INOM
EXAMENSARBETE TEKNIK, GRUNDNIVÅ, 15 HP
STOCKHOLM SVERIGE 2020,
A study on dynamics of green financing
A qualitative analysis of supply and demand on green products and future opportunities
JULIE SALICATH AASEN
EMMA EICHHARDT AND OLIVIA STEEN
KTH
TRITA TRITA-ITM-EX 2020:122
Abstract
Global warming and an increased focus on sustainability has grown in society and in various industries. This study takes an approach in the role of the financial industry with a focus on sustainability from a supply and demand perspective in the Scandinavian banking market.
Based on literature studies, the frameworks System Dynamics and Multi-Level Perspective are used in order to map the complex system of green financing with a focus on the banks' larger corporate customers. The frameworks are used to describe the dynamics on the green financing market between the government, banks and the corporate customers. In order to identify future threats and opportunities and to map how the green financing market has developed, experts from the Swedish leading banks were interviewed. The study shows that increased awareness in sustainability and demand for green products have been driving the development of green products. Green financing is still a relatively new market where major changes have taken place and continue to take place as new guidelines and frameworks are being introduced. The
regulatory instruments continue to drive the market forward as it creates support, standardization and harmonization of the market, while at the same time increasing the demands on reporting which can be expensive for smaller actors to meet. There is a positive outlook on the growth of the market from both the supply and demand side, although it is difficult to determine how fast the market will grow. The future is being met by challenges in how to standardize the green products, design them to fit a broader customer base and adapt them to future stricter regulations. Rules and frameworks will continue to be created to regulate the green financing market as it grows. The future possibility of new green products that will continue to contribute to a more sustainable and economically sustainable society is presented in the study.
Sammanfattning
Global uppvärmning och ökat fokus på hållbarhet har vuxit fram i samhället och i olika industrier. Denna studie tar ansats i finansindustrins roll med fokus på hållbarhet från ett utbud- och efterfrågan perspektiv på den Skandinaviska marknaden. Utifrån litteraturstudier används modellerna System Dynamics och Multi-Level Perspective för att kartlägga det komplexa systemet av grön finansiering med inriktning mot bankernas större företagskunder.
Modellerna används för att beskriva dynamiken på den gröna finansmarknaden mellan statliga enheter, banker och företagskunderna. För att identifiera framtida hot och möjligheter samt kartlägga hur den gröna finansmarknaden har utvecklats, intervjuades experter från de svenska storbankerna. Studien visar på att en ökad medvetenhet kring hållbarhet och en efterfrågan av gröna produkter har varit drivande i framtagandet och utvecklandet av gröna produkter. Grön finansiering är fortfarande en relativt ny marknad där stora förändringar har skett och
fortsätter att ske i takt med att nya riktlinjer och ramverk tillkommer. De regulativa
instrumenten fortsätter att driva marknaden framåt då det skapar stöd, standardisering och harmonisering av marknaden, samtidigt medför de ökade krav på rapportering vilket kan vara dyrt för mindre aktörer att möta. Det finns en positiv syn på tillväxt av marknaden från både utbud- och efterfrågesidan, även om det är svårt att avgöra hur snabbt marknaden kommer att växa. Framtiden möts av utmaningar i hur man ska standardisera de gröna produkterna, utforma dem för att passa en bredare kundbas samt anpassa de till framtida strängare regelverk. Regler och ramverk kommer fortsätta tillkomma för att reglera den gröna
finansmarknaden i takt med att den växer. Framtida möjligheten till nya gröna produkter som ska fortsätta bidra till ett mer hållbart och ekonomiskt hållbart samhälle, presenteras i studien.
Preface
This bachelor thesis has been conducted for the Royal Institute of Technology, KTH, School of Industrial Engineering and Management, with specialization in Energy Systems and Sustainable Development. The three methods presented in the study have mainly been divided;
System Dynamics (Julie and Emma), Multi-Level perspective (Olivia and Julie), Interviews (Olivia and Emma).
However, the results, discussion and conclusion have been provided together.
The supervisors on this thesis are Fabian Levihn and Björn Palm. Examinator Per Lundqvist.
The thesis has been a collaboration together with Handelsbanken, Nordea, SEB and Swedbank.
Table of contents
1. Introduction 6
1.1 Background 6
1.2 Purpose 7
1.3 Problem Formulation and Research Questions 7
1.4 Delimitations 7
2. Theory 8
2.1 Green Products and Markets 8
2.1.1 The Development of Green Financing 8
2.1.2 Green Products 9
Green Bonds 9
Green Corporate Loans 9
Sustainability Linked Loans 10
2.1.3 ESG Risk 10
2.1.4 Digitalization of the Financial Market 11
2.1.5 Scandinavian Banking Market 11
2.2 Banks and Regulations 11
2.2.1 Principles for Responsible Banking 12
Steps in the Principles for Responsible Banking 13
2.2.2 EU’s Taxonomy 14
3. Method 15
3.1 Analytical Frameworks 15
3.1.1 System Dynamics 15
3.1.2 Multi-Level Perspective 16
The socio-technical landscape 17
The socio-technical regime 17
The niches 17
3.2 Reliability and Validity 17
4. Analysis and Results 18
4.1 System Dynamics 18
4.2 Multi-Level Perspective 19
4.3 Interviews 22
4.3.1 Handelsbanken 22
4.3.2 Nordea 26
4.3.3 SEB 27
4.3.4 Swedbank 29
5. Discussion 32
5.1 Green Products 32
5.2 Regulative Instruments 33
6.1 Further Research 34
7. References 35
Appendix 39
Interview Questions 39
1. Introduction
This chapter will present a brief background of the bank market’s recent developments in the trajectory of the concept of sustainable development. This is followed by the purpose of the study where the applied methods are presented, problem formulation and research questions. At the end of the introduction chapter, the reader will find the delimitations of the study.
1.1 Background
The Earth’s climate is changing in response to increasing concentrations of greenhouse gases as a result of human activities. After more than a century of industrialization, deforestation and large scale agriculture, quantities of greenhouse gases in the atmosphere have risen to record levels posing serious risk for the future of humankind (United Nations, 2020). As a result, in 2015, all United Nations Member States adopted 17 goals for sustainable development, often referred to as the Sustainable Development Goals (SDGs), developed as a global call to take actions to protect the planet and assure that all people live in peace and prosperity by 2030 (UNDP, 2020). The SDGs see the environment, economy and social development in a context and operate as a roadmap for the global effort towards sustainable development. With only a decade left before the SDGs’ 2030 deadline, the United Nations Development Programme works to help countries achieve significant results fast with a focus on shifting the goals from commitments to actions.
