Roundtable: ESG a natural fit for Nordic banks
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Roundtable: ESG a natural fit for Nordic banks


The Nordic region has a long and proud history in social welfare, sustainability and related areas, so it is naturally well placed to play a prominent role in green finance too. GlobalCapital gathered a panel of prominent market participants together in June to discuss key themes and consider the next big developments


Atanas Dinov, GlobalCapital: Why has the Nordic market been such an incubator for green and labelled debt developments? Where did it all start and how did issuers and investors in capital markets start this drive? Jens, being a supranational, at the same time the Nordic Investment Bank also lends to a lot of the borrowers that the banks themselves face, could you say how it started from your viewpoint?

Jens Hellerup, Nordic Investment Bank: I think it comes back to the Nordic welfare model, which is very much linked to equality, sustainability, social welfare and transparency and this is linked to the business where you focus more on long term value creation than on short term goals. This also leads to ESG.

On the ‘E’ side, you have renewable energies: in Denmark you have the big wind farms onshore and offshore, in Norway you have hydropower, and in Iceland you have geothermal energy.

On the ‘S’ side, social security, equality again, and you read much about social responsibility from the corporate side. And on the ‘G’ side, it’s based on transparency, low corruption levels in the Nordics and the strong rule of law.

Where it started for NIB was in 2005, as we were the first supranational to get the mandate to finance environmental projects. I cannot say it was before there was any climate change or climate crisis but at least it was before there was the same awareness of it as today.

Institutions in the Nordic countries were among the first to issue green bonds, with NIB in 2011, Kommunalbanken in 2010. One of the first green bonds from the World Bank in 2008 was, to a large extent, bought by Nordic investors.

So ESG is rooted in more than 20 years in the region — this whole movement in green bonds, ESG and how it could be turned into sustainable finance. It’s not only about risk and return but about impact, which is the third dimension in the current investor equation. And investors were very open about that.

Dinov, GC: After starting from the SSA market, how did ESG transition through to the banking side? What are investors looking for in bank debt products?

Petra Mellor, Nordea: Nordea started issuing green bonds in 2017 and the SSA market set a very good precedent here. I think it was the European Investment Bank that issued the first green bond back in 2007 and Nordea was one of the investors. And just to add to what Jens said, the Nordic market is very well advanced in terms of sustainability, both the banking and the corporate sector. Given that many large investors are government-owned or cooperatives, there was also strong interest early to invest in sustainable bonds. Consequently, there’s been a big demand for green and other labelled bonds in the Nordics from the investors from the very start.

Banks saw this and started to analyse how we could also contribute to a climate change and transition. We started to investigate which assets we had that were potentially eligible for green funding.

Kerstin Ahlqvist, Swedbank: I believe it has been an iterative process. I agree with what Petra mentioned regarding the demand for the product itself. We have, in Sweden for example, state-owned funds with investment mandates and criteria from the outset being long-term-driven with an aim to be sustainable over time. And, as also mentioned, there is the aspect of social welfare and long-term contribution of pension money managed by Swedish investors, which I guess is also the case in Denmark and in Norway.

So, the demand has been there from the start because of these mandates and then the private sector has followed suit. While there are certainly other drivers as well, this is one of the more important ones.

Dinov, GC: How has this investor demand been transitioning into another part of the banking sector — covered bonds and mortgages?

Eivind Hegelstad, SpareBank 1 Boligkreditt: First let me just add to Kerstin’s point. There’s a lot of pension money in Norway looking to do the right thing. But the huge fund, the sovereign wealth fund of Norway, cannot invest in Norwegian assets at all, it can only buy non-Norwegian assets. But it is looking to buy green and it has been an innovator in that field around the world but not inside Norway because it’s not allowed to.

The Nordic market is very well advanced in terms of sustainability, both the banking and the corporate sector. Given that many large investors are government-owned or cooperatives, there was also strong interest early to invest in sustainable bonds. Consequently, there’s been a big demand for green and other labelled bonds in the Nordics from the investors from the very start
Petra Mellor, Nordea

But there are three things that I would highlight that spring to my mind when we started planning the first green covered bond issue back in 2017.

We’re very digitalised societies in the Nordics. We have a lot of data and we like to use the data. And that went hand in glove with the green question.

There’s also, as people have been saying around the table already, a great deal of wanting to quickly do the right thing regarding the environment and the green transition in the Nordics. I’ll just say it like that. But it would be amiss to not say that we also want to do the right thing for our investors around the world.

We are a relatively small capital market in Norway. We are — I wouldn’t say necessarily dependent — but we’re keen to bring on board as many European investors as we possibly can. This was an important point as well when it came to offering green bonds. Demand for green grew and we wanted to satisfy that demand by offering green bonds, and thereby be relevant to covered bond investors around Europe.

Christian Bech-Ravn, Jyske Realkredit: The Danish covered bond system is different from the rest here in the Nordics. We have a match funding principle where we need to match cash flows on the loan and on the bond. This makes it more difficult for us to issue green bonds.

Basically, if we were to finance all our green lending with green bonds, we would have to double the number of ISINs that we issue; that would of course affect the liquidity. So, from the Danish perspective we have a lot of focus on transparency, at the cover pool level, and are really trying to be ahead of the curve when it comes to this transparency.

