The message at Nordea’s recent Nordic AAA Seminar was clear: The green transition demands substantial investment, and the financial sector has an indispensable role to play. The annual event brought together around 150 institutional investors and issuers from the Nordics and Europe to focus on the pressing theme of climate change and finance.
The urgent need for financing, action and implementation to combat climate change was a common refrain from the series of high-profile speakers, which included Peter Møllgaard, Chair of the Danish Council on Climate Change; Signe Krogstrup, Governor at Danmarks Nationalbank; and Johannes Hahn, European Commissioner for Budget and Administration.
Møllgaard stressed that the current pace and scale of climate action are insufficient to tackle climate change.
“Approaches need to be scaled up. We can go very far with existing technology, and it’s about time that we acted,” he said.
Large-scale investments needed
Denmark is known for its ambitious climate strategy, which includes reducing emissions by 70% in 2030 compared to 1990. In February, the Danish Council on Climate Change for the first time found that the Danish government had demonstrated a path to a 70% reduction by 2030. However, the Council also concluded that the path entails too many risks, especially when it comes to agriculture, carbon capture and storage and the effects of carbon taxation.
“Overall, there is a plan, but it appears to be too risky,” Møllgaard explained, also noting that Denmark’s strategy falls short of new targets set by the EU Commission.
He went on to highlight the investment opportunities, including new and more climate-friendly industries with globally scalable solutions, such as electric vehicles, lab-based protein, vertical farming and clean manufacturing.
“These new emerging industries must be financed. Large-scale investments are needed,” he said.
Approaches need to be scaled up. We can go very far with existing technology, and it’s about time that we acted.
A ‘manageable’ cost of 1-2% of GDP
Danmarks Nationalbank Governor Signe Krogstrup pointed to several estimates that the cost of the green transition will amount to 1 to 2% of GDP.
“When you think of the risks of not achieving it, that’s a manageable number,” she said.
She also emphasised that the transition requires vast amounts of financing of investments in renewable energy supply and infrastructure. One of the financial sector’s most important contributions will be the proper risk assessment and risk management of climate-related financial flows.
“That’s one thing the financial sector does well, the right pricing of risk. Risk assessment is key, both for allocation of capital and maintaining financial stability in the transition,” she said.
Krogstrup also shared details around Denmark’s issuance of green bonds. The country made its debut on the green bond market in 2022, with DKK 15 billion in issuance for that year. Nordea served as structurer on Denmark’s green bond framework. The country plans a new issuance for the second half of 2023, with a goal of reaching DKK 25 billion in green bonds by the end of the year.
Risk assessment is key, both for allocation of capital and maintaining financial stability in the transition.
Substantial growth in EU bonds
EU Commissioner Johannes Hahn turned the audience’s attention towards EU bonds, which he described as an investment in a “greener, more digital and resilient Europe.”
In recent years, the EU has moved from a relatively small and infrequent issuer to one of the leading names in Europe’s debt capital markets. In 2019, the EU issued only EUR 0.4 billion in long-term funding. That compares to EUR 120 billion in 2022 – 300 times as much. Nordea is a member of the EU’s primary dealer network and facilitates investment in EU bonds.
The Commissioner noted that EU bonds have emerged as an important tool, alongside the EU budget, in responding to historic crises, such as the COVID-19 pandemic and Russia’s invasion of Ukraine. These bonds, and especially green bonds, are a catalyst for supporting new green technologies, he added.
He noted the consistently strong level of investor interest in EU green bonds, even in highly volatile market conditions, with recent issuances being many times oversubscribed.
Once again, investment is key, he said: “Finance – both public and private – is critical in rewiring our economy and society on a sustainable basis.”