Banks play an important role in society and are vital for economic growth and the transition to a low-carbon society. Therefore it is crucial that banks take great responsibility for their actions involving the environment in order to enable society to develop sustainably. This is often referred to as green financing, the process of taking into account environmental and social considerations when making investment decisions, which contributes to increased investment in long term and sustainable activities (Europäische Kommission, 2020). The governance plays an important role in ensuring that these social and environmental considerations are integrated in the decision-making process. These three elements; environmental, social and governance (ESG), are all vital parts of sustainable economic development and financing (ibid).
To help companies and industries work sustainably, there are plenty of guidelines and
initiatives. One of these is the Principles for Responsible Banking which was introduced during 2019 by the United Nations Environment Program Finance Initiative (UNEP FI). This is an initiative to align the signatories’ business strategies with the Paris Agreement and the SDGs (UNEP FI, 2020a). The main aspects of the principles are evaluation, target setting and requirements for public reporting on sustainability fields, in which the banks can have the greatest positive effect and minimize the biggest negative effects. To achieve this, banks must be transparent and responsible, and work together with their customers to promote and
encourage more sustainable economic activities (UNEP FI, 2020b).
Another important sustainability initiative which will be discussed further in this report is the EU taxonomy, which was conducted by an expert group advising the European Commission, the Technical Advisory Group on Sustainable Finance (TEG). The final guidelines for the EU
achieve net zero carbon emissions by 2050. The EU taxonomy is a new classification framework with common European standards for identifying what constitutes as a sustainable and green investment with the goal of redirecting capital flows towards more sustainable actions. By adopting the taxonomy requirements, companies can prove that they contribute to the Paris Agreement and the SDGs in a secure way (Nordea, 2020a).
1.2 Purpose
The purpose of this study is to analyze green financing in Scandinavia to increase an
understanding of supply and demand on green products. Further on, the study aims to get an insight on how the financial market operates; how regulations and guidelines from EU and UN affect the market as well as future opportunities within the market. This analysis will target banks’ corporate customers and their responsibility regarding the climate issue, aiming to build a theoretical assessment on the importance of green financing. To investigate the purpose of the study three methods will be used; System Dynamics, Multi-Level Perspective and interviews with relevant stakeholders from Handelsbanken, Nordea, SEB and Swedbank. The methods will be further explained in chapter 3. Method.
1.3 Problem Formulation and Research Questions
Since green financing is a fairly new and niched part of the banking market, the regulations regarding what is green has up til now been left to each bank. To face society’s expectations on sustainability, UNEP FI published the framework Principles for Responsible Banking as a starting point for a sustainable banking system. With EU’s new taxonomy the market will keep changing and therefore, the focus of this study is to examine how these regulations will affect green financing as well as analysing how the financial market might evolve regarding supply and demand within the area. Thus the research questions are:
1. Why and how were green products developed and how will they continue to develop?
2. How have regulative instruments affected the development of green financing in the past and how will they affect the future?
3. How does key actors and dynamic patterns in green financing interact and what affects the future market?
4. What are the challenges for green financing and what does the future look like?
1.4 Delimitations
This study will focus on the green financing aspect of green banking due to its complexity as a whole. The analysis is limited to the Scandinavian green financing market, mainly due to the fact that this market is relatively homogeneous and therefore easier to dissect compared to the entire green financing industry. To narrow down the scope of bank customers, the study will target only corporate bank customers such as industries and companies. The analysis of the study will rely on interviews from relevant stakeholders from four different, well established banks in Scandinavia, focusing on the banks’ external work on reducing emissions towards corporate bank customers, i.e. the environmental perspective of ESG. Some limitations will
occur regarding the interviews’ reflection of the green financing market in Scandinavia, therefore an analysis of the reliability and validity of the interviews will be made.
2. Theory
This chapter provides relevant theory in order to analyse the complex system of green financing.
Firstly, an introduction of green products and markets is presented, followed by regulations and agreements towards sustainable financing.
2.1 Green Products and Markets
In order to analyze the entry of green products on the market of green financing, a description of the development of green financing is presented below. This is followed by a portrayal of the existing green products, the importance of ESG risk, digitalization’s affectance on the green financing market and an overview of the Scandinavian banking market.
2.1.1 The Development of Green Financing
Green financing has become a buzzword in the banking sector of today and is a worldwide initiative to change the banking sector by creating better sustainable business practices (Lalon, 2015). In recent times, substantial progress has been made in the field due to growing interest in the subject, changing technology increasing availability and external pressure on banks to consider sustainable practices. The nations that have agreed to sign the UN Principles for Responsible Investments (UN PRI), the biggest alliance in the world that encourages sustainable investments, can see this increased interest. Since the UN PRI started data collection, the
number of users has risen at a remarkable rate (PRI, 2020).
Although direct environmental impacts of banks are small relative to other industries, their indirect effects on sustainability by financing and investing holds a part of environmental emissions (Pinter & Deutsch, 2006). Therefore, the banking industry can play a significant role in controlling climate-related risks and help the transition to a low carbon economy by steering investment in the direction of green and sustainable projects (Bergedieck et al., 2017).
Sweden has been proven to be the leading country in showing the full potential of the green bonds, among most segments in the European countries (Rado, 2018). This shows that the nation plays a crucial role in shaping the future of green financing. For instance, Sweden's second largest city, Gothenburg, has been awarded for the fourth year in a row by Brut for being the most environmentally friendly city in the world (Leaper, 2017). This is primarily due to renewable funding opportunities, such as green bonds, which essentially makes green ventures profitable.
However, there is no commonly stated definition of what exactly green is. Investors of all types encounter time-consuming obstacles and excessive capital costs during the process due to unclear standards, which implicitly harms the credibility of green markets, resulting in lack of interest (EBF, 2017).
2.1.2 Green Products
Green Bonds
The first green bond was created in 2008 in a collaboration between Världsbanken and SEB. The background was that a number of institutional investors were demanding a bond with a high credit rating and that supported climate projects. These pioneers of investors were
Länsförsäkringar, Skandia and Andra and Tredje AP Funds. Since then, the World Bank has issued green bonds for approximately USD 8.5 billion, which has funded approximately 70 climate and environmental projects in developing countries. A market for green bonds has emerged and grown strongly; with more players and new forms of green bonds (Brundin, 2015).
A green bond is a bond where the capital is earmarked for various forms of environmental projects. For example, the projects may be about new technologies for reducing carbon dioxide emissions, water treatment or more environmentally friendly infrastructure. There are different forms of green bonds, with regard to how the money is used, how the bond is examined, the type of security and the form of the coupon. Most bonds have the same credit rating as other debt instruments issued by the issuer.