We have been publishing different data on ESG for our covered bonds. We started publishing EPC scores, not only showing lending to the top 15% most energy-efficient buildings, which we could actually finance with green bonds, but also showing the rest of the loan book. By doing this we also show the tail risk. And we think that’s important for investors, when they’re looking at the cover pool, not only to look at what is green, but they also need to look at the amount of non-green activities that are being financed out of the cover pool. Investors need to look at what the bank is doing to change this. If the bank over time is able to finance a transition of the non-green activities. And by showing the entire cover pool, that is something that we are able to show.

We have been working on publishing this data since 2017-2018. We were the first financial institution to start publishing ESG data for covered bonds. And now all Danish mortgage institutions are publishing this data, and we’re starting to see, that especially for Danish covered bonds, investors are using this data in their investment decision — looking more at a cover pool level instead of each individual bond.

We’re still working on ESG transparency. In the European market there’s still very much a focus on whether the bond is green or not. But we can see now in Denmark, the investors are slowly looking more at the cover pool and we think within the next couple of years we will see the same for many European covered bond investors.

More similarities than differences

Dinov, GC: This sounds like there are also divisions between different markets within the Nordics. Johannes, from your perspective as an originator, have you encountered these differences?

Johannes Trautwein, DZ Bank: Of course, there are some specialities in different countries and different approaches that have been used by the various issuers. When you look for example at DNB Bank, which issued its first green bond in a covered bond format in 2015, they made use of the energy efficiency regulations that were in place in Norway and became stricter over the course of the last years. This approach has been used by other banks and got translated into other countries with their own energy efficiency regulations.

There are also differences across the issuers, but they have a very similar approach based on a common understanding. In terms of types of sustainable bonds, they are all very much looking into the green bond market rather than the social or sustainability bond market. To summarise, there are more similarities than differences.

Mellor, Nordea: I can add that from Nordea Bank Abp, we issue senior preferred, senior non-preferred and capital instruments and from here we have issued more than 10 green bonds in different formats across five currencies. Nordea also owns a mortgage credit institution in each of the four Nordic countries where we operate and we have issued green covered bonds from each of these different subsidiaries as well, where the use of proceeds is intended to finance the green assets in the mortgage covered bond pools.

We issued our first green covered bond in Denmark, where we opened a green ISIN in 2019. Subsequently, we have issued green covered bonds across the different countries. We have five different green portfolios where we have assets. From the bank, we have green assets from large corporate institutions and business banking, while we have green mortgage portfolios in the four Nordic countries and currencies in which we operate.

Dinov, GC: How do the European Union’s Green Bond Standard compare with different practices within the region? And how is this affecting your issuance?

Ahlqvist, Swedbank: I believe that the EU Green Bond Standard will likely be somewhat of a gold star standard going forward due to it being so strict. However, it will capture only a very small part of the balance sheets of banks at least in some of the Nordic countries. As long as there is no harmonisation of energy class systems in between countries, I think there is a difficulty in comparability.

The EU Green Bond Standard will likely be somewhat of a gold star standard going forward due to it being so strict. However, it will capture only a very small part of the balance sheets of banks, at least in some of the Nordic countries
Kerstin Ahlqvist, Swedbank

If we just look at the Nordics, Sweden is one example where approximately 1% of the national stock of EPCs is A label, whereas for example in the Netherlands it’s more like 15% or even higher.

Bech-Ravn, Jyske Realkredit: In Denmark it’s also closer to 15%.

Ahlqvist, Swedbank: So it is clear that the starting points really differ between countries.

I like the approach that you are taking at Jyske Bank and we have the same kind of approach. In Swedbank, when we look at the balance sheet and the funding, we see it more holistically and we believe that more and more investors do as well. Green bonds have been a catalyst for putting focus on greenifying the balance sheet but at the end of the day, the most important is how we manage to transition the total balance sheet. Green Asset Ratio is a bit limited in terms of reporting and comparability as it is not taking into account the different starting points between countries.

Trautwein, DZ Bank: That’s an experience I can totally share. At the beginning of the green bond market, investors really looked into the project itself, whether there was any kind of positive impact. But then the discussions shifted really fast towards the ESG strategy of the issuer and how it matched to the projects it was financing.

Now it is shifting again towards the projects itself but more on the risk mitigation — investors now want to make sure the financed projects are not harming any other environmental and social objectives.

Discussions shifted really fast towards the ESG strategy of the issuer and how it matched to the projects it was financing. Now it is shifting again towards the projects itself but more on the risk mitigation — investors now want to make sure the financed projects are not harming any other environmental and social objectives
Johannes Trautwein, DZ Bank

That underlines that discussions have become quite broad, focusing not only on the projects but also on the overall ESG strategy of the issuer. For some years now, an increasing number of issuers are incorporating the new Taxonomy into their frameworks and also starting to look at the European Green Bond Standard.

Bech-Ravn, Jyske Realkredit: On the EU Green Bond Standard, it’s very much a data exercise. It’s really about getting the data for the activities that you’re financing and especially when we talk about covered bonds where we need to get the data for many different buildings.

I believe that we have many buildings that are actually complying with the Taxonomy but we still need the data. Especially when we talk about SMEs we still need the data for each individual company, to make sure they are also living up to the ‘do no significant harm’ and they are living up to the minimum social safeguards.

