developments in the green finance landscape · 2020-06-02 · green, profitable and export-oriented...

Developments in the green finance landscape

Trends among Export Credit Agencies and other financial institutions

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Chapter 1 Introduction page

1.1 Report purpose and approach 4

1.2 Background 6

1.2.1 Green finance is taking off 6

1.2.2 ECAs role in the transition 7

1.3 Green finance: definition and landscape 8

Chapter 2 Findings and trends

2.1 Funding 10

2.1.1 Closing the green funding gap 10

2.1.2 Public funding — new missions or new institutions 10

2.1.3 Private funding – green bonds and beyond 12

2.2 Green lending products 13

2.2.1 Product 1: “Branded Green” 13

2.2.2 Product 2: “Certified Green” 14

2.2.3 Product 3: “Green Advantage” 15

2.2.4 Product 4: “Sustainability-Linked Loan” 17

2.3 Integration and organization of credit process 18

2.3.1 Awareness of climate risk, now how to integrate into credit processes? 18

2.4 Summary: Opportunities and challenges 20

2.4.1 Opportunities for financial institutions and export credit agencies 20

2.4.2 Challenges for financial institutions 20

2.4.3 Challenges for export credit agencies 20

Appendices

1. Defining lending in practice 21

2. References 29

Content

Chapter 1

Introduction

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1.1 Report purpose and approach

Export Credit Norway (Eksportkreditt Norge AS)works actively to incorporate sustainability into itslending processes, as part of the definition of itscorporate responsibility. During 2018, Export CreditNorway conducted a study investigating how it couldfurther develop its work on sustainability within itsmandate, with a particular focus on its potential rolein facilitating the transition towards a more climate-resilient economy.

Building on the results of this study, in 2019 ExportCredit Norway aimed to further evaluate thepossibility of categorizing its loans under a morerobust classification of what constitutes “green”,with a view to potentially offer green lendingproducts to encourage development of technologyand industry growth in this space among Norwegianexporters. Export Credit Norway engaged EY toassist with the research and reporting on the trendsand opportunities in this space.

Based on the insight into green finance that thisreport offers, Export Credit Norway deemed itrelevant to make the findings public, to serve as ageneral source of knowledge and provide a summaryof current trends and relevant information for otherfinancial actors and export credit agencies (ECAs).

The desktop review of publicly available informationfocused on, among other topics, the policies,frameworks, and approaches to sourcing greenfunding, the policies, frameworks, and approaches toidentifying and classifying eligible activities for greenlending, and the range of green or sustainabilitylending products offered. Additionally, the relevantstandards, principles, and guidance were reviewed,including: Green Bond Principles, Social BondPrinciples, and Sustainability Bond Guidelinesproduced by the International Capital MarketsAssociation, the Green Loan Principles andSustainability-Linked Loan Principles produced by theLoan Market Association, the Climate BondsStandard, and the draft EU Taxonomy on sustainableeconomic activities.

The interviews covered the above topics, with aspecific focus on how each organization had adaptedand applied green finance concepts and guidance.The organizations contacted included Cicero, SEB,DNB, Nordic Investment Bank (NIB), Eksport KreditFonden (EKF), Svensk Exportkredit (SEK), AtradiusDSB, KfW IPEX-Bank, and the European InvestmentBank (EIB).

Appendix 1 provides a summary of the guidanceprovided by different standards/principles whendefining green, and how financial institutions areapplying this guidance. The appendix focuses on foursectors key to the Norwegian economy (Renewableenergy, Oil & gas, Shipping, and Aquaculture).

Purpose

The purpose of this report is to provide anoverview of the current state of green finance,highlighting emerging trends and relevantguidance for financial institutions consideringhow to define “green”.

Research for this report was concluded inFebruary 2020 and was a combination ofdesktop review, considering publicly availableinformation on green finance, and interviewswith a range of financial institutions.

Approach

This report builds on Export Credit Norway’s existing work on the green shift and its impact on Norwegian business

The first report, “Green maritime — the status ofturnover, export, employment and investments”(“Grønn maritim — status for omsetning, eksport,sysselsetting og investeringer”), revealed that Greenmaritime in Norway tripled compared to a generaldecline in the maritime industry (2014-2018). Thissignificant increase must be seen as a strategic moveby the players in the maritime industry, both tocompensate for income loss and to adjust to a futuresituation with increased demand for green solutions.Green maritime has significantly higher productivitythan other industries and this move towards greencan also leave the Norwegian maritime industry witha comparative advantage internationally. Increasedrevenue and investments in green maritime are goodnews for the environment, climate — and for theNorwegian economy.

