About this ATALK
Discover the intricacies of sustainable finance and the European Taxonomy in this engaging episode. Ricardo Pedraz discusses the future of sustainability in finance and business.
Find in this ATALK:
- 𝗘𝘂𝗿𝗼𝗽𝗲𝗮𝗻 𝗧𝗮𝘅𝗼𝗻𝗼𝗺𝘆 𝗗𝗲𝗺𝘆𝘀𝘁𝗶𝗳𝗶𝗲𝗱: Grasp the fundamentals of this extensive classification system that is revolutionizing the finance and business sectors in Europe, and comprehend its significance for organizations of all sizes.
- 𝗘𝗦𝗚 𝗥𝗲𝗽𝗼𝗿𝘁𝗶𝗻𝗴 𝗮𝗻𝗱 𝗖𝗼𝗺𝗽𝗹𝗶𝗮𝗻𝗰𝗲: Understand the importance of accurate ESG reporting, how it influences corporate image, and the steps businesses must take to ensure they comply with relevant regulations.
- 𝗧𝗲𝗰𝗵𝗻𝗼𝗹𝗼𝗴𝗶𝗰𝗮𝗹 𝗜𝗻𝗻𝗼𝘃𝗮𝘁𝗶𝗼𝗻𝘀 𝗗𝗿𝗶𝘃𝗶𝗻𝗴 𝗦𝘂𝘀𝘁𝗮𝗶𝗻𝗮𝗯𝗶𝗹𝗶𝘁𝘆: Delve into the crucial role technology plays in gathering, managing, and reporting ESG metrics, ultimately facilitating the improvement of sustainability strategies and generating a positive impact.
- 𝗚𝗿𝗲𝗲𝗻 𝗙𝗶𝗻𝗮𝗻𝗰𝗲 𝗮𝗻𝗱 𝗜𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗢𝗽𝗽𝗼𝗿𝘁𝘂𝗻𝗶𝘁𝗶𝗲𝘀: Explore the growth of green finance, and learn how it creates new investment opportunities while promoting environmental protection and social responsibility.
Don’t miss this informative and thought-provoking conversation that will expand your understanding of sustainability in finance and business. Listen now and stay ahead in the world of sustainable finance!
Joana Alves, Co-Founder at APLANET, interviewed Ricardo Pedraz for this ATALK. You can find the full transcript of their conversation below.
|Welcome to ATALKS where sustainability has a voice, at APLANET, we have created this space so that we can discuss the most important sustainability hot topics and for that we interview relevant sustainability professionals from different sectors and geographies so that they can share their experience with us.|
Today, we’re delighted to have Ricardo Pedraz with us as a guest from Spain and to introduce our guest speaker. Ricardo is a sustainable and public finance consultants at AFI. And he is responsible for advising on several sustainability finance projects, from defining their strategy to their implementation and reporting. He’s also a professional of sustainable finance at the AFI School of Finance in issues related to sustainable finance, blending finance and public finance. And he’s the author of several publications around this topics. Ricardo, thank you very much for being with us here today. It’s a pleasure to have you here.
|Ricardo Pedraz||Thank you for inviting me, Joana. It’s a pleasure for me too.|
|Joana||Thank you so much for being with us here, Ricardo, you are a sustainable finance expert. Can you tell us what made you decide to dedicate your professional life to sustainability?|
|Ricardo||Well, I’ve been working in an office in seven years ago, so I have a previous experience not related to finance. And also the sustainability. I was working on public policy before, yeah. But as I joined AFI, everything is ready to finance. And in this case, I’m mainly involved on public finance and sustainable finance. Yeah, as part of my background and and professional works, I was devoted to several topics and one of it, one of those was ready to climate change policies yeah in related to economic policy, not only as environmental policy. So when the sustainability became a nuclear part of finance, I was more or less ready to contribute as part of AFI on this topic. Now I’m involved in several sustainable finance projects and my background just helped me to work on them.|
|Joana||That’s very, very interesting, but and for the public that doesn’t know AFI, can you explain this? What are the type of projects that you work on a daily basis and what type of clients do you advise?|
Okay here at AFI we work with a whole bunch of clients. Yeah, mainly on finance issues. Okay and as part of the public finance team also I’m working with several financial entities that are public but sometimes to regional or national or local governments sometimes even international entities. And with those we are involving on issuing green bonds. I’m sure all of you know about green bonds and also preparing the budget of public entity in relation to the regulation, but also considering sustainability issues, but some also involved in other projects with other corporates.