For companies in the Nordics, the minimum social safeguards are already included in the legislation, so I think most of them will live up to these requirements. But we still need to get the data from them. This is going to be a data exercise that we will be working on over the next years.

Ahlqvist, Swedbank: Yes, the best banks in disclosure, reporting and standardisation will most likely benefit.

Hellerup, NIB: It’s the same with buildings because if you look at LEED and BREEAM certification for buildings, NIB will only finance green buildings with the highest certification (LEED Platinum or BREEAM Excellent or Outstanding) and these are not even eligible under EU Taxonomy. That’s quite interesting that you have the best rating and they’re not eligible within the EU Taxonomy.

Dinov, GC: Would you say that the EU Taxonomy and the Green Bond Standard are making your issuance easier?

Hellerup, NIB: I don’t think they make it easier but we have tried to look into the projects we have financed with our green bonds (NIB Environmental Bonds). What we have done is to see how eligible are they with the EU Taxonomy. And we take the whole portfolio into account — it’s about 80%. But if you then start thinking about ‘do no significant harm’ part, it’s about 50% of the 80%.

I agree about the minimum safeguards. We really do the ESG work and we go out and speak to people on the project and look at them. We believe we are covered on that one but we probably need data if somebody came in and audited it. Maybe a pure player is able to issue a bond which is aligned with the EU Green Bond Standard, but if you are a bank where you have a big portfolio of different things, it would be very difficult to issue a bond in the near future that is aligned to the EU Green Bond Standard.

Hard requirements

I really support that we get standardisation of what is green but the EU Taxonomy’s requirements are too hard at the moment
Christian Bech-Ravn, Jyske Realkredit

Trautwein, DZ Bank: We also observed this in the market with an increasing number of issuers mandating external parties to review their frameworks and whether they are aligned with the EU Taxonomy. But for many of them, they at least aren’t fully aligned because they often missed some of the DNSH (do no significant harm) criteria, which are partially very difficult to fulfil, like for green buildings. For the adaptation requirements, say if you have a single building in an area which has a high flood risk, what are you going to do? How do you want to adapt to that as a single person or institution? It’s similar with other requirements like the famous toilets and the flush volume you cannot exceed — it’s a similar issue with very strict requirements. Some of these DNSH criteria are very difficult to achieve.

Bech-Ravn, Jyske Realkredit: I really support that we get standardisation of what is green but the EU Taxonomy’s requirements are too hard at the moment, as you’re saying, for new buildings. It’s difficult with the ‘do no significant harm’ actually to get the data.

Jyske Bank is financing electric cars where we need to know what type of tyres are on the car to be aligned with the do no significant harm criteria. But we don’t have that information. If a private owner buys a car and finances it with us he is free to change the tyres the next day if he wants to. We are not able to follow what type of tyres are actually on the car. We need the government to step in and start adopting the Taxonomy into the legislation.

Dinov, GC: Eivind, what is your opinion being in a country outside the EU. How is that Taxonomy affecting your issuance of covered bonds?

Hegelstad, SpareBank 1: I’m glad you asked that question. We’re not really outside the EU, we’re part of the European Economic Area. Most regulations pertaining to banks have EEA relevance. So we would have to transpose those into Norwegian law. Part of being in the inner market, but not being an EU member state is we follow all the rules but have no political say in Brussels.

We found the Taxonomy to be overall very helpful, very formative. And to get a standardisation of what a green bond is, is very helpful for investors and would make it much easier for people to understand what they’re buying.

I do agree with the complexity; there’s too much complexity in the Taxonomy. And I absolutely agree also with Christian that it’s up to governments to look at that complexity and think about the regulation, to make the process more straightforward. But that’s probably very far down the list of all the to-do things that a government has to look at.

Nevertheless, we issue green bonds solely based on residential Norwegian mortgages and we were able to let the national building regulations solve the ‘do no significant harm’ questions for us. So I do have full alignment with the EU Taxonomy for my green bond issues going forward.

Dinov, GC: Considering what you have just said, that the EU Taxonomy is somewhat restrictive, are you ready to report the upcoming Green Asset Ratios that the European Banking Authority will require banks to report? Has that been a constraint on your funding or has that helped by adding transparency to your bonds and are investors looking with new interest to buy those?

Hegelstad, SpareBank 1: It absolutely adds transparency. That is part and parcel of what the system should be. Banks should report the level of EU Taxonomy-aligned assets as a share of all lending. Partially going back to my previous answer, there are more complexities involved with lending categories outside mortgages. If I put on my SpareBank 1 hat, for the whole of our group of 13 banks, we do a lot of other sustainable categories in the lending programme so there are more complexities there, and we struggle with easily finding the Green Asset Ratio in certain aspects amongst some of those categories.

But the GAR within mortgages is pretty straightforward. You just calculate if something aligns fully. However, there are going to be some discrepancies in what are my green assets and my GAR ratio is because I’m going to have grandfathered green mortgage assets, which are outside the Taxonomy. I’m going to have assets that were green a while ago, even before the Taxonomy came into existence, and I’m going to continue to report those as green because I have green bonds outstanding. That’s an explanatory situation that we obviously need to engage in and look at, as part of the reporting.

It’s the same way with the green assets that are outside residential and commercial properties, which are seen as green or classed as green but they don’t fully align with all the ‘do no significant harm’ criteria. And you have to explain that as well because your GAR is going to look small versus your overall green portfolio in those cases.

