EU legislation shapes national laws and initiatives

Most Spanish environmental and climate laws derive from the transposition of EU legislation. To fulfil the EU’s emissions reduction target under the Kyoto Protocol – reducing greenhouse gas emissions (GHG) by 8% from 1990 levels in the period 2008-12 – Spain agreed to a 12.5% reduction for this period and 18% below 1990 levels in the period 2013-20[1].

Equally, to deliver on the EU’s “2030 Climate and Energy Policy Framework” and policies under the European Commission’s 2019 “European Green Deal” – aiming to help achieve the Paris Agreement – Spain implemented corresponding initiatives, including:

• Participating at the EU Emissions Trading System (EU ETS) to reduce emissions through Law 1/2005 on GHG Emissions Trading.
• Setting-up a National Climate Council, which formulates and oversees the country’s strategy on climate change, which is based on the following principles: positive tax policy, rational land-use planning, energy saving and efficiency policies, and the establishment of a voluntary environmental management system.
• Formulating a 10-year National Energy and Climate Plan (NECP), setting-out how to reach national targets, including the binding national target for reducing greenhouse gas emissions that are not covered by the EU Emissions Trading System (ETS).

Meanwhile, passing the country’s first Climate Change and Energy Transition Law turned into a decade-long wait, with first debates taking place in 2011 until the Spanish Parliament finally adopted the law in May 2021[2], committing the country to cut emissions by 23% by 2030, compared with 1990 levels. This target is significantly lower than goals set by other major European emitters (Germany, for example, has committed to cut emissions by 65%), but the Spanish government has argued that the country’s emissions haven’t grown as much as in other EU states in recent years and are currently at levels seen in the late 1990s.

However, while discussions about the law’s level of ambition – or lack of – are ongoing, lawmakers have been praised for being the first in the world to include into the law a requirement for company climate action plans, as well as tight deadlines for businesses to reduce emissions. All corporates in Spain now must achieve emission reduction targets over a five-year scope – as such, pledging net-zero as a long-term goal is no longer an option.

Market observers equally welcomed the law’s:

• Goal to generate 74% of the country’s electricity with renewable sources by 2030.
• Ban of all new coal, gas and oil exploration and production permits with immediate effect.
• The 31 December 2042 deadline for the end of fossil fuel production on Spanish territory, while the sale of fossil fuel vehicles will be prohibited by 2040.
• The obligation for listed companies, financial institutions and insurers to prepare an annual report evaluating the impact of climate change risks on their finances. In addition, the Bank of Spain, the Stock Exchange Commission and the General Directorate of Insurance and Pensions have been ordered to jointly prepare, every two years, a report of the impact of climate change risks on the Spanish financial system[3].

Going forward, with the first review of the climate goals scheduled for 2023, climate stakeholders have called on the government to establish an independent climate committee that would advise on enhancing those objectives, also to Spain dropping to 21^st place (out of 32 ranked countries) in “The Europe Sustainable Development Report 2020“, an independent quantitative report on the progress of the European Union and its member states towards the UN’s Sustainable Development Goals (SDGs), published by the Sustainable Development Solutions Network (SDSN) and the Institute for European Environmental Policy (IEEP). In 2019, the country had ranked in the top 15[4].

Yet, there’s optimism that the new law in combination with the “Next Generation EU” fund, which the European Union created to help its member states tackle the consequences of the COVID-19 pandemic crisis, will accelerate the green transition. Through the fund, Spain can receive financing of up to €140 billion, which the government – according to its Recovery, Transformation and Resilience Plan – will use to invest in four areas: ecologic transition, digital transformation, gender equality, and social and territorial cohesion[5].

Corporate Spain’s journey to net-zero: setting the pace for sustainability

The long wait for a national climate strategy and law could have been an excuse for Spanish businesses to ‘wait and see’. However, quite to the contrary, Spain’s corporates have been at the forefront of implementing sustainability strategies. Utility company Iberdrola, for example, today one of the Top 20 sustainable companies in the annual Corporate Knights index, was amongst the first companies to issue a Green Bond (in 2014) and has since become one of the world’s largest private issuers of green notes[6].

Large corporates demonstrate green leadership

Collaboration on the road to net-zero is key for Spain’s corporates: in 2020, the UN Global Compact Network Spain was once again ranked as the largest local network worldwide by number of associate members[7], while Forética, the leading organisation in sustainability and corporate social responsibility in the country and the representative of the World Business Council for Sustainable Development (WBCSD) in Spain, currently counts more than 200 companies[8].

SMEs collaborate for net zero journey

Similarly, the country’s SMEs are joining forces to share ideas: in May 2021, the SME Climate Hub launched in Spain, increasing the accessibility to climate action for more than 1.3 million SMEs in the country by offering a one-stop-shop to make a climate commitment and access best-in-class tools and resources to achieve net-zero[9].

Sustainable Finance: steady growth, with room for more 

Years of strong growth for Spain’s economy came to an abrupt halt in 2020 when the COVID-19 pandemic hit.  The International Monetary Fund (IMF) estimated that the country’s GDP contracted by approximately 11.6% in 2020, the highest among developed economies.

