13-03-2024 09:48

Financed emissions: A key lever in the net-zero transition

Financed emissions are the emissions produced by the companies Nordea invests in and lends money to. As a financial institution, our largest climate challenge and impact come from these indirect emissions, which in 2023 represented 99.9% of our total disclosed greenhouse gas footprint. Find out how we as a bank are working to reduce financed emissions in our lending portfolio.

The financial sector plays a crucial role in allocating financing in society. This means it can also play a vital role in financing the transition to a low-carbon economy by steering capital towards sustainable activities and solutions.

As the largest bank in the Nordic region, Nordea can support the transition to net zero via our customer financing and investment decisions. Our largest climate impact is through our lending and investments, which also represent the lion’s share of our greenhouse gas emissions.

For these reasons, and as a member of the Partnership for Carbon Accounting Financials (PCAF), we are committed to disclosing our share of responsibility for the emissions produced by the companies we finance and invest in – known as “financed emissions.”

Nordea has set an overall target of achieving net-zero emissions across our value chain by 2050 at the latest. In addition, we have the most ambitious interim target among Nordic banks of reducing the financed emissions across our lending and investment portfolios by 40-50% by 2030 compared to 2019.

For the lending portfolio, this interim target is supported by sector-specific climate targets aligned with science-based pathways and regional sector roadmaps. Find out more in Nordea’s progress report on climate targets and actions for the lending portfolio.

So how are we working to bring down the financed emissions in our lending? Engaging with our clients on their net-zero transition plans and having ESG integrated in our credit processes are both central to our implementation strategy. As a financial institution, we can influence our clients’ major business decisions, including how they approach the transition to net zero.

What are scope 1, 2 and 3 emissions?

Greenhouse gases, such as carbon dioxide (CO2), trap heat in the atmosphere, contributing to global warming and climate change. Emissions of greenhouse gases (GHG) are measured in CO2-equivalents (CO2e) and divided into three different scopes, depending on how they are tied to an entity.

Scope 1: Direct GHG emissions from sources controlled or owned by an organisation, such as a company’s buildings, facilities and vehicle fleet.

Scope 2: Indirect GHG emissions from the production of purchased energy, such as electricity, heating and cooling.

Scope 3: All other indirect GHG emissions in an organisation’s value chain, both upstream and downstream. Examples include financed emissions, business travel and emissions from the use of a company’s products.

Financed emissions from our lending and investment portfolios fall under scope 3 emissions for Nordea.

What are financed emissions?

Financed emissions for corporate loans reflect the lender’s share of responsibility for a client’s emissions. The share is based on the client’s so-called “enterprise value,” which includes the company’s equity book value plus its total debt.

To illustrate, if Nordea’s lending to Company A comprises 10% of its total enterprise value, and the company’s emissions add up to 12,000 tonnes of CO2e, Nordea’s financed emissions from Company A will be 1,200 tonnes of CO2e (10% x 12,000 = 1,200).

The two main drivers of financed emissions are: 1) a company’s absolute emissions and 2) Nordea’s relative share of the capital structure of the company. This means that financed emissions can increase if the company’s emissions increase or if Nordea’s share of lending to the company grows, either through increased lending relative to other banks or due to a decline in the company’s equity book value.

Read more about Nordea’s Financed emissions methodology for the lending portfolio.

Angelica Lundman, Head of LC&I Corporate Team 3, Nordea

ESG on the brain – the Customer Brain

Our “Customer Brain” is a business intelligence tool developed by Nordea and used across our Large Corporates & Institutions business area. The application provides a comprehensive view of our clients, portfolios and business units, gathering a wide range of information, such as data about deals and loans, as well as Nordea’s financed emissions for clients and portfolios.

“It’s something we analyse and follow up on every month,” says Angelica Lundman, head of a corporate client executive team in LC&I Sweden. “It’s an integrated part of the risk management process that we discuss with our country lead, who has financed emissions targets at the portfolio-level.”

The tool provides an overview of the client’s scope 1 and 2 emissions, the lending balance and Nordea’s financed emissions for that client from a 2019 baseline until today. A similar view is available at an aggregated portfolio level as well. If the financed emissions for a client stand out as high, there will be questions, and a detailed plan will have to be presented.

“As a client executive, we consider the financed emissions to be an integrated part of the client strategy and an important factor when evaluating the relationship,” she adds.

Financed emissions for one client may be high, but they may also have an ambitious transition plan that will make a big impact in reducing emissions when implemented.

“We have to remember that this is a transition. We have an ambition of being an active advisor and an integral part of our clients’ transition journey,” she says.

Nordea’s financed emissions: By the numbers

In 2023, financed emissions represented 99.9% of Nordea’s total greenhouse gas footprint, with business loans accounting for 74% of our financed emissions in our lending portfolio. From 2019 to 2023, we achieved a 29% reduction in financed emissions for the lending portfolio, putting us on track to reach our 40-50% reduction target by 2030. The drop was mainly due to volume reductions in shipping and animal husbandry as well as exits from offshore and Russia.

Mikko Lehtonen, Client Executive, Nordea

A factor in financing decisions

Mikko Lehtonen, a client executive for energy industry group corporates in LC&I Finland, says it’s all about being close to the client and understanding their business and transition strategies.

“As long as they have a good and credible plan, including reporting, and we understand that they’re going in the right direction towards a desired outcome, then we’re comfortable,” he says. He notes that financed emissions are also considered by Nordea LC&I’s Business Selection Committee when it makes financing decisions.

