Financing Sustainable Development: Key Challenges and Prospects [1st ed. 2019] 978-3-030-16521-5, 978-3-030-16522-2

Table of contents :
Front Matter ....Pages i-xxvi
Introduction (Bruno S. Sergi, Magdalena Ziolo)....Pages 1-7
Sustainability in Finance and Economics (Diana-Mihaela Țîrcă, Anișoara-Niculina Apetri, Mirela Ionela Aceleanu)....Pages 9-52
Sustainable Development Versus Green Banking: Where Is the Link? (Magdalena Ziolo, Marta Pawlaczyk, Przemysław Sawicki)....Pages 53-81
Sustainability, Innovation, and Efficiency: A Key Relationship (Daniele Schilirò)....Pages 83-102
Socially Responsible Financial Markets (Dejan Jednak, Sandra Jednak)....Pages 103-125
Institutional Investments and Responsible Investing (Ria Sinha, Manipadma Datta)....Pages 127-168
Patronage in the Financing of Social and Sustainable Projects (Manuel Nieto-Mengotti, Carmen Gago-Cortés)....Pages 169-192
Sustainable Capital Market (Andreea Stoian, Filip Iorgulescu)....Pages 193-226
Sustainable Public Finance and Debt Management (Isabel Novo-Corti, Xose Picatoste)....Pages 227-247
Environmental, Social and Governance Risk versus Company Performance (Türker Şimşek, Halil İbrahim Aydın, Bartosz Oliwa)....Pages 249-268
Sustainable Financial Systems (Stanisław Flejterski)....Pages 269-297
Green Finance Concept: Framework and Consumerism (Marwa Ben Ghoul)....Pages 299-312
Public–Private Partnerships as a Mechanism of Financing Sustainable Development (Bruno S. Sergi, Elena G. Popkova, Kseniya V. Borzenko, Natalia V. Przhedetskaya)....Pages 313-339
Social Reporting of Egyptian Islamic Banks: Insights from the Post-Revolution Era (Mohamed Nagy Osman)....Pages 341-369
Back Matter ....Pages 371-375

Citation preview

PALGRAVE STUDIES IN IMPACT FINANCE

Financing Sustainable Development Key Challenges and Prospects Edited by Magdalena Ziolo · Bruno S. Sergi

Palgrave Studies in Impact Finance Series Editor Mario La Torre Sapienza University of Rome Rome, Italy

The Palgrave Studies in Impact Finance series provides a valuable scientific ‘hub’ for researchers, professionals and policy makers involved in Impact finance and related topics. It includes studies in the social, political, ­environmental and ethical impact of finance, exploring all aspects of impact finance and socially responsible investment, including policy issues, financial instruments, markets and clients, standards, regulations and ­ financial management, with a particular focus on impact investments and microfinance. Titles feature the most recent empirical analysis with a theoretical approach, including up to date and innovative studies that cover issues which impact finance and society globally. More information about this series at http://www.palgrave.com/gp/series/14621

Magdalena Ziolo  •  Bruno S. Sergi Editors

Financing Sustainable Development Key Challenges and Prospects

Editors Magdalena Ziolo Faculty of Economics and Management University of Szczecin Szczecin, Poland

Bruno S. Sergi Davis Center for Russian and Eurasian Studies Harvard University Cambridge, MA, USA

Palgrave Studies in Impact Finance ISBN 978-3-030-16521-5    ISBN 978-3-030-16522-2 (eBook) https://doi.org/10.1007/978-3-030-16522-2 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2019 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the ­publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and ­institutional affiliations. Cover illustration: © AlexSava / iStock / Getty Images Plus This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Acknowledgements

Research results presented in this book are an element of the research project implemented by the National Science Center Poland under the grant OPUS13 no UMO-2017/25/B/HS4/02172.

v

Praise for Financing Sustainable Development “This book provides a significant insight into new methodologies of researching effective resources of sustaining development while boosting global economy that is also relevant to The Americas’ economy.” —Dr. Abel Adekola, Dean and Professor of International Management, Jay S. Sidhu School of Business & Leadership, Wilkes University, USA “This is a valuable book that discusses and elaborates on contemporary challenges and prospects of sustainable development with particular emphasis on the finance aspects. Financing Sustainable Development presents relevant theoretical and the latest empirical studies in the scope of financing sustainable development. It provides a comprehensive understanding of financing sustainable development, particularly in the emerging Asian markets.” —Professor Jamal Wiwoho, Rector, Universitas Sebelas Maret, Indonesia

vii

Contents

1 Introduction  1 Bruno S. Sergi and Magdalena Ziolo 2 Sustainability in Finance and Economics  9 Diana-Mihaela T‚îrca˘, Anis‚oara-Niculina Apetri, and Mirela Ionela Aceleanu 3 Sustainable Development Versus Green Banking: Where Is the Link? 53 Magdalena Ziolo, Marta Pawlaczyk, and Przemysław Sawicki 4 Sustainability, Innovation, and Efficiency: A Key Relationship 83 Daniele Schilirò 5 Socially Responsible Financial Markets103 Dejan Jednak and Sandra Jednak 6 Institutional Investments and Responsible Investing127 Ria Sinha and Manipadma Datta 7 Patronage in the Financing of Social and Sustainable Projects169 Manuel Nieto-Mengotti and Carmen Gago-Cortés ix

x 

Contents

8 Sustainable Capital Market193 Andreea Stoian and Filip Iorgulescu 9 Sustainable Public Finance and Debt Management227 Isabel Novo-Corti and Xose Picatoste 10 Environmental, Social and Governance Risk versus Company Performance249 Türker Şimşek, Halil İbrahim Aydın, and Bartosz Oliwa 11 Sustainable Financial Systems269 Stanisław Flejterski 12 Green Finance Concept: Framework and Consumerism299 Marwa Ben Ghoul 13 Public–Private Partnerships as a Mechanism of Financing Sustainable Development313 Bruno S. Sergi, Elena G. Popkova, Kseniya V. Borzenko, and Natalia V. Przhedetskaya 14 Social Reporting of Egyptian Islamic Banks: Insights from the Post-Revolution Era341 Mohamed Nagy Osman Index371

Notes on Contributors

Mirela Ionela Aceleanu  is PhD Professor in the Department of Economics and Economic Policies and Director of the Doctoral School of Economics I, Bucharest University of Economic Studies, Romania. She has participated in research internships at the University of Reading (UK), University of Gothenburg (Sweden) and University of Barcelona (Spain). Her extensive research experience consists of the publication of numerous economic studies and participation in conferences and in research projects. She is Assistant Editor of the Theoretical and Applied Economics Journal and a reviewer for many other journals. Research interests include the labour market, employment policies, green jobs, environmental policies, sustainable development, the rural and green economies, and education. Anis‚oara-Niculina Apetri  is PhD Assistant Professor in the Department of Accounting, Finance and Audit, Stefan cel Mare University of Suceava, Romania. She has participated in Erasmus training at the University of Parma (Italy). Her research experience consists of the publication of numerous economic studies and participation in conferences and in research projects. She is Assistant Editor of the Accounting, Finance and Business Economics Journal and a reviewer for several conferences and journals. Research interests include finance, corporate finance, public finance, sustainable finance and banking. . Halil Ibrahim Aydın  is Associate Professor at the department of economics, Faculty of Economics and Administrative Sciences at Batman University. He also serves as Vice Dean of the Faculty of Economics and Administrative Sciences and on the Faculty Board of Directors. His teaching areas are xi

xii 

NOTES ON CONTRIBUTORS

Macroeconomics, Economic Development and Growth, Social Capital, Turkish Economy, International Economics, and Energy Economics. The author has many national and international publications on multidisciplinary issues to his name. In addition to academic papers, articles and projects he has been the editor of numerous other publications. His works include “Para-Banka ve Finans (2016)”, “İktisadi Krizler ve Türkiye Ekonomisi (2015)”, “Bölgesel Kalkınma Üzerine Yazılar (2014)”, “Kalkınma Üzerine Ekonomi Politik Yazılar (2016)”, “Sosyal Sermaye ve Kalkınma (2016)”, “Economic Development: Global & Regional Studies (2017)”, “Economic Development: Social & Political Interactions (2016).” Marwa  Ben  Ghoul  is a Tunisian PhD fellow in the Faculty of Science Department of Statistics, Anadolu University, Turkey. She graduated as a Statistician from the School of Statistics in Tunisia and has an MA in Econometrics and Economic Modelling from Tunisian Polytechnic School. She worked as a professional statistician and a project leader at datametrix (CRO Company) for almost six years. Her main research interests include econometrics, biostatistics, data analysis and modelling. Kseniya  V.  Borzenko  is a postgraduate and assistant in the Chair of Economic Theory at Rostov State University of Economics, Russia. She is the author and co-author of several dozen scientific papers and she has participated in Russian and European conferences. Manipadma  Datta is a Professor in Business and Sustainability at the TERI School of Advanced Studies, New Delhi, the pioneer in sustainability research. He has been involved in management teaching, training and research for more than three decades in India and abroad. His areas of expertise include sustainable development, climate finance, responsible investments, integrated reporting, circular economy finance, weather derivative, public management, corporate social responsibility, strategic management, sustainability and creativity, and valuation of intangibles. He has served in many institutions including University of Calcutta, Vidyasagar University, Nirma University, Institute of Management Technology Ghaziabad, Indian Institute of Management Lucknow, International Institute of Management Delhi and Vrije University Brussels. He is a regular contributor to national and international refereed journals and is on several editorial boards. He has co-authored two books and authored an audio-visual book on strategic finance. He is on the PhD adjudicator boards of several universities in India and abroad. A regular consultant to

  NOTES ON CONTRIBUTORS 

xiii

International Finance Corporation (IFC), World Bank and Government of India sponsored research projects, he has developed housing finance models for the poor in Bangladesh and Nepal and a business model for utilizing biodiversity of the Cooperative Republic of Guyana, South America. He holds an MA and a PhD from the University of Calcutta; he is also a Fellow of the Institute of Company Secretaries of India. Stanisław Flejterski  is Ordinary Professor, PhD (habil.) at the Economic Faculty, WSB University of Szczecin, Poland. He worked for nine years as a manager in the banking sector. His teaching and research fields of interest are comparative economics, finance and banking. He has published as author, co-author or co-editor many books and articles in professional journals. He has cooperated with foreign organizations and universities on scholarships, scientific stays, study visits and guest lectures in Germany (Berlin, Heilbronn), Switzerland (Zurich), Holland (Amsterdam), Italy (Rome, Florence), the United States (New York, Philadelphia), Mexico (Celaya) and Turkey (Istanbul). Since 2007 he has been a member of the Committee of Finance Sciences at the Polish Academy of Sciences and of SUERF (the European Money and Finance Forum Vienna). He has received many prizes and awards for his scientific and teaching activity. Carmen Gago-Cortés  received a PhD in Economics from the University of A Coruna (UDC), Spain in 2017. In 2015, she was appointed Assistant Professor in the Business Department of the Faculty of Economics at UDC. Her research is in the field of sustainable development. She is the author of scientific publications of international impact in this area. She has received several awards for her work, including the First Prize for Research in the Faculty of Economics (2010), the secondary prize Valentín Paz Andrade for Research in Galician economy and the Outstanding Paper in the 2016 Emerald Literati Network Awards for Excellence. In 2013 she obtained a research grant from the Provincial Council of A Coruña. In 2018, she was given an Extraordinary Doctorate Award. She has presented her research at international conferences such as the prestigious International Conference on Applied Business & Economics, the International Conference Sustainable Energy Use and Management, the International Scientific Conference Economy and Social Development in the Open Society or the III Iberoamerican Socioeconomic Meeting. She was the coordinator of different types of rental housing programmes of the regional government of Galicia (Spain) from 2006 to 2012.

