener technologies will pay for themselves and create pools of profitability,” he says. “But the idea that this will apply in every area is naïve.
“Overall, the transition will cost money. There will be many opportunities and there is no alternative, but there will be victims on the road and there will be net payers.”
He is equally unhappy about any suggestion that the financial sector can save the world. This was certainly the impression given by COP’s focus on the unprecedented participation of the private sector and the fanfare around the news that institutions representing $130 trillion had signed up to the Glasgow Financial Alliance for Net Zero (G-Fanz).
What is really important and is not discussed enough is making clear who should play what role in the transition
During the conference, Erste was announced as one of the members of the Net-Zero Banking Alliance (NZBA), the banking arm of G-Fanz. The group joined 94 other banks in committing to achieve net-zero financed carbon emissions by 2050 and to set shorter-term targets for high-emitting sectors within 18 months.
Nevertheless, Spalt worries that the increasing public focus on the financial sector risks letting other key players off the hook.
“What is really important and is not discussed enough is making clear who should play what role in the transition,” he says. “Clearly there is a role for the financial services sector. But there is a bigger role for policymakers, regulators and industries.
“All the carbon-intensive industries need to – together with policymakers – come up with transition plans themselves, and, so far, this is not happening in a coordinated way. Everyone is hoping someone else will solve the problem.”
Spalt is especially keen to stress the importance of politicians stepping up.
“The definition of the transition journey is their responsibility,” he says. “This is also because it is a question of social justice. Someone will have to pay for the transition, and working out who should pay, and who should be subsidized, is a political exercise.”
Local agenda
Clearly, this is a global issue, but it has particular resonance in central and eastern Europe (CEE), where six of Erste’s main markets are located. Countries such as Poland and Czech Republic are still heavily dependent on coal, while one of the most enduring legacies of communism is low-quality and inefficient housing.
It is also a region where climate change has been slow to appear in the public discourse. Erste was the first group headquartered in the region to join the NZBA. Other big regional groups, such as Raiffeisen Bank International (RBI) and Hungary’s OTP, have yet to sign up – although RBI, like Erste, joined the UN’s Principles for Responsible Banking this year.
As this suggests, climate change is now rising rapidly up the agenda in CEE. This is partly due to a blizzard of legislation from the European Union, where all but one of Erste’s subsidiaries are located, but also because it is becoming clear that the region will not be immune from physical risks.
Serbia, Erste’s only non-EU market, was the first to find itself on the sharp end of global warming when devastating floods hit the Balkans in 2014, but the effects are now being felt in central Europe and even Austria itself.
“We have been surprised very recently by tornadoes very close to the Austrian border in the Czech Republic, which caused a lot of damage,” says Spalt. “We have also had forest fires in Austria that have lasted for three weeks, which is unheard of.
“Change is happening fast, and we can’t assume that we are immune to extreme weather events.”
As a result, Spalt says, attitudes towards climate in CEE are shifting.
“Initially people were hoping this was just a fad which would pass, but they have now understood that it isn’t going to go away,” he says. “Even where there is not enthusiasm, there is a clear understanding that this is the future.”
The potential market for green home loans in our region is huge and the case for them is compelling
It probably helps that EU members in the region are about to be the beneficiaries of a wave of financing for climate mitigation and adaptation. Under the bloc’s Covid recovery package, NextGenerationEU, CEE is eligible for more than €95 billion of extra funding, of which 52% will be dedicated to green investments.
Spalt, who took over the top job at Erste in January 2020, says the prospect has generated intense interest among companies in the group’s markets, along with “huge” demand for advisory services.
“They want to know what funds they can access, what data they need to provide to get cheaper financing and what they need to do next,” he says.
This plays to Erste’s strengths. Spalt’s predecessor, longstanding chief executive Andreas Treichl, was an ardent advocate of the value of banks maintaining an advisory relationship with customers – including Erste’s core retail client base – in an era of digitalization.
He was equally evangelical about the importance of financial literacy and invested heavily in promoting it during the second half of his 22-year tenure, including founding a Financial Life Park for families at Erste’s Vienna headquarters in 2016.
Spalt sees a strong correlation between sustainability and financial literacy, particularly in areas such as green mortgages and housing loans. Erste already has programmes in all its markets designed to help customers understand and access subsidies for improving the energy efficiency of their homes.
“The potential market for green home loans in our region is huge and the case for them is compelling,” says Spalt. “Many of them pay for themselves in energy savings over two or three years. This is going to be one of the key growth segments in retail banking over the coming years.”
Regulation
Of course, the flip side of the EU’s sustainability drive is a rising tide of regulation. Banks’ asset management divisions have spent the last year grappling with the complexities of the Sustainable Finance Disclosure Regulation, and now banks themselves are scrambling to prepare for climate stress tests conducted by the European Central Bank, which will start in January.
These will model the near-term risks of extreme weather events and a rapid transition to higher carbon prices, as well as the longer-term impact of rising temperatures and policy responses.
As Erste’s former chief risk officer, Spalt is well aware of the complexities involved in getting to grips with an entirely new science.
“Modelling climate risk is a challenge because clearly there is no observable historic data that shows the correlation between a 0.5°C increase in temperature and credit risk,” he says. “Therefore, you have to start by collecting relevant data. Then you need to make assumptions about your exposure to physical risk and transition risk in different regions and different sectors.”
Financial regulators should not be making climate policy. They are not climate experts and nor are we. Climate policy is a matter for politicians
For Erste, as for other eurozone banks, the focus in recent months has been on the data collection part of the process – a laborious task which, as Spalt notes, is “incredibly expensive and doesn’t yield any kind of return.”
Nevertheless, he is broadly supportive of the ECB’s initiative – provided that it doesn’t lead to what he sees as regulatory overreach.
“If we treat climate stress tests as a connected training exercise, where regulators and banks try to understand better what is relevant, and what potential management conclusions can be, that’s great,” he says.
“If we misuse it early for taking on decisions on capital weights or on regulatory ratings, that will be wrong because it will base decisions on weak fundamentals.”
Spalt is also wary of – and vehemently opposed to – the use of regulation as a means of implementing climate policy.
“Financial regulators should not be making climate policy,” he says. “They are very good at understanding financial risk and the relation of risk capital, and at creating stability on financial markets. They are not climate experts and nor are we.
“Climate policy is a matter for politicians. It’s their job, they’re being elected and they’re being paid for it. They need to work out what is socially acceptable and what is socially wanted, and put that into law, then everybody can play his or her role.”
Emissions finance
If this sounds as though Spalt is talking his own book, he is quick to point out that Erste has a relatively light carbon footprint. The group has reduced emissions from its own operations by 25% in the last year and aims to be carbon neutral by 2023, although this is expected to involve the use of carbon offsets.
Erste’s financed emission intensity is low, at below 100 grams of CO₂ per euro, and exposure to high-emitting industries such as coal-based power generation, cement production, livestock farming and waste management amounts to just over 1% of total loans.
The group is working on reducing that further and in March committed to reduce financing for thermal coal mining and power generation to zero by 2030. It is also asking customers in those sectors to produce plans for transitioning away from coal by 2023.
At the same time, Spalt sees the primary role for banks in the transition as acting as a conduit for finance.
“We have a unique opportunity now,” he says. “On one side, people have understood that there is a huge desire to transform industries and technologies and the way we live, how we drive, how we travel and how we work.
“And at the same time, we have an abundance of liquidity, from the capital markets as well as from EU funds. The role of the banks is to bring these two sides together, to act as a broker and channel these huge amounts of money to where they should go.
“We can’t do everything, but we can do this. And if we can channel these funds to where they should be, that will be a huge achievement.”
