Managing ESG risks - crucial to maintaining our financial strength
ESG issues could affect Nordea both on the short and longer term, directly or indirectly. These issues may relate to financial exposures, the operations of our customers and investee companies, internal operations, or functions supporting our internal operations, for example outsourcing.
Nordea considers that ESG factors can be significant drivers of credit, market, liquidity, compliance or operational risks. The principle of embedding ESG factors in Nordea’s risk management and business strategy is based on the importance of each factor as a driver of existing risks. Nordea uses qualitative and quantitative measures for the risk identification and materiality assessment of ESG-related risks. We subsequently develop monitoring, mitigation and management strategies for the identified material risk. Where relevant, we assess the potential need for capitalisation while accounting for good practices and regulatory guidance
As a key principle of effective risk management, we maintain a diversified lending portfolio, distributed between corporate and household customers and diversified across geographies, industries and products. For credit risk, existing processes are progressively being enhanced to identify, evaluate, and monitor material ESG-related risks. From on-balance sheet investment perspective, ESG principles are already incorporated into the framework for long-term illiquid asset investments and ESG factors are progressively applied in assessing them as drivers of market and liquidity risk categories and the associated portfolios
ESG-related risks impacting our customers and balance sheet
ESG assessments are performed for both lending and investment portfolios on Nordea’s balance sheet to identify, evaluate and monitor material ESG-related risks.
For corporate borrowers, ESG assessments are performed according to the size and type of the transaction and the customer’s internal segmentation. ESG-related risks identified qualitatively as material at customer level inform the credit risk assessment, with conclusions on the customer group's risk level included to the credit memorandum. Approvals are made according to the established credit decision-making process. For customers associated with a high level of ESG-related risks, decisions are escalated to higher-level credit committees where relevant.
For mortgage borrowers, the main ESG-related risk relate to collateral energy efficiency and physical hazard exposures.
For the long-term illiquid asset portfolio, ESG and impact principles guiding investment decisions include the introduction of concrete ESG criteria, which fund managers seeking to secure investments from Nordea are expected to either satisfy at the outset or strive to satisfy as soon as practically possible. The principles also include the requirement of monitoring the progress of ESG performance within the portfolio.