xiv 

NOTES ON CONTRIBUTORS

Filip  Iorgulescu  is Lecturer at the Bucharest University of Economic Studies, works as a senior economist for the Romanian Fiscal Council and is a researcher associated with the Center of Financial and Monetary Research. He holds a PhD in Finance from the Bucharest University of Economic Studies and between 2014–2015 he received a post-­doctoral scholarship to study risk transmission in financial markets. His main research interests and teaching areas are sustainable public finance, fiscal policy, financial markets and risk management. He has been a visiting researcher at Universidad Complutense de Madrid (2014) and an Erasmus+ teacher at Université d’Orléans (2016), Tashkent Financial Institute (2017) and Université de Poitiers (2018). Dejan Jednak  holds a PhD in Finance from the Faculty of Organizational Sciences, University of Belgrade, and MSc and BSc degrees from the Faculty of Economics, University of Belgrade. He is employed as chief financial officer at Belgrade City Markets, Serbia. Previously he worked in the banking sector and in academia as a lecturer in various finance courses. He has published papers in international and national journals, conference proceedings and a textbook, Financial Markets (2011). Sandra Jednak  is an Associate Professor in the Faculty of Organizational Sciences, University of Belgrade. She has published scientific research papers in international and national monographs, journals and conference proceedings. Her teaching areas include introduction to economics, macroeconomics, microeconomics, economic development and the European Union. Her research focus is on the economic growth and development of South-eastern European countries. Other research interests include knowledge-(based) economy, energy economics, international economics and higher education. Manuel Nieto-Mengotti  received a PhD in Economics from the University of A Coruña (UDC) in 2015. He has worked at Movistar telecommunications company since 1999, where he has developed his professional career in the commercial area of the company, including management of business intelligence and head of the internal training department, actively promoting knowledge about the ICT sector and the latest technological trends. He is currently a Professor in the area of Fundamentals of Economic Analysis in the Faculty of Economics and Business of UDC, where he teaches macroeconomics and European sectoral economics. He is also the author or co-author of several scientific publications in journals such as

  NOTES ON CONTRIBUTORS 

xv

Telematics and Computing and Computers in Human Behavior. He is currently assigned to the EDaSS research group on Economic Development and Social Sustainability at UDC. Isabel  Novo-Corti is Associate Professor of Economic Analysis at the Universidade da Coruña (UDC–Spain) and Tutor at the Associate Centre of A Coruña (UDC) at the Spanish National Open University, She has a PhD in Economics. She is coordinator of the EDaSS research group on Economic Development and Social Sustainability, a member of the University Institute of Maritime Studies and was Head of the Department of Economic Analysis and Business Administration at the UDC. She is the director of the Atlantic Review of Economics. Her research focuses on public policies and sustainability in the framework of the knowledge society. She has published in prestigious academic journals such as the Journal of Cleaner Production, Ocean & Coastal Management, Sustainability, Marine Pollution Bulletin, Computers in Human Behavior, Progress in Industrial Ecology and Management of Environmental Quality. She has been a visiting scholar at Washington University (Missouri, USA), Reading University (United Kingdom), Harvard University (Massachusetts, USA) and University of Oxford (United Kingdom). She has been honoured with international awards such as the best work on ethical economy, at the International Conference XXII Hispanic-Portuguese Scientific Management Conference in Vila Real (Portugal, 2012) and the award for best research paper of 2015 published in the journal Management of Environmental Quality. She has been invited as keynote speaker at international conferences, such as the IV Conference on ethics economics in Bogotá (University S. Tomás–Colombia) and the 2016 international conference “Information Society and Sustainable Development”—ISSD in Pologravi and ECOTREND, 2018 (University Targu-Jiu–Romania). Bartosz Oliwa  is a PhD student at the University of Szczecin, Poland. He obtained MA degrees in the faculties of Finance and Accounting and European Studies—European Project Management. He is co-author of a number of European projects in the financial perspective for 2007–2013 implemented in public administration, educational units and third sector organizations. Currently, he is involved in research on the Szczecin real estate market and the assessment of the local enterprise sector, in particular of SMEs. His main research interest is the role of financial markets in creating sustainable development.

xvi 

NOTES ON CONTRIBUTORS

Mohamed  Nagy  Osman holds a PhD in Accountancy from Queen Mary, University of London (UK), and an MSc in Accounting and Finance from Dundee University (UK). His main research interests are corporate social responsibility, sustainability and governance reporting practices. He is a lecturer in accountancy at Aberdeen University (UK). He has received funding from the Ministry of Higher Education, Egypt and the British Accounting Association, UK to pursue his research. Marta  Pawlaczyk  is a graduate in Finance and Accounting at the State University of Applied Sciences in Konin and a student of Management at the University of Economics and Business in Poznanˊ. She works at the headquarters of the French chain of supermarkets and hypermarkets, food and industrial E.Leclerc. Her interests are sustainable development, business psychology, corporate social responsibility, product and brand management, green banking and green innovations. Xose Picatoste  graduated in Economics and has an MA in International Migration: Research, Migration Policies and Intercultural Mediation from the Universidade da Coruña (UDC)–Spain as well as an MA in Teaching Secondary Education from the International University of Valencia, Spain. He is currently a PhD student and teaching and research staff in training at the Universidad Autónoma de Madrid–Spain. His research is focused on public economics, particularly the labour market, knowledge society and sustainability. He was awarded first prize in sociological research for MA students in the Faculty of Sociology–UDC in 2015 and was a finalist at the COTEC innovative programme in 2018. He has published books (AranzadiThomson Reuters) and articles in the journals such as the Journal of Cleaner Production, Telematics and Informatics and Economic Computation and Economic Cybernetics Studies and Research. He has been guest editor of the Central European Review of Economics and Management and International Journal of Innovation and Sustainable Development. He is a member of organizing committees of various international conferences, such as ISSD– Romania, and EDaSS International Conference on Economic Development and Social Sustainability, from 2012 and 2013, respectively, to the present. He has attended and presented papers at numerous international conferences, such as the Society for the Advancement of Socio-Economics SASE (Berkeley, USA and Lyon, France) and the Iberoamerican International Conference RISE–SASE (Porto Alegre, Brazil and Cartagena de Indias, Colombia). He was a visiting researcher at Constantin Brancusi University

  NOTES ON CONTRIBUTORS 

xvii

of Targu-Jiu (Romania) in 2016 and, in 2018, he was a recognized student at the Latin American Centre (Oxford University) under the supervision of Diego Sánchez-Ancochea. Elena  G.  Popkova  is a Professor of Economics and President of the Institute of Scientific Communications, Volgograd, Russia. Her research interests are economic growth, sustainable development, globalization, humanization of economic growth, developing countries, institutionalization of social development, development planning and strategic planning. She has more than 200 publications in Russian and foreign peer-­reviewed journals and books. Natalia V. Przhedetskaya  is Professor in the Chair of Economic Theory at Rostov State University of Economics, with 20 years’ experience of lecturing in universities in Rostov-on-Don, Russia. Her research interests include marketing of non-profit organizations and socio-economic relations in non-profit organizations. She is the author of more than 50 academic works and six monographs. Przemysław  Sawicki  holds an MA in Finance from the University of Szczecin, Poland. He has been a professional with the banking industry for 25  years. He has worked for domestic and foreign financial institutions, including the brokerage office of Pomorski Bank Kredytowy SA and for several banks, including ING SA and Deutsche Bank SA. Currently, he is a Branch Director of PKO Bank Polski SA in Szczecin. In the subordinate organizational structure he manages several smaller bank branches. He is the author of studies and economic thematic publications. Daniele Schilirò  is Associate Professor of Economics in the Department of Economics, University of Messina, Italy. He holds a BA (Laurea) in Economics from the Catholic University of Milan (1979) and an MPhil in Political Economy from the University of Cambridge (UK) (1979/1980). He was also a Special Graduate Student at Yale University (USA) in 1980. He was the winner of the scholarship “Bonaldo Stringher” from the Bank of Italy, Rome, in 1980. He is a Researcher and Member of the Scientific Committee of the Centre of Research in Economic Analysis (CRANEC), Catholic University of Milan. He has researched macroeconomics, economics of structural change and history of economic analysis at Cambridge University (Selwyn College, 1985 and Sidney Sussex College, 2002) and Oxford University (Brasenose College, 1986) (UK), and the University of

xviii 

NOTES ON CONTRIBUTORS

Twente (NL) (2006). He was a visiting professor at the University of Dubai in 2014, and University of Valencia in 2016 and 2017. He has spoken at several international conferences. He is a Member of the Editorial Board of Frontiers in Management Research, Economics and Journal of Mathematical Economics and Finance. Current research interests include growth, innovation, SMEs, green economy, EMU governance, gulf economies and behavioural economics. Bruno S. Sergi  is an Instructor at Harvard University, and an Associate of the Harvard University Davis Center for Russian and Eurasian Studies and Harvard Ukrainian Research Institute. He is the Series Editor of the Cambridge Elements in the Economics of Emerging Markets and an associate editor of The American Economist. Concurrently, he teaches International Economics at the University of Messina and is a co-­founder and Scientific Director of the International Center for Emerging Markets Research at RUDN University in Moscow. He has published over 150 articles in professional journals and 21 books as author, co-author, editor or co-editor. Türker  Şimşek  is Associate Professor of Economics in the Faculty of Economics and Administrative Sciences at Tokat Gaziosmanpaşa University, Turkey. He also carries out administrative duties including Vice Dean of the Faculty of Economics and Administrative Sciences, Member of the Faculty Board of Directors, University Internal Control System Evaluation Board Member and Head of the Economic History Department. His teaching areas include macroeconomics, political economics, history of economic thought, history of economy, Turkish economy, international economics, energy economics and policies, and Turkey–EU relations. He has many national and international publications on multidisciplinary issues. Ria Sinha  is a Senior Fellow at the Centre for Responsible Business, New Delhi and a visiting faculty in the Department of Business and Sustainability, TERI School of Advanced Studies (TERI SAS), New Delhi. She holds a PhD in Business Sustainability from TERI SAS and an MA in Economics from University of Calcutta. She has nearly eight years of experience in industry and academia and is an expert in the areas of climate finance, voluntary sustainability standards (VSS) and business sustainability. She was an HSBC Scholar in TERI SAS. As a DAAD–German Indian Climate Change Dialogue Fellow, she spent time in Germany and presented her research at conferences held in Vienna, Berlin and Boston MA. She was also invited as

  NOTES ON CONTRIBUTORS 

xix

an ICRIER Young Scholar by the National Bureau of Economic Research Summer Institute in Massachusetts. At present she is conducting a research project with the University of Szczecin, Poland. Andreea Stoian  is a Professor of Finance in the Department of Finance in the Faculty of Finance and Banking at the Bucharest University of Economic Studies–BUES (Romania). She holds a PhD in Finance from BUES. Since 2012 she has been the head of the Center for Financial and Monetary Research at BUES.  She has been a visiting scholar at Universite Paris 1 Pantheon-Sorbonne, Université Libre de Bruxelles and Universidade do Porto and an Erasmus guest lecturer at University of Poitiers, University of Bordeaux and University of Orleans. She is the First Vice-Chair of the International Network for Economic Research, co-founder of the Romanian Association of Finance and Banking and fellow of the Monetary Research Center at the University of National and World Economy (Bulgaria). She is also the Executive Editor of the Romanian Journal for Fiscal Policy. Her main research interests are in fiscal policy, mainly focused on fiscal sustainability and vulnerability, public debt and budget deficit, but also on financial markets. She has published articles in the journals Eastern European Economics, Empirica. Journal of European Economics, Applied Economics Quarterly, Czech Journal of Economics and Finance and Managerial Finance. Diana-Mihaela  Țîrcă is PhD Professor of Economy in the Faculty of Economics, Department of Management and Business Administration at the Constantin Brancusi University of Targu-Jiu. Her research area is sustainable development, green economy, labour market and green jobs. She is director of the Center for Fundamental and Applied Economic Studies. She has been a visiting professor at the University of Szczecin, Poland and held research internships at the University of A Coruña, Spain. She has many publications in sustainability issues. She is guest editor of the Special Issue on Sustainability Energy Use and Management (Progress in Industrial Ecology, An International Journal, 2015), Special Issue on Innovation for Sustainable Development (Journal for Cleaner Production, 2018) and Special Issue on Information Society and Sustainable Development—Selected Papers from the 5th International Conference ISSD 2018 (Sustainability, 2019). Magdalena  Ziolo is Associate Professor, PhD at the University of Szczecin, Poland. Her research and teaching focus on finance and banking, especially sustainable finance, green banking, sustainable development and public finance. She has received scholarships from the Dekaban-Liddle

xx 

NOTES ON CONTRIBUTORS

Foundation (University of Glasgow, Scotland, 2013), Impakt Erasmus + (Ulan Bator, Mongolia, 2017) and CEEPUS (University of Prishtina, Kosovo, 2015, 2016, 2017, 2018). She is a member of the State Quality Council, Kosovo Accreditation Agency. She carries out research supported by the National Science Centre Poland in the area of financing sustainable development. Her achievements encompass more than 120 reviewed papers and academic books.

