One-of-a-kind green bond from Landshypotek Bank sets new record

Landshypotek Bank continues to blaze a trail in the world of sustainable finance. The Swedish bank was in 2018 the first issuer in the world to issue a green covered bond that exclusively finances sustainable forestry. The bank has just refinanced that bond, receiving its highest investor demand to date.

The SEK 6 billion fixed green covered bond drew SEK 14.2 billion of investor interest within the first hour of the order book opening, a number that continued to climb as the transaction went on. The bond also set a new greenium record for AAA-issuers at an impressive 12 basis points.

“We are one of the only banks in the world to issue green covered bonds where the asset pool consists only of sustainable forests. That makes the product unique and helps drive the extremely high interest from investors,” says Martin Kihlberg, General Counsel and Chief Sustainability Officer at Landshypotek Bank.

Absorbing, not just avoiding, CO₂ emissions

Part of the bond’s appeal to investors comes from the fact that forests are a carbon sink. Most green bonds make an impact by avoiding or reducing greenhouse gas emissions, for example by funding energy efficient buildings or renewable energy. However, the forests in Landshypotek Bank’s green asset pool go even further by absorbing CO₂ from the atmosphere. In addition, they help avoid emissions by providing raw materials for wood-based products that can replace fossil fuel-based products, such as plastics or metals. 

The bond is estimated to provide an annual climate benefit of around 260 tonnes of CO₂ absorbed or avoided per million SEK invested (as per the bank’s Impact Report 2022). That’s more than 20 times the climate impact of a Nordic covered bond peer group and more than 10 times the climate impact of the closest peer.

Nordea acted as joint lead manager on the transaction.

“It has been a true pleasure to work with Landshypotek Bank on this transaction and observe the well-deserved massive interest for their green bonds. This green bond is a strong representation of the value that the green bond format brings as investors show that high climate impact is desired and promoted,” says Ebba Ramel, Country Lead Sustainable Finance Advisory at Nordea

Investor interest on the rise

The 2,765 underlying forests in the green bond asset pool represent 513,000 hectares, roughly equal to the size of Dalsland and Öland in Sweden. The forests are either certified, for example by PEFC, or have a green forest management plan with at least 5% deciduous trees and at least 5% nature conservation action plans (NO/NS), promoting diversification, biodiversity and storm protection.

The bank’s green bond framework received a “dark green” shading, the highest available, from second party opinion provider CICERO Shades of Green.

Kihlberg says investor interest in the bank’s green bond has continued to rise in recent years, both among dedicated green and general interest investors.

“The unique feature is that the underlying forests are absorbing CO₂, something the green bonds from other banks are not doing to the same effect,” he adds.

A trip to the forest

In the autumn of 2022, Landshypotek Bank took investors out to the Swedish forest to meet with one of its forest owners.

“Many of them were happy to leave their office, take a bus north, step into the forest, meet the owner and see modern Swedish forest management with their own eyes,” says Kihlberg.

One of the investors of the green bond, that also was part of the forest trip is Öhman Fonder.

“Öhman participated in Landshypotek Bank’s first green covered bond back in 2018 and we are happy to now also be part of the refinancing of the bond. It was very interesting to participate in the arranged visit to the private owned forest last autumn since a large part of the Swedish forests are managed privately. We were impressed by the biodiversity work conducted by the forest owner to ensure the resiliency of the forests as well as by the emotions and love that the owners put into their forests. We appreciate the collaboration we have had with Landshypotek Bank and the support they provide to the Swedish forests,” say Julia Stålbro, Portfolio Manager and Viktoria Voskressenskaia, Sustainability Analyst at Öhman Fonder.

Did the strong investor demand in the latest transaction exceed the bank’s expectations?

“We really think this is something investors would like to have. It’s something they can benefit from in their own reporting and calculations of their climate impact,” says Kihlberg, adding, “We went in with high expectations both on volume and pricing, and those expectations were met.”