Dinov, GC: What does this mean for the unsecured issuance from banks, in senior and capital deals? Would the GAR or the EU Taxonomy help and assist with future issuance?

Trautwein, DZ Bank: The basic idea of the GAR is quite good and I understand what they are trying to achieve. However, you have to be very careful when using this figure and comparing banks because there are so many exceptions within the GAR that make it very difficult to compare one bank with another.

We found the Taxonomy to be overall very helpful, very formative. To get a standardisation of what a green bond is, is very helpful for investors and would make it much easier for people to understand what they’re buying
Eivind Hegelstad, SpareBank 1

Green lending towards SMEs or a company outside the EU will not contribute to increasing the GAR — in contrast, it would decrease the ratio. The same applies to activities or sectors that are not covered by the EU Taxonomy.

There are so many exceptions out there, that it makes it very hard for people outside to see what this number actually means. You really need to have a description of why that GAR is at that point. It’s a good idea, but it’s really difficult to use that number to compare banks.

Mellor, Nordea: I think that many banks will continue to issue under the ICMA Green Bond Principles and thus will have to continue to report on and maintain those portfolios as long as we have the green bonds outstanding under those Principles. We would probably see new issuance under the EU Green Bond Standard as well in 2025.

The first issuers under the EU GBS will likely be monoline banks — banks that have one product to offer, for example real estate — and also corporate [lenders] that operate in categories where the EU Taxonomy is relatively easier to assess, for example an energy or a utility company.

For a well-diversified bank, it can be a little bit harder to define EU Taxonomy alignment, especially on the SME side. For the retail mortgages business, it may be a little bit easier to define the EU Taxonomy alignment.

Hellerup, NIB: Now with the Taxonomy you have the concept of what is green and what is not green. With the EU Taxonomy available now, this is what will help the ESG market going forward. NIB has had the environmental mandate for 20 years based on its own taxonomy.

There are a few categories where we don’t agree with the EU Taxonomy or we had some differences, where something was outside it, or we had something where we are stricter. But now there is something which is defined as green, which we can agree whether it is good or bad. We all know about nuclear, we all know about natural gas, and we can discuss whether these should be included or not. But at least it’s up to the issuers when they issue their green bonds and take these categories into their green bonds.

Dinov, GC: When you issue as an EU bank, how would that compare to a non-EU bank, say one based in the UK or North America? Are these clearly defined standards helping you with your unsecured issuance?

Ahlqvist, Swedbank: We have touched on this earlier but of course guidance generally is good. GAR, as discussed, has several limitations because for example of what data is available.

What we will see is probably two developments going forward: EU GBS being one path where we have very high standard green assets — and then another path of transition frameworks being developed. And I think we won’t be able to achieve any of the climate targets from us banks nor the overall targets for the EU if we don’t manage to align these two and focus on developing both.

What we have seen outside the EU is that there is already progress in this area. We have UK banks, Canadian banks and Asian banks that are not bound by the EU Taxonomy regulations, allowing them to take a more holistic approach.

Holistic approach

Dinov, GC: Do you think this is better for them?

Ahlqvist, Swedbank: They can look at it a bit more holistically than EU banks and, as we have said earlier, the GAR ratio is impacted by the composition of a bank’s balance sheet. The starting point and outcome will naturally differ between a mortgage bank and banks with more diversified balance sheets with a higher degree of corporate lending. Banks with a lot of SME lending will be at a disadvantage because these smaller corporates might not report on EU Taxonomy and therefore only the denominator is impacted, indicating a lower GAR ratio.

All this is interesting because non-EU banks can be more creative by implementing financing frameworks with a broader approach to transition planning. In the EU, we will probably also land there but it will take a bit longer.

Dinov, GC: Although transition finance is a big topic, not much issuance linked to it is happening. How would a bank finance borrowers that are in transition? If sustainability-linked loans are extended, would you be able to issue sustainability-linked bonds?

Hellerup, NIB: It’s hard to issue a sustainability-linked bond. For example, Nordea has financed their sustainability-linked loans with a bond and this might be a way to finance the transition. This is because the sustainability-linked loan is a super-good product for transition because that’s where you look at the company and not a project, which typically is behind a use of proceeds bond.

And these two supplement each other very well as these are two different products. It’s not one or the other being better. For transition finance we need to look at the whole company in its transition. Say, do we like a cement factory? You look at the company in its transition to produce cement in a more sustainable way. If it is a utility company there could be a wind farm to substitute some fossil fuel-based heating, then it will be a good project.

For a bank supporting the transition, the sustainability-linked loan is very good tool. However, a bank issuing a sustainability-linked bond is challenging because you need to look at the underlying project you are financing and get that audited. That would be very difficult. But I like the idea that you are financing the sustainability-linked loans. ICMA has a working group that is looking at how you can structure a bond which finances sustainability-linked loans. Four institutions, JP Morgan, Crédit Agricole, the Loan Market Association and NIB, are in the working group and we have created some guidelines.

Bech-Ravn, Jyske Realkredit: I definitely think we need to finance the transition. Right now, we are rewarding companies that are setting up targets. If we look a couple of years ahead, then we will start including target setting from companies much more into our credit processes.