Spain’s sustainable finance market catches up with the top

However, despite those challenging market conditions, sustainable finance in Spain rose 22.4% from 2019 to 2020, totalling €30.1 billion. And, globally, Spain is catching up with the bigger markets such as the US, France and the Netherlands, having ranked in the Top 5 for Sustainability Bonds with a total issuance of €3,12 billion[10]  for the first time in 2020 and claiming a market share of 3% in the global Green Bonds markets in the same year[11]. With Spain’s GDP projected to grow by 5.3% in 2022[12], and with an ambitious regulator, an equally determined central bank and a proactive financial services sector, Spain’s sustainable finance market is set to continue growing at pace. So, how exactly are Spain’s key financial markets institutions promoting sustainability?

CNMW and Banco de España at the forefront of raising climate awareness

Spain’s financial regulator, CNMV, has been actively promoting the EU’s initiatives to boost and standardise sustainable finance across the EU, such as the EU taxonomy and the Sustainability-related disclosures in the financial services sector (SFDR). A CNMV Internal Committee coordinates the activities of the CNMV in all matters related to sustainable finance and sustainability.

Spain’s Central Bank, Banco de España, joined the Network for Greening the Financial System in March 2018, only three months after the NGFS was created[13], and has since been busy developing tools to analyse the implications of climate change for its financial system as well as engaging with domestic banks to raise awareness. In this context, the Bank of Spain, which has started to incorporate sustainable and responsible investment criteria to manage its Non-Monetary Policy Portfolios, ran a top-down stress test to assess the resilience of the banking sector to climate-related transition risks. First results pointed to a moderate negative impact on economic activity over the short term and on Spanish banks’ profitability.

Furthermore, the Spanish Central Bank has assumed a leading role amongst the EU’s central banks, urging its counterparts to ensure that climate risks do not endanger the financial stability in Europe. In June 2021, Banco de España Governor, Pablo Hernández de Cos Governor, outlined how climate change affects the financial sector, inflation and the natural interest rate, and what regulators, supervisors and central banks can do to address climate change and support the transition to net zero through their monetary policy.

ICO plays pioneering role

The foundations for a flourishing sustainable finance segment were laid in 2018 by the Spanish State Finance Agency Instituto de Crédito Oficial (ICO) when it announced it was going to align its activity with the United Nations Sustainable Development Goals (SDGs) and the Paris Agreement[14].

With the issuance of three Green Bonds – the most recent in June 2021 – with a total volume €1.5 billion, the ICO has demonstrated the key role it plays in helping Spain to achieve its climate and energy objectives. Furthermore, the ICO supports a just transition having so far issued seven Social Bonds, totalling €3,55 billion, which positions the ICO among the leaders in the European Social Bonds market[15].

Spanish Treasury develops a unique ‘novelty’ Green Bond Framework

Published in July 2021, Spain’s Green Bond Framework, which includes seven eligible green categories representing €13.6 billion of central government green expenditure between 2018-21, received the highest rating (and the highest possible rating) by a European sovereign issuer from Second Party Opinion (SPO) provider Vigeo Eiris. Uniquely, the Framework focuses on climate change adaptation. In addition to the ‘adaptation to climate change’ category, Spain also incorporated adaptation components in its water, biodiversity, and pollution-related categories, which investors welcomed, expressing their hope that this ‘novelty’ might inspire other sovereign issuers to include adaptation projects, too[16].

The Spanish Treasury issued its first Sovereign Green Bond under this innovative framework in September 2021. With the 20-year €5 billion green note Spain became the 11th member state in the European Union to join the Sovereign Green Bond market[17].

Financial Services industry pledges support …

The regulator’s proactive stance – and its rather more ‘carrot than stick’ approach – and the ICO’s sustainable finance leadership paid off early: In 2019, the majority of Spanish banks signed the Spanish Collective Commitment to Climate Action, which is similar in purpose and ambition to the Responsible Banking Principles[18]. One year later, FINRESP, the Spanish Centre for Responsible and Sustainable Finance, launched with the goal to address the financing challenges and needs of the Spanish business community (SMEs in particular) in their efforts to becoming sustainable and to make a positive contribution to the 2030 Agenda and the Paris Agreement goals[19].

… while Spain’s corporates and local authorities help promote the sustainable finance market

Telecoms company, Telefonica, and renewable energy company, Acciona – both frequent issuers of Green bonds - also delivered two ‘sustainability firsts’ in the Spanish market: in H1 2020, Acciona became the first corporate to align with the EU Taxonomy, while in January 2021 Telefonica became the first telecoms firm in to set-up a Sustainability Framework.  

