At Nordea, we are committed to sustainable business and development by combining financial performance with environmental and social responsibility as well as sound governance practices.
We work to engage with customers on environmental, social and governance matters and to have an understanding of the challenges and opportunities faced by customers in their businesses and industries. It is also important for us to integrate ESG assessments into our risk management and due diligence processes and ensure we never support financial crime.
With respect to financing in our Sustainability Policy (pdf, 1 MB) we commit to:
- engaging with customers on environmental, social and governance matters and having an understanding of the challenges and opportunities faced by customers in their businesses and industries.
- including and integrating environmental, social and governance risk assessments into risk management and due diligence processes.
- developing and supplying financial products that support sustainable development.
- engaging with stakeholders to ensure continuous development and performance in financing activities.
- preventing financial crime and including measures to manage these risks in financing activities.
- engaging in analysing the potential risk elements in connection with financing that could cause reputational damage to Nordea. Equally we expect that customers and stakeholders themselves engage in managing their reputational risk.
- high standards and best practices as regards tax compliance and reporting, and not financing or facilitating tax schemes that are considered tax evasion, or which, although considered legal, are perceived as aggressive tax planning or are otherwise not in line with Nordea’s internal ethical standards.
An overview of sustainability in the credit process
Nordea’s Code of Conduct describes high-level ethical principles that guide our business and includes aspects such as care for the environment, labour rights, how we treat our customers, commitment to human rights, the right to privacy, and anti-bribery and corruption. The Code of Conduct is a central steering document for our financing operations together with our principles on ESG in financing, investing and advise in our sustainability policy. The impact of ESG risks is taken into account in our credit decision-making, including escalation to credit committees as determined by Nordea’s governance.
Nordea regularly performs ESG risk analysis on large corporate customers to manage ESG-related risks and opportunities. For these customers we have a dedicated team of ESG analysts who use a specific ESG tool and methodology to analyse the corporations. Large customers with high ESG risk are escalated to our Executive Credit Committee, which is chaired by the Head of Group Credit Risk Management. Decisions taken in the Executive Credit Committee are reported to the Board.
We are currently looking into how we can enhance the integration of ESG in relation to our small and medium-sized corporate customers. For these clients, environmental and in some cases also social and political aspects are currently considered in credit decisions, where relevant. ESG questions are integrated into the standard escalation process, as set forth in our credit risk framework. Credit decisions are handled on a case by case basis by local management but can, according to our escalation process, be elevated to the Business Banking Business Risk Forum, Business Banking Business Ethics and Values Committee and finally also to the Business Ethics and Values Committee at Group level for a recommendation on how to handle a potential ESG risk.
The Swedish Financial Supervisory Authority (Finansinspektionen) presented a report in November 2015 on banking and sustainability. In the report they concluded that banks should be more transparent towards consumers with regards to how sustainability is considered in the credit process and that this should primarily be through an initiative within the banking industry. The sustainability overview document below is a banking sector initiative facilitated by the Swedish Bankers' Association in order to give an insight into how banks take sustainability into account and how it is integrated in the process of lending to corporates. The board of the Swedish Bankers’ Association has approved the document as an industry recommendation.
The Equator Principles
An Equator Principles Financial Institution (EPFI) will only provide loans to projects that conform to the principles. Please note that the EP’s requirements differ depending on type of loan.*
- Review and categorisation: Due diligence of projects includes a social and environmental review and risk assessment.
- Social and Environmental Assessment: The borrower provides an S&E Assessment and proposed measures on how to mitigate and manage risks along the project
- Applicable Social and Environmental Standards: Assessment of the projects' overall compliance with established IFC Performance Standards and the World Bank Group Environmental, Health and Safety Guidelines.
- Action Plan and Management System: The borrower provides an action plan listing prioritised actions, and implements an S&E management system.
- Consultation and Disclosure: The EP requires the borrower to initiate a continuous and effective engagement with stakeholders affected by the project to ensure concerns are adequately incorporated.
- Grievance mechanism: The borrower establishes a grievance mechanism designed to receive and facilitate resolution of concerns and grievances about the Project’s environmental and social performance
- Independent review: An independent expert shall review the S&E Assessment, the Action Plan and the Consultation process.
- Covenants: In addition to relevant host country environmental and social laws, regulations and permits, the client needs to have legally binding documents ensuring compliance with EP environmental and social management and/or action plans during the construction and operation of the project. The client also needs to provide periodic reports in a format agreed with the EPFI.
- Independent Monitoring and Reporting: In more risky projects: the borrower shall appoint qualified external experts to verify and report on monitoring.
