ESG Country Snapshot: Spain’s quixotic journey

The latest in our country snapshot series: Reasons for optimism as government seeks to regain investors’ trust

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“Take care, sir, those over there are not giants but windmills.”

The famous words of Sancho Panza, Don Quixote’s squire, before the misguided knight errant engages in a joust with imaginary giants in La Mancha, captures the story of ESG investing in Spain.

Spain could have been a giant in renewable energy but many investors who believed in that vision ended up, like Don Quixote, tilting at windmills.

The crash of the renewable energy boom finally hit in 2013-14 when the Spanish government withdrew all investment incentives and made retroactive cuts in guaranteed subsidies that caused the market to collapse.

What could have created a virtuous circle of ESG investments, instead generated litigation under the Energy Charter, still ongoing with 40 investor-state disputes cases registered.

Some foreign investors have been successful in their arbitration claims but thousands of domestic retail investors have been unable to get remedy.

Trust has been eroded but there ARE some signs of recovery. Take just two examples.

First, the European Investment Bank is considering financing a project comprising 21 wind farms in Spain by Saudi company Alfanar. The EIB would lend €385m of the total €643m cost.

Second, Teresa Ribera, Spain’s Minister for the Ecological Transition, told a parliamentary committee in July that she would be working on a Climate Change Bill over the summer.

She explicitly mentioned that one of the aims is to “regain the trust of investors” with “predictable and stable frameworks” and promised to have it ready by September.

A Spanish ‘173’?
A spokesperson said the Bill will include a Spanish version of the article 173 French Energy Transition Law but declined to provide more details until it is published.

Article 173 requires (on a comply-or-explain basis), not just listed companies but also institutional investors, to report on climate-related risks and how they manage them.

At the time of writing it is not clear what the new Spanish Bill’s approach would be. The previous government said a Bill was on its way for about two years but nothing came of it.

But, now in opposition, the former ruling party, Partido Popular, in June tabled a proposed Bill in parliament which has been criticized for its timing.

“They took advantage of the work carried out by civil servants to present it as the product of the party’s own research,” says Ana Barreira, Director of the International Institute for Law and the Environment (Instituto Internacional de Derecho y Medio Ambiente or IIDMA).

Nevertheless, the Partido Popular’s bill as it now stands proposes a commitment to define obligations for institutional investors and asset managers in relation to their climate change strategy.

It also includes compulsory disclosure of how they take into account “sustainability factors” (i.e. ESG factors) when it comes to their investment decision-making.

The prospect of a new Climate Change Bill has raised expectations and sparked public debate on climate finance and seen thought leaders travel to Spain to share their experience.

International experts such as Michel Colombier, who chairs France’s Expert Committee for the Energy Transition in France and Lord Deben, Chairman of the UK’s independent Committee on Climate Change, participated in different events around the bill.

Peter Sweatman, CEO and founder of Climate Strategy, a Madrid-based climate finance consultancy, has closely participated in the debates. He says the UK’s climate change act of 2008 is a good model for Spain, for three reasons:“It has strong and independent governance, clear carbon budgets and is managed by an independent expert Committee on Climate Change with its own resources.”

Regarding the possibility of incorporating a Spanish 173-like clause, he says: “It would stimulate a new level of engagement in green finance and sustainability for Spanish asset managers.”

How the Bill defines institutional investors’ reporting duties will be an important question.

In 2014, a reform of Spain’s Fund and Pensions Plans Regulation (See Article 69) introduced a “very peculiar approach to comply-or-explain”, says Jon Aldecoa, a veteran pensions and SRI consultant in Spain based out of the Basque Country.

“If you don’t do ESG you don’t have to explain anything. It’s like a punishment for those who practice SRI: Don’t comply, don’t explain!” Aldecoa tells RI.

As for fossil fuels, Minister Ribera hinted that it would be a priority of the Bill to address which subsidies are in place and how they can be cancelled.

Other opposition parties in parliament, Unidos Podemos, En Comú Podem, En Marea (a coalition that includes the green party Equo), have also tabled their own climate change Bill.

It proposes an explicit fossil fuel divestment clause (See Article 46), with the only exception being coal plant closures in the context of the Just Transition, an element of the Paris Accord.

IIDMA’s Barreira raises concerns about one clear example. In 2016 the European Commission granted Just Transition-related subsidies of €2bn to close 26 uncompetitive coal mines in Spain by 2018.

Barreira says that a number of companies are determined to continue operations. “The state aid was granted as part of the Just Transition. If they want to remain open, then they should return the subsidies.”

IIDMA has challenged the Spanish authorities and the owners of coal-generated plants in the courts, the list of defendants includes Iberdrola, Enel’s Endesa and Energias de Portugal and Naturgy (formerly Gas Natural Fenosa).

IIDMA normally sues on the basis of the EU Industrial Emissions Directive, which introduced limits for nitrous oxide (NOx), Sulphur dioxide (SO2) and dust emissions.

