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What are the ESG (environmental, social and governance) criteria and

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ESG stands for environmental, social and governance, but what does each of these letters mean?

  • The E for environmental encompasses the effect that companies’ activities have on the environment – directly or indirectly.
  • The S for social includes the impact that a certain company has on its social environment in the community.
  • The G for governance alludes to the company’s corporate governance – for example, the composition and diversity of its Board of Directors, transparency policies for its public information, or its codes of conduct.

Companies are increasingly incorporating these three letters into their language, as the weight these criteria have for investors when choosing one investment or another, is key. Let’s talk about socially responsible investing. What does it mean?

Sustainable and responsible investing is an investment philosophy that integrates environmental, social and good governance criteria in the process of studying, analyzing and selecting securities for an investment portfolio, according to the latest SpainSiF report (promoted by BBVA) on sustainable and responsible investments in Spain.

Investors, increasingly interested in ESG criteria

Initially, it was the rating agencies specialized in sustainability that paid attention to these concepts, with more or less focus on some of them depending on the sector of the analyzed company. Sustainability or CSR teams were in charge of providing information to these agencies, which in turn shared their assessments with their customers.

Institutional investors have historically considered aspects related to corporate governance relevant for investing in banks. In recent years, their interest in the climate and social issues has progressively increased.

Some of the biggest asset management companies – especially those with passive management funds (like Vanguard, State Street, BlackRock) and also some active management funds, have created specialized teams, developing internal methodologies to assign their own sustainable ratings.

Therefore, “In 2020, there was a notable increase in analysis and request for information on environmental and social issues from investors, which was also associated with progress in BBVA’s sustainability strategy, and with the publication of our first report from the Task Force on Climate-related Financial Disclosures (TCFD) in November, which was very well received,” notes the Investor Relations (IR) team. Thus, the Group made an extraordinary effort to interact with a focus on these topics at the end of 2020, and into 2021.

In these interactions, “investors focused on the way BBVA is implementing its sustainability strategy, with a special interest in climate change,” the IR team explains. For example, they ask which sectors are the most sensitive to climate change in the loan portfolio and how the bank is helping clients in their transition toward a low carbon economy. Other topics that have generated greater interest have been diversity and the salary gap, cybersecurity, customer data protection, business ethics and financial inclusion initiatives in developing countries. In essence, topics that ESG rating agencies take into account.

Investors have stressed the importance of having uniform data on sustainability across banks in order to be able to compare and evaluate the companies in which they are investing.

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