- EPFI Reporting: All signatories to the Equator Principles shall report publicly on transactions that have reached Financial Closure and on their implementation processes and experiences taking into account appropriate confidentiality considerations
*The EP’s requirements for project-related corporate loans differ in the Principles 7 and 9 and public project name reporting by EPFI from those for project finance and requirements for bridge loans differ in the whole EP review process as well as in EPFI’s public reporting requirements from requirements for project finance (for more details, please see the Equator Principles).
The main purpose of SPRAT is to distinctively identify relevant social and political risks in a particular customer’s business with potential impact on the customer’s ability to fulfil the credit obligations or likelihood of damage to Nordea. Thus all corporate credit customers new to the Nordea Group are screened with SPRAT, a three-step process, which includes the producing of a country risk profile, an industry risk profile, and an overall social and political risk profile, which is then amended to the other factors in the credit evaluation process. SPRAT is mandatory for customers with credit limits of over EUR 5 million. SPRAT is also used for customers with credit limits below EUR 5 million for companies that are obviously predisposed to social and political risks.
Nordea’s risk definitions are based on commonly accepted international standards from the World Bank and the UN Global Compact.
Applying the Equator Principles
Nordea adopted the Equator Principles (EP) in 2007. Our analysts and other relevant staff have been trained in Nordea’s internal EP process. Nordea follows the Equator Principles Manual (toolkit). The toolkit provides guidance on how to apply the EP in the day-to-day business.
The ten principles contained in the EP are organised into four workflow steps:
1. Initial project review
2. Project appraisal
3. Project negotiation, commitment and monitoring
4. External reporting
Nordea evaluates the borrower’s capacity to adequately identify, prevent, mitigate and manage key social and environmental risks and impacts of the project based on documentation provided by the borrower, independent environmental and social consultants and in certain cases site visits.
The relevant business units in Wholesale Banking include CSR matters in the initial business selection discussions. The detailed project appraisal and internal EP reviews are carried out by the EP reviewer within Wholesale Banking. The person has relevant education and broad working experience to support performing the task. The EP reviewer also proposes conditions related to environmental and social issues for loan agreements when necessary, participates in drafting the scope of work for independent consultants, communicates with other relevant project parties and monitors project compliance with Equator Principles. In the above tasks the EP reviewer co-operates with the rest of Nordea's deal team responsible for the financing of the transaction in question.
The EP reviewer presents the EP transactions to Nordea's EP Advisory Group (EPAG), which confirms the EP category and either supports or does not support the transaction based on EP compliance. The EPAG has 4-6 members who are senior managers from relevant business and risk management units. EPAG's statements are included in the evaluation of the relevant credit committee deciding on the financing of the transaction.
Nordea monitors (quarterly, semi-annually or annually depending on type of project) the performance of all active projects in its portfolio to ensure compliance with environmental, social and other conditions. The borrower provides annual social and environmental monitoring reports that are usually verified by an independent expert. In case of any non-compliance, Nordea will determine an appropriate course of action together with the other lenders.
Equator Principles in project finance
Nordea’s Export and Project Finance (EPF) unit is responsible for managing project financing in Nordea.
Export Finance is a tailor made financing package to foreign buyers of Nordic capital goods such as machinery and equipment. Project Finance is limited recourse financing for projects in developed, as well as emerging markets, involving Nordic equipment suppliers or project sponsors.
EPF has long addressed environmental and social risks in their projects, and since Nordea adopted the Equator Principles in 2007, risk governance in this area has been further strengthened.
We apply the principles by;
- developing evaluation and compliance routines for deal managers and credit analysts
- producing toolkits for credit analysts
- training analysts and other relevant staff in using the routines and tools
- establishing network and workflow for reference and advice on social and environmental risks
- integrating the workflow with our general credit evaluation and decision workflow
Project financing in large and complex projects
Project financing is funding in which the lender looks primarily to the revenues generated by a single project both as the source of repayment and as collateral for the exposure. Project finance is often used for large projects where several parties cooperate in project development and/or financing. Large and complex projects also imply more diversified and complex risks than smaller projects, and the risks may have many forms and materialise in many different ways. Large industrial projects may, for instance, imply social and environmental risks due to location, local population issues and so on. If they materialise, such risks may impose large practical and financial consequences on the project and the project participants.
Projects with large environmental and social risks
In projects with larger environmental and social risks there is usually an independent consultant monitoring the project on behalf of Nordea and other lenders. Normally the consultant’s task is to review the project’s compliance with the Equator Principles, which are based on the IFC Performance Standards on human rights.