Enabling banks to finance the real transition

At Nordea, we aim to embed sustainability at our core. We are committed to reaching net-zero carbon emissions by 2050 and are well on our way towards an ambitious target to reduce emissions from our lending and investment portfolios by 40-50% as early as in 2030. We have also set several sector-specific climate targets as well as sustainable financing and investing goals.

As a bank, we have a unique opportunity to facilitate our clients’ transition towards a more sustainable and net-zero future. In order to drive meaningful change, we must be able to finance companies that are working to change their business models, including in carbon-intensive industries, and it must be recognised that this takes time and effort.

Regulation that is too rigid or short-sighted risks being counterproductive, as it could limit banks’ ability to help clients transition to a more sustainable future. Such a client selection approach would be counter to the European Banking Authority’s guidance and would achieve very little beyond moving financing to other financial services providers that may not be as committed to instituting real change.

Nordea’s commitment to facilitate real change is thus based on partnering with our clients according to their transition needs, while at the same time taking proactive steps to mitigate ESG-related risks. Achieving that objective requires a policy environment that reflects the complexity involved.

Our aim: to support a meaningful transition

Policymakers and supervisors have set an agenda that will introduce a number of changes quite quickly. In our view, it will be key to ensure that the policy measures help us achieve our stated aim – to support a meaningful transition. These measures must factor in flexibility and time, while ensuring a consistent pathway, as we and our clients navigate towards achieving common sustainability goals.

Banks are taking a proactive approach in laying out their own transition plans, including targets across various time periods and limits on the most harmful impacts that will ultimately steer their portfolios. How the portfolio looks today will be very different from how it will look going forward. The very economies we support are undergoing a seismic shift, and we all have to understand and manage new risks in a way that we have not consistently done in the past.

To that end, we are working closely with our clients to understand their transition plans. We complement that engagement with a range of other initiatives, including deep-dive assessments of key sectors and our transition financing approach. By facilitating real transition for our clients, we are also mitigating and managing ESG risks.

The challenge of the century and the opportunity of a lifetime

One notable challenge is our major dependency on reliable data, not just on the status quo but more importantly on forward-looking data. Nordea continues to invest and engage with clients to overcome this challenge, but it is a dependency that must be recognised. Structured ESG data are a prerequisite for developing models that can adequately quantify how ESG risks materialise, but the need for such data also limits the speed at which banks and supervisors can move ahead.

Furthermore, it is important for supervisors to understand the markets and sectors in which individual EU banks operate. Even within Europe, physical and transition risks differ from one region to another. For example, the physical risk of water scarcity differs between southern and northern Europe. Transition risks are also lower in the Nordic energy sector, with much of its energy production already based on renewable sources, compared to other parts of Europe and beyond.

Consequently, individual banks will have different focus areas when it comes to managing portfolios, client engagement and allocating capital in a way that is most relevant to the sectors and segments in need of transition. Regulation and supervision must take that variation into account. While we support having harmonised rules, it is not always possible to apply a one-size-fits-all supervisory approach to ESG for all banks in the EU.

As the EU continues to manifest its leadership in climate transition, it is important to focus on the carrot as well as the stick. If policymakers can incentivise the investments needed in the sustainable transition, then we will be there to finance it, to the extent the risks are acceptable. We must avoid a situation where it becomes more advantageous for non-EU banks and non-banking entities to provide the financing and investment needed in the EU. It is the challenge of the century and the opportunity of a lifetime.

To achieve real progress on the sustainability agenda, we need banks that are committed to supporting their clients’ transition and a regulatory framework and supervisory practices that support banks in this task. The content, pace and sequence of the regulatory and supervisory agenda must be carefully considered and include a degree of flexibility and predictability to avoid hindering those segments most in need of transition financing.

Author

Martin Persson
Head of Large Corporates & Institutions, Nordea