By 2020, non-compliant plants will have to either invest in technology to keep NOx and SO2 emissions under allowed limits or close down.

“But coal plants will continue to emit CO2 and we need to start thinking of closing dates; 2025 is a reasonable deadline, it allows plants to write off the investment to limit NOx and SO2 emissions, while renewables become more competitive.”

IIDMA has backed up its legal moves with shareholder activism by borrowing shares to ask questions at company AGMs. This season it has also engaged Santander, together with ShareAction and BankTrack, on lending to the Polish coal industry via a subsidiary.

The fact that a small independent law firm, outside institutional investment circles, is at the forefront of active ownership scrutiny is not a positive sign for the role of investors.

Size and scale
All Spanish SRI practitioners consulted by RI for this article agree that there’s a problem of size and scale of the market.

Many also agree that a number of corporate pensions schemes have been the driving force of SRI in Spain. Nonetheless the size of the largest one, CaixaBank worth €4bn, is telling compared to other countries.

Francisco Javier Garayoa, Director of Spainsif, the 60-member Spanish SRI forum, says that the Comisiones de Control (akin to trustee boards) of occupational pension plans are very ESG-aware. He also credits international asset managers that are introducing SRI products in the market.

The Comisiones de Control have equal representatives of both sponsoring companies and employees or their beneficiaries. A third key player are the asset managers that run the plans under fiduciary mandates.

Jordi Jofra is President of the Comisión de Control at CaixaBank’s pension plan Pensions Caixa 30. He tells RI that their journey started in November 2008 signing up to the UN-backed Principles for Responsible Investment, together with Telefonica’s pension plan which signed up in January that year.

Jofra says the first step is to truly believe in the principles yourself. “The next step needs to come from your asset manager, you have to chase them so that they put your investment beliefs into practice.” Their asset manager is VidaCaixa, owned by the bank, which serves other pension plans.

Jofra highlights that in February 2018 the pension plan rewrote and published its SRI beliefs. “It’s an important step for us. It shows our beneficiaries that we want to be serious about SRI.”


Jofra admits there are two areas in which they would like to make progress. First, Jofra says he would like to have more time and resources to devote to engagement activities.

Second, due to their strategy (investing in funds of funds) they can’t vote at AGMs, although Jofra says they are studying alternatives.

Fineco, the private banking arm of the Basque savings bank Kutxabank, has taken the journey towards SRI more recently.

Fineco’s Fund Manager Jon Recacoechea says that after joining the PRI in 2016 the next step was to set up a “pure” SRI fund and start integrating ESG strategies within the existing ones progressively.

Typically, Fineco serves retail and some institutional clients above €0.5m, for example, companies with cash flow surpluses.

Recacoechea sees a number of factors that have constrained Spain’s progress in ESG. There’s scepticism about responsible finance, particularly among retail investors as well as pervasive short-termism, the “CSR fatigue” of the last 20 years and a lack of education.

He offers another example. For many years the few options available were fondos solidarios (charitable funds) by which the fund manager would donate some of the higher than usual fees to a charity.

Conceptually this “mixed philanthropy and ESG investment” and hasn’t helped to build the case for the SRI in Spain, says Recacoechea.

He shares Jofra’s concerns about active stewardship remaining the next challenge.

But there have been instances of divestment at Fineco. The fund sold out of Swiss-listed LafargeHolcim over alleged payments to the Islamic State to keep a cement plant subsidiary open in Syria.

Aldecoa, who works with consultancy Novaster, says: “We are promoting impact investment portfolios as a more sophisticated SRI approach.”

He is closely involved in the production of Novaster’s annual Observatory of the SRI in Spain report.

This year Aldecoa highlights that despite the overall “slow motion progress” the number of impact investment funds has increased. He also works with Anesvad Foundation and banking group Bankia advising on the creation of SDG-themed funds.Everyone agrees that progress will come from Europe, on the back of the legislative proposals of the European Commission’s Action Plan.

Mario Sánchez Richter, Economist with trade union Comisiones Obreras (CCOO), tells RI that just relying on the best practice of market participants has not been enough. Therefore, he sees the future EU legislation as a much needed stimulus.

“We are stuck when it comes to exercising shareholders’ voting rights,” Sánchez Richter notes.

CCOO has small pension plan (€11m), mainly a default option for the union members whose employer doesn’t offer them a plan.

The plan is not only an active asset owner member of the PRI but also issues voting recommendations for their members serving as representatives at other plans’ Comisiones de Control (i.e. trustee boards).

Sometimes there is an additional obstacle, Sánchez Richter says: “There have been cases when the sponsor of the pension plan doesn’t want to vote the shares – let’s say they don’t like any potential noise that they think might come with it.”

Regardless of the legislation that will come from the EC’s Action Plan, there is a more pressing EU law on the horizon whose transposition deadline is looming: the Shareholders Rights Directive II (SRDII).

