14-09-2022 15:57

Nordea issues innovative bond to fund sustainability-linked loans

The new framework allows investors to invest in Nordea's sustainability-linked loan financing activity that tackles climate change. Investors describe the new bond structure as an "innovative and creative" way to help drive the green transition.
Child walking in the beach close to wind farm

Nordic corporates have embraced sustainability-linked loans in recent years, and now Nordea has launched an innovative bond that allows investors to support corporate borrowers that have set ambitious sustainability goals as part of their financing.

The new bond format is modelled closely after the so-called “use-of-proceeds” structure that covers green bonds, where proceeds from the bonds are earmarked for specific green investments. In Nordea’s case, that could be green loans to clients for projects that are labelled “green.” However, with this new bond format, the bond’s proceeds aren’t earmarked for green loans or assets but rather sustainability-linked loans.

What is a sustainability-linked loan?

Sustainability-linked loans are a type of lending arrangement where a company’s borrowing costs are tied to its progress on meeting certain set and measurable annual sustainability targets. If the company meets those key performance indicators (KPIs), it gets a discount on the interest paid; if not, it pays a premium.

Corporate interest in sustainability-linked loans has surged in recent years. Unlike green loans, where the financing must be used for specific green projects, the money from sustainability-linked loans can be used for general corporate purposes. But the interest terms of the loan give the borrower an incentive to meet certain pre-defined sustainability targets.

Nordea’s new Sustainability-linked Loan (SLL) Funding framework is believed to be the first of its kind.

“We want to innovate and take part in moving the market forward,” says Jacob Michaelsen, Head of Sustainable Finance Advisory at Nordea. “This new framework builds on the successful development of the green bond market while also recognising the considerable momentum in the sustainability-linked loan market.”

Nordea’s Head of Bank Debt Petra Mellor described the “ESG friendly” framework as a “complement” to Nordea’s existing green funding framework, adding:

“We look forward to issuing more bonds in various formats and currencies in the future under both frameworks.”

How does it work?

Money from the bond is used to finance or refinance sustainability-linked loans that have been selected to be part of the SLL Funding asset pool. Loans in the pool must:

  • Be aligned to the Sustainability-linked Bond Principles
  • Contribute to combating climate change, for example through the reduction of greenhouse gas emissions or energy consumption
  • Have key performance indicators (KPIs) and targets that are considered “material” and “ambitious” by an external reviewer

Once the suitable assets are identified, they are assessed by external provider ISS ESG, which also reviewed the funding framework.

A cross-functional Nordea committee will regularly review the asset pool, and if a sustainability-linked loan no longer complies with the required criteria, for example by failing to meet a relevant target, it will be removed from the pool. Nordea will also report annually on the performance of the underlying companies and KPIs on an aggregated basis.

Why did Nordea develop this framework?

As the largest financial services group in the Nordic region, we are well positioned to support our customers in the transition to net zero. While the SLL Funding framework is not “green” per se, it is designed to cater for the transition assets not included in Nordea’s green bond asset portfolio, but that still have a strong alignment to ambitious sustainability goals.

“Green bonds and the use-of-proceeds structure focus on what you do with the money now. Sustainability-linked loan structures, which set targets into the future, are about transitioning,” says Michaelsen, adding:

“With this bond, we’re giving investors an opportunity to confirm that they’re actively supporting the companies in their transition.”

With this bond, we’re giving investors an opportunity to confirm that they’re actively supporting companies in their transition.

Jacob Michaelsen, Head of Nordea Sustainable Finance Advisory

Strong demand from investors

The inaugural issuance of SLL SEK/NOK 4.1 billion senior preferred notes in September, based on the framework, drew strong investor interest.

Helena Lindahl, Senior Portfolio Manager at Storebrand Asset Management, an investor in the bond, said Nordea has shown “great creativity by issuing the first bond backed by sustainability-linked loans, capturing a wider circle of sustainable lending which would not necessarily be captured by their issuance of green bonds, but is sustainable nonetheless.”

“In order to ramp volumes up, we need to be innovative and creative. These are exactly the leadership values Nordea shows,” she added.

In order to ramp volumes up, we need to be innovative and creative. These are exactly the leadership values Nordea shows.

Helena Lindahl, Senior Portfolio Manager at Storebrand Asset Management

 

Lisa Dohlvik, Portfolio Manager at AMF, another investor, noted that allocating capital to enable a transition to a more sustainable society is central to the green transition, adding, “For us, it is important to influence in the right direction. Through Nordea’s sustainability-linked loans, companies get the opportunity to carry out a sustainable transition with the help of the financial markets.”

Other investors in the bond include Carnegie Fonder, Danske Invest, If Skadeförsäkring AB, Handelsbanken Fonder, Nordea Asset Management, SEB Investment Management and Simplicity.

Nordea's climate action objectives

  • Net-zero emissions by 2050 at the latest
  • 40-50% reduction in emissions across investment and lending portfolios by 2030
  • 50% reduction in emissions from internal operations by 2030
Find out more about Nordea's sustainability targets