We are also doing some risk analysis for these clients on sustainability issues, trying also to estimate which is the potential demand of sustainability related projects or services or products as part of the projects I’m involved, they are not only the only ones that office working on, but these are the ones that I’m working on. Yeah. And finally the financial entities which is more or less the biggest part of the clients that we are working for. Yeah, this financial entities a the public as I said before insurance companies, banks and also investors… They are really worried about the regulation and sustainable finance, but also at the same time developing new products, trying to engage with clients and sustainability issues as it is a new issue to add on the previous ones you are they were involved on with the clients and now it’s part of the clear specifications that they request sometimes to the clients. So well these are the type of support we are providing them.
|Joana||That’s very interesting because you have this background in finance and also in sustainability and you have a different range and type of clients from public sector to private sector and financial sector. So you can have this broader perspective and knowledge of what’s happening in sustainable finance, but from a more systemic point of view and regarding that in your experience both in finance and sustainability. Why is sustainability considered a risk factor that needs to be managed and quantified by investors? Why is it so important nowadays?|
|Ricardo||Sustainability is not only about risk, yeah, but it’s a key issue now. Yeah, when we were developing risk analysis before we were considering technology potential and future demand, the cost flow of the company and other issues, yeah? But several analysis and experience from the corporate sector have released really nice reports and conclusions. That sustainability should be another issue to consider because sometimes they are not relevant from the risk analysis point of view, but sometimes it is. And you need to clarify which is in which case you are, it’s time. Yeah. So sometimes there are sustainability factors that might affect your cash flow, the valuation of some assets, the potential demand, the regulation and well, it’s another one. It’s an additional issue to consider when considering risk. |
The main topic from financial point of view now is climate, but it’s not the only one. Yeah, when we refer to sustainability. But it’s true that the supervisor, the financial supervisor, for example, on the financial regulators are really worried about the climate risks, Yeah. And how it can affect risks of the corporates or clients, the relation to the financial entities. So now it’s the issue that can create or enhance new risks, yeah. So we need to consider them and first of all, identify in which cases which type of factors can affect the valuation of an asset or the future cost flow and if we can minimize this kind of risk. Yeah. So it’s not a topic, this is a trend now, but it’s a new one that we need to add on, on the issues that we deal with in relation to financial risk analysis.
|Joana||It’s important why you just said it’s not, it’s not just a risk, it’s or an additional risk. It’s a key issue nowadays in businesses. And I think that regulations are also confirming this trend and as you know, the there is this new European Union taxonomy, I know you have a lot of experience working with a taxonomy that basically establishes a list of sustainability sustainable economic activities. So there’s a classification on where should the money go, right? Can you explain this Ricardo of having you experience in advising your clients in taxonomy? What’s the rationale besides the behind this legislation and and how does it work in practical terms?|
|Ricardo||Okay, yeah, taxonomy is a new issue and I guess it will be really important in the future, but much more important I did today. Yeah, it’s something new that came up few years ago and the new regulation is in place, but still working process, OK. |
This regulation that you refer to in the youth taxonomy, as everybody knows, it’s about how to identify which activities can be also positive from the sustainability point of view. OK. So it’s a way to understand each other of what we call sustainable activity.
The regulation states there are now 6 environmental objectives that should be considered when referring to sustainability. The regulation still doesn’t refer to social issues. It seems it will come up later. Yeah, and now they have developed two of those six sustainability objectives, and it means that they have identified which activities can be real. I mean, they are in place, but also when they are developed can be really positive to achieve one of these environmental objectives. Okay they clarify which is the activity, how should it be developed, the technical criteria and some other consideration trying to avoid other damages that might be related to, yeah, try to minimize all the risks and in other fields.