List of Figures

Fig. 2.1 Fig. 2.2 Fig. 2.3 Fig. 2.4 Fig. 2.5 Fig. 2.6 Fig. 2.7 Fig. 2.8 Fig. 2.9 Fig. 2.10

Distribution of EIB bonds by region of investors. Source: https://www.worldfinance.com/banking-guide-2017/ sustainable-banks18 Structure of Romanian financial system (weight of assets in total assets) during the period 2010–2018. Source: Drawn up by the authors based on data from www.bnr.ro 27 Weight of assets of banking sector in GDP during the period 2008–2017. Source: Drawn up by the authors based on the data from www.bnr.ro, RSF 2018, p. 68 29 Evolution of prudential, financial and structural indicators in the banking sector during 2008–2018. Source: Drawn up by the authors based on data from www.bnr.ro, RSF 2018, p. 68 30 Structure of bank assets and liabilities. Source: Drawn up by the authors based on data available on www.bnr.ro, RSF 2018 31 Placements of investment funds. Source: Drawn up by the authors based on data available on www.bnr.ro, RSF 2018 32 Density of insurances (EUR/inhabitant), quarter I 2018. Source: Drawn up by the authors based on data available on www.bnr.ro, RSF 2018 33 Structure of investments in Pillar II and Pillar III. Source: Drawn up by the authors based on data available on www.bnr. ro, RSF 2018 33 Structure of stock of loans accessed from IFN. Source: Drawn up by the authors based on data available on www.bnr.ro, RSF 2018 34 Volume of investments in FinTech companies globally. Source: Drawn up by the authors based on data RSF, BNR, 2017, www.bnr.ro 44 xxi

xxii 

List of Figures

Fig. 2.11 Fig. 2.12 Fig. 2.13 Fig. 2.14 Fig. 6.1 Fig. 6.2 Fig. 6.3 Fig. 6.4 Fig. 6.5 Fig. 7.1 Fig. 7.2 Fig. 7.3 Fig. 8.1 Fig. 8.2

Fig. 8.3

Number of persons who resorted to online trade services (% of total population) (2007–2016). Source: Drawn up by the authors based on data RSF, BNR, 2017, www.bnr.ro 45 Number of active credit or debit cards. Source: Drawn up by the author based on data www.bnr.ro 46 Internet access on mobile phone (%)—EU average and Romania—2016. Source: Drawn up by the authors based on data RSF, BNR, 2017, www.bnr.ro 47 Number of persons who conducted at least one financial activity on the Internet (2016). Source: Drawn up by the authors based on data from RSF, BNR, 2017, www.bnr.ro 48 The prevailing types of ESG integration techniques. Source: Sustainalytics and IRRC Institute 2017 141 Different phases of ESG integration in assets. Source: UNPRI 2016 143 Climate aligned bonds by region. Source: Bonds and climate change: The State of the Market, Climate Bonds Initiative, 2018148 Sectors financed by climate aligned bonds. Source: Bonds and climate change: The State of the Market, Climate Bonds Initiative, 2018 149 Process of ESG integration in PE. Source: Integrating ESG in Private Equity, UNPRI 2014 150 Percentage of projects according to innovation criteria. Information extracted from https://top100desafio. fundaciontelefonica.com/. Self-made graph 186 Category projects. Information extracted from https:// top100desafio.fundaciontelefonica.com/. Self-made graph 186 Diagram of interactions within the ecosystem generated by the platform to support innovation and entrepreneurship projects around the world. Self-made graph 189 Sustainable and Responsible Investments in Europe (thousand euros). Source: Data extracted by the authors from Eurosif (2018)204 Issuance of green bonds between 2007 and 2018. Source: Data compiled by the authors from CBI annual reports on the green bonds market available at https://www.climatebonds. net/resources/reports213 Green bonds—total outstanding amount and number of issuers by the end of June 2018. Source: Data compiled by the authors from “Bonds and Climate Change: The State of the Market 2018”, CBI, available at https://www. climatebonds.net/resources/reports/bonds-and-climatechange-state-market-2018215

  List of Figures 

Fig. 8.4

Fig. 9.1 Fig. 9.2 Fig. 9.3 Fig. 9.4 Fig. 11.1 Fig. 11.2

Fig. 11.3

Fig. 11.4 Fig. 11.5 Fig. 11.6 Fig. 12.1 Fig. 12.2 Fig. 12.3

xxiii

Yield to maturity between 2010 and 2018: green versus sovereign and corporate bonds. Source: Daily data series of S&P Dow Jones indices for green bonds, US treasury bonds, non-US sovereign bonds (developed countries) and non-US corporate bonds (developed countries) obtained from https://us.spindices.com/index-family/global-fixed-income/ global-sovereign217 Integral sustainability and sustainable finances. Source: authors’ own elaboration 228 Main environmental and social aspects related to sustainable finances. Source: authors’ own elaboration 230 Relation between public revenue and inequality. Source: authors’ own elaboration 242 Relation between public revenue and inequality. Source: authors’ own elaboration 242 Relations between financial sector and growth and development of the national economy. Source: own elaboration272 Irregular deregulation/reregulation cycle (heuristic approach). A—prosperity—underregulation (regulatory mildness). B—recession—the risk of overregulation as a result of the financial crisis and an element of post-crisis enterprises. Source: own elaboration 279 Relations between direct and market-based regulation (heuristic approach). Point O—mixed regulation (hypothetical optimum). Point A—the predominance of direct regulation. Point B—the predominance of selfregulation. Source: own elaboration 282 Choice between full regulation and full deregulation of the financial sector. Source: own study 289 Choice between individualized supervision and integrated supervision of the financial market. Source: own study 289 Choice between national and supranational (European) supervision of the financial sector. Source: own study 290 Awareness of global problems 307 Hearing about the term green finance 308 Does your bank use green products and services? 308

List of Tables

Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 2.5 Table 2.6 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 9.1 Table 9.2 Table 10.1 Table 10.2 Table 10.3 Table 11.1 Table 11.2 Table 12.1 Table 12.2 Table 12.3 Table 13.1

Evolution of number of credit institutions and branches of foreign banks Dimensions of financial inclusion (2017) Intermediary objectives and macro-prudential instruments Methodology of calculation of the capital buffer level for systemic risk Capital buffers applicable to credit institutions in Romania Benefits and risks of Fintech Types of responsible investing ESG integration in hedge fund strategies Potential benefits of climate-related disclosures Studies exploring the relationship between responsible investing and financial performance HLEG challenges and areas for action Actions to reduce deficit bias ESG risk categories Relation of ESG to CFP (general and in various regions) SRI strategies overview in Europe The 4 × 2 Matrix of financial system characteristics (with examples of candidate variables in each ‘bin’) Bank business models in the EU Definition of green finance Green finance products and services Frequency of project preferences Comparative analysis of the existing methods of evaluation of the effectiveness of financing measures in the sphere of sustainable development

28 37 39 40 41 48 132 153 155 157 233 243 250 259 260 274 293 302 305 309 315 xxv

xxvi 

List of Tables

Table 13.2 Table 13.3 Table 13.4 Table 13.5 Table 13.6 Table 13.7 Table 13.8 Table 13.9 Table 13.10 Table 13.11 Table 13.12 Table 13.13 Table 13.14 Table 14.1 Table 14.2 Table 14.3

Scale for qualitative treatment of effectiveness of financing sustainable development 319 The efficiency of financing of sustainable development in developed countries, 2017–2018 321 On the efficiency of financing of sustainable development in developing countries, 2017–2018 322 Statistical data on the financing of sustainable development in developed countries in 2016–2017, USD thousand per capita 323 On the financing of sustainable development in developing countries, 2016–2017 (USD thousands per capita) 323 Evaluation of the effectiveness of financing sustainable development in developed countries in 2018 324 Evaluation of the effectiveness of financing of sustainable development in developing countries, 2018 325 The volume of investments in public–private partnership and the index of sustainable development of developed and developing countries in 2018 326 The dependence of sustainability of development in 2018 on the volume of investments in public–private partnerships in 2017 326 SWOT analysis of financing of sustainable development by the mechanism of public–private partnership, developing countries328 Legal regulation, effectiveness of financing of sustainable development in 2018, and volume of attracted investments within PPP in 2017 330 Regression dependence of effectiveness of financing of sustainable development in 2017 on legal regulation in 2018 331 Regression dependence of volume of investments within public–private partnership in 2017 on legal regulation in 2018331 Social reporting in Egyptian Islamic banks’ annual reports and websites in the post-revolution era 351 Contextual information on the study population 363 Stakeholders of Egyptian Islamic banks 363

CHAPTER 1

Introduction Bruno S. Sergi and Magdalena Ziolo

Current extensive and in-depth challenges are shaping the way modern economic systems work and establishing a novel approach to the analysis of economic phenomena. Environmental and social risks in assessing general transaction risk are growing because of the impact and the role of such factors as increasing climate change, aging of societies, social exclusion and polarization, changes in the model of consumption, and globalization, as well as the automation of industrial processes. The criteria for assessing the risk of transactions change under the influence of economic changes. This is clear in the conditions of “greening” the economy and social inclusion. These two phenomena, referring to the environmental and social pillars of sustainable development, strongly weigh on the necessity of extending the risk assessment criteria used by financial institutions for ESG risk (environmental, social, corporate governance). The demand for extending the risk

B. S. Sergi (*) Davis Center for Russian and Eurasian Studies, Harvard University, Cambridge, MA, USA e-mail: [email protected] M. Ziolo Faculty of Economics and Management, University of Szczecin, Szczecin, Poland e-mail: [email protected] © The Author(s) 2019 M. Ziolo, B. S. Sergi (eds.), Financing Sustainable Development, Palgrave Studies in Impact Finance, https://doi.org/10.1007/978-3-030-16522-2_1

1

2 

B. S. SERGI AND M. ZIOLO

assessment methodology with ESG components is emphasized by the Environmental Program Financial Initiative (UNEP FI), and the state of implementation of this postulate by financial institutions, depending on the country and institutions, is still at various levels of development. Investigating the economy moving on a greener path, the sharing economy, industry 4.0, and banking 3.0 are just preferred contexts of these changes that are setting the stage for a fresh look at the economy and the ways it is financed, broadly considered. In the context of environmental and social challenges that are continuously affecting modern states, the sustainability concept is receiving increasing recognition as a means to counter the effects of negative externalities. One of the conditions necessary for successful implementation of sustainable development is adequate financing. Thus, financial markets face challenges in matching financial products and services to the needs of sustainable development. An active financial sector, distributing capital and managing associated risk, is essential for a well-functioning economy. The conventional motivation of the financial sector is the one-­dimensional goal of maximizing profits. The neoclassical approach to finance, based on private property theory, discounts environmental and social considerations. A strict neoclassical finance perspective holds that social responsibility is outside the duties of directors of corporations and should be solely the concern of the government. The approach to finance based on the efficient market hypothesis and the maximization of cash-flow generating processes neglects the interface between the field and sustainable development. Yet there is a desire and an expectation expressed by people, governments and financial markets that contemporary companies are human agents satisfying economic, environmental and social needs. The concept of sustainable finance addresses the need for a pioneering approach to financing sustainable development. Sustainable finance includes among other factors: development finance, environmental finance, carbon finance, socially responsible finance, green finance, ethical finance, and microfinance. Moreover, contemporary changes in the financial landscape are not limited to the nature and availability of financial capital, because finance is, in fact, the key to solving social and environmental problems. Therefore, representatives of both classical and neoclassical schools of economic thought are now considering factors such as value for money and “smart” finance that transcends the parameters of conventional finance. The recent global financial crisis that resulted from the credit crunch in 2007 forced financial markets and companies to rethink systemic risk exposure. As a result, the importance of the integration of ESG factors

