17 Sep 2018
Nordea enables impactful financing
ASAP is about accelerating knowledge and passion for sustainability among leaders of today and tomorrow. Everyone can be a leader – yes you too! Step one is to fully understand different parts of society and business in order to see how things relate to each other. Sustainability is a lot about connecting the dots. That’s why the ASAP project team is happy to delve further into one of the three topics regarding the role of banks and financing operations, mentioned on the Nordea partner page. This time our focus is on how Nordea enables impactful financing of sustainable projects and businesses. The following text is written by Felix Nilsson and Fanny Sjödin at Nordea Sustainable Finance. Enjoy your read!
Accelerating investments in sustainable solutions
According to the Business and Sustainable Development Commission, the investments needed to reach the Global Goals are about $5 to $7 trillion per year (i.e surpassing the GDP of Japan!). These investments will have to be made by issuers such as the public sector and companies. These investments are enabled by banks and the financial industry. Hence, Nordea and the financial industry plays a vital role in enabling our clients to make and increase these investments, and this is how we make an impact at scale.
Remember, a bond is like a loan. Investors buy it (“lend” money), the company gets capital (“borrows” money) and pay interest to the investor that is now the bond owner. Nordea acts as an intermediary in the capital market, which means that we enable the issuance of green bonds and thereby ensure the funding of green projects for our clients. This is one way to accelerate investments in sustainable solutions. During the past 4-5 years the green bond market has been booming. Almost all Green bonds live up the standard of The Green Bond Principles (ICMA), thereby ensuring that their proceeds are used for projects with environmental benefits such as a renewable energy project, environmentally efficient buildings or robust waste management systems. This development is great if you want the financial industry to contribute to the SDG’s, but even so less than 1 % of all bonds issued worldwide are in a green format! In the SEK market the equivalent number is 11 %.
What about social and sustainable bonds, bonds where the proceeds are used for more broad sustainability benefits such as access to clean water, affordable housing or access to health care? They still only make up to about 10 - 20 % of the combined Green, Social and Sustainable bond market. To accelerate investments solving the SDG’s we’ll need them as well. It is a bit tricky though and this market is still relatively young. Calculating reduced carbon emissions can be done - even though it is not always that easy - and the data quality from companies and service providers is improving. But what about reduced hunger, increased learning or well-being? How can companies calculate benefits and collect the data? These are some of the challenges the financial industry is facing to make Sustainable bonds mainstream and to further accelerate companies’ investments in sustainable solutions. Want to see how we in a concrete way work with our clients to accelerate investment in sustainable solutions? Check out this video as our client K2A shares their story about green loans!
Sustainability evaluation of corporate customers
Nordea is not only looking at sustainability when acting as an intermediary on the Green bond market. If you look at our total corporate lending portfolio for example it makes up to about EUR 150 billion! Therefore, ensuring sustainable development is also about understanding the sustainability issues facing our corporate customers and help them improve their businesses.
But how sustainable are our corporate customers and how can we know? Over the past years we have established a process using Environmental, Social and Governance (ESG) factors to understand the sustainability risks and opportunities relevant for our corporate customers. Our in-house ESG analyses team conducts the ESG evaluations and categorize our corporate customers into one of the five ESG risk categories.
By including ESG in lending decisions we can reduce the risk in our lending portfolio over time by avoiding high-risk companies. The ESG evaluation also enables a dialogue with our clients on a broader range of topics creating better customer experience. It is a win-win. But our evaluations can still be improved and the dialogue with our customers on sustainability issues can still be intensified. Sourcing the right data from our clients and educating our advisors is key for future success!
Did you get all that?
To summarize we can say that by integrating sustainability into our business, we will take responsibility in assisting our customers in their quest to become even better while also reduce the risk in our own balance sheets over time. We at Nordea have an obligation to engage, drive and contribute to drive the sustainability change in the capital markets. Join ASAP to learn more and help us improve!
Written by: Felix Nilsson & Fanny Sjödin