So the taxonomy or the classification of sustainability activities, which is the real name, there is something that will help us as a dictionary to identify if you are developing or not an activity that might be considered positive from a sustainability point of view. Now the regulation in place just only referring to two climate objectives, mitigation and adaptation, but there will be four more that will come up. Hopefully this year. So we will have a whole set of activities that can be with no doubt in Europe, be referred as sustainable if they fulfill the criteria set up in the regulation. It’s like a dictionary, It’s like a new way to understand each other of what we call sustainability, because prior to this regulation there were nothing similar. We agree each other, but if we talk with another third person, I’m sure we need to discuss a bit in order to clarify with what we call sustainability. But because it might not be the same at least in a few years, there will be a clear definition in Europe, Yeah, about what we call sustainability and it’s different this approach that the usual we were using in the past, now we are referring only to economic activities, not about the company. And how it handle the company and how the managers are handling the company and how it’s managed. Yeah, how is the treatment with the how they treat the the workers or the OR the clients or whatever. Now we are talking about the activities that might be economy competitive, if not that might not exist in the market for sure. Yeah, but also really positive from in at least one of those environmental objectives.
|Joana||That is a very interesting explanation and I think it’s very easy to understand the expression dictionary because it’s really a dictionary, but Ricardo, so basically the taxonomy is firstly a classification tool to help companies define whether their economic activities are considered sustainable or not at the moment regarding environment, but it’s also aligned with reporting, right, because they’re already companies that have to report their alignment with the taxonomy but there will be many more with the CSRD and and so do you think that this is something that is just for the large companies to worry about or do you think that in the following years it’s something that this alignment will need to be reported by many more companies besides the large companies or listed companies?|
|Ricardo||OK, Yeah, it is a really important topic. That will be a more important topic in the future. Yeah, really cornerstone of the pub, sustainable finance regulation and an activity. Let me explain a bit about the taxonomy. Now there’s only one request. Yeah, it’s to be transparent about: are your activities related to the taxonomy? If they are, they are eligible according to the taxonomy. And if they are eligible to, do you fulfill all the technical criteria? If they are, they’re only eligible but also aligned to the taxonomy. |
So all the big companies in Europe have to report on it. OK. It’s a new way to account, like a green accountancy. Yeah, you have a dictionary and you match your activity to it. So you make a clear explanation about how green is your activity. But now it applies only to the big companies, the big corporates. Yeah, but in the future, the new regulation will reduce the thresholds. Many more companies, yeah, will be obligated to report according to this classification. And also report not only about the financial stuff, yeah and accountancy, normal accountancy request, but also about this green accountancy I might call it. Yeah, but you can say OK if you are not alive, can you do it? For sure, you can do it. Yeah, you should do it. If you want to explain yourself as an economic activity to your clients, to your financiers, to your investors, to everyone, yeah.
So it’s a dictionary, as I said before, that you can use even if you are not forced to use because everybody will use it in the financial sector. This regulation is made for financials, but the financial are here just to support clients, corporates that do businesses and we try to finance, ensure or invest on those activities. But this only the reason that taxonomy applies directly to the financial sector but also to non financial sector.
I’m sure it is complicated for many SMEs yeah. But pay attention because it will evolve. Now we have 2 lists related to two environmental objectives, We will have six in the near future. And I guess we’ll have also social list of activities that might be really supportive for this social goals that might be defined. So more or less everybody will find the way to set a goal to be more sustainable. Yeah. And report on it, it will be a benchmark for everybody.
So I guess it’s a new language we will use for businesses or reporting and for finance. So I’m sure it’s something that will stay here for a long time. I am sure it will be useful, but I’m sure it is complicated now. So we’re trying to make it easier, but not easy to do it. Yeah?
|Joana||Exactly. And it seems very complicated and very complex because it’s more than 600 pages and I think that not all companies have resources to interpret how to check their eligibility and alignment with the taxonomy and also the reporting issues. So do you think it’s inevitable that these companies will need support from consultancies such as AFI to help them check this alignment with the taxonomy? Or do you think that it will increasingly become more simple so that everyone can buy themselves reports on what is being asked by the taxonomy? I think.|
|Ricardo||I think those people like I am, which are external for company we can support that corporates at the beginning, yeah, I’m sure it’s helpful for them to interact with somebody which is an expert or kind of an expert on this topic because it will help that the corporates or the clients, my clients, to understand the regulation and try to follow it. Yeah, it’s difficult, but we can support it. |
In the future when you have, you are part of a corporate, yeah. You might have, for example, three business lines. Yeah. If you analyze from the tax taxonomy point of view to today, this during this year, I mean, it might be a difficult task. You have never accounted your business line according to the taxonomy. You were not in place two years ago. So for sure it’s a new issue. Yeah. So we can support you on that, but once you have it analyze this year, next year if you don’t develop a new business, the accountancy will be the more or less the same. I mean you you update the financial data related to it, but the activity will be the same, one will be classified either non eligible, eligible, well eligible and align it as I said before, so it might you might find useful to get support from external entity or expert like I am, But it’s mainly at the beginning I might say.