Large energy corporates have generally come far in calculating and reporting their scope 1, 2 and 3 emissions and setting their transition plans, which helps Lehtonen as a client executive.

“It’s something we follow carefully, in dialogue with our clients. These issues have become part of our job description,” he says

To that end, Nordea’s Large Corporates & Institutions unit has developed a Climate Transition Handbook and a “Maturity Ladder” tool to help client executives understand their clients’ climate transition plans and encourage engagement and discussion around these issues.

The bank has a target of having 90% of our exposure to large corporate customers in climate-vulnerable sectors covered by transition plans by the end of 2025. At an estimated 70% by the end of 2023, we’re well on our way to reaching that goal.

The data challenge

One of the biggest challenges with estimating financed emissions is the limited data availability and use of assumptions. Some companies report their emissions data in their annual or sustainability reports on an annual basis, resulting in a time lag. Where the data is not available, PCAF provides proxy data for specific industries and countries.

At Nordea, we are focusing our efforts on improving our data quality, looking for new alternatives and developing our own approaches to providing a more comprehensive view of our climate impact.

“We’re working on developing internal proxies, based on the actual data we capture,” says Elias Porse, head of ESG Data in Large Corporates & Institutions. “You can’t really make progress until you have the data to measure your progress.”

Porse notes that, with more companies reporting under the Corporate Sustainability Reporting Directive (CSRD) for 2024, the availability and scope of reported data should improve significantly.

A financed emissions glossary:

CSRD: The Corporate Sustainability Reporting Directive is the European Union (EU) regulation that requires large companies to report on their environmental and social risks, and on how their activities impact people and the environment. The new rules entered force in January 2023, and the first companies will have to start reporting for the first time for the 2024 financial year in 2025. The regulation is expected to increase the availability and scope of companies’ reported sustainability data, which will help financial institutions in calculating their financed emissions.

Double materiality: Under the concept of “double materiality,” companies must consider how sustainability affects their financial well-being as well as how their activities impact both society and the environment. The EU’s CSRD requires companies to conduct a double-materiality assessment to identify their relevant disclosure requirements under the European Sustainability Reporting Standards (ESRS).

Enterprise value: A measure of a company’s total value, including the book value of its equity and debt. A lender’s share of financed emissions for a given company is calculated based on its relative share of the firm’s enterprise value.

European Sustainability Reporting Standards: The European Sustainability Reporting Standards are a core component of the sustainability reporting landscape within the EU, providing the mandatory reporting framework to be followed under the Corporate Sustainability Reporting Directive. The ESRS was formally adopted by the European Commission under the CSRD in July 2023.

Financed emissions: Greenhouse gas emissions linked to the lending and investment activities of financial institutions. They reflect a lender’s share of responsibility for a client’s emissions, and are calculated based on the lender’s share of the client’s enterprise value. Financed emissions can increase if either 1) the company’s absolute emissions increase, or 2) the lender’s relative share of the company’s capital structure increases.

GHG Protocol: The Greenhouse Gas Protocol is the world’s most widely used set of greenhouse gas accounting standards and calculation guides.

GFANZ: The Glasgow Financial Alliance for Net Zero (GFANZ) was launched at the UN climate summit COP26 in 2021 to coordinate efforts across the financial system to accelerate the transition to a net-zero economy. Nordea is a member, along with over 600 financial institutions from around the world.

ISSB: The International Sustainability Standards Board (ISSB) is the independent standard-setting body launched by the International Financial Reporting Standards (IFRS) foundation to set global sustainability reporting standards. The ISSB in June 2023 launched its inaugural standards, IFRS S1 and IFRS S2, which come into effect for annual reporting periods starting on or after 1 January 2024. Unlike the ESRS, the ISSB standards are global, voluntary and focused on financial materiality, while the ESRS is based on a double materiality approach.

Net zero: Net zero refers to a state where greenhouse gases released into the atmosphere are balanced by their removal from the atmosphere, resulting in “net-zero” emissions. Committing to become net zero means that an entity aims to reduce its absolute emissions across all three emission scopes by 90-95% and only the final 5-10% that cannot be cut will be neutralised through carbon removals. Net-zero targets cover around 90% of the global economy. Nordea has adopted a target of achieving net-zero emissions across our value chain by 2050.

NZBA: The Net-Zero Banking Alliance (NZBA) aims to accelerate the transition of the global economy towards net-zero emissions by 2050. The alliance was formed by the United Nations Environment Programme Finance Initiative (UNEP FI) in 2021, and Nordea joined that same year. Members are committed to aligning their lending and investment portfolios with net-zero emissions by 2050 and setting intermediate targets for 2030 or sooner, using robust, science-based guidelines.

PCAF: The Partnership for Carbon Accounting Financials (PCAF) is a global partnership of financial institutions that work together to develop and implement a harmonised approach to assessing and disclosing their financed emissions – the emissions associated with their loans and investments. Nordea joined PCAF in 2020, and recently joined a core team of 15 experts to develop new accounting standards.

Scope 1 emissions: The direct GHG emissions from sources controlled or owned by an organisation, such as a company’s buildings, facilities and vehicle fleet.

Scope 2 emissions: The indirect GHG emissions from the production of purchased energy, such as electricity, heating and cooling.

Scope 3 emissions: All other indirect GHG emissions in an organisation’s value chain, both upstream and downstream. Examples include financed emissions, business travel and emissions from the use of a company’s products. For a bank such as Nordea, financed emissions are treated as scope 3 emissions.

Sustainable finance

Sustainability

Corporate insights

ESG

Insights