Since the most common is that the organization that issues the bond issues it with its entire balance sheet as collateral, the green bond gets the same credit rating and thus returns as the corresponding "regular" bonds the organization issues. The idea is that the risk in the issuer through the project will be lower as many green bonds are about risk mitigation, and in this way the bond should be an attractive investment.
There are other types of bonds investing in sustainability that will not be the focus of this report, for example; social bonds that focus on social impact investments, blue bonds that invest in marine projects and sustainable bonds which are investments to social or green projects that meet the criteria of the UN SDGs (Hall, 2019).
Green Corporate Loans
The difference between corporate loans and bonds lies in the way they are funded, bonds are funded by the investor market and loans are funded by a bank. The type-structure is similar to bonds but with three categories; green loans, social loans and sustainability loans. As well as with bonds this study will be focusing on green loans.
If a company wishes to take a green loan to fund a project they are required to present the expected environmental effects that the project will bring. Afterwards the lender assesses if the borrower meets the requirements. If the lender moves forward with the green loan the
borrower must report with certain decided intervals how the project is proceeding, to avoid any greenwashing (Linklaters, 2020). Greenwashing is the practice of conveying a false perception or presenting inaccurate information about the environmental impact of a company’s products.
Nordea was the first in Sweden to introduce green corporate loans in 2018, which was later followed by other large swedish banks. Green corporate loans are mostly utilized by smaller and medium sized companies that do not have the possibility to issue green bonds (Montan, 2018).
Sustainability Linked Loans
This type of funding is applied on how sustainable a company is in whole instead of a specified project. Usually the loans interest rate is connected to the company’s sustainability performance which is most often measured with an ESG rating, the interest rate is lowered if the company performs well and might be raised otherwise. Sustainability linked loans are flexible since the money itself does not have to be used for green activities and therefore have become quite popular (Osborne Clarke, 2020).
2.1.3 ESG Risk
ESG refers to Environmental, Social and Governance. In many instances, this too is called sustainability. Sustainability in a corporate sense is about the business approach of the company, i.e. how its goods and services lead to sustainable growth (Nordea, 2020b).
Environmental performance explores topics such as climate change impact through greenhouse gas emissions, waste reduction and energy conservation. Social performance includes concerns such as human rights and employment standards both inside and around the supply chain, occupational health enforcement, and diversity. Governance performance examines a set of rules or principles that define rights, accountabilities and anticipations among all stakeholders within the company. This incorporates items such as board creating, bribery and corruption policies (Hall, 2019).
When looking to implement an ESG investment strategy or apply ESG across a portfolio,
investors can consider several different ESG variables. Usually, these considerations include key concerns unique to the sector such as climate change, human resources and workforce
management, corporate governance, gender diversity, privacy, and data protection, among others. For example, a mining company and a financial company face different key ESG risks and opportunities and are therefore judged on the main issues relevant to their respective
industries.
The concept of ESG investing started in the 1960s, as socially responsible investing, with investors withdrawing stocks or whole sectors from their portfolios based on corporate practices such as tobacco manufacturing or South African apartheid regime participation.
Nowadays, ESG investors still have similar reasons for ethical concerns and alignment with principles, but the sector is increasingly growing and changing as more investors look to
integrate ESG factors in the investment process alongside conventional financial analysis (MSCI, 2020).
When examining which parts of the world are most active in ESG, Nordic institutions are found to be on the front edge. According to Nordea’s study “The death of dirty investing” (Trocmé et al., 2017), as much as 99% of the Nordic institutional assets managed already contain some form of ESG policy, which is extremely positive. Development countries tend to be behind in ESG related activities. For their future development, they really need to think about sustainability from a long-term perspective, but because they do not have the money, very little happens. The United States is also alarmingly far behind, while high-exporting countries such as China have actually begun to focus strongly on sustainability and succeed quite well (Nordea Markets, 2018).
2.1.4 Digitalization of the Financial Market
Digitalization has led to great changes in the financial market. One aspect of this is the transition of how banks and customers act in order to emerge as sustainable, increasing the demand for climate-smart solutions. Another aspect is the change in banks’ external appearance towards customers. The number of physical bank offices has decreased and much of the information and contact now occur online through an app or website. This has led to more addressed offerings to the customers and created an easier way for customers to compare banks and different
offerings, which has contributed to increasing transparency between competitors (Digital McKinsey, 2017). Additionally, information and communication technologies (ICTs) has opened up for a higher level of connectivity as more people come online, more data is being generated and more devices are connecting to the network. This increases collaboration between
stakeholders as well as encouraging exchange of ideas previously not experienced. As the main output of the ICT sector is information, both greater awareness and education will foster an environmental responsibility mindset (ITU, 2019). Digitalization and ICTs offer solutions to monitor, mitigate and adapt to the impacts of climate change, which encourages the usage and development of renewable energy, and enables a shift towards a circular economy (ibid). The latter has through recent years gained considerable recognition, as a circular economy can improve circularity in actors’ supply chain in order to meet the needs of a growing global population, whilst creating a long-term and resilient economy (Ellen MacArthur Foundation, 2017).
2.1.5 Scandinavian Banking Market
The market structure of the banking industry in the Scandinavian countries is relatively homogeneous. The markets are characterized by a few large Nordic actors in each country, which constitute a large part of the total market followed by smaller, more locally rooted actors (Fondevik & Nyland, 2016). The retail banking market in Sweden is dominated by four large actors representing a total market share of 63% in Sweden; Swedbank (20%), Handelsbanken (17%), Nordea (14%) and SEB (12%) (ibid).
2.2 Banks and Regulations
In order to meet the Paris Agreement and the UN’s SDGs, both industry-led initiatives such as UNEP FI’s Principles for Responsible Banking and legislative and non-legislative regulations presented in EU’s Action Plan on Sustainable Finance are being established successively. With recommendations from both UNEP FI, EU’s High-Level Expert Group on Sustainable Finance (HLEG) and the European Commission’s Technical Expert Group on Sustainable Finance (TEG), the European Commission published in 2018 the EU Action Plan on Sustainable Finance. The Action Plan presents a long-term strategy targeting EU’s commitment to reach net-zero greenhouse gas emissions by 2050. The Action Plan outlines ten reforms (PRI, 2018);
1. Establishing an EU classification system for sustainable activities 2. Creating standards and labels for green financial products 3. Fostering investment in sustainable projects
4. Incorporating sustainability when providing financial advice 5. Developing sustainability benchmarks
6. Better integrating sustainability in ratings and market research 7. Clarifying duties of institutional investors and asset managers 8. Incorporating sustainability in prudential requirements
9. Strengthening sustainability disclosure and accounting rule-making
10. Fostering sustainable corporate governance and attenuating short-termism in capital markets
The first action point will be further examined under 2.2.2 EU’s Taxonomy in order to establish knowledge about regulations relevant in analysing green financing. Further on, the Green Bond Principles is introduced. The Green Bond Principles can be explained as a set of principles developed to promote integrity in the green bond market through guidelines that recommend disclosure, transparency and reporting. The principles are developed to be a helping framework for banks when creating green bonds.