We will see that the companies that we are rewarding now will become the standard. When we look at our credit process, we will say ‘Do they have targets? If yes, good’. Then we can give them a loan. And when we say ‘Do they have a target? No, they don’t have any targets,’ then potentially we will give them a higher price on a loan. It’s also about transition risk; I think that many banks are still working on how to deal with that. I believe in the future we will see sustainability-linked loans as a matter of transition risk rather than awarding some companies.

Process not a product

Trautwein, DZ Bank: There is one phrase that covers it quite well — transition is a process not a product.

Ahlqvist, Swedbank: Many banks are now working on transition loan definitions as well and I believe we will see these definitions becoming clearer in the near future. SLLs are part of it but there is likely a broader set of criteria that you can add to the transition loan definition as well.

Dinov, GC: In Nordea’s case, why didn’t you issue an SLB? Why did you choose the innovative approach to do it through a use of proceeds bond?

Mellor, Nordea: We realised that we had many assets on the balance sheet that were sustainable but not necessarily qualified for our green funding framework. So we created a new framework where we use sustainability-linked loans to allow our investors to invest in Nordea’s SLL financing activity that tackles climate change where the use of proceeds of the bond is intended to be used to finance the SLLs. As the use of proceeds format in terms of green bonds was very well established and this new format contributes to climate change, we discussed whether we would call these bonds transition bonds. But there wasn’t a market standard yet for transition bonds, while the Loan Market Association had already established principles for SLLs.

We then decided to issue SLL bonds where the use of proceeds are intended to be used for the sustainability-linked loans on our balance sheet. This way we offer investors another way to invest in Nordea sustainable assets with more information and transparency than a normal bond. The product also allows us to engage with our customers in the journey towards a better sustainable world. All assets in our SLL bond asset portfolio have climate targets that are quantifiable, ambitious and robust.

We choose not to issue a sustainability-linked bond as SLBs may not be regulatorily efficient for banks. Hence, we invented this new, more efficient SLL framework instead.

Dinov, GC: You first issued in local currencies and then in euros. If you were to repeat it, which currency would you choose?

Mellor, Nordea: We like the local currency markets and we know the local market investors well. We had a good dialogue with key investors and decided to test the new product in the local market first. Another advantage of starting in the local market is that the benchmark size here is smaller. This meant that we didn’t have to build up a portfolio of €2bn in assets before issuing a benchmark size. Hence, in the Nordic countries, in SEK and NOK, we could issue smaller volumes still in benchmark formats.

We started with SEK and NOK in 2022 and then we came with the first SLL euro benchmark in 2023. And we hope to come back to the local markets as well as the euro market in due course.

Where are the SLBs?

Dinov, GC: On the subject of SLBs, there’s been only one case of a bank issuing, when Berlin Hyp printed a senior preferred deal in April 2021. It came with a 25bp step-up coupon. Why are there no more SLBs and what is stopping their issuance?

Trautwein, DZ Bank: We worked on this transaction as bookrunner and it went very well. Berlin Hyp achieved a very tight pricing on the back of positive investor feedback. However, as you mentioned, the regulatory requirements are having a negative impact on the take-up from banks so far. When you issue an SLB as a bank you theoretically have an incentive to redeem if you do not meet your target and have to pay a higher coupon.

It is not MREL-eligible and therefore it doesn’t really make economic sense for most banks to issue SLBs. Therefore, the innovative structure from Nordea is a very interesting development and I would hope for more issues to come.

I recently read that Crédit Agricole CIB is considering issuing an SLLB, which could give a further boost to this segment.

Hegelstad, SpareBank 1: We were fascinated by the Berlin Hyp sustainability-linked bond at the time and we had a discussion with them and looked into it. The incentives offered for the issuer to stay the course, well, that’s a technical issue, but it is a bit difficult due to swaps and cash flows and perhaps analytical and reporting requirements. It could probably be solved, but I’d first put that on hold in a “technical box”.

The problematic thing was that you need to be able to control the environment. Essentially this goes back to what Christian was saying: it’s about the whole covered bond pool or the whole balance sheet, how you green it, how you improve it over time, that’s the sustainability-linked feature. That’s the way it works with Berlin Hyp as well.

But if you don’t control the environment then it’s challenging. We try to control the environment, by saying to customers ‘you get an interest rate discount if you green your house’. Here I’m just talking about residential mortgages, just to keep it simple. Some will greenify their houses but most won’t. For single family house owners it may not be worth it. It’s probably too little, it’s too complicated, it costs a lot, it’s a long process to renovate.

You aren’t able to move people to greenifying their houses with a say 50bp discount, which our banks are offering to prospective mortgage holders in this country. And when you can’t control the environment, how can you promise then that your overall balance sheet or your whole cover pool will move in a certain direction by a certain time? You really can’t.

It’s also a little bit disingenuous and almost to be taking a bet that you are able to. You are then reliant upon the government coming in and saying, we are going to have to have these energy efficiency measures implemented, and here is a new law to achieve that. This means that however you calculate the CO2 emissions equivalent, which is complicated in its own right, you reach it just by being compliant with the new regulation.

That is what, at least to my understanding, Berlin Hyp has done as well. They’ve said this is the energy use or CO2 reduction target of the German government moving in that direction and that is also our target for the SLB.

Johannes can correct me if I’m wrong, but now there is a discussion pertaining to the German government, whether they are going to make their goals in 2030, 2045 or not. And many people are saying they’re not going to make them.

