05-04-2024 14:57

What are financed emissions?

You may have come across the term “financed emissions” in the field of sustainability. What are they, and why do they matter? Here’s an explainer. 

Financed emissions are the greenhouse gas emissions linked to the investment and lending activities of financial institutions, specifically the emissions produced by the companies a bank invests in and lends money to. At Nordea, our largest climate challenge and impact come from these indirect emissions, which in 2023 represented 99.9% of our total  greenhouse gas footprint. 

The financial sector plays a crucial role in allocating financing in society. This could be lending money to companies for building and development projects or other innovation. It could also be managing the funds our customers invest in. Through these actions, we play a vital role in financing the transition to a low-carbon economy by steering capital towards sustainable activities and solutions. 

As the largest bank in the Nordic region, Nordea can, through our customer financing and investment decisions, support the transition to net zero – the state where greenhouse gases released into the atmosphere are balanced by their removal from the atmosphere. 

When are emissions direct, and when are they indirect?

Greenhouse gases, such as carbon dioxide (CO2), trap heat in the atmosphere, contributing to global warming and climate change. Emissions of greenhouse gases (GHG) are measured in CO2-equivalents (CO2e) and divided into three different scopes, depending on how they are tied to an entity. 

Scope 1: Direct GHG emissions from sources controlled or owned by an organisation, such as a company’s buildings, facilities and vehicle fleet.

Scope 2: Indirect GHG emissions from the production of purchased energy, such as electricity, heating and cooling.

Scope 3: All other indirect GHG emissions in an organisation’s value chain, both upstream and downstream. Examples include financed emissions, business travel and emissions from the use of a company’s products.

Financed emissions from our lending and investment portfolios fall under scope 3 emissions for Nordea.

Did you know?

Nordea has set an overall target of achieving net-zero emissions across our value chain by 2050 at the latest. In addition, we have the most ambitious interim target among Nordic banks of reducing the financed emissions across our lending and investment portfolios by 40-50% by 2030 compared to 2019. 

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Corporate loans as an example 

To unfold how scope 3 emissions are calculated, we can take corporate loans as an example. Financed emissions for corporate loans reflect the lender’s share of responsibility for a customer’s  emissions. The share is based on the customer’s so-called “enterprise value,” which is the total value, debt included. 

To illustrate, if Nordea’s lending to Company A comprises 10% of its total enterprise value, and the company’s emissions add up to 12,000 tonnes of CO2e, Nordea’s financed emissions from Company A will be 1,200 tonnes of CO2e (10% x 12,000 = 1,200).

The two main drivers of financed emissions are: 1) a company’s absolute emissions and 2) Nordea’s relative share of the capital structure of the company. This means that financed emissions can increase if the company’s emissions increase or if Nordea’s share of lending to the company grows, either through increased lending relative to other banks or due to a decline in the company’s equity book value.

While this example illustrates the mechanisms of financed emissions, it does not show how a bank can  bring down the financed emissions in its lending. At Nordea, engaging with our customers on their net-zero transition plans and having environmental, social and governance (ESG) factors integrated in our credit processes are both central to our implementation strategy. As a financial institution, we can influence our customers’ major business decisions, including how they approach the transition to net zero.


A financed emissions glossary:

CSRD: The Corporate Sustainability Reporting Directive is the European Union (EU) regulation that requires large companies to report on their environmental and social risks, and on how their activities impact people and the environment. The new rules entered force in January 2023, and the first companies will have to start reporting for the first time for the 2024 financial year in 2025. The regulation is expected to increase the availability and scope of companies’ reported sustainability data, which will help financial institutions in calculating their financed emissions.

Double materiality: Under the concept of “double materiality,” companies must consider how sustainability affects their financial well-being as well as how their activities impact both society and the environment. The EU’s CSRD requires companies to conduct a double-materiality assessment to identify their relevant disclosure requirements under the European Sustainability Reporting Standards (ESRS)

Enterprise value: A measure of a company’s total value, including the book value of its equity and debt. A lender’s share of financed emissions for a given company is calculated based on its relative share of the firm’s enterprise value.

European Sustainability Reporting Standards: The European Sustainability Reporting Standards are a core component of the sustainability reporting landscape within the EU, providing the mandatory reporting framework to be followed under the Corporate Sustainability Reporting Directive. The ESRS was formally adopted by the European Commission under the CSRD in July 2023.

Financed emissions: Greenhouse gas emissions linked to the lending and investment activities of financial institutions. They reflect a lender’s share of responsibility for a client’s emissions, and are calculated based on the lender’s share of the client’s enterprise value. Financed emissions can increase if either 1) the company’s absolute emissions increase, or 2) the lender’s relative share of the company’s capital structure increases.  

GHG Protocol: The Greenhouse Gas Protocol is the world’s most widely used set of greenhouse gas accounting standards and calculation guides. 

GFANZ: The Glasgow Financial Alliance for Net Zero (GFANZ) was launched at the UN climate summit COP26 in 2021 to coordinate efforts across the financial system to accelerate the transition to a net-zero economy. Nordea is a member, along with over 600 financial institutions from around the world.

ISSB: The International Sustainability Standards Board (ISSB) is the independent standard-setting body launched by the International Financial Reporting Standards (IFRS) foundation to set global sustainability reporting standards. The ISSB in June 2023 launched its inaugural standards, IFRS S1 and IFRS S2, which come into effect for annual reporting periods starting on or after 1 January 2024. Unlike the ESRS, the ISSB standards are global, voluntary and focused on financial materiality, while the ESRS is based on a double materiality approach.

Net zero: Net zero refers to a state where greenhouse gases released into the atmosphere are balanced by their removal from the atmosphere, resulting in “net-zero” emissions. Committing to become net zero means that an entity aims to reduce its absolute emissions across all three emission scopes by 90-95% and only the final 5-10% that cannot be cut will be neutralised through carbon removals. Net-zero targets cover around 90% of the global economy. Nordea has adopted a target of achieving net-zero emissions across our value chain by 2050. 

NZBA: The Net-Zero Banking Alliance (NZBA) aims to accelerate the transition of the global economy towards net-zero emissions by 2050. The alliance was formed by the United Nations Environment Programme Finance Initiative (UNEP FI) in 2021, and Nordea joined that same year. Members are committed to aligning their lending and investment portfolios with net-zero emissions by 2050 and setting intermediate targets for 2030 or sooner, using robust, science-based guidelines. 

PCAF: The Partnership for Carbon Accounting Financials (PCAF) is a global partnership of financial institutions that work together to develop and implement a harmonised approach to assessing and disclosing their financed emissions – the emissions associated with their loans and investments. Nordea joined PCAF in 2020, and recently joined a core team of 15 experts to develop new accounting standards. 

After reading this article, is your perception of Nordea?