On banks’ agenda: assesing clients and strengthening sector policies
European Green Deal framework and commitments are very ambitious. Although some might see sustainability as a risk with all the regulations coming and speed of change, we see opportunities for growth and development like never before. The banking sector will play a significant role within this transformation as there is a huge capital needed to finance the investments.
Banks are taking an active role in the sustainability transition. Two main directions are client assessment and strengthening various policies. As a bank the vast majority of our impact on climate is indirect – meaning offerings: products and services, financing and investment solutions therefore we need to rethink what type of clients do we work with and how do we support them.
It is clear that financing of non-sustainable businesses will be purposefully decreased. We have developed a framework to assess how our clients run their ESG agenda, what type of policies and governace structure do they have, how do they treat environment. What we focus extremely on now is environment – we asses both the direct and indirect impact of the business of our clients. To put it simply, we strive to understand where our clients have their challenges and what actions are taken to change.
Starting 2022 we as bank will need to report our Green asset ratio – meaning what part of our lending to private individuals and companies is green and what part is brown. The European Union Taxonomy is a way to set tangible targets for different sectors and it sets rules of what is defined green and what is not. If we take a simple example of the ordinary car – as of today in the EU if the car doesn’t emit more than 50 grams CO2 per kilometre it is compliant with the Taxonomy. But in 2025 a car would be Taxonomy compliant only if it has zero tailpipe emissions.
Additionally, we have strengthened our sector policy on fossil fuels covering extraction, refining and power generation from coal, oil, gas and peat. In our roadmap we have defined to phase out of thermal coal mining and coal fired power generation by 2025 and 2030 respectively.
How do bussinesses transform – H&M and Daimler examples
There are no excuses for not moving towards sustainability - tools, advice, products are there. Be it sustainable bonds, green loans, sustainability linked loans, green leasing or other products – each company can decide which way to go and to choose the most suitable instruments and pace to reach their own sustainability targets.
I want to highlight sustainability-linked bonds that are a new trend in the bond market. In contrast to green bonds, where the money is earmarked for specific green projects, sustainability-linked bonds are linked to how well the company meets a number of defined sustainability targets.
H&M is an example worth mentioning here. The company has joined the trend with the issuance of a sustainability-linked bond of EUR 500 million with a tenor of 8.5 years. The bond is linked to three targets, and if H&M falls short of meeting these, the company will have to pay an interest rate premium to the bondholders. The targets that H&M has committed itself to meeting by 2025 are to increase the share of recycled materials to 30 per cent, to reduce emissions from its own operations and from purchases of electricity and heat by 20 per cent from 2017 level and to reduce the total emissions from raw materials, fabric production, clothing manufacturing and transport by 10 percent.
Another good transformation example is Daimler. SEB has advised Daimler in setting up a green financing framework that is classified as Dark Green, which is the highest level according to the research institute Cicero’s independent expert opinion. The framework will be used for borrowing through e.g. green bonds, green commercial papers and green loans.
On September 2020 Daimler issued its first green bond of 1 billion for 10 years term with the aim to steadily advance towards CO2-neutral technologies and services. The net proceeds from the green financing instruments will be allocated to develop and produce zero-emission vehicles such as battery-electric and fuel-cell electric vehicles, for example. Furthermore, the proceeds will be used to upgrade manufacturing facilities or construct new facilities for the production of zero-emission vehicles and drivetrains, and to establish the recycling of batteries and fuel cells.
2021 will be the break-out year for the sustainability-linked concept
The sustainable debt market exceeded our forecasts during the first quarter of 2021 and the energy transition is accelerating. We now expect sustainable bond issuance of more than USD 1trn this year, which is 25% more than we expected in our most optimistic estimate at the start of the year.
Funding is rising because the transition is gaining pace faster than anyone had anticipated. 2021 will see a significant increase in public investment in energy infrastructure, and we now see the first signs of a true disruption in energy-using sectors like autos. The market is also broadening to embrace new financing solutions and new areas, such as gender equality and water.
The first quarter of 2021 was a record quarter for the sustainable debt market, with USD 378bn of new issuance, representing 50% of the total market for 2020. It was driven by green and social bonds, with issuance of USD 150bn and USD 94.2bn, respectively.
At the same time, issuance of sustainability-linked bonds was more than ten times higher than in the same period last year and has already surpassed the total for 2020 while sustainability-linked loans doubled. These developments indicate that 2021 will be the break-out year for the sustainability-linked concept, both regarding loans and bonds.