I hope that because if not it will be difficult to spread this knowledge and spread this way to interact each other, among business people and other supporters on this. It’s different from the financial entities point of view because their business and the alignment or eligibility according to taxonomy depends on the clients they have and they might change or the part of the business you fund or you insure. Yeah I might insure one entity but my finish to be my client two years later and then and each year I need to account it all my clients. so for financial entities, if we are hot topic from now to the future, yeah and that’s why we are involved on these issues.
We are becoming sustainability experts. But on those issue related to finance mainly, yeah, we there are all the people that might be much more experts on sustainability stuff in general, Yeah, we are really focusing on financial linkages with sustainability. So taxonomy again, it’s difficult at the beginning and I hope it won’t be in the future, so, well, we might, we will try to help the clients in other issues, yeah for sure. But now this is a good topic to work with.
|Joana||Great. And hopefully this will become a more simple and accessible language that all companies can understand. And talking about the SMEs, Spain is a country of SMEs and the great majority of the companies is not yet obliged not only to disclose their alignment with the taxonomy but also they are not yet obliged to disclose their non-financial information. Nevertheless, do you think that the SMEs are already aware that they should integrate sustainability in their businesses and what advice would you give for foreign SMEs, that is, that is starting to think about a successful sustainability strategy to implement?|
|Ricardo||I mean if you are an SME you, I’m sure you’re focusing on two or three business lines, yeah and it depends on the business line you are a good company on. You will have several regulation or requests from clients. Yeah that might affect your future demand in the sense sustainability will be an issue to try to identify the future demand. |
All of us as clients, all the big corporates, as clients of SMEs, yeah, will request some better behavior on sustainability criterion factors. So for those who are part of an SME, yeah, even if they’re medium or small, I’m sure they have clients, big corporates sometimes or they’re trying to get funding from a bank or an investor, all these clients, all these financers will analyze the SME sustainability point of view because it will be a request from the regulation.
So it will be a kind of trickle down for everybody. Yeah, Apart from that, you might realize that sustainability is a good way to behave and also a good way to define future strategies because the man will be more linkage to sustainability activities in the future than today because clients requested. So you might consider this a part of your strategy, not the unique issue, but part of it important one. So those, but one of it, yeah?
So even if you are part of a sector that have a strong regulation really. For example, a chemistry that the the regulation now requests really good behavior, environmental issues, several requests. Or you are part of a… you are a provider of a big corporate or you at the end get finance or insurance for a financial entity. You might have this request from your ecosystem, Yeah, of your environment. Or you might consider that this is the future and also consider it so from my point of view as part of AFIr that we tackle this issue as part of financial or economic activity and just the only way we that our rationale is useful or try to explain it. I think we might consider that everybody might find a way to be more sustainable and it would be better for them in the future.
|Joana||That’s a good advice for SMEs. Don’t wait for the law to make it mandatory for you to disclose your non financial information and start integrating sustainability in your strategy. And Ricardo, you are also a professor at AFI at the AFI School of Finance. Can you explain us what How does it work? What type of topics do you teach? Then what are your typical students?|
|Ricardo||One of the topics I’m teaching is on taxonomy. Yeah it’s obvious I guess and we are trying to support financial entities or non financial entities to understand it and apply it to understand how to identify if your activities might be considered sustainable according to the taxonomy or not. |
It’s not easy as you said before, Joana, but well we can help you to understand it to show you which are the tool, which is the relation some examples debate on them. So this is one topic, but all the topics we are teaching on is ready to finance.
Sometimes finance are related to product development. I can’t develop a financial product green loan. And but it depends on what the financial entity is financing, OK. If the activity is green, I might consider my green, my loan as green. But our innovation as part of the sustainable finance product development, yeah, we might develop some KPIs related loans and those KPI might be related to sustainability and I don’t care about your activities, but if your sustainability performance is improving, I might offer you a better price. But if it’s not improving enough, I might offer you a worse price. It’s another sustainable finance product.