2.2.1 Principles for Responsible Banking
On the 23rd of September 2019 in New York during the annual United Nations General Assembly, the Principles for Responsible Banking (PRB) were launched by 130 banks from 49 countries. PRB is a starting point to help the financial industry to contribute positively to the society. It has been developed to meet the Sustainable Development Goals and the Paris Agreement, and works as a framework for a sustainable banking system. It has its roots in changes in society’s expectations and that banks have to be transparent and clear on how their activities and products create value for customers, investors, clients and society. The PRB consists of six principles (UNEP FI, 2020c):
1. Alignment
2. Impact & Target Setting 3. Clients & Customers 4. Stakeholders
5. Governance & Culture
6. Transparency & Accountability
The first principle focuses on aligning the banks’ business strategy to be consistent and to contribute to the SDGs, Paris Agreement and other relevant national and regional frameworks.
The second principle is about finding and publishing targets where the biggest impact can be made. The focus is on increasing positive impact and lowering negative impact as well as identifying risks to the environment and people which occurs from activities and products. The third principle is about encouraging clients and customers to include sustainability in economic activities to provide shared prosperity for current and future generations. The fourth principle focuses on achieving the society’s goals through proactively and responsibly consult, partner and engage relevant stakeholders. The fifth principle concerns the implementation of the commitment of the principles through a culture of responsible banking and effective governance. The sixth and last principle aims to periodically review the collective implementation of the principles, to be transparent and accountable for the positive and negative impacts and the contribution to the society’s goals (ibid).
Steps in the Principles for Responsible Banking
The Principles for Responsible Banking is divided into three key steps that the banks which have signed the agreement are required to take. The steps are designed to ensure continuous improvement of the bank’s impact and contribution to the society through an effective
implementation of the principles. The steps in this framework are made to be a step-up-process due to the fact that every bank works with the essence of sustainability in various ways and have different opportunities, in order to bring together the banks. Within four years the bank that has signed the agreement has to fully implement the required steps, and within the first 18 months publish their first report and self-assessment on the principles to show that they are in line with the annual reporting cycle (UNEP FI, 2020b).
Step 1: Impact Analysing
“Analyse where your bank has significant positive and negative impact on society, the environment and the economy. Then identify where your bank can realize the greatest positive impacts and reduce significant negative impact.” (ibid)
Through analysing the banks’ core business areas’ impact on the society, economy and
environment, targets with the largest potential to make an increase in positive and decrease on negative impacts are composed. To define this the bank has to dissect their main sectors and type of activities such as types of products and services provided, technologies financed across the main geographies the bank is operating in and engage relevant stakeholders and civil society with information and aspects of their analysis (ibid).
Elements that should be taken into account of the impact analysis:
- The scale of the bank’s activities with regards to specific industries, technologies and geographies
- Priority list and relevant changes that can be related to sustainable development within the areas/countries the bank is operating in
- Identify a scale of how big of an impact the bank has on the social/society, economy and environment
Step 2: Target Setting and Implementation
“Set SMART targets that address the significant impacts your bank has identified, and work towards achieving them.” (ibid)
This step is divided into two parts; setting targets and implementing them. As a minimum, two SMART (Specific, Measurable, Achievable, Relevant and Time-bound) targets have to be set and published on the banks most significant positive and negative impact. The targets have to be in line with the Paris Agreement as well as other relevant national, regional or international frameworks and should clearly drive adjustment and further contribute to the affected SDGs.
The bank can change its targets and add targets but at the end of the four-year implementation period the bank has to implement and publish at least two targets. If the implementation of a target would have a negative impact, this has to be identified and actions toward mitigate them
should be made. To implement and meet the set targets, milestones should be set and means to measure and monitor the process should be established. A controlling and monitoring
department should be implemented within the bank that is responsible for following the process of the implementation of the targets and if required amend actions (ibid).
Step 3: Accountability
“In your bank’s existing report, describe how your bank is implementing the Principles for Responsible Banking. Provide an assured assessment of the progress that your bank is making.”
(ibid)
In the banks’ public report they are required to publish how they work with and implement the Principles for Responsible Banking, their targets, progress and impact, both positive and negative. This to show the progress of their plan and implemented actions towards the targets.
Through a Reporting and Self-Assessment Tablate, a self assessment can be made of the
progress, but needs to be assured of an assurer. Based on aggregated individual reporting by the banks, signatories will take stock every two years, and publish their collective progress through UNEP FI (ibid).
2.2.2 EU’s Taxonomy
EU’s taxonomy is intended to further connect finance with sustainability by providing firms and investors a common framework to identify in what degree an economic activity can be
considered environmentally sustainable. To be qualified as a sustainable and green investment according to EU’s new taxonomy, an activity must contribute to at least one of the six following objectives and not significantly harm any of the other environmental objectives. At the same time, the activity must comply with minimum social- and governance safeguards defined by the International Labour Organisation (ILO) Conventions, such as basic human rights and minimum wages (TEG, 2019).
The regulation’s six environmental objectives for the purpose of the taxonomy:
1. Climate change mitigation 2. Climate change adaptation
3. Sustainable use and protection of water and marine resources 4. Transition to a circular economy, waste prevention and recycling 5. Pollution prevention and control
6. Protection of healthy ecosystems
The taxonomy regulation will apply to financial market participants, large companies, the EU and Member States. Financial market participants who offer financial products in the EU will be required to provide information covering activities that substantially contribute to climate change mitigation and adaptation in pre-contractual disclosures and periodic reports. Large companies who are already required to provide a non-financial statement under the Non- Financial Reporting Directive (NFRD) includes large public-interest companies with more than 500 employees, listed companies, banks and insurance companies. These companies will be required to disclose information of how, and to what extent, their activities are associated with
criterias of the taxonomy regulation when setting public measures, standards or labels for green financial products or green bonds (TEG, 2020).
The requirements of the first two climate-related objectives of the taxonomy will be adopted by the European Commission by the 31st of December 2020, and will therefore apply from 31st of December 2021. The remaining four environmental objectives will be adopted by the European Commission by the 31st of December 2021, and will therefore apply from 31st of December 2022 (Lillycrop, 2020). The requirements are applied one year after the adoption because of a required 12-month ratification period.
