Channelisation of liquidity into sustainable investments and projects

The banking system, unquestionably, also strained by uncertainty created due to the pandemic, is going through a prolonged period of low interest rates while, at the same time, has excessive liquidity, which in combination with the quantitative easing measures applied by the European Central Bank (ECB) the latter years, is creating additional cost for institutions.

The Cypriot banks have to manage a very difficult conjuncture, which affects their efforts for sustainable profitability. In an economy like Cyprus, where private debt is very high and the number of individuals and entities who meet the justifiably strict criteria for new lending is limited, channeling new funds is particularly difficult. The effort is also hampered by the fact that Cyprus facilitates a large number of banking institutions in relation to the size of its real economy. In this environment, most banks have imposed negative interest rates or liquidity fees on certain categories of large customers, in order to reduce the cost of safekeeping large deposit amounts (liquidity). As banks’ efforts are observed on utilizing their available major liquidity surpluses, in order to assist, the ECB has recently improved its lending conditions for liquidity and reduced collateral requirements depending on the purpose and scope of the loan. This development can be helpful for the Cypriot banks to some extent, provided always, that the relevant financing criteria are met, mainly to grant new loans of a certain amount and on terms aimed at achieving Sustainable Development Goals under UN 2030 Agenda (17 Sustainable Development Goals-SDGs) and EU Sustainable Finance Action Plan (SFAP).

However, no matter how helpful the above actions are, they certainly do not solve the problem on their own. In addition to the challenges, the Cypriot banks and the Cypriot economy, are provided with a great opportunity which arises from the Cyprus Recovery And Resilience Plan 2021-2026 "Cyprus - Tomorrow". The Plan provides for significant direct investments, up to €1.2 billion, of European funds but also for additional investments of billions from the private sector. It is easily understood that the Cypriot banks have a major opportunity not only to grant new lending, but also to get involved in projects addressing compliance with SDGs and ESG criteria (Environmental, Social, Governance).

Sustainable Finance is a key pillar of the EU effort on channeling funds to make sustainability considerations an integral part of its financial policy, “aiming to ensure coherence between industrial, environmental, climate and energy policy to create an optimal business environment for sustainable growth, job creation and innovation.”  SDGs have been set across all industries. Since 2018, the EU has adopted a targeted Action Plan with specific legal-economic technical parameters for Sustainable Financing leading to Sustainable Growth. EU aims for the Member States to implement their commitment to channel private capital into investments not only in support of the Paris Agreement (2016), with the initial aim of achieving a neutral carbon balance by 2050, but also at the same time, achieving the UN 2030 Agenda.

The implementation of the rules concerning Sustainable Financing and Development is anything but a firework. The Cypriot banks and large corporations are significantly affected by these developments and if they do not react in time, they risk losing the growth train and likely may face supervisory consequences in due time. The European Commission, for example, recently approved a review of banking rules in the EU with a view to completing Basel III. One of the changes that is being promoted is the obligation of banks to systematically identify, disclose and manage risks related to the ESG criteria in the context of the broader risk management process they apply (Risk Management Assessment). Indicative is the obligation on conducting regular simulation exercises of extreme climatic conditions (stress tests), both by the supervisory authorities as well as the credit financing institutions themselves. It's clear that Sustainable Financing is already here and the faster the regulated entities adapt to the new reality and guide their customers towards this direction, the greater will be the benefits both for themselves as well as the economy in general.

Lawyer, LLB. LLM. LPC. Banking and Financial Services (Sustainability Strategies & ESG), Alumni Member of the Institute for Sustainability Leadership, University of Cambridge.