1 INTRODUCTION 

3

and sustainable development with corporate and investment decisions is even more critical today—this is not a future matter. Companies, financial market entities, and regulators are asking new questions, looking for new threats, and searching for new opportunities in the markets of the future. There are innovative approaches to creating sustainable shareholder value that require companies and investors to adopt a systemic and long-term vision and to understand the financial significance of ESG factors within the full spectrum of threats and opportunities. Sustainable finance is characterized by a different approach to traditional finance—the role and function of finance, profit, and risk—as well as a different approach to the awareness of economic value and benefits. Novel economic, social, and environmental perspectives that currently characterize sustainable finance allow for adequate adaptation of financial systems and the financial sphere to new challenges. The financial sphere reacts by responding to new dilemmas and challenges with a time lag in the real sphere. The financial changes that concern the macro, mezzo, and micro scale in the functional, instrumental, and institutional dimensions are considered. The transformation processes are carried out in all sub-­ disciplines of finance. In the area of ​​banking, the sustainability concept has found expression in green and responsible banking. The offer of green banking services supports the process of adaptation and transformation towards the green economy, and responsible banking also implements the assumptions of the concept of social inclusion and respects and promotes ethical standards. The perspective of public finance concerns primarily the impact on pro-social and pro-market attitudes of market participants through tax policy instruments (green taxes) and, more broadly, fiscal policy. However, the redistributive function of public finances should not be overlooked here in the context of the impact on the social inclusion process and the leveling of income inequalities. Sustainable finances are also perceptible in the finances of enterprises, in entrepreneurs making decisions about socially responsible investments or pro-environmental investments and implementing specific consumption patterns. At the micro level, the demands of newly sustainable finances are reshaping the concept of microfinance as well as personal and behavioral finance. Dissemination of the sustainable finance concept takes place through institutions and instruments used within the financial market. Therefore, respecting the demands of sustainable finance is also a challenge from an institutional economics perspective. The organization of the financial sphere, including the financial system, to enable it to adapt to the requirements of

4 

B. S. SERGI AND M. ZIOLO

sustainable finance necessitates a systematic and ongoing process of change and of structural and organizational quality; this may involve extensive changes in institutional culture and a rethink of operational mission. The execution of these changes should be orderly and controlled, which is effected by strict regulation. Regulations are essential primarily for the shaping and supervision of the supply of financial products and services, and the security and stability of the banking and financial sector, depending on the quality of risk management (including the ESG risk approach). The ESG risk has relevance to financial institutions. Finansinspektionen’s report highlights the importance of banks being more open so that their customers, investors, counterparts, and other stakeholders can form a more definite opinion of how the banking sector takes account of environmental and sustainability issues in its lending procedures. Apart from the environmental factors, social and corporate governance issues also impose considerable risks and opportunities for the business sector across the world. Expectations of the financial sphere and its role are changing over time. The process of adjusting to the sustainable finance paradigm is long-­lasting and requires compromise. A proper understanding of the need for change by all market participants and cooperation between the public, private, and third sectors is key to its smooth implementation, as each of these sectors has a significant impact on the success and dissemination of the rules and principles of sustainable finance. Sustainable finance, in turn, is an essential element in the implementation of postulates of development and sustainable growth, and in this context, they act on the indicators of goal achievement in these two areas. The interdependence and adequacy of the real sphere and the financial sphere molding development and sustainable growth is, therefore, a critical factor for the success of both concepts and a strategically crucial factor from the perspective of ensuring the quality of states, economies, and societies on a global scale. Considering contemporary development trends in finance and challenges facing financial markets in the conditions of sustainable growth and development, we have tried to comprehensively present phenomena and problems focusing on sustainable finances, including markets and financial systems. The next thirteen chapters address the questions driving a growing body of literature to elaborate theoretical and practical achievements showing the relationship between the financial market and the processes of growth and development, with an emphasis on growth and sustainable development. The concept of green, sustainable, responsible finances in terms of supply and demand is approximated and reviewed. The institutional

1 INTRODUCTION 

5

and legal dimensions of sustainable finances is defined, identifying essential initiatives and institutions supporting the concept of sustainable finance. The chapters analyze the role of finances in financing environmental protection measures, the importance of socially responsible investments in the economy, and the role of sustainable finances in minimizing the phenomenon of financial and social exclusion. The increasing demand for green and responsible banking in the context of environmental risk management and shaping the offer of banking products supporting sustainable development are discussed. Attention is paid to the category of the ecological, financial market, with emphasis on the instruments of this market. The importance of public finances in stimulating the processes of sustainable development, especially with the use of tax policy instruments, is discussed. The book covers the cognitive gap concerning the financing of sustainable development and shows trends in sustainable finance and sustainable financial markets. Each chapter begins with a brief summary and ends with a conclusion. Chapter 1 includes an introduction. Chapter 2 aims to draw attention to the significant gap in the existing research, along with the issues of sustainable development. The concept of sustainable development, if placed in an economic category, needs much attention, but seeing from the perspective of the discipline of finance, the latter is unsatisfactory, with questions left unanswered. The ranking problem, its strategic dimension, and the amount of financial resources distributed and disbursed to focus on sustainable development, and the identification of financial phenomena included in this category, is seen as a priority. Chapter 3 considers the role that banks play in society and points out that they can significantly influence sustainable development goals. Many banks in the United States and Europe have begun to adapt their financial policies for investments in environmentally sustainable businesses. The authors analyze the role of green banking in the implementation of environmental sustainability, identify green financial products, and point out the role of green banking networks. Chapter 4 aims at highlighting the key relationships between sustainability, innovation, and efficiency. First, it examines the concept of sustainability, looking at the neoclassical literature on sustainability and its relationship with innovation. Then, it analyzes different theoretical approaches and discusses the policy issues for sustainability where innovation, natural capital, human capital, population, and institutions are fundamental factors. Chapter 5 aims to describe socially responsible financial markets. A socially responsible financial market should influence business,

6 

B. S. SERGI AND M. ZIOLO

markets, and the economy to consider ­sustainability issues to deliver economic, social, and environmental benefits. Financial markets have changed their structure, introducing new laws, regulations, and innovative instruments, and obtained supervision and transparency. Chapter 6 is designed to supply insights on the pertinence of responsible investing in both developed and developing economies in light of the international deliberations on sustainability and sustainable development. Responsible investing presents a strong business case for institutional investors to merge ethics with profitability. However, to develop a strong business case, it is imperative to dive deeply into the various forms of responsible investing and the contemporary trends, drivers, and barriers associated with it. Institutional investors employ various ESG evaluation methodologies, subject to the type of financial instrument and the availability of ESG data. These assessments help investors to undertake informed decisions and lead to ESG integration in several asset classes such as listed equity, fixed income, hedge funds, and private equity. Chapter 7 refers to the problem that many companies have contributed, altruistically, to the generation of crowdfunding platforms as a space of knowledge and innovation where entrepreneurs develop their projects independently or in collaboration. The companies considered this platform as an investment whose rate of return was transformed into a profitable improvement of its brand image. However, these platforms have evolved, in recent times, to generate real ecosystems of technological innovation, oriented to the propulsion of business projects of a marked social trend, seeking alternatives for social inclusion and green projects aimed at improving sustainability and the environment. Chapter 8 discusses the important effect the capital market has in an economy by supplying all the necessary mechanisms for the efficient allocation of financial resources, which contributes to growth and long-term economic development. Chapter 9 presents a theoretical approach to public debt management from the perspective of sustainable finances. Differences in the understanding of sustainable public debt management in a traditional and stable financial paradigm are pointed out. The chapter uses a critical analysis of literature, the method of induction and deduction, a method of comparisons and generalizations, and a synthesis method. Chapter 10 describes the Environment, Social and Governance (ESG) Risk Management Policy and ESG factors that can affect the probability of meeting investment aims over the long term by affecting the sustainability of returns. The chapter discusses the process of ESG risk management and

1 INTRODUCTION 

7

attitudes of managers towards ESG risk. The concept of measurement and ESG risk management is also described. The aim of Chap. 11 is to offer an integrated approach that describes a sustainable financial system. The sustainable financial system is in opposition to the conventional one and seeks to meet the requirements of sustainable development and integrating sustainability into global financial markets in an optimal way. In this context, the sustainable financial system would include financial instruments, institutions, and markets that would take into consideration issues such as the environmental and social responsibility of entities that seek financing. Thus, sustainability and responsibility in finance and investment require ethics. Chapter 12 aims to point out the role of banks and other financial institutions in the progress and development of green consumerism and stimulating pro-ecological behavior of households and companies. The research encompasses the analysis and assessment of financial products that are especially important for green consumerism and the impact on pro-ecological behavior. Chapter 13 develops the authors’ method of evaluating the effectiveness of financing measures in the sphere of sustainable development employing the example of various developed and developing countries of the world based on 2018 data. As a result, the authors develop a conceptual model of financing of sustainable development based on the mechanism of public–private partnership. Chapter 14 presents a case study exploring the social reporting practices of Egyptian Islamic banks (IBs) after two revolutions in Egypt. The two Egyptian Arab uprisings in 2011 and 2013 threatened the social legitimacy of IBs. This chapter aims at investigating the social reporting strategies employed by Egyptian IBs to defend their social legitimacy after two uprisings. The case is framed within legitimacy theory, arising from the notion of a “social contract” between the company and society. To sum up, this book is a valuable source of knowledge and information on the role and specifics of finance in stimulating the processes of sustainable growth and development. The volume is dedicated to all those interested in information that fits into the problems of green, responsible, sustainable finances and green banking, and in particular to the leading representatives of academia, practitioners, executives, officials, and graduate students in economics, finance, and management who deal with the aspects and problems of sustainable financial markets in their profession.

CHAPTER 2

Sustainability in Finance and Economics Diana-Mihaela T‚îrca˘, Anis‚oara-Niculina Apetri, and Mirela Ionela Aceleanu

1   Introduction Sustainability is typically defined as an “efficient use of natural resources and its effect on profitability”. “However, sustainability as basic strategy extends beyond the energy efficiency, environmental investments and reduction of CO2 emissions” (KPMG 2013). In the financial and banking sector, sustainability “is about the design, building and execution of long-­term banking businesses, it involves a holistic vision of resources”. Sustainability in the banking field should be a combination of corporate culture, efforts toward business and operational innovations, along with a customer-oriented socially responsible attitude (Gelder 2006, p. 4). Sustainability can affect decision-making

D.-M. T‚ îrca˘ (*) Constantin Brancusi University of Târgu-Jiu, Târgu-Jiu, Romania A.-N. Apetri Stefan cel Mare University of Suceava, Suceava, Romania e-mail: [email protected] M. I. Aceleanu The Bucharest University of Economic Studies, Bucharest, Romania e-mail: [email protected] © The Author(s) 2019 M. Ziolo, B. S. Sergi (eds.), Financing Sustainable Development, Palgrave Studies in Impact Finance, https://doi.org/10.1007/978-3-030-16522-2_2

9

10 

˘ ET AL. D.-M. T‚ ÎRCA

regarding the investment policies and/or the launch of new financial banking products and services. Financial sustainability requires reforms that support investments in clean technologies and in their use, to make sure that the financial system can sustainably finance long-term growth and ensure a contribution to the creation of an economy with low carbon dioxide emissions and resilience to climate change. These reforms are essential to fulfil the climate and environmental objectives and the international commitments undertaken by the European Union (EU) by virtue of the Paris Agreement on climate change and the objectives of the circular economy package in 2015. A series of specialised studies explore the role of financial markets in sustainable development. Some economists (Busch et  al. 2015‚  p. 1) emphasise that their current role is quite modest and identify a paradox. On the one hand, the participants in financial markets are integrating more and more the environmental, social and governance (ESG) criteria in their investment decisions; but on the other hand, from the point of view of organisational reality, there does not seem to have been a real change to more sustainable business practices. The authors of the study identify two main challenges in the field of sustainable investments: firstly, the reorientation to a long-term paradigm for sustainable investments, and secondly, improvements in the reliability of ESG data. Our purpose is to offer an overview of the financial and banking system in Romania in the context of the new era of sustainability that is creating changes in the financial banking sector all over the world. Therefore, the research includes the collection of data about the financial banking system of Romania and their analysis by the application of statistical methods such as graphic representation. The data analysed and used for this study were extracted from the financial stability reports of the Romanian central bank.