The adoption of EU’s taxonomy regulation by banks aims to result in more effective and improved ability for banks to meet sustainability targets and meet their customers and other stakeholders sustainable preferences, enlarging the amount of capital channeled to sustainable activities, and reduce the risk of greenwashing by increasing the financial market’s
transparency (TEG, 2019). In practice, the taxonomy will conceivably lead banks to improve their operational systems and procedures to collect and manage data, while bank customers are provided with required information.
3. Method
This chapter presents the applied methodology. This includes a thorough description of the analytical frameworks System Dynamics and Multi-Level Perspective, followed by an examination of the interviews’ reliability and validity.
3.1 Analytical Frameworks
The analytical frameworks; System Dynamics and Multi-Level Perspective are used to create an understanding of the relation between different actors and factors, as well as to get an insight of the future of the green financing market. Both of these frameworks analyse dynamic patterns in long-term transitions in complex systems.
3.1.1 System Dynamics
System Dynamics will be used in this study to evaluate the complexity of the system of green financing as a whole through the concept of a causal loop diagram. The framework of System Dynamics was created during the mid-1950s by Jay Forrester, a professor of Massachusetts Institute of Technology (System Dynamics Society, 2020a). This method of modelling is used to create an equitable representation of a complex system for long-term, strategic modeling and simulation to enable an analysis of complex relationships.
In the System Dynamics methodology, a system can be described using causal loop diagrams, to build a theoretical understanding and to identify the dynamic patterns underlying the system. In a causal loop diagram, the system is represented with nodes that illustrate the variables and edges that illustrate a connection or relation between two nodes using the concept of feedback loops (Lynch, 2020). If the tendency in the loop is to reinforce the initial action, the loop is called a positive or reinforcing feedback loop (R), and the loop is called a negative or balancing
feedback loop if the tendency is to oppose the initial action (B) (System Dynamics Society, 2020b). Further on will arrows be drawn as edges representing causality. An arrow with a positive sign (+) represents positive causality, i.e. if two linked nodes both decreases or both increases. An arrow with a negative sign (-) represents negative causality, i.e if one of the linked nodes increases whilst the other node decreases and vice versa.
3.1.2 Multi-Level Perspective
In order to further analyse and understand the socio-technical system of green financing, the framework of the Multi-Level Perspective, often referred to as the MLP, will be used. The MLP was originally developed in Rip & Kemp’s Technological Change (Rip & Kemp, 1998), and further theoretically elaborated by Frank W. Geels in his following scientific articles (Geels, 2001). Geels later defined the framework as a tool for directing societal change towards increased sustainability (Geels, 2011). The MLP describes the structure and dynamics of socio- technical systems, often used to understand transitions and highlights the dynamics and
complexity of social change and innovation. The term socio-technical is based on the principle of understanding industrial transformation and how change occurs. In this study, the MLP will be used considering its broad system-wide focus, integrating social change in the system. This perspective is well adapted for understanding change over time, dynamic processes, and how the shift of socio-technical systems is radically changing. The MLP is therefore highly relevant in studying how the financial market approaches the sustainability transition, steering the societal change towards an efficient and decarbonised economy. The following section outlines a
detailed description of the MLP.
As the name states, the Multi-Level Perspective identifies three levels within societal systems;
niche, regime and landscape. The three levels of the MLP explain the dynamic transition processes within and between the different analytical levels, as shown in Figure 1. In the MLP theory, transitions are defined as shifts from one socio-technical regime to another, that occurs through interaction processes at the niche-regime-landscape interface (Bilali, 2019). The way these processes align, can in certain markets enable a breakthrough of green innovations (Blomkvist & Johansson, 2016).
The socio-technical landscape
The socio-technical landscape, i.e. the level that constitutes the environment of the socio- technical regime, represents macro-level trends and contextual drivers and barriers to
transitions. Changes at this level are long-term and happens at a slower pace due to the depth of the structural trends the environment entails. These changes may influence and put pressure on both niche and regime level, opening up for new technologies and create a ‘window of
opportunities’ triggering a change in the system’s structure (Geels, 2005). The socio-technical landscape level is characterised by the set of rules that guide technical design, the rules that shape market development and rules for regulating these markets (Blomkvist & Johansson, 2016).
The socio-technical regime
The socio-technical regime represents transitions at meso-level, illustrating current structures and practices characterised by dominant rules, institutions and technologies that are self- reinforcing. The regime is dynamically stable, i.e. innovations still occur, but they are mainly incremental and transpires along a predictable trajectory. This creates a ‘lock-in’ effect, making the regime resistant to technological and social changes (Kemp et al. 1998). Niche-innovations must therefore overcome the ‘lock-in’ effect before entering the regime. If innovations at niche level can create value in the regime, it can create significant transitions in the regime. Further on, the landscape level can create pressure on the regime, being stabilizing or inhibitory to the system.
The niches
The niche level represents transitions at micro-level, in which radical innovations and novelties emerges. Actors at niche level, such as entrepreneurs, start-ups and spinoffs, are less
constrained by the mainstream society, and may experiment with radical innovations creating pressure at landscape level (Whitmarsh, 2012). In order for the niche-innovations to compete with the existing regime, radical innovations must grow towards a dominant design and take advantage of a “window of opportunities” (Geels, 2011). Timing plays a significant role here.
This enables a breakthrough and allows the niche to enter the regime. A socio-technical transition takes place and reshapes the regime whilst adapting the new niche-innovation. This will in the long run pressure the landscape, creating transitions at macro-level.
3.2 Reliability and Validity
The interviews are used in this study in order to get a perception of how the leading banks in Scandinavia act sustainably. The interviews relies on a discussion with relevant stakeholders from Handelsbanken, Nordea, SEB and Swedbank. To ensure reliability, the interviews relies on questions designed to gather relevant information consistent with the competencies deemed essential for the study of green financing. To establish both reliability and validity, the interviewees are experts on the related issues, ensuring that the answers concerns the respective banks as a whole making the answers and discussions upright and realistic.
Considering that the interviewees come from the four leading banks in Scandinavia, the gathered results and answers can reflect how the market operates in a reliable sense. The different interviewees were also given similar questions in order to observe patterns in the green financing market as well as increasing the total reliability and validity of the interviews.
4. Analysis and Results
In this chapter, the qualitative results will be presented. The empirical results are gathered from analysing green financing as a system through a System Dynamics, Multi-Level Perspective
analysis and finally with interviews. The first two models describe green financing as a system and how the different components interact. The interviews confirm the systems analysis and results and provide a deeper insight into how the theory is linked to the results.