In June the Treasury ran a public consultation seeking stakeholder views on its transposition which was open only for two weeks (an oddity of Spanish laws).

The SRDII ups the ante on institutional investors by introducing new transparency obligations on their voting and engagement activity.

Corporance, the first proxy advisory firm in Spain, was set up in 2017 by governance pioneer Juan Prieto on the back of the regulatory changes SRDII will bring.

Corporance is the Iberian partner of Expert Corporate Governance Services (ECGS), a European network of independent proxy advisors with members in France, Germany, Switzerland, the Netherlands, Italy and UK.

At the time of writing, Prieto is analyzing preliminary data on voting during the Spanish AGM season. The trends don’t seem to improve: Spanish institutional investors don’t vote much or vote without following an informed decision.

According to Prieto, the data from the previous year showed that US and UK institutional investors voted more than Spanish ones in their own turf, and almost as much as their French peers.

“In the vast majority of cases, AGMs are held with all items in the ballots sort of pre-approved. If there’s no debate and discussion between shareholders and companies, what’s the point?” Prieto tells RI.

As Prieto explains, the threshold to file a shareholder proposal in a Spanish listed company is 3%. If that is combined with a lack of published voting policies, and more worrying, lack of active ownership and engagement by investors, concerns about Spain’s stewardship capabilities are confirmed.

But Prieto is optimistic: “It will have to change. Don’t look for great headlines in the past. The news is that everything needs to be built up.”

Also optimistic is Antonio Santoro, the PRI’s new Head of Southern Europe, based out of Madrid since July.

There are 62 Spanish signatories, of which 14 are asset owners, and the whole region is the second fastest growing after Asia in terms of new PRI members.

The areas of focus for the PRI reflects the weakness referred to by others.

“Introducing the market to corporate engagements […] and providing support to further empower the boards of trustees,” Santoro says.

According to Santoro, the Spanish market will become increasingly sophisticated in the coming years as the EU legislation is enforced, enabling a culture of active ownership to flourish.

One feature of Spain’s market is that Spainsif lacks a membership of asset owners per se.

Some investors have argued that at such a crucial time for SRI in the country, Spainsif would be a stronger and more influential forum with asset owner backing, for example from the 14 PRI asset owner signatories.

Other notable players

One notable player is state-owned bank Instituto de Crédito Oficial (ICO), which has issued three social bonds which have raised much of the capital from international institutional investors. Nothing would prevent ICO from issuing more in the future, while corporates and regional government continue with their green bond issuance.

The country also features a large number of mutualidades (mutual societies), pools of assets linked to professions and trades, whose goals are similar to those of a complementary pension scheme.

Their national umbrella group, Confederación Española de Mutualidades, has 285 members. It reports in total 2.5 million individual participants and assets worth €45bn. The largest one is the €8bn AUM Mutualidad de la Abogacía, a mutual society for lawyers.

The Confederación does not refer to any ESG investment strategy. However, two of its members, the €1.3bn Loreto Mutua (for the air transportation sector) and €198m La Mútua dels Enginyers (for engineers) are PRI signatories.

If more mutuas became interested in ESG investing, the potential that PRI’s Santoro sees would become more apparent.

Similarly, there is a complementary pension fund for all state public employees (Administración General del Estado, as opposed to local and regional governments’ employees).Contributions to the fund were suspended in 2012 due to austerity cuts as a result of the financial crisis and only resumed in April this year. In its investment policy, the pension fund has a separate chapter focused on SRI principles, which mandates the fund manager (currently BBVA Asset Management) to apply ESG factors.

The Administración General del Estado’s pension fund, with above 500,000 members, has €648m in assets.

Those figures pale in comparison with neighbouring France’s ERAFP, which is a 100% SRI investor with €28bn in assets. But it shows that there are avenues for Spain to explore.

Further progress in ESG practices could come from the significant holding of state-owned companies – the Sociedad Estatal de Participaciones Estatales or SEPI.

Other state-owned companies include Aena, the IBEX35-listed airport operator, and rail infrastructure manager Adif, which this year issued green bonds.

When it comes to stock exchanges, Bolsas y Mercados Españoles features the FTSE4Good IBEX Index, created in partnership with London’s FTSE Group.

The Spanish ‘Social Stock Exchange’ is not strictly a trading floor, but the first
equity crowdfunding platform authorised by the securities regulator. Since 2015 it has been promoting social impact investment and entrepreneurship.

Minister Ribera has also said that a future Climate Change Act should encourage the Central Bank to produce regular research about the impact of climate change on the economy, including risks and opportunities.

Spain’s Central Bank has been a member of the new Network for Greening the Financial System since April, where it is currently represented by former Deputy Governor Javier Alonso.

The journey does not stop here. Spanish SRI practitioners will not be short of adventures. Don Quixote claimed he knew by heart the ingredients of a magic potion which could cure any wound, the Balsam of Fierabras. A good stock of the magic potion will come in handy along the way.