But when we talk about finance, we always talk about risk and performance and profits. Yeah, Subinomial, yeah. So we’ll link it. Profit and risk, the risk here, it is a product, a project service. It should provide you an expectation of better profits. If not, it’s not worth to have that risk. And as part of the risk, we analyze sustainability factors and we are teaching on them. Yeah, Which are material factors which are relevant for your business and your strategy should be taken care of, Yeah. Because at the end, if you take care of them properly, I’m sure your financier will consider that the risk is less, so the price might be less. If the risk is bigger, the price might be bigger. So it’s quite simple now, but you need to gather different data, you need to develop different methodologies to understand which is the increase of risk related to a ESG factor and that’s what we are teaching them on the school of finance here at AFI. Yeah, and well, several of the topics are related to AFI school of finance, but some unsustainable finance that are mainly those of ones.
|Joana||That sounds very interesting, and I’ll probably be a potential student at your school and hopefully many of our listeners too. And there’s indeed a lot to learn around these topics regarding sustainability and finance and I’m sure you’ll have many more people engaged and Ricardo you actually you also have some kind of expertise regarding technology and APLANET is a tech company. So I would like to know what is your opinion about the role of technology as a lever to sustainability.|
|Ricardo||Okay. Well, as I said before, I used to work on public policy too. Yeah. And there are two levers now for public policy. Yeah, digitalization and sustainability support of. Yeah. |
So digitalization of technology is based on technology. It’s a key issue for everybody. Yeah. So when we talk about sustainability, that the gathering should be based on technology shouldn’t be a human resource intensive, Yeah. Management of those data should be based on technology. Because if not, it’s really human resource intensive and it’s not worth it. Yeah, sometimes, yeah.
And decision taking and reporting or monitoring at least, Yeah, should be based on technology. We need technology to incorporate the sustainability data as part of the decision taken. Not only for corporates and financial entities, but also for public governments and we’re trying to support that. It’s not easy, but hopefully one day the public entities will also consider sustainability reporting as part of their activity and this kind of need might also help them. But at least, for corporates, for business development, it’s a key issue. Sustainability and the technology implementation is part of the decision taken that they should consider yeah, at the beginning that my identify two or three fields to gather information. But as you need to take care of which are the facts or several factors according to different activities and different assets and different locations, sometimes yeah, you need to to handle with a lot of data and for sure you need IT development, yeah, so for sure it’s a must.
|Joana||Exactly. Totally agree technology must be looked at as a friend to help companies collect, manage and report all this big volume of ESG data. So that the companies in the end they can save time and resources and become more efficient in their sustainability management because otherwise they will be the whole year just focus on this kind of as you said human resources work just gathering information. And not using their time for what is important, which is improve their sustainability strategy and generate a better impact, right?|
|Ricardo||True. That’s true. Sustainability is not only about risk, as I said before, it’s also about the impact, which is becoming more important. It’s the other side of the coin and it’s related to sustainability. Different side of… sometimes you have a factor that might consider risk, but also an opportunity, yeah, because you have a really good and positive impact. As I said before, taxonomy is about the impact at the end. Yeah, risk is different. Yeah. Taxonomy is not really about risk and we can, although we can take consideration about taxonomy and other ESG considerations in relation to ESG risk analysis. Yeah, but impact will be a key issue in the future and sustainability impact will be the main part of the impact that will be monitoring.|
|Joana||Exactly. That’s a great note to end on. And Ricardo, lastly, we always make this question to our guests. Who would you like to be here interview that ATALKS?|
|Ricardo||Well, I mean, I think it’s useful to have here financial provider, yeah, somebody that’s really good experts and sustainability as part of this sustainability world. And it can show the SMEs or corporates, which is the other side of the coin. Yeah, financials are taking care of sustainability as much as corporates, but they have also some regulation. Trying to understand it will help you. So people that’s working in this field, I’m sure it will be really useful for some of the listeners of this podcast here because for example, those experts are engaging on this product development risk analysis that you might be providing information about it. So I’d really recommend to interview some of those experts in the financial world that are working on sustainability.|
|Joana||Thanks Ricardo for your suggestions. We’ll make sure to have both. Representatives from the financial sector and also from SMEs. I think it’s important that everyone has a voice and that everyone shares their their perspective from a sustainability standpoint. |
Ricardo, thank you so much for your most valuable inputs. It was great to have you here today and for everyone who’s listening, I hope you have enjoyed it and see you in the next ATALK. Bye, bye.