4.1 System Dynamics
Figure 2. Graphical description of a System Dynamics on green financing
To analyze green financing a causal loop diagram was built using system dynamics which can be seen above, a larger version can be found in the Appendix. Starting in the middle, it is found that the banks’ desire for sustainable change is influenced by two key components; meeting their customers demand for green products and living up to current guidelines and regulations. The guidelines and regulations that are brought up in this report have been composed by the EU and UN who are the main driving forces to make the banking market more green and who are mostly driven by an increasing environmental awareness. However they have to make sure the regulations are not too strict or else they might inhibit the market, especially for smaller companies that might not be capable of living up to the reporting standards. Therefore a balancing loop limits the guidelines and regulations from becoming too strict. In turn the guidelines and regulations increase the supply for green products by making them more tempting compared to non-green options.
The supply of green products is also dependant on the banks that offer them, which means that a high desire for sustainability in banks increase the supply. Digitalization has also increased the supply by making the banks offers more transparent, the customers can easily compare
products online which increases competition and in turn further development. A bigger supply of green products grows the environmental awareness in customers by increasing availability in green choices, which together with guidelines and regulations creates a reinforcing loop of continually expanding sustainable governance. The increasing environmental awareness affects the demand for green products which closes another reinforcing loop that steadily makes green products a viable option.
A higher demand for green financial products enforces the banks’ desire for sustainable change, since they are interested in meeting their customers’ demands. If the banks’ customers operate environmentally and economically sustainable they also lower their business risks, which further on lowers the banks’ investment risks. Therefore the green financing products can have a lower interest rate compared to regular unsustainable loans. Green loans and bonds
connected to a project makes the project cheaper and for companies that simply work sustainably a sustainability linked loan cheapens their operation. With this, as well as new energy efficient technology, the high costs of working sustainably are lowered making it more lucrative for corporate customers to pursue. Corporate customers are also affected by ethics and their financial status, but an unethical company might reconsider if it’s profitable enough. If more companies pursue a green business the amount sustainable corporate customers will increase, which in turn also increases the demand for more green financing products completing a reinforcing loop that helps companies work more sustainably.
However, there are still corporate customers who can not or choose not to work sustainably, possibly due to high costs, and they reduce the demand for green financing products. These customers are negatively affected by the increase in environmental awareness which might push them to become more sustainable. The last component of this system is the environment which is evidently negatively affected by unsustainable corporate customers due to either CO2
or other greenhouse gas emissions. Corporate customers that are classified as sustainable might still have a negative impact on the environment, but by committing to improvement and
acknowledging their unsustainable operations they can eventually become purely sustainable and make a positive impact on the environment.
4.2 Multi-Level Perspective
In this analysis, the existing socio-technical regime is the financial market. Banks play a vital role in the dynamics within this regime, bound to current regulations and lock-ins, creating a dynamically stable regime. In addition to banks, the banks’ corporate customers are presented in the existing regime establishing balance. It is the relation between the banks and their corporate customers that shapes the financial market through creating investment opportunities as well as generating cash flows.
Ever since climate change became a buzzword, the regime has been infiltrated with pressure from landscape level. The three areas identified as drivers for transition at landscape level are;
climate change, regulations from EU and UN, as well as digitalization, all presented as the
environment of the financial market. Climate change itself has stimulated legislative proposals from both EU and UN in order to reduce the environmental impact, influencing how the financial market can operate sustainably and creating guidelines for product development, i.e.
affecting both the regime and niche level.
As for digitalization, information and communication technologies (ICTs) has created
opportunities at both regime and niche level. ICTs has affected banks and their customers, i.e at regime level, in scaling the market for climate-smart solutions, increasing both awareness and demand for green products available. This has promoted an environmental responsibility mindset among stakeholders, pressuring new innovations at niche level to stimulate climate smart behaviour and circular solutions.
The development of the landscape has put pressure on the existing regime, opened up and enabled opportunities for innovations at niche level to arise. This has led to a change in the system’s structure of the financial market and has created a ‘window of opportunities’ for novelties such as green products to arise. Green products are currently infiltrating the regime, challenging the existing standards of products in order to overcome the regime’s stability.
Nevertheless, green products only make up a fraction of the total products available on the financial market. In order for green products to become a standard in the regime, demand as well as customers’ willingness and desire to change must increase. Once the regime has
adjusted to the new dominant design of green products, the regime shift will again pressure the landscape, stimulating new regulations from EU and UN. The relationship between the different levels with respective actors in the MLP is shown below in Figure 3.
Figure 3. Graphical description of transitions in green financing through Geels’ MLP
Being green is not only a requirement on banks from actors at landscape level, but also a strategic choice to be competitive on the market. As customers’ demand for green products increases, banks’ ability to change becomes more vital in order to maintain customer loyalty.
Therefore, supply and demand on green products must harmonize. Considering that green financing is a relatively new market, banks now have the opportunity to decide whether to be a
to a green financing market will also disclose which actors lacking transformation- and survival strategies.
As regulations from EU and UN are being introduced as recommendations from above, both banks and product developers are affected by new guidelines. EU’s new taxonomy represented in the EU Action Plan on Sustainable Finance will require banks to disclose information on their sustainable economic activities, affecting the standards of the existing regime. As the taxonomy defines what constitutes as sustainable and green investments, banks must set requirements on their clients’ projects in order to fund it. At niche level, the taxonomy will influence product development regarding the markets new demands for green products.
The taxonomy is not yet adopted by the European Commission, but other guidelines such as the PRB has started to affect actors at regime and niche level. The PRB works as a framework for a sustainable banking system and even though the PRB is a part of the landscape level, the PRB has it roots from the change in society’s expectations belonging to the regime level. The PRB affects the regime level and niche level due to the fact that this framework puts demand on transparency and clearness on how the banks activities and products create value for their customers as well as for their investors, clients and society. The transparency contributes to the possibility of comparing banks. Considering the increased awareness towards acting sustainable as a demand from customers and actors at regime respective landscape level, banks’ reputation will rely on how they execute activities sustainably.
The process of the regime shift to a green financing market shows how the interactions between the different levels generates change and opens up for opportunities at respective levels. As a result of climate change, regulations and digitalization has created pressure at regime level, increasing the demand for green products and the awareness towards sustainable actions.
Additionally, the landscape level has created momentum at niche level, enabling development of green products. The infiltration of green products at regime level has further on stimulated development of new regulations at landscape level in order to control the green financing market. This lasting loop of changes indicates that the different levels will continue affecting each other over time, creating new possibilities for the future of green financing.
The green financing market is fairly new and still evolving, but seen to the short time
perspective, it has grown fast. The most significant changes as of today at regime level are the adoption and implementation of regulations from landscape level, the increased awareness of including green products in the banks’ portfolio considering the increased demand from corporate customers and finally, including ESG when making risk assessment. Green products are still more of a niche than a new standard within the financial market, but on the other hand both supply and demand increases constantly. As the demand on green products and financial solutions keep increasing, the green financing market will expand with new green innovations.
