Risk governance

Sound ESG risk management is essential for financial strength

Managing ESG-related risk is key to maintaining our financial strength.
In June 2020, our Risk Committee approved the revision of ESG risk definitions in Nordea’s Risk Taxonomy to consider ESG factors as drivers of existing risk categories such as credit risk, liquidity risk, market risk and operational risk, and to further incorporate them into existing risk management frameworks taking a proportionate and risk-based approach. 

Recent efforts have focused on integrating climate-related risks in the Credit Risk Framework while integration with other financial risk frameworks is planned to start in 2021. To support this work, we are participating in external and regulatory initiatives aimed at developing comparable methods for assessing transitional and physical climate impacts and are actively advocating on policy consultations through various industry groups. 

Managing ESG risk in relation to our customers

In relation to our customers, Nordea’s Code of Conduct is the central steering document for our financing operations together with our principles on ESG in financing, investing and advice in our sustainability policy.

The ESG evaluation of borrowers is currently integrated into the credit process through the credit risk framework. For corporate borrowers, there are different types of ESG evaluations performed depending on the transaction and the customer’s internal segmentation. In 2021, the credit risk framework will be updated to address regulatory requirements and supervisory expectations on the integration of climate and environmental factors into customer onboarding, evaluation and monitoring processes. For household customers seeking mortgage funding, energy efficiency labels and carbon emissions are one of many factors considered in credit decisions.

At Nordea we have a unique inhouse ESG process  

In the process for the Stars funds, after thorough analysis, every company is assigned an internal ESG rating and must pass a certain rating threshold if we are to invest in it. 

The rating scale is based on a three-degree format – A, B and C, where A is the highest possible rating and C the lowest. The rating accounts for how well a company performs across five pillars – business model, business ethics, corporate governance, social aspects and environmental aspects. 

A positive trend sign (+) indicates that the company has a positive ESG outlook. Furthermore, it has taken key steps since our last review and continues to demonstrate strong initiatives to excel in terms of managing ESG risks and focusing on opportunities. 

A negative trend sign (-) indicates that the company has a negative ESG outlook. Material incidents have occurred since the last review, or a change in company structure or business that increases risk profile without adequate initiatives undertaken by the company to address the changes. 

* ESG is an abbreviation of Environmental, Social & Governance and is commonly used in the context of addressing ESG aspects. 

We recognise that integration of material ESG issues forms part of our fiduciary duty towards customers and stakeholders. In order to ensure that investment and portfolio construction decisions are based on comprehensive information, we seek to integrate ESG aspects into our investment analysis. To do this, we make both external and internally sourced ESG data available to all investment teams, and we have integrated ESG into the portfolio performance reviews of our equities and fixed-income teams. We believe this ESG integration can enhance risk-adjusted returns. 

Our proprietary research seeks to identify stakeholder risks at company level, which can be related both to the business model and to how the company manages its material ESG risks and opportunities. ESG data is used to support and to understand how companies are positioned to manage longer-term risks and opportunities.  

As shareholders we have developed a responsible investment framework that comprises a wide range of approaches. Some are decided and deployed at the corporate level – “overlays”, which apply to all funds – while others are product-specific and apply to solutions with an enhanced ESG focus.  

Our responsible investment approach is governed by the Responsible Investment Committee (RIC), chaired by Nordea Asset Management’s CEO, which determines our ESG investment guidelines. It also decides the appropriate reaction when a company is found to have contravened our guidelines. The RIC might decide to exclude, quarantine or engage with the company, depending on the type of contravention and our ability to influence the company.  

To add detail to the ESG investment guidelines, the RIC has developed a Responsible Investment Policy, which details the international conventions to which we subscribe and what we require of our investee companies.