Just look at the resistance in Germany to the green change. In the EU election the Green Party lost nearly 9 percentage points of its overall vote tally in Germany compared to the last parliamentary election in the country; there’s a shift in opinion and that is a big part of the reason why people are thinking that Germany is not going to make their commitments. And that then would imply that Berlin Hyp is not going to be able to make theirs either.

But you can of course do many other things as a specialised lender, like Berlin Hyp is, and they’re very competent people and I have all the confidence in them. But this is the dilemma for banks looking to issue SLBs which are linked up with a government target.

Bech-Ravn, Jyske Realkredit: I fully agree with you Eivind, and it also introduces some risk of greenwashing. When you’re setting a target where you’re not really able to control it yourself, it’s actually controlled by the environment. For Berlin Hyp, it’s very much controlled by the government.

We have a target that’s even more ambitious than Berlin Hyp’s. We have a target to reduce carbon emissions for residential buildings by 85% within the next 10 years. It’s very ambitious but the main driver for this is the transition of the energy supply in Denmark. We are financing renovations of buildings that we finance but the main driver is not going to be the banks, it’s going to be the transition of society, which we are not as a bank driving.

So, when we are issuing these sustainability-linked loans and also bonds, we must be very aware that there is a chance of greenwashing.

Trautwein, DZ Bank: As we have discussed, Berlin Hyp used the carbon intensity target for the SLB. There are two key factors. First, the energy efficiency of the buildings they are financing, that’s something they can somehow manage and mitigate. The second point is the energy mix in Germany. Due to geopolitical developments with Russia’s war against Ukraine, the energy mix in Germany has deteriorated in terms of CO2 emissions, at least temporarily. Instead of natural gas, coal is now increasingly used to generate energy. So, while Berlin Hyp was still well above its target achievement path in 2022, this gap narrowed in 2023.

Dinov, GC: With a lot of control being outside banks and lenders, and issuing SLBs not being the way forward, what is the best way to green a bank’s balance sheet? Where is the best spot to do that in the capital structure?

Bech-Ravn, Jyske Realkredit: We are a bit special as a Danish bank so covered bonds are a big part of our business. It would have a big effect to do it with covered bonds, but again, our main focus is still on transparency. It’s more on transparency than issuing green bonds. We can, and we have, issued green bonds, but our main focus is on transparency.

Ahlqvist, Swedbank: We see labelled bonds as tools to help incentivise green lending but most importantly it starts with the focus on our customer lending. What do we do in terms of customer business, sustainable product development and how do we get customers on board? We, on the funding side, are the residual of our green asset growth, meaning that if we manage well on the business side then we can issue green bonds. But it starts with the customers and it starts with the commitments we, banks, have in place in the green transition journey we are on.

The social aspect of “ESG” is also important to mention in this context. Swedbank added social lending criteria to our framework to support targeted groups in the communities in which we operate already two years ago. We are proud to have led the way in societal commitment to our customers and we were the first Nordic bank to issue a social bond in 2023.

Hegelstad, SpareBank 1: I totally agree with that. It starts with the lending and there are things that are easier and things that are more difficult in the lending. If you talk to companies, you can certainly set targets in their plans. You can do that on commercial buildings as well. But when it comes to the biggest part of our balance sheets, which is residential mortgages, at least it is for any bank in Norway, it’s going to be very difficult and very unpopular and a big no-no to the ‘S’ in ESG if you tell customers they can’t get a mortgage.

Tier Two greenium

Dinov, GC: Nordea recently issued its second green tier two in euros. What was the investor reception to adding an ESG label to the capital?

Mellor, Nordea: We issued our first green tier two in November last year and the new green tier two in May. Nordea is still the only Nordic bank that has issued green tier two in euros. We have issued green in all bond formats now but AT1s: we have issued green covered bonds in all our four different home currencies on the back of green mortgages in these currencies. From the bank we have issued green senior preferred, non-preferred and then tier two. We have looked at the market conditions, together with the investor appetite, to decide which bond format we would use our green assets for at the time. In 2017, we issued green senior preferred and then slightly later green senior non-preferred when the asset class became relevant, and then most recently we issued green in tier two format.

We’d like to be active across different bond formats but of course we also take into account the market conditions, the investor appetite and the potential greenium when deciding which format to issue green bonds in.

Dinov, GC: Did you achieve a greenium with your recent tier two?

Mellor, Nordea: Yes, we achieved about a 5bp greenium in our tier twos. We have achieved slightly different greeniums in different products and currencies in different times. For example in the euro covered bond market, there has tended to be a smaller greenium as spreads have been already tight historically compared to local and credit markets.

Meanwhile, in the green Swedish covered bond market, the investor interest has been significant. Both times we have issued green SEK covered bonds, we have had very well oversubscribed order books and investors have been more willing to accept a larger greenium than in the euro covered bond market.

Ahlqvist, Swedbank: There are different approaches to how to view the effectiveness of the instruments you choose to issue and there is no right or wrong. The approach that we have taken is that green senior and covered bonds are the most effective and relevant funding instruments for green assets, whether mortgage loans or corporate loans.

Then one can look at it from a market-driven approach, which is more driven by the greenium. We have been steered by the potential greenium achieved when choosing the format of what we have issued in the past.