2   A Vision of Sustainable Finance “Sustainable financing” generally refers to the consideration of social and environmental factors in the decision-making process in investment decisions, which involves increased investments in sustainable long-term activities. More precisely, environmental protection reasons refer to the reduction of climate change and adjustments to it and to the environment in a wider sense, and to related risks (for example, natural disasters). Social reasons can refer to matters such as inequality, inclusion, work relations, and investments in human capital and in communities. The social and environmental protection reasons are often interconnected because in

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

11

particular climate change can aggravate the existing inequality of systems. The governance of public and private institutions, including management structures, relations with employees and remuneration of executive directors, plays a fundamental role in assuring that social and environmental issues are integrated in the decision-making process (European Commission in Evaluation of Impact of Directive Proposal for Energy Efficiency 2016, p. 2). Sustainable financing refers to any form of financial service which integrates environmental, social and governance criteria in business decisions or investment decisions for the long-term benefit of customers and society in general. Activities in the field of sustainable finance include sustainable funds, green bonds, investments in impact, microfinancing, active ownership, loans for sustainable projects and development of the whole financial system in a sustainable way (Lancet Report 2017). Sustainable financing means “better development” and “better financing”—development which has to be sustainable in every one of its economic, social and environmental dimensions. Sustainable financing is a comprehensive approach which combines different strategies for improvement of the social, economic and environmental performance of the financial system. Sustainable financing is a comprehensive concept which includes the ESG factors. In part, sustainable financing means the integration of ESG criteria in decisions on financing of investments. In a wider sense, sustainable finance refers to a financial system which promotes sustainable economic development rather than the boom; sustainable social development rather than inequality and exclusion; and sustainable development of the environment rather than damage of the natural environment. The realisation of this goal requires a clear vision—which can be understood, implemented and measured in practice. Sustainable finance can be broadly defined as a financial system that is stable and tackles long-term education, social, economic and environmental issues such as sustainable employment, retirement financing, infrastructure construction, technological innovation and climate change mitigation. It is finance that fosters sustainable economic, social and environmental development. In a narrow sense, sustainable finance means integration of environmental, social and governance factors in financial decisions (EU-High-Level Expert Group on Sustainable Finance (HLEGSF) 2017). One obstacle to the development of sustainable finance is the lack of a mutually agreed upon taxonomy in the field of sustainable finance. The terminology used in sustainable finance can be confusing because there are few standard definitions, and different countries and organisations use the

12 

˘ ET AL. D.-M. T‚ ÎRCA

same terms to designate different things. The existence of a common taxonomy could provide protection against “green laundering” as well as a condition for effective policy support. The classification of sustainable investments is also important for a series of parties interested in sustainable financing (European Investment Bank 2017, p. 46): • companies will have a better understanding of what to expect (for example, methods for measuring the “green” level of their activity); • political decision-makers will be able to clarify transition objectives as financial flows signalled for achievement of these objectives; and • non-governmental organisations (NGOs) will be able to promote a strong system as a way of putting problems they care about into the mainstream. The European Investment Bank (EIB) coordinates a group of multilateral development banks for the elaboration of “Common principles for following the financing granted for mitigation of climate changes”. The purpose of the group is to make recommendations for the elaboration of comprehensive EU strategies for sustainable financing. In the final report of January 2018, the group of experts recommended that the European Commission adopt a logbook for the period 2018–2019 regarding a full taxonomy in the field of sustainability (European Investment Bank 2017, p. 47).

3   Challenges and Opportunities Encountered by the EU in the Elaboration of a Sustainable Funding Policy The European Union (EU) has taken a leading role in efforts to build a financial system which supports sustainable economic growth. In 2015 a series of historical international agreements were adopted, including the Agenda 2030, the sustainable development objectives of the United Nations and the Paris Agreement on climate change. The Paris Agreement, signed in December 2015 by 195 countries, is the first universal agreement on climate, adopted on a world scale, whose goal is adjustment to climate change and the consolidation of resilience to it and limitation of global heating to a level way below 2 degrees Celsius (CE 2018b, p. 1).

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

13

The European Union has established ambitious objectives in the field of climate, environment and sustainable development. In view of achieving the objectives undertaken based on the adopted agreements, the EU is committed to drawing up a strategy regarding sustainable financing. This action is a priority for the EU and is included in the plan of action regarding the union of capital markets. The Union of Capital Markets is a mechanism by which the European Commission wants to mobilise capital in Europe. The capital would be directed to companies and to infrastructure projects which require funds for development and the creation of jobs. The Union of Capital Markets aims at the following objectives: • to develop a diversified financial system in which the well-developed and profound capital markets come to complete the banking financing; • to unblock the capital which is now frozen and to put it in the service of the economy, by offering more investment options to the holders of savings accounts and more financing variants at lower costs to companies; • to accomplish a true single capital market in the EU, in which investors can invest without obstacles in other countries, and companies can obtain funds from varied sources, regardless of their location (European Commission 2016). The financial sector has an essential role to play in the achievement of these objectives, because for such sustainable investments, huge amounts of private capital could be mobilised. Valdis Dombrovskis, vice-president responsible for financial stability, financial services and union of capital markets, declared: “The signing of Paris Agreement in 2015 represented a landmark for the whole world and for world economy. We are going now towards a society with low carbon dioxide emissions, in which the energy from renewable sources and smart technologies improve the quality of our life, stimulate the creation of jobs and economic growth, without damaging our planet. Financing has an important role to play in the assurance of a sustainable future” (European Commission 2018, p. 2). For the elaboration of an effective EU strategy regarding sustainable financing, the European Commission founded an independent group of high-level experts (HLEG) in December 2016, composed of 20 confirmed

14 

˘ ET AL. D.-M. T‚ ÎRCA

experts from civil society, the financial sector and the academic environment, and observers from European and international institutions. In its first interim report, the HLEG identified the ways in which the financial sector can be better connected to the real economy in order to support the transition to a more efficient economy from the point of view of resources, with a more pronounced circular nature, and formulated strategic recommendations for a financial system which supports sustainable investments. The recommendations formulated by the HLEG can be synthesised as follows: • a classification system or a “taxonomy” which clarifies for the market what “sustainable” means; • clarification of investors’ obligations regarding the realisation of a more sustainable financial system; • improvement of the information provided by financial institutions and companies regarding the way in which they take into account sustainability in their decision-making process; • a label at the EU level for ecologic investment funds; • integration of sustainability in the mandates of European supervisory authorities (ESA); • a European standard for green bonds. Moreover, the Commission proposed the inclusion of environmental, social and governance factors in the mandates of European supervisory authorities. The group of experts recommends the reforming of norms and EU financing policies to facilitate green and sustainable investments. Thus, it is necessary that the capital flows are oriented towards a market which supports sustainable projects and services. For this purpose, as a first priority, we have to change the investment culture and the behaviour of all the participants in the market by giving them the possibility to choose and offer green products. The HLEG claims that the reorientation of investment flows to sustainable projects in the long run will concurrently improve the stability of the financial system. The plan of action regarding sustainable finance adopted by the European Commission in March 2018 has three main objectives (European Commission 2018, n.d.-a):

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

15

• to reorient capital flows to sustainable investments in order to achieve sustainable growth favourable to inclusion; • to manage financial risks which result from climate change, degradation of the environment and social problems; • to promote transparency and a long-term vision in financial and economic activity. As for the first objective, it is noted that the current investment levels are not enough to support a sustainable economic system from the environmental and social point of view. Europe recorded an annual deficit of investments of almost 180 billion EUR to achieve the EU’s objectives in the field of climate and energy by 2030 (European Commission in Evaluation of Impact of Directive Proposal for Energy Efficiency 2016, p. 3). The EU commits to allot at least 20% of its budget to actions directly related to climate (European Commission 2018, n.d.-c, p. 3). In 2017, almost a third of the investments mobilised by the European Fund for Strategic Investments (EFSI)—extended until 2020—represents an efficient tool to support the transition to a more sustainable economy. The  amounts of money channelled from this fund in the field of energy, environment and efficient use of resources and to social infrastructure are examples for this statement. We can see that supplementary measures are necessary to channel more investments to sustainable sectors, but this is difficult to achieve because it is not yet clear to investors what sustainable investment means. The inclusion of social and environmental objectives in the process of making financial decisions is designed to limit the financial impact related to social and environmental risks. Currently, environmental and climate change risks are not always properly taken into account by the financial sector. Insurance companies, which are affected most by the risks generated by climate change, will have to prepare to incur higher costs, as will banks, which may incur greater losses due to decreased profitability of the companies most exposed to climate change. According to the Lancet Report of 2017, between 2000 and 2016 the annual number of disasters caused by weather conditions increased globally by 46% (Lancet Report 2017, p. 7), and during 2007–2016, the economic losses caused by extreme weather phenomena increased globally by 86%, reaching 117 billion EUR in 2016 (Ostry et al. 2014, p. 4). This trend is alarming because almost 50% of the exposure to risk of banks from the eurozone is directly or indirectly related to the risks resulting from climate change. We see more and more often that there are other environmental matters which can threaten the current

16 

˘ ET AL. D.-M. T‚ ÎRCA

business models, such as the loss of biodiversity and the collapse of ecosystems and deficit of water (Ostry et al. 2014, p. 4). Transparency of activities of the participants in a market is essential for a financial system to function well. The communication of information related to sustainability by companies is a necessary condition for the evaluation by financial market institutions of the way in which they manage sustainability risks. Moreover, the transparency of information will also contribute to the orientation of enterprises to a more sustainable direction regarding their investments. Transparency is beneficial to citizens because it allows them to compare performances in the matter of sustainability of enterprises and to make investment decisions with full knowledge of the cases. The long-term vision or holistic vision describes the practice of making decisions which have long-term objectives or long-term consequences. Although it is known and accepted that investments in social and environmental objectives require a long-term orientation, current practices are based on the generation of high profitability in a short period of time. Therefore, a key element of the sustainability agenda is the reduction of unjustified pressure exerted on the process of making financial and economic decisions by the desire to obtain short-term performance (CE 2018b, p. 4). In May 2018, the Commission presented a package of measures as a result of its plan of action regarding the financing of sustainable growth, which includes three proposals aiming at  (European Commission, Commission action plan on sustainable finance 2018, n.d.-b): • the establishment of a unitary system for classification of sustainable economic activities (“taxonomy”); • the improvement of information requirements for the way in which institutional investors integrate ESG factors in their risk processes; and • the creation of a new category of reference points to help investors compare the carbon emissions of their investments. In order to apply this plan of action and monitor the fulfilment of its three main objectives, we will need adequate technical support and a robust governance structure that includes the expertise necessary for all the fields of sustainable development. The EU has been a pioneer on certain key aspects of sustainable financing because of regulations and financial innovations adopted early on by issuers, investors and intermediaries. The EU was among the first in i­ ssuing

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

17

green bonds, although its global weight has decreased. Green bonds, which first appeared in 2007, are the most well-known instruments of sustainable investments. They are instruments of market debt with incomes allotted exclusively for the financing and refinancing of assets with ecological benefits—mainly the mitigation and reduction of climate change, but other positive effects on the environment as well, such as biodiversity and the reduction of pollution, sustainable transportation and waterrelated projects. Until 2014, the EU held over 45% of total issues of green bonds. In 2016, the market share was reduced to 30%, as issues increased in other regions, such as China. The level recorded by the EU is low compared with its market potential, which is estimated at 74.6 billion USD of the annual issue of green bonds until 2020 (compared with ~20 billion USD issued from the middle of year 2016). More studies indicate that the use of green bonds could lead to the mobilisation of at least 100–140 billion USD per year for supplementary investments in clean and efficient energy systems. Thus, the EU’s pioneer role is also proven by the following aspects: • the first green bond was issued by the European Investment Bank (EIB) in 2007; • between 2010 and 2014, the EIB represented the biggest financier at world level and offered more than 90  billion EUR for climate action projects, 13.8  billion EUR for energy infrastructures and energy security in 2015, and over 150 billion EUR since 2005 in the transportation sector (EU-High-Level Expert Group on Sustainable Finance (HLEGSF) 2017, p. 11). • in the European Strategic Investments Plan, the allocations for climate matters were recently increased by 40%; and • the latest regulation regarding pension funds strongly promotes the disclosure of the impact of ESG factors on investment strategies and risk management frames. The EIB, the biggest issuer and provider of multilateral funds in the world, mobilised 56.4 billion EUR from the international capital markets in 2017, apart from the 3.8 billion EUR invested in pre-financing at the end of year 2016. Out of this total amount, 4.3 billion EUR was in the form of green bonds, called bonds for awareness of climate problems. They were launched as the bank celebrated a decade since it became the first issuer of green bonds. The bonds issued by the bank reach investors

18 

˘ ET AL. D.-M. T‚ ÎRCA

80

63 68 66

60 40 20 0

21 19 21

14 11 12 America

2 Europe 2015

Asia 2016

2

1

Middle East and Africa

2017

Fig. 2.1  Distribution of EIB bonds by region of investors. Source: https:// www.worldfinance.com/banking-guide-2017/sustainable-banks

who in general would not invest in Europe and who contribute indirectly to European projects by investing in EIB bonds (Fig. 2.1). We estimate that the green bonds market will continue to expand with the involvement of China. “China is facing huge environmental problems which must be treated seriously”, according to Aldo Romani, an expert with the EIB who structured the first green bond in 2007. “The green bonds are a way by which China establishes a meaningful connection with the international markets in order to contribute to the resolution of global problems” (European Investment Bank 2017, p. 44).