The Community of Madrid delivered another headline making transaction with its inaugural €1.3 billion sustainable bond, which was the largest of its kind in 2020, and the second largest on record. Meanwhile, the €3.2 billion leverage buyout of Masmovil Ibercom in July of 2020 by KKR, Civen and Providence marked the country’s largest ESG-linked loan on record[20]

NatWest and Spanish corporates and FIs collaborate in fight to tackle climate change

Iberdrola sets the pace for energy transition

With over 170 years of history, Spanish utility company Iberdrola is a global energy leader, the number one producer of wind power and one of the world’s biggest electricity utilities in terms of market capitalisation.

In November 2020, the company announced a €75 billion investment plan for its green transition. Projects include smart grids, the development of renewable energy generation and energy efficiency programmes. So far, the company has increased its installed free of emissions capacity to over 35,000 MW, 76% of the total own capacity. Although the emissions per kWh generated are already more than 40% below the average for the European electricity sector, Iberdrola has set the goal to reach carbon neutrality by 2050.

To raise further funding for the green projects in its pipeline, the Spanish energy utility, which issued its first green bonds in 2014, launched a €2 billion dual tranche green hybrid bond, with the support of NatWest, at the beginning of 2021. As well as securing investor money for its green projects, the hybrid bond helps increase the company’s financial flexibility and secure funding for its capital-intensive green transition programme.

Telefónica is going strong with decarbonisation and inclusivity

Spanish telecommunications company, Telefónica, which operates in 12 countries and serves over 344 million customers is committed to tackling climate change, as well as increasing its positive social impact. The Madrid-headquartered firm is on-track to reach its decarbonisation objective of reducing its energy consumption per unit of traffic (MWh / PB) by 90% and achieving net-zero emissions in its four core markets by 2025.

To get funding for green and social projects within its sustainable financing framework and to diversify its funding sources, Telefónica turned to NatWest to support the launch of the sector’s first sustainable hybrid bonds, aiming to raise €1 billion.

This sustainable hybrid bond, which delivered the lowest-ever coupon for Telefónica hybrids, marked the first issuance under Telefónica’s freshly updated sustainable financing framework, expanding the scope of its social impact projects to include deploying broadband in disconnected areas to help reduce the ‘digital divide’ and improve connectivity, support for employment and entrepreneurship as well as educational initiatives and skills development programmes. Green initiatives within their framework focus on energy efficiency of the network infrastructure, renewable energy, and digital solutions for the environment. One example is the replacement of Telefónica’s copper-based network with fibre, which the company started in 2019 after issuing its first green bond. From 2016-19, thanks to the shutdown of hundreds of thousands of elements and the closure of hundreds of copper plants, Telefónica has saved 346GWh of energy and avoided 93,297 tCO2, equivalent to the carbon captured by more than 1,543,000 trees.

CaixaBank plays critical role in advancing sustainable finance in Spain

Spain’s leading retail bank, CaixaBank is committed to accelerating the transition to a low-carbon economy that promotes sustainable development and is socially inclusive. In its Environmental Strategy, the financial institution outlines how it contributes to this transition through financing and investing in sustainable projects, managing climatic risk, and reducing the direct impact of its operations. Caixa has already achieved an 85% reduction in its carbon footprint and is the first listed Spanish bank to offset 100% of its calculated CO2 emissions, while 99.34% of the energy it consumes comes from renewable sources.

To provide sustainable financing to its customers, CaixaBank has tapped into the global capital markets for social and green issuances. In November 2020, the company placed its first Green Bond for €1 billion to finance renewable energy projects and energy-efficient buildings and followed up with its Second Green Bond, a €1 billion transaction, in February 2021. In May 2021, with the support of NatWest, CaixaBank successfully launched its debut Green Bond in the Sterling market, £500 million 5.5-year Green Senior Non- Preferred Notes, with the bond proceeds supporting projects that meet the UN Sustainable Development Goals (SDG) #7 “Affordable and Clean Energy: Renewable Energy” and SDG9 “Industry, Innovation and Infrastructure: Green Buildings”.

Notes

[1] Environmental law and practice in Spain: overview | Practical Law (thomsonreuters.com)

[2] Climate Change News: Spain end fossil fuel production 2042 new climate law

[3], [5] globalelr.com: Spanish public law in 2021- 10 things to look out for

[4] unsdsn.org: europe sustainable development report 2020

[6] iberdrola.com

[7] investinspain.org: Sustainability

[8] foretica.org: Sobre foretica

[9] smeclimatehub.org: The SME climate hub debuts in spanish increases accessibility to net zero emissionsreductions

[10] environmental-finance.com: Sustainable bonds insight 2021 (PDF)

[11], [16] investinspain.org: Spain green bond

[12] ec.europa.eu: ECFIN forecast winter 2021 (PDF)

[13] icw-banco-de-espana-margarita-delgado-final.pdf (ngfs.net)

[14] ico.es: Sustainable financing

[15] ico.es: ICO-27s Sustainable bonds

[16] See [11]

[17] Institutional Asset Manager: Spain issues first sovereign green bond

[18] , [19] afi.es: Green Finance in the UK and Spain latest developments and key service providers (PDF)

[20] Clifford Chance: Spanish Financial Markets in 2021 Perspectives after Covid 19 (PDF)