We look at two things there. Firstly, the greenium is important for us because we transfer over the entire funding cost discount back to the business areas to incentivise green lending provided to customers. From the start in 2017, when we launched our first green bond framework, we had 10bp transferred so we actually overpaid in the fund transfer pricing internally. Nowadays, we have a more market-driven, transaction-based tool. It means we now transfer back 3bp to 5bp, which is the discount to the funding cost we achieved in greenium over the last few years.

The other element is the derisking element a green label brings to the execution of a trade. In the MREL build-up to January 2024, we issued quite high volumes of senior bonds, and the market has not always been with us during these years. Hence, it has also been a very efficient tool to issue green or social bonds to derisk and to secure the funding we need in a certain instrument more cost-efficiently.

We have so far issued in senior preferred and senior non-preferred formats and we will also, to Petra’s point, look at local markets as the greenium achieved in SEK and NOK domestic covered bonds are favourable because of the high demand from local investors.

Dinov, GC: Would you consider green tier two?

Ahlqvist, Swedbank: Our approach is a bit different there. We believe that green covered and senior instruments are more effective to fund green assets.

Dinov, GC: Where have you found the biggest greenium up to now — in what currency and in what format? And is it possible to pinpoint it precisely?

Ahlqvist, Swedbank: Issuance format and currency have been very market-dependent and the greenium differs at different points in time. Swedbank was the first Nordic bank issuing green senior non-preferred bonds in sterling and in US dollars. We have also been issuing in Swiss francs, euros and Swedish kronor. Our framework allows the flexibility to issue across the capital stack down to tier two, but not in AT1 format.

Dinov, GC: And in covered bonds, in which currency is it best to capture the greenium?

Bech-Ravn, Jyske Realkredit: It’s close to zero, no matter where you go. At least in the euro market the greenium is relatively small. It’s the same in the Danish market at least, I cannot say for the Norwegian or the Swedish ones. I know that the Swedish investor base in general have more focus on green investments. So I would imagine that there is a bigger greenium in Sweden.

Jyske Bank has issued senior bonds in the Swedish market and, especially when we look at the senior market, it’s almost a necessity that you do it in a green format in the Swedish market.

Mellor, Nordea: We have seen a slightly smaller greenium in the euro and Danish krone markets of 1bp or 2bp or so. And in the Danish krone market, the greenium is passed on directly to the customer, given the match-funding principle. In the Swedish and Norwegian covered bond markets, we have received some 4bp to 5bp greenium due to the high demand from the local investor base. Like Swedbank, Nordea is passing on the greenium we get from bond issuance to the business areas.

Hegelstad, SpareBank 1: I agree with Christian, the greenium is rather small. Like I said earlier, we offer customers up to 50bp off the interest rates for greening their houses and we get nearly nothing back. This has been a question from equity analysts — what is the cost to the bank, as the volumes are so small in terms of successfully converting people to become green with their houses. There’s not a cost issue. It should be bigger, it is generally zero to 2bp in covereds.

I don’t think — maybe I’m speaking on behalf of the SSA sector — that any of us are issuing green bonds because of the greenium. It is very small. It’s more about making the awareness, doing the communication of what you’re doing, signalling, these kinds of things
Jens Hellerup, NIB

Hellerup, NIB: I don’t think — maybe I’m speaking on behalf of the SSA sector — that any of us are issuing green bonds because of the greenium. It is very small. It’s more about making the awareness, doing the communication of what you’re doing, signalling, these kinds of things.

You can claim that maybe at the beginning there was a couple of basis points, but it has gone close to zero. You might see it in the secondary market, if there is a crisis or if something happens in the market, then investors are more willing to stick to green bonds and you see more performance there. Where it is most helping is maybe in the execution. You see it with Germany, because there you have a bond that you can compare directly and the last green bond there was half a basis point of greenium or close to that.

That said, we would also like to issue in Swedish kronor because we have lending in Swedish kronor but here it is very difficult to issue if it is not a green bond.

If we want to get the diversification into the Swedish asset managers and pension funds, the green bond is the way forward.

Dinov, GC: There is a lot of talk about supras and their hybrid issuance. Some view their mandate itself as being ESG-compliant whereas banks are for-profit organisations. Is the next step for ESG capital markets to expand the greening of the economy and the lending by going down to perpetual capital?

Hellerup, NIB: There was the G20 report which basically said the supras should try to do more lending. Supras have equity and callable capital. However, it is only the equity they can leverage on. So if you don’t increase your capital you can issue hybrid capital and you can use that to leverage on.

African Development Bank has been the first to issue hybrid capital. It was sold to a completely different investor base from the usual SSA bonds and they also made it green. They did a very good trade but one reason for it working was also due to the spread and maybe not because it was green.

At least within our sector this may be a strange concept if you call this a use of proceeds bond. You do some funding which is now hybrid capital, you pay more than normal funding, which is fine as you want to leverage three to seven times, but only the proceeds can be used as use of proceeds.

Limited impact

Trautwein, DZ Bank: From a pricing perspective, I see limited impact to doing perpetual debt in a green format because the more subordinated you go, the less SRI investors tend to be in the order book. Therefore, the impact on the pricing will be rather limited in our view.

