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.
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.