4   The Role of the Financial System in the Transition to a Green Sustainable Economy A financial system which serves the sustainable development of the EU is one which (EU-High-Level Expert Group on Sustainable Finance (HLEGSF) 2017, p. 16): • considers the total value of financial assets, by incorporating sustainability factors in the evaluation and design of financial products; • is productive and serves its users in their projects and needs, especially households, companies and governments; • is resistant to both external shocks and internally generated shocks; • demonstrates the alignment between the sustainability preferences of its users and the results of their decision-making process, assurance of responsibility and transparency; and • has a long-term perspective and surpasses the “tragedy of horizon”.

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

19

The EU must reorient the financial system away from short-term stabilisation toward long-term impact, and the financial system must focus in the long run on the influence of ESG factors. As for the role of the financial system in the process of transition to a sustainable economy, a series of question marks appear. While the reforms implemented as a result of the financial crisis which began in 2007 managed to stabilise the financial system, they did not lead to significant improvements in the unemployment rate, financing possibilities for pensions, education, technological innovation, environmental protection and climate change. Therefore, the functioning of the financial system must be reoriented or improved to lead to the stimulation of job creation, investments and prosperity in the European economy and society, by supporting simultaneously the transition to an economy based on sustainable development and to a stable financing model. Indeed, by answering this challenge of sustainable long-term economic and social development, the financial system will succeed in recovering the positive role it can play in society, by representing a strong financing source for institutions. The improved functioning of the European financial system includes two imperatives (Communication of European Commission 2018, p. 2): • ESG factors should be integrated in financial investment and risk management decisions to access the best opportunities for investments and loans; • financing should contribute to better development—by supporting the creation of good quality jobs and reduced inequality, including economic growth and transition to a decarbonised and efficient economy from the point of view of resource use. The financial system has a crucial role to play in the transition to a greener and more sustainable economy. It is about to be reformed in order to valorise the lessons learned from the financial crisis and to reorient private capital to more sustainable investments. These reforms involve a vast change to the functioning of the financial system. On 31 January 2018, the HLEG published their final report (EU-High-Level Expert Group on Sustainable Finance (HLEGSF) 2018, p. 6), which offers a comprehensive vision of the way to elaborate a strategy for sustainable financing at the EU level. The report states that sustainable financing aims at two imperative issues (CE 2018b, p. 1):

20 

˘ ET AL. D.-M. T‚ ÎRCA

• the improvement of the contribution of financing to sustainable growth, including inclusion, by financing the long-term needs of society; • the consolidation of financial stability through the incorporation of ESG factors in the process of making investment decisions. The report proposes eight essential recommendations, several horizontal recommendations and a series of actions designed for specific sectors of the financial system. The mobilisation of capital for a sustainable economy requires actions on two levels: • the first level is the transfer of current allocations of capital from a non-sustainable path to a sustainable path; • the second level is assuring the necessary funds to cover the investment gaps in order to ensure the objectives are achieved on time. As for the financing of EU objectives for climate and energy, the latest estimates highlight that between 2021 and 2030, funds of 177 billion EUR will be required. We believe that in the coming years the financial system should assure the support of other sectors, such as sustainable fishing and sustainable agriculture. Furthermore, it should fully support action on a series of environmental problems, such as the quality of water and air, biodiversity, waste and efficiency of resources, many of which are related to the Circular Economy Strategy of the EU. 4.1   Sustainability and the Main Participants in the Financial System Financing the transition to a sustainable economic model with low carbon dioxide emissions will require the support and commitment of many participants, such as banks, insurance companies, pension funds, assets administrators, credit rating agencies, stock exchanges and world financial centres. A special role regarding the transition to a sustainable economy belongs to the banking sector, because banks represent the spine of the EU financial system and are the biggest source of external financing for the economy. This support can be offered by the big banks because they seek new lending opportunities. The reason is that these banks seek to make placements

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

21

in good assets, with a high liquidity. The capital is not a major problem, as long as the current capital and liquidity requirements are not stricter. The question we can ask is: will a “green adjustment” of minimal capital requirements take place? It is sometimes suggested that there should be minimal capital requirements for certain classes of assets, such as green bonds and green loans. Thus, some consider green bonds less risky than other bonds, ceteris paribus, because they contribute to more sustainable economic development. Although some consider the risk difference between the two types of bonds to be insignificant, the decrease of capital requirements (which could be higher than the risk difference) would represent an important policy signal for promotion of the green sector. Other specialists argue against such a “green supporting factor” and refer to the reduction of risk and to political reasons. Thus, if the political supporting factors were ignored by most banks, only a few banks would be able to focus on these green assets, which are underrated for the real risk they bear. In general, this could lead to a non-correlation of capital and risk requirements and reduce trust in the banking system. Moreover, “sustainable assets” have not yet been identified to which we could apply different capital requirements. We can conclude that there are many efficient ways of supporting a green sector rather than trying to direct capital flows by establishing differentiated capital requirements. In any case, it would be useful to collect data for “green” assets in order to obtain more information about their risk profile. For example, initiatives such as the European Mortgage Federation/European Covered Bond Council’s Energy Efficiency Mortgage Action Plan could be a good example to follow (European Mortgage Federation and European Covered Bond Council 2016). The business model of the insurance sector is quite suitable to support sustainability. Insurance products allow investors to focus on the long term, knowing they have financial protection against short-term risks. On a global level, the insurance sector plays a significant role in investments in different classes of assets. The insurance sector is also the biggest institutional investor in Europe, representing almost 10 trillion EUR in assets or about 60% of EU GDP (EU-High-Level Expert Group on Sustainable Finance (HLEGSF) 2017, p.  33). At portfolio level, most of the sector’s liabilities are in the long term. If regulatory and accounting frameworks do not limit their actions, insurance companies could hold substantial assets in the real economy and

22 

˘ ET AL. D.-M. T‚ ÎRCA

could act as stabilisers of the economic and financial cycle. The recognition of sustainability problems could facilitate investments in (green) infrastructure projects. 4.2  The Banking Sector and the New Era for Sustainability Banks understand more and more that they have to make greater efforts to manage environmental risks and seek new opportunities for a sustainable financing market. Alongside the many significant events such as the Paris Agreement on climate, the decision of the World Bank to stop financing oil and natural gas exploration and a record year for ecological connections, sustainable investments managed to become more attractive and in high demand. Governments and enterprises all over the world have intensified the connection of financial systems with sustainable development, because industry experts gather proofs which support those business models which give priority to environmental, social and governance (ESG) criteria. Furthermore, the banks cannot deny that the world—and the investment climate—has changed. Although the decisions of the capital market were previously based on a bi-dimensional analysis of risks and profitability, a Deloitte report from 2017 declared that in the new age of the sustainable banking sector, decisions are based on three dimensions: risk, yield and impact. We can see that since 2009 the sustainable bank and the sustainable banking sector have been the centre of attention among international, European and national institutions as well as specialists and researchers in the financial banking field. Thus, the United Nations Environment Programme claimed that sustainable finances “are now recognized as one of the megatrends which shape the future of the global capital markets” (World Finance 2018b). In a series of studies, the International Financial Corporation showed that there was a direct connection between the ESG practices of a company and larger, more stable profits. In addition, the application of ESG practices leads to other advantages for companies, such as the improvement of reputation of an institution and increasing trust of investors. The implementation on a wider scale of ESG practices is supported as well by the Working Group on financial information related to climate change—Task Force on Climate-related Financial Disclosures (TCFD)— which proposes to persuade companies to disclose climate-related infor-

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

23

mation to help investors and creditors make the best financial decisions based on complete information. Michael Bloomberg, leader of the TCFD Group, announced at the end of 2017 that 237 companies had publicly committed to support the recommendations of the TCFD. Furthermore, the European Commission announced a strategy of aligning its financial system with the EU agenda on climate and sustainable development. One of the key challenges of a sustainable bank is the lack of standardisation between banks, and the European Commission is addressing this issue by establishing a common language for sustainable financing and by creating EU labels for green financial products. The EU also aims to increase the transparency of corporate reporting according to the proposals of the TCFD (World Finance 2018a). Even if progress is made in the establishment of methodology and instruments for tracking and reporting green loans and the financing of loans, the challenges for the sustainable banking sector will persist, because the daring actions of governments and enterprises constantly transform what a sustainable bank means, which is considered an extremely complicated enterprise. Eric Dugelay of Deloitte,  Partner and Global Sustainability Services Leader, declared that he hoped the world of financial institutions—and the banking world in particular—would enter “a new and promising era”, in which the contribution of the banking sector to sustainability would be recognised on a wide scale. More than ever, financial institutions are taking into account ESG factors and offering socially responsible investment products. According to an investigation conducted by the Programme of United Nations for Environment, green bonds still represent less than 1% of the total issue of bonds, despite their significant increase in recent years. Moreover, only 5–10% of bank loans are considered “green” by the existing national measures (World Finance 2018b). However, although an increase in ESG assets has been recorded, investment managers often do not disclose specific information about the way in which the ESG factors are included in their decisions. Thus, it is very difficult to identify a set of universally agreed principles for a sustainable bank, and even more difficult to compare the performances of different banks. Yet the Global Alliance for Banking Values (GABV) is attempting to create a measuring instrument which offers a common approach for the reporting of ESG impact by banks. The GABV considers that the dashboard becomes a standard for evaluation of any bank depending on its alignment with environmental and social values. The effort to support the transition of

24 

˘ ET AL. D.-M. T‚ ÎRCA

the banking sector will require the involvement of all actors from the financial system, including not only banks and institutional investors, but also insurance companies, central banks and financial regulatory authorities (World Finance 2018b).

5   Sustainable Finance and Risk Management 5.1  Prudential Requirements for Banks and Insurance Companies Banks, insurance companies and pension funds are the main sources of external financing for the European economy and represent an important vector of transformation of savings into investments. Therefore, they could offer the critical mass of investments necessary to correct the deficit in investments in order to assure the transition to a more sustainable economy. However, banks, insurance companies and pension funds can also be exposed to risks related to non-sustainable economic development. For example, according to some estimates, at least half of the assets of banks in the eurozone (CERS Report 2016, p. 4) are now exposed to risks related to climate change. The macro-prudential supervisory authorities (CERS Report 2016, p.  11) have also reported the existence of such risks for financial stability. In this context, it is time that the risks associated with climate change and other environmental factors are taken into account more rigorously in prudential regulations, resorting to a careful calibration which does not jeopardise the credibility and effectiveness of the current prudential framework of EU, which is by its very nature based on risks. As the EU taxonomy develops, the Commission will evaluate whether it is possible to adopt more adequate capital requirements which better reflect the risk that characterises the sustainable assets held by banks and insurance companies. The improvement of banks’ transparency and disclosure of sustainability factors and the way they influence their risk profile is probably the most advanced reason for revising the prudential regulatory framework, especially Pillar III of the Basel Agreement. Currently, Pillar III is designed to stimulate market discipline by the disclosure of information. Thus, the new regulatory initiatives should aim at increasing the disclosure of sustainability factors. In order to be useful, the disclosures must be standardised among banks, be reported consistently in time and be sufficiently advanced.

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

25

Sustainability factors could be incorporated in each of the three pillars of the prudential framework for insurance. The insurance sector is regulated by Solvency II, which is probably the most advanced, comprehensive and complex system for risk management in the world. Solvency II is based on an evaluation of assets and liabilities, which is based on the “market coherence” principle, implying that all the assets and liabilities of an insurance company should be available for trading at any time (EU-High-Level Expert Group on Sustainable Finance (HLEGSF) 2017, p. 34). The Amendment to Solvency II of 2016 which set forth the reduction of capital requirements for certain investments in infrastructure represents an important step, but it is recommended that this amendment should be extended without affecting the quality of the regulatory framework. The promotion of sustainability should not be made by undermining the stability of the financial system. Moreover, sustainability factors could be introduced in the evaluation of risk of insurance companies and in resistance tests. Although the reporting of information about sustainability would improve the risk analyses, currently there is no specific EU regime that requires insurance companies to report sustainability problems. 5.2  Sustainability Risks and the Surveillance Process The improvement of transparency and disclosure by banks of sustainability factors and the way they influence their risk profile are the most advanced reasons for changing the regulations in the field of surveillance. A series of European authorities have explored how sustainability factors should be incorporated in the revision process of the surveillance framework (Pillar II). The purpose of Pillar II is to improve the connection between the risk profile of an institution and its risk management systems. It is also used by supervisors to encourage the continuous improvement of internal procedures by banks in order to evaluate the situation of specific risks of institutions and the adequacy of their capital. Supervisors wield many prudential instruments, including the ability to establish supplementary capital requirements for prospective reasons or as a result of deficiencies identified in the management and/or governance of risks. ESG factors could be included in stress tests. For example, the Bank of England takes measures to include sustainability problems in risk analyses (EU-High-Level Expert Group on Sustainable Finance (HLEGSF) 2017, p. 36).