On the structuring side, it is possible. With regards to the discussion whether a perpetual instrument potentially requires you to have green assets for eternity — of course that can be an issue and it can be a risk. However, if we look at the banks, they all strive to become more green, to increase their green lending. So I don’t see a big risk that there won’t be enough green assets available for issuers.

From our point of view, the sweet spot for issuers in terms of getting most of the SRI investors in the order books but also achieving a significant greenium is in the senior unsecured space, be it in preferred or non-preferred format.

Dinov, GC: Do you think it is an option to do a labelled AT1? Has there been any resistance from regulators or from investors?

Mellor, Nordea: In our green funding framework we are open to any bond format, so we are not restricted from a funding framework point of view. We are following the market developments and we have not yet issued AT1s in green format. One of the reasons is that there seems to be a little bit of resistance from some investors for green AT1s, partly because capital is supposed to fund your whole balance sheet, not just the green assets.

Also, there is some scepticism from the regulator with regards to the fact that AT1 is by definition a perpetual bond and your green assets are not necessarily perpetual. That means it could be a mismatch of the maturity and thus a potential incentive for an issuer to redeem an AT1, which is not allowed from a regulatory point of view. Hence, we have not yet gone down that path.

Ahlqvist, Swedbank: I think we have the answers from the others here. Jens’ point about how the capital efficiency is working and the perpetuality impact is a challenge and so is the mismatch. And the regulator has not really been pushing the development either.

Dinov, GC: It sounds like we are in a transitioning process and, in the Nordic markets, despite there being all these differences, it appears that local investors, in local currencies as well, are also demanding innovative products. How has your interaction changed over the years with these regional investors?

Ahlqvist, Swedbank: Our interaction has really evolved over the years along with the regulatory development. If green bonds have been a catalyst for issuers to push green assets, now what we see and the approach we take is more of a holistic one. It is one where the investors — if they have enough relevant disclosures and data available in a standardised and comparable way by us banks — can take decisions on a much more holistic basis.

To go back to your question on whether we can we issue an SLB, some of us here today are diversified banks with mortgages and also corporate commitments on our balance sheets, making the starting point more difficult to issue an SLB. But I think an investor would, if they have a holistic view and are confident with the data that we as an issuer provide, be able to compare between the different banks how we score from an ESG perspective and buy our conventional bonds.

That is also why we at Swedbank have what we call a sustainable funding strategy. Our approach is that we as a treasury function have an important role to play within the bank to drive initiatives that contribute to the bank’s transition and sustainability targets. If successful, that can bring down the funding cost and we can contribute positively to the ROE for the bank. That is the way we work and the reason why we are so involved with these topics internally.

More interaction

Bech-Ravn, Jyske Realkredit: I very much agree. We are definitely having more interaction now with investors regarding ESG. We have really tried, especially when we talk about transparency, to push this to the investors. At the start we didn’t really get a need from the investors but we saw transparency as the best way to work with sustainability. We made a push to investors before they needed the data and now we can see that it’s paying off that we originally made this push. Taking this data into consideration now, it’s easier for them.

We have really tried to push our agenda to investors and now it is paying off, at least in the Danish market, which is our most important market.

Hegelstad, SpareBank 1: While I agree with what’s been said so far, I feel that covered bond investors — and I am talking about the covered bond investor because that is the product I issue — have landed in two camps.

One is a very large camp and they have a tick-the-box exercise; they’re not interested in the detail. They appreciate that you follow the EU Taxonomy for example but that’s it. And then you have a very small group, which are very agile and detail-orientated.

Bech-Ravn, Jyske Realkredit: I think the small group is growing quite fast. The investors are getting more details and while five, six years ago, we only met with the portfolio manager, now, we often meet with the portfolio manager and the ESG manager. The focus on ESG is changing and investors are becoming more detail-orientated.

Dinov, GC: Investors being more sophisticated when it comes to ESG, is there a particular region or type of investor that now stands out?

Trautwein, DZ Bank: I totally agree that the discussions with investors have changed quite a lot in the last few years. There are more ESG discussions, and ESG also plays an important role in conventional bond transactions. There are regions, particularly within Europe, that are more frontrunners than others. The Nordics, as we already mentioned, where ESG is strongly rooted, is one of them. But also in France and the Netherlands ESG is a major topic. Other regions are also picking up and increasingly incorporating ESG in their investment decision process. But the Nordics, France and the Netherlands are still the places to go if you want to market ESG transactions.

Hellerup, NIB: I agree that the Nordics has been ahead of other regions for years. And investors from this region have asked the questions. You need to bring your own environmental analyst to a lot of the meetings because the ESG theme is coming, so the questions can get quite technical. But that happens always in the Nordics but it is also true for the Netherlands and France where you have a dedicated investor base there as well.

Mellor, Nordea: Investors are engaged in this topic and we have a good dialogue with them. We also engage with our customers as we can’t do this on our own. We have to do it together: investors, issuers and the issuers’ clients — the customers.

Bech-Ravn, Jyske Realkredit: And there is a big focus on a green transition in the Nordics. It was quite interesting in the EU election, when most of Europe moved right, the Nordics moved left — moving to the green parties.

Mellor, Nordea: Indeed, but the support for the Greens fell in Germany and France.

Bech-Ravn, Jyske Realkredit: But we, the Nordics, actually went the other way. In Denmark, Sweden and Finland as well.

Ahlqvist, Swedbank: And the young generation is interested in the future of our climate.

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