With a change in demand, new regulations and guidelines will be developed in order to regulate the financial market. Future guidelines and regulations can also bring a change to green
financing. If stricter regulations are established towards corporate bank customers, the need for green financial solutions will increase. As green products lead to more funding towards green projects, both banks and their corporate customers will plausibly experience positive ripple effects as well as contributing in lowering CO2 emissions.
As pressure from both landscape and niche level affects the financial market, banks put requirements on their corporate customers in order to act more sustainably. An issue with implementing stricter requirements, for example a higher interest rate, is that all of the competing banks would have to adopt the regulation at the same time in order to not be out- competed. Nevertheless, this can lead to complications regarding competition law and price cartels. On the other hand, if only one bank implemented such strict adjustments, the bank would most likely lose its customers to a competing bank with better offers, considering that most customers focus on financial profitability. Therefore, major adjustments from EU and UN at landscape level can help with lowering the risk of being out-competed as these regulations affect most banks.
4.3 Interviews
The interviewees are experts on the related issues from the four Swedish leading banks. From Handelsbanken the interviewees are Catharina Belfrage Sahlstrand (Head of Sustainable Business Development, Debt Capital Markets), Karin Lagerstrand (Vice President,
Sustainability) and Jenny Tiger (Regulatory expert). From Nordea the interviewees are Jacob Michaelsen (Head of Sustainable Finance Advisory), Veronica Palmgren (Group Sustainable Finance) and Margrete Eilertsen (ESG Analyst, Group Sustainable Finance). From SEB the interviewee is Jonas Solehav (ESG Advisor, Sustainability Strategist), and from Swedbank it is Fredrik Nilzén (Head of Group Sustainability).
4.3.1 Handelsbanken
The reason for Handelsbanken to issue their first green bond was because there was potential among swedish companies, especially real estate companies, property owners and real estate developers. Primarily there was great value for the issuer to issue a green bond, since this brings easier access to a wide variety of investors. Catharina Belfrage Sahlstrand at
Handelsbanken says they had a will to contribute to the green financing market and to change.
They contribute to change on two fronts; the placement side where they do their asset
management and the funding side where they use their own balance sheet or arrange bonds to match investors with borrowing customers. The financial market has a big part to play and Sahlstrand believes the market has realized it is not only a wish to place money in the right place but a responsibility. Sahlstrand sees offering green products as an advantage even if it is not required from above. Sahlstrand says that Handelsbanken wants to contribute to a
sustainable society, but also lifts the perspective that their customers have a high demand on green financial solutions.
Focusing on the Nordic and the bond market there has definitely been a change in demand, Sahlstrand says. Sustainability and working with it has seen an increase on the corporate market and Sweden is definitely a frontrunner when it comes to the environment. Sahlstrand sees that a big difference is how they approach their customers in this subject, green products used to be offered to some customers that might find it interesting while it has now become a standard to offer green products to most customers and it is expected. Connecting financing to sustainability usually starts with the larger corporate customers and then it is progressively adapted by the rest. Here is where green loans started, the green bond market is getting mature
and is slightly restricted to bigger corporations that have access to the capital market.
Therefore, smaller companies demanded another option which launched the green loans.
Sahlstrand points out that the more Handelsbanken works with sustainability the more they have learned, which has also changed their perception of green. The green bond market, before the EU taxonomy was initiated, was mostly founded on the climate bond initiatives and the Green Bond Principles. This is still the foundation of the market but there has been some changes to include transitions more. There used to be more focus on defining and labeling already green projects, but what is becoming more important is to transform for example making a non-energy efficient building more efficient.
Sahlstrand hopes the green financing market will keep growing. Looking at the fast growth so far, there are no signs for the growth to slow down, which Sahlstrand calls a perfect storm.
Sahlstrand thinks regulations will only enforce the future growth, which is positive, and therefore the regulations are welcomed at Handelsbanken. A factor that can be slightly braking growth is the administrative burden for actors who need to adapt to the regulations due to the fact that regulations come with a higher demand on reporting. A bank usually has resources to handle reporting regarding the regulations, but if the issuer is a smaller company they might face complications. With new regulations, such as the taxonomy, it can become a problem in the form of an entry barrier for smaller companies to enter the market. Nevertheless, Sahlstrand believes that the taxonomy will have a positive influence on the market, making it clear that all actors define green in the same way. It contributes with security and creates a better reputation.
The sustainability linked loans are currently mostly used by bigger companies since they are tailored using each customers specific strategic goals regarding sustainability. For these types of loans to be useful the company has to base their targets in areas where they can make the greatest impact. However, as these loans become more mature on the market and more
experience is gained, they could create somewhat of a standard by categorizing businesses into certain sectors, says Sahlstrand. This could be more applicable for smaller companies, however this is still a future development.
The sustainability linked loans were developed due to a demand from customers and are meant to complement the green financing market. The sustainability linked loans make it possible to borrow green without having a specific project, but the customer must meet their goals. There are many customers who have well thought out sustainability goals, but no new green projects, and therefore the sustainability liked loans are an alternative to lend green but based on a whole company view and not only on projects. Sahlstrand says there has to be transparency between customer and bank to make this product possible.
Handelsbanken has different relations with their customers, according to Sahlstrand. Some already have ambitious sustainability goals and Handelsbanken’s role is then to give feedback and possibly challenge their goals. Some customers are less educated on sustainability, and therefore the most important part for Handelsbanken is to teach them how they can incorporate sustainability. Sahlstrand has found that challenging their customers deepens their
relationships and that the customers appreciate what they do. Sahlstrand points out that even if the customer currently does not meet their requirements for green loans, they might improve and want them in the future. That is why it is important to give counsel instead and have a
dialog about sustainability. Handelsbanken has some customers that they have had for years, and as long as they actively work with sustainability they do not find it a problem for them not to have green loans right at this moment. Sahlstrand says some customers believe they are already sustainable enough and with these customers they work with tying sustainability with targets so that they know how to report on it. Handelsbanken will have to report their balance sheets to TCFD (The Task Force on Climate-related Financial Disclosures), which means their customers must be able to make reports as well.
Sahlstrand has seen tendencies to include CO2 in KPI-goals since most companies affect it, however it is less relevant for service companies. An initiative that addresses this is Science Based Targets which connects CO2-targets directly to the Paris Agreement. It helps companies set goals for their specific sector and to make it easier to compare companies’ sustainability targets with each other.
According to Sahlstrand, the sustainability linked loans could be more standardized and offered to a broader customer base through dividing customers into different sectors and connecting their CO2 targets based on sector targets. This is not an index that exists on the market today and Sahlstrand does not believe that an ideal index can be developed and followed. The importance is not to have a perfect index to connect incitament or punishment to, but an index that ease the banks target setting with sustainability linked loans for different customers.