26 

˘ ET AL. D.-M. T‚ ÎRCA

Pillar III of the prudential framework is designed to stimulate market discipline through the disclosure of information. Although the voluntary regulatory initiatives have generated an increasing level of disclosure of sustainability factors, disclosures about the financial risks that banks are facing or regarding the systemic risks that they generate for the wider financial system have been made in a limited way. In order to be useful, the disclosures must be standardised among banks, be reported consistently in time and be sufficiently advanced (EU-High-Level Expert Group on Sustainable Finance (HLEGSF) 2017, p. 36).

6   The Financial System in Romania in the New Sustainability Era 6.1  Particularities Regarding the Romanian Financial System Although the financial system includes a large number of financial intermediaries, banks are considered first-degree “actors” in the mediation process, acting both on the monetary market and on the financial market. In Romania, the banking system dominates the financial system, a structure that is seen in other countries of Central and Eastern Europe (CEE) as well. The banking system, as a component of the financial system of a country, can be defined as the totality of institutions, financial banking relations, norms, infrastructures and techniques which interact with the purpose of mobilising the monetary liquid assets of the economy in the form of deposits and distributing them in the form of loans, financial funds and other facilities (various systems of payments) to financial and non-­financial agents, natural or legal persons. The structure of the financial system in Romania (Fig. 2.2) reflects a local financial culture oriented mainly toward the banking sector. We can see that investments in the capital market, although they are increasing, remain marginal. The Romanian financial system is based on banking lending (“bank-oriented”). The diversification of financial institutions was substantially delayed in the period of transition by the difficulties of macro-­ stabilisation and the restructuring of the real sector. The capital market, the insurance market and the leasing market—although they have recorded favourable progress—still have a low degree of depth (Apetri 2018‚ p. 14).

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

27

120.0%

100.0%

80.0%

6.1% 1.0% 3.5% 7.6%

6.2% 1.4% 3.6% 6.9%

6.4% 2.1% 3.8% 6.6%

7.4% 2.9% 3.6% 6.4%

8.0% 3.9% 3.4% 6.0%

8.0% 4.8% 3.9% 5.8%

7.7% 5.9% 4.2% 5.9%

7.4%

7.2%

6.8% 4.1% 6.0%

7.2% 4.2% 5.9%

60.0%

40.0%

81.8% 81.9% 81.1% 79.8% 78.7% 77.6% 76.3% 75.6% 75.5%

20.0%

0.0%

2010

2011

2012

2013

2014

2015

2016

2017

2018

investment funds

insurance corporations

private pension funds

non-bank financial institutions

credit institutions

Fig. 2.2  Structure of Romanian financial system (weight of assets in total assets) during the period 2010–2018. Source: Drawn up by the authors based on data from www.bnr.ro

From the point of view of market share held by each category of institutions in the structure of the financial system, we can see that the greatest share is held by credit institutions, with a market share of about 75% (Fig. 2.2). In the current context, the banks hold a dominant position in the structure of the Romanian financial system compared with the other financial institutions, which hold lower market shares, even in the conditions of a trend of increasing their weight in the GDP. The Romanian banking ­system is of a classical type, based on the attraction of deposits and giving loans. In the time period 2008–2018  in Romania the banking sector, although marked by a concentration of the number of credit institutions,

28 

˘ ET AL. D.-M. T‚ ÎRCA

Table 2.1  Evolution of number of credit institutions and branches of foreign banks 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018a Credit institutions Of which branches of foreign banks

43

42

41

41

40

40

40

36

37

35

35

11

10

9

8

8

9

9

7

8

7

7

Source: http://www.bnr.ro/Indicatori-agregati-privind-institutiile-de-credit-3368.aspx a The values for 2018 are for the month of June

remained the most important component of the financial market, but its share continuously decreased compared with the values of the previous years (Apetri 2018‚ p. 15). Table 2.1 shows the evolution of the number of credit institutions and branches of foreign banks which worked and are still working in Romania in the post-crisis period. We can state with conviction that the banking system can be considered the key pillar of financial mediation, both due to the importance that lending has in the financing of the economy and also due to its role in the administration of payment systems and the transmission of monetary policy impulses of the central bank. Although the development of financial technological innovation has favoured the appearance of a number of new competitors in the lending market and the financial services market, such as non-banking financial institutions, payment institutions, institutions issuing electronic currency and FinTech companies, these entities do not hold a significant weight in the financial system. The figures from the annual report of the National Bank of Romania for 2017 show that the Romanian banking sector has retained its dominant position in the local financial system, both from the point of view of assets held (accumulating three-quarters of total assets) and financing for the private sector (almost 90% of total financing granted, December 2017) and public administration (accumulating three-quarters of the government bonds held by the system) (Annual Report of NBR 2017, p. 96). Although the banking sector continues to represent the main component of the financial system, Romania has recorded the lowest weight of

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

450 400 350 300 250 200 150 100 50 0

2008

2009

România

2010

2011

Poland

2012 Hungary

2013

2014

2015

Czech Republic

29

2016 2017T1 2017T2 2017T3 Bulgaria

EU Average

Fig. 2.3  Weight of assets of banking sector in GDP during the period 2008–2017. Source: Drawn up by the authors based on the data from www.bnr.ro, RSF 2018, p. 68

assets of the banking sector in the GDP compared with other countries in the region and with the EU average, at a significant distance from the other countries in classification (Fig. 2.3). The increased role of the banking sector in financing the economy, simultaneously with the maintenance of capacity to deal with any potential unfavourable evolution, is also important in the context of Romania’s plans to join the eurozone. Ten years after the crisis of 2008, the Romanian financial system had become more robust. In that time the Romanian banking sector (Fig.  2.4) (Financial Stability Report of National Bank of Romania 2018‚ p. 58): • consolidated its solvency position, without requiring the intervention of the state for recapitalisation; • maintained the liquidity indicators at an adequate level; • achieved one of the fastest reductions of the non-performing loan rate in European countries; • had a gradual improvement of profitability, and later recognition of consistent losses of loan risk (during the years 2010, 2011, 2012 and 2014);

30 

˘ ET AL. D.-M. T‚ ÎRCA

50.00 40.00

41.08

34.43

30.00 20.00 10.00 0.00 -10.00 -20.00

17.0

13.76

17.59

36.48 21.5

19.97

1.6 Dec.2008

16.4 5.6

Dec.2014

Sep.2018 -12.5

Solvability rate (%)

Quick liquidity (%)

NPL(%)

ROE(%)

Fig. 2.4  Evolution of prudential, financial and structural indicators in the banking sector during 2008–2018. Source: Drawn up by the authors based on data from www.bnr.ro, RSF 2018, p. 68

• reduced its vulnerability associated with the foreign exchange risk, by significantly reducing the weight of loans in foreign currency in its balance sheet. The Romanian banking sector is capable of handling unfavourable evolutions. Profitability has had a sinuous evolution since 2008, in close correlation with the dynamics of the new loan, respectively with  the assets quality level. The financial rate on return in the months of August and September 2018 was close to the level recorded in December 2008 (16.4%, September 2018), sustained by a present cost of low risk and lending growth (RSF, BNR, 2018, p. 66). The quality of assets continually deteriorated until 2014, but substantially improved from 2015. The non-performing loan rate reached 21.5% during the year 2014, but the micro- and macro-prudential measures initiated by National Bank of Romania (NBR) since 2013, doubled by a consensus of banks in Romania, resulted in a significant adjustment of this indicator, up to 5.6% in September 2018 (Financial Stability Report of National Bank of Romania 2018, p. 66). This reduction was one of the fastest among EU countries. Liquidity was consistent during this period and the main indicators were adequate. The positive dynamics of solvency were fuelled by the contributions of capital of the banks, a prudent policy of dividends, reorientation toward retail lending and the increase of exposures treated by the current regulatory framework as deprived of credit

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

120.0

31

Other assets Foreign assets

100.0

Claims on the government sector

80.0

Claims on the NBR

60.0 40.0

Non-financial corporation loans, foreign currency

20.0

Non-financial corporation loans, lei

0.0

19.4 12.1 10.6 9.3 8.9 8.5 8.5 9.9 12.6 15.4 17.4 17.5 08 009 010 011 012 013 014 015 016 017 . 17 . 18 2 2 2 2 2 2 2 2 2 ep ep s s

20

Household loans, foreign currency Household loans, lei

Fig. 2.5  Structure of bank assets and liabilities. Source: Drawn up by the authors based on data available on www.bnr.ro, RSF 2018

risk, but offering a higher liquidity (Financial Stability Report of National Bank of Romania 2018, p. 66). An analysis of the structure of assets of aggregated balance sheets of banks highlights the following evolution (Fig. 2.5): • we notice the high pace of increase in loans granted to the private sector in Romanian currency, especially the retail type; • loans in foreign currency have reduced their annual pace of decrease (up to −4.8%, September 2018, compared with −7.7%, March 2018, annual variations), on the background of intensifying the granting of new loans to non-financial companies; • the trend of increasing the weight of external assets in total bank assets has been accentuated, so that the foreign sovereign exposure has a modest weight in the balance sheet of banks; • the receivables to the governmental sector remain important; the weight of this balance sheet item in total assets fluctuates around 21%. To support financial mediation, we foresee faster growth of lending to non-financial companies, compared with the population, but the business model will not fundamentally change the balance sheet structure.

32 

˘ ET AL. D.-M. T‚ ÎRCA

6,000,000 5,000,000 4,000,000 3,000,000 2,000,000

3,645,154 2,918,938 1,000,000 1,205,884 801,305 467,300 623,898 659,575 233,805 2010 2011 2012 2013 2014 2015 2016 2017 T3 2018 -1,000,000

-2,000,000 -2,558,530

-3,000,000 -4,000,000 -5,000,000 other funds

mixed funds

bond funds

equity funds

Fig. 2.6  Placements of investment funds. Source: Drawn up by the authors based on data available on www.bnr.ro, RSF 2018

Investment funds. In Romania, investment funds have recorded a contraction of activity since 2014 regarding the level of total assets. The analysis of placements in investment funds shows that a significant part of them is focused on the local market; the funds of placement in shares and mixed investments are preferred to the funds of placement in bonds (Fig. 2.6). The role of the insurance sector in Romania continues to be considerably less than in other EU member states, but there is significant potential for development, especially in the life insurance segment. In Romania, the average expense of an inhabitant for insurance products, calculated by the insurance density indicator, is the lowest compared with other countries in the EU (27.6 EUR/inhabitant, Fig. 2.7). Private pension funds. The data from the last financial stability report of NBR show an increase in the number of participants in privately administered pension funds (Pillar II) and optional pension funds (Pillar III), and the optional pension funds have increased. The analysis of placements of these participants in the financial market shows that the government bonds maintain their dominant position, with a weight of 62.4% (Fig. 2.8).

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

1600.0

33

1366.5

1400.0 1200.0

1047.7

1000.0 800.0

638.0

600.0 400.0 200.0 0.0

150.1

90.8 Austria Bulgaria

101.6

27.6

90.1

Czech France Germany Poland Romania Hungary Republic Insurance density

Fig. 2.7  Density of insurances (EUR/inhabitant), quarter I 2018. Source: Drawn up by the authors based on data available on www.bnr.ro, RSF 2018 120.00 100.00 80.00 60.00 40.00 20.00 -

T4 2016 T1 2017 T2 2017 T3 2017 T4 2017 T1 2018 T2 2018 T3 2018 Bank deposits

Government securities

Municipal bonds

Corporate bonds

Non-governmental foreign bodies bonds

Equities

Titluri de participare - OPCVM

Fig. 2.8  Structure of investments in Pillar II and Pillar III. Source: Drawn up by the authors based on data available on www.bnr.ro, RSF 2018

34 

˘ ET AL. D.-M. T‚ ÎRCA

25,000,000.0 20,000,000.0 15,000,000.0 10,000,000.0 5,000,000.0 0.0

consumer and other purposes credit

mortgage credit

credit to non-financial corporations

Fig. 2.9  Structure of stock of loans accessed from IFN. Source: Drawn up by the authors based on data available on www.bnr.ro, RSF 2018

Non-banking financial institutions. The financing channel of the real economy by non-banking financial institutions (IFN) has maintained its increasing trend since 2015. The structural analysis of the stock of loans accessed from IFN shows that the loans granted to companies represented 77% of total exposure (Fig. 2.9). From the perspective of interconnections between the components of the financial sector, the banking sector is strongly interconnected with the non-banking financial sector, but the risk of contagion between these sectors remains at a manageable level, and the exposures of non-banking financial institutions to credit institutions are relatively modest. Although the financial banking sector globally seems to have recovered since the financial crisis, there has been a significant change in the financial sector characterised by the increase in the new technology-oriented companies (FinTech companies) offering an alternative to the services traditionally offered by banks, which has caused a reduction of the market share of banks. Although banks are in a strong position to approach these threats, it would be naïve to suggest that the current order of the financial industry cannot be changed. Aware of the threat of these new companies and systems, banks are now focusing on the transformation of enemies into allies through strategic investments and acquisitions, but also by direct collaboration with these FinTech companies, thus avoiding the consequences associated with an investment or direct acquisition. A possible area in which

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

35

banks could work directly with these FinTech companies is in the use of software instruments, such as the instruments necessary for the development and distribution of Application Programming Interfaces (APIs), instruments which allow both parties to work with the same data. This will have a significant impact on the way in which banks and FinTech companies carry out their activities. FinTech companies will have the necessary instruments to develop more innovative and complex applications, and banks will be able to maintain their position in the market (World Finance 2018a). According to the company Capgemini’s 2017 report on the Top 10 Trends in Banking, this collaboration will offer the banks a new business model. Of course, this new business model, which has been used by technology giants such as Amazon and Google for many years, will bring benefits, such as obtaining incomes in lower risk conditions than the new FinTech companies, but also risks, such as cyber-attacks. According to data provided by the Ponemon Institute (World Finance 2018a), the annual cybernetic costs are highest in the financial services field, of about 18  million USD.  Such risks could be in the spotlight of regulatory authorities in future, and as for software security, they will gradually pass from a purely technological problem to a basic challenge of banks’ businesses. If financial products are more and more accessed by digital channels, we will probably witness a wider use of digital channels and a global reduction of the number of bank branches. A series of research has shown that visits by consumers to the subsidiaries of retail banks will decrease by 36% between 2017 and 2022, which will lead to the reduction of workforce costs and the change of staff structure from the banking industry. Thus, the number of workers who will manage online transactions will increase and the number of necessary administrative workers to meet the daily needs of customers will decrease (World Finance 2018a). 6.2  The Stability of the Financial System in Romania and Macroprudential Policies Efficient and coherent surveillance is essential to assure the protection of investors, to favour the integration of capital markets and to ensure financial stability. For the purpose of fulfilling the objective of ensuring the stability of the financial system, NBR has selected, apart from the intermediary objectives of macro-prudential policy recommended at the EU level, two specific national

36 

˘ ET AL. D.-M. T‚ ÎRCA

objectives: the sustainable increase of financial mediation and improvement of financial inclusion—for which it has proposed specific instruments (Financial Stability Report of National Bank of Romania 2017, p. 88). The introduction of the first additional intermediary objective has as its foundation the low degree of financial mediation—Romania has the lowest level of this indicator in the EU. However, at the level of the financial system in Romania there is an important and viable but still unexploited potential regarding lending to non-financial companies. The sustainable increase of financial mediation, especially by widening the lending scope to the companies’ sector, continues to be a challenge for the banking sector. The modest evolution of financing of companies by the banks is influenced by a series of issues, including (Financial Stability Report of National Bank of Romania 2018, p. 30): • the high number of companies which have negative capital or which do not carry out activity, but also the high degree of indebtedness of certain categories of companies; • deficiencies of the insolvency framework of legal persons; • the training level of bank staff involved in the lending activity, and the offer of financing products which do not address the problems specific to non-financial companies. Statistics show that banking financing was less used by Romanian companies than by others; for example, during the period 2004–2017, about 15% of active companies in the economy resorted to bank lending. They preferred commercial loans, loans from shareholders or affiliated entities, respectively from non-resident financial institutions. The increase of financial mediation for companies could be an alternative driver for economic growth, provided that the discipline in payment improves, uncertainties are reduced and the market returns to a positive feeling. The second objective, the improvement of financial inclusion, aims at assuring non-discriminatory access, and at reasonable costs, of consumers to basic payment services (bank account which allows the receipt of incomes, withdrawal of cash, making payments, including by a debit card, etc.). The degree of financial inclusion in Romania is among the lowest in the EU and among the countries from the region. The main causes of this situation are: the high proportion of persons who are part of the informal economy, the low weight of urbanisation and the lack of trust in the financial system (Financial Stability Report of National Bank of Romania 2018, p. 50).

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

37

The rate of holding a bank account among the adult population was 58% in the year 2017, way below the value recorded at the European level (about 95%, data related to the year 2017), and the financial mediation level of the population in relation to GDP remains low (16.1%) compared with the eurozone (57.9%). Romania records a lower stock of assets per capita compared with the eurozone because of the poor quality of the housing fund and the poor development of financial markets. The index for access to financing (the affordability index is calculated as the ratio between the available income and the necessary optimal income to take out a real estate loan in prudential conditions) highlights the reduction of access to the credit market, in the context of an increase of interest rate for real estate loans. Moreover, the high degree of inequality of incomes represents an obstacle to access to financing of households, and the loans taken are used exclusively to cover basic consumer costs. Furthermore, Romania has one of the lowest rates in the EU of using cards and online platforms for making payments, while from the point of view of infrastructure, Romania is in line with the other countries from the region (Table 2.2). Table 2.2  Dimensions of financial inclusion (2017) Romania Bulgaria Poland Hungary Population debt in GDP (2018 T2) Percent of adult population holding a bank account Percent of adult population with at least one loan taken from a regulated financial institution Number of debit cards (million) Number of credit cards (million) Percent of adult population using a debit card to make payments Percent of adult population that pays utility invoices and/or makes online payments Percent of adult population with savings in a credit institution Number of ATMs per 100,000 adults Number of branches of merchant banks per 100,000 adults Source: RSF, BNR, 2018, December, p. 48 a Data for 2015

16 58

22,3 72

35,2 87

18,4 75

15

12

23

7

13,6 2,8 24

6,5 1,0 35

30,5 5,8 73

7,7 1,4 54

19

26

65

38

14

28

33

24

66 26

95 50

69a 29

60 14

38 

˘ ET AL. D.-M. T‚ ÎRCA

From the perspective of banking savings, 52% of the Romanian population has at least one deposit opened with a credit institution (RSF, BNR, December 2018, p. 52). At the level of bank deposits, there persist a series of inequalities both from the point of view of distribution of amounts deposited in the accounts of credit institutions and from the perspective of regional distribution. These inequalities can suggest a lower appetite among an important segment of the population for using banking services rather than using cash. An important element in the improvement of the degree of financial inclusion and the assurance of sustainable lending is represented by the increase in the financial education level of the population. From this point of view, NBR is actively involved in the improvement of the financial education level, by carrying out various programmes addressed both to school children and to the university environment, research environment and a wider audience. The international financial crisis has determined the need to create a new regulatory framework, which makes available to the national authorities the mechanisms of identification of structural and cyclic risks as well as the macro-prudential instruments by which they can be mitigated. Thus, the regulatory framework CRD IV/CRR7 sets out the possibility that the competent national authorities request that the credit institutions maintain, in addition to the minimal requirements of own funds, a series of capital buffers created by own funds of basic level 1 (Financial Stability Report of National Bank of Romania 2016, p. 90). Macro-prudential measures such as supplementary capital requirements have the objective to contribute to the consolidation of the capacity of institutions to handle endogenous and exogenous shocks, by contributing to the reduction of cyclical or structural risks. The supplementary requirements consist of capital buffers and are added to the minimal requirements of own funds regulated and apply exclusively to Romanian banks. In the context of operationalisation of the macro-prudential policy strategy, the National Committee for Financial Stability (CNSF) issued the Recommendation of CNSF no. 1/26.11.2015 for implementation of capital buffers in Romania and the Recommendation of CNSF no. 3/18.12.2015 for implementation of the buffer for systemic risk in Romania, following which NBR introduced the capital conservation buffer, the anticyclic capital buffer, the buffer for other institutions of systemic importance and the buffer for systemic risk. The list of intermediary objectives and macro-prudential instruments undertaken by NBR is ­presented in the Table 2.3.

2  SUSTAINABILITY IN FINANCE AND ECONOMICS 

39

Table 2.3  Intermediary objectives and macro-prudential instruments Objective

Macroprudential instruments

Effects

Excessive increase of lending and indebtedness

Anticyclic capital buffer

Supplementary capital requirements imposed in periods of significant increase of lending to be released in periods of decrease of lending (negative stage of financial cycle) Reduction of excessive indebtedness of debtors, assurance of sustainable lending Reduction of excessive indebtedness of debtors, assurance of sustainable lending Assurance of adequate liquidity of the institution in the short and long term

Limits for indebtedness degree (DSTI)

Limits for the ratio between loan and guarantees (LTV) Lack of liquidity Indicators for coverage of the liquidity necessity (LCR) and net stable financing (NSFR) Focus Limits regarding exposures Assurance of diversification of portfolios of financial institutions Institutions of Capital buffer for Additional capital requirements which systemic importance institutions of systemic cover the risks of dimension of importance institution and limitation of likelihood of appearance and impact of financial crises Consolidation of Capital buffer for systemic Coverage of any other vulnerabilities resilience of risk with systemic potential which can have financial a negative impact on the real economy infrastructures Source: Annual Report of NCMS 2017

The capital buffers applicable to credit institutions, Romanian legal persons, since 1 January 2019 are (Financial Stability Report of National Bank of Romania 2018, p. 97): • Capital conservation buffer (CCoB buffer), which shall apply to all credit institutions, will have a maximum amount of 2.5% of the total value of risk-weighted exposures, being formed by own funds of basic level 1. At the national level in Romania, the capital conservation buffer is implemented in steps of 0.625% per year, across the period 2016–2019. Thus, during the year 2018, all the banks,

40 

˘ ET AL. D.-M. T‚ ÎRCA

Romanian legal entities allotted own funds of basic level 1 for the capital conservation buffer in the amount of 1.875% of the total value of risk-weighted exposures, and from 1 January 2019, the requirements increased to a maximum of 2.5%. • Anticyclic capital buffer (CCyB buffer). During the period 2016–2018, the anticyclic capital buffer applicable in Romania was established at the level of 0%, while the results of analysis regarding total indebtedness did not present the signals which would indicate an excessive increase of indebtedness at aggregate level. • The capital buffer for systemic risk (SyRB buffer) is designed for the prevention and reduction of macro-prudential risk which could have negative consequences for the financial system and the real economy. National Committee for Macro-prudential Supervision (NCMS) recommended that the National Bank of Romania should implement a capital buffer for systemic risk applicable to all exposures, from 30 June 2018, with the purpose of supporting the process of adequate administration of credit risk and increasing the resilience of the banking sector against potential unanticipated shocks, against the background of unfavourable structural circumstances. The buffer level is established depending on the average values of the last 12 months of indicators regarding the non-performing loan rate and coverage degree with provisions as shown in Table 2.4. • The buffer for institutions of systemic importance (buffer O-SII): the National Bank of Romania, as competent authority, can impose on each institution of systemic importance to maintain, at the highest consolidation level, a buffer of up to 2% of the total value of exposure to risk. The requirements for capital buffer for other institutions of systemic importance are re-evaluated every year and apply since 1 January 2016. Table 2.4  Methodology of calculation of the capital buffer level for systemic risk Non-performing loan rate (NPL) 5% 5% Source: www.bnr.ro

Coverage degree with provisions

Buffer level (% of own funds rate level 1)

>55% >55%