A customer's dependance on financing variates between different sectors/industries, the company’s capital structure and leverage, Sahlstrand states. The customers’ interest in choosing green also variates but Sahlstrand explains that it is a generally high demand on sustainable solutions and customers want to show where they stand in climate related questions.
Sahlstrand raises the perspective that in the extension with the TCFD and an increased transparency, a company that is not acting sustainably can face higher costs on capital
adequacy, and on the other hand be a relief if the company acts sustainably. Sahlstrand says that today, a customer can choose the financing solution that fits them the best, but this choice is becoming more and more compromised, and in the future, not predicted when, it will be harder to lend cheap money.
Sahlstrand believes that putting demand, advising, and to have mutual learning between the bank and their customers is important for the financial system to operate properly. As Handelsbanken protects their credit risks, they also have to care about their customers sustainability risks. A strong bond and relationship between the bank and their customers is important for Handelsbanken and they want their customers to be a part of their journey towards a more sustainable future.
The green market is a competitive market, and both Handelsbanken and the customers are aware of the different offers on the market. As Sahlstrand explains, companies doing well in the sustainability area would want to work with Handelsbanken. On the other hand, companies that haven’t started their sustainability journey yet would choose a different offer, even if they are the ones that need the most help and could have a larger positive impact. Sahlstrand says that they want to help all of their customers in becoming more sustainable, not only the customers that already have joined the journey.
Handelsbanken signed the Principles for Responsible Banking in September 2019 along with a big group of other banks. Karin Lagerstrand at Handelsbanken believes most banks will sign this agreement since it is an important step for the financial sector to support sustainable
development. Currently they are working with Impact Analysis, meaning an analysis of where every bank has the greatest impact which can be very different in every bank. Handelsbanken has a lot of real estate financing and could therefore for instance set a target related to real estate. Another important factor is geographic location, for example Handelsbanken operates in the UK who are about to leave EU which brings another factor to consider. Therefore
implementing the PRB is a foundational work and most banks are still in the initial phase to examine their impact and deciding their targets. Each bank must decide on at least two targets and how these will be applied considering their operations and at the same time incorporating the Paris Agreement, global goals as well as national and local guidelines. The first reporting occurs within 18 months from signing where the signatories will explain how far along they are with mapping and which areas they will target. This work is then continued until all the
structures and targets are set which has to happen within four years.
Lagerstrand informs that the PRB is a big commitment, but it is something the banks would have to address sooner or later. However, this way there is an incentive as well as a more standardized way for all banks to do their work similarly. This also makes it easier for
customers and groups of interest to be able to cooperate and compare banks. The targets might be different, but the final aim is fairly the same. The PRB is important to gain strength in the sustainability work of each bank. If a company or business is not sustainable it faces climate related risks and if the bank is involved with this company they face these risks as well. This is just a push in a direction the market had to go in either way. Lagerstrand currently does not see any direct drawbacks or risks with this initiative and to secure achievement the PRB secretariat provides substantial support for the signatories. According to Lagerstrand, this initiative will evolve further. After the set targets have been accomplished there will be new targets to reach for further accomplishments in line with the PRB. Therefore, the plan is to continually evaluate the goals and set new ones.
Jenny Tiger at Handelsbanken raises both advantages and disadvantages with the taxonomy.
One of the benefits of the EU entering and controlling the European market is that it will lead to a harmonization of the market by knowing for sure what counts as a green product. According to Tiger, the harmonization of the market is a great strength as it becomes a safety for all interested parties by knowing what it means for a product to be green, and that it will also contribute to the growth of the green financing market. A problem within the market today is greenwashing, products are being marked as green even though they aren't green. Through the standardization of what counts as green, Tiger believes that greenwashing will decrease.
Further on, Tiger argues that there are some objections on how correctly EU has landed in their regulations, but Tiger also explains the difficulties of reaching an agreement between the 27 member states.
With the taxonomy follows an increased demand of transparency and reporting. Tiger explains that a product does not have to completely follow the taxonomy, but there is a demand on describing how the product relates to the taxonomy. Tiger believes that it is positive with an increased transparency within the market, but it also lifts a problematic aspect of increased transparency. For smaller companies it can be harder to meet the high reporting requirements
to prove that they are green. It takes a large amount of data and it can be expensive and therefore harder to choose a green product. Tiger explains that with clarity around which requirements to fulfill, even if it can be hard to adjust to new regulations and requirements in the beginning, a standardization within the market creates a larger European market.
Tiger believes in a future growth of the market, but it is hard to predict how fast the market will grow. The green market is still a small part of the total financial market, but Tiger thinks the standardization and clear regulations will push the growth. It is a large interest from both Handelsbanken and customers to invest in green products and new variants and solutions of green products are developed continuously and will continue to develop, according to Tiger.
One of Handelsbanken’s larger focuses and strategic areas is the green market and to contribute to a more sustainable society. Handelsbanken is working and have worked with climate-related issues for a long time even if authorities and laws do not require this. New regulations are welcome at Handelsbanken, as Tiger explains that the regulations ease their work in developing products towards their customers. New regulations also help in standardizing the market, which Tiger finds positive. Furthermore, Tiger describes that the Scandinavian banks have quite similar products and have similar thoughts on what they count as green, but looking at the whole European market it is diverge and therefore a standardization of the market can contribute to a larger and more harmonized market.
4.3.2 Nordea
Jacob Michaelsen at Nordea explains that the sustainability linked loans are offered to typical corporate customers and that the KPIs variate from customer to customer. Since Nordea’s customers are operating in different industries they meet different sustainability challenges, as well as how they work and have worked with sustainability. Due to the complexity of different companies and branches, the KPIs are not standardized. Nordea is not in a stage where they want to standardize, and Michaelsen points out that low standardization is not the largest issue due to the benefit of choosing KPIs where their customers have the largest potential to make an impact. Michaelsen also lifts the issue with data. Smaller businesses often have less data which makes ESG-analyzing harder and consequently makes it less practical. Due to the fact that this is quite a new market, changes and developments will happen.
The focus on sustainability is an important matter according to Michaelsen. He believes that the interest in sustainability will continue to grow and that it is important for banks to show where they stand in the sustainability question. From Michaelsen’s perspective, Nordea wants to ensure that they engage their customers in these kinds of questions so that they subsequently work towards this as much as possible. Michaelsen also raises the importance of developing their green products to make it easier for the customers to choose green alternatives – with more green products such as green bonds and loans the bank shows a commitment to the importance of sustainability.
Nordea was the only Nordic bank amongst the banks that founded the Principles for Responsible Banking and is currently working with the implementation of PRB. Veronica Palmgren at Nordea explains that the second part of the implementation; to create tangible and