The second report, on “Climate change adaptation inNorwegian business — status and opportunities forgreen, profitable and export-oriented growth”(“Klimaomstilling i norsk næringsliv — status ogmuligheter for grønn, lønnsom og eksportrettetvekst”) made it clear that “In order for Norwegianbusinesses to become more robust for a climate-friendly future, efforts must be directed towardsindustries with the greatest potential for lowgreenhouse gas emissions, high profitability andinternational growth.”

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During the autumn of 2019 Export Credit Norway had two reports conducted by Menon Economics.

This report builds on the above to offer insight into how financial institutions define “green” and applythe definition in practice.

1.2 Background

With demand remaining strong, green bond issuancescontinue to be oversubscribed. Further illustratingthis trend, the recent 2019 Dutch Sovereign 20 yearterm issuance was 3.5 times oversubscribed. Theproceeds from this issuance were tied to financingsolar energy, marine renewable energy, waterinfrastructure, low carbon buildings and low carbonland transportation.6

Over the last year the range of products has quicklydiversified from Green Bonds, to include Social andSustainability Bonds on the funding side, GreenLoans, and most recently Sustainability-Linked Loanson the lending side. This will be described in moredetail in the trends and findings section of this report.

The motivation behind green finance has developedfrom ethics towards returns and customer needs

In 2013 the strategic advisory board to theNorwegian Sovereign wealth fund defined five mainmotivations for responsible investment practices:

1. Avoid unethical products and sectors (Eg.weapons of mass destruction)

2. Avoid companies engaged in unethical behaviour(Eg. child labour or pollution)

3. Respond to stakeholder expectations of theinvestor’s purpose

4. Universal ownership (i.e. investors such as theNorwegian Sovereign wealth fund has a stake inthe “sustainability” of the world as a whole,through impacts of climate change on globalproductivity)

5. Improve results (i.e. improved returns in the longrun)

Since then, the motivations of green finance seem tohave shifted from the first four towards a muchstronger focus on the fifth motivation; returns. Thefinancial institutions included in this research stateseveral reasons related to protecting and capturingreturns, including:

• Capture opportunities to invest in “the winners oftomorrow” in the green transition

• Reduce risk of losses as a result of assetsbecoming obsolete (stranded assets), or losingvalue

• Meet customer demands to direct their funds in agreener, more sustainable direction

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The support of the financial services sector is essential to reaching global and national climate goals. Asubstantial shift is needed in order to reach the goals of the Paris Agreement, and this shift will requirefunding. The Intergovernmental Panel on Climate Change (IPCC) cites that the global stock of financialcapital needed is at USD 386 trillion1.

1.2.1 Green finance is taking off

EY’s annual Investor Survey 2018 showed a massiveshift in the attention to climate risk in just one year.In 2018 48% of respondents indicated they wouldimmediately rule out a prospective investment as aresult of climate risk, compared to just 8% in theprior year. While BlackRock CEO Larry Fink’s annualletter noted that “The evidence on climate risk iscompelling investors to reassess core assumptionsabout modern finance”2.

The EU Commission is clear that “the scale of theinvestment challenge is beyond the capacity of thepublic sector alone”3. In 2018 the commissionadopted the Sustainable Finance Action Plandeveloped by a High-Level Expert Group onSustainable Finance.

In 2019 the incoming European commissionpresident announced plans to “turn the EuropeanInvestment Bank into a “climate bank”, unlocking apotential €1tn in funds to help move Europe’seconomy toward cleaner energy”4.

At the same time, the President of the EuropeanCentral Bank (ECB) stated that it would “incorporateclimate risk into both its economic forecasts and inits capacity as watchdog of the financial system”7.The ECB also intends to carry out a strategic reviewof its approach to climate change in 2020, includingan assessment of whether its market neutrality policyshould be changed.

The financial sector has responded by working toincorporate climate risk, set goals, adopt standards,categorize eligible activities, and develop products.As of September 2019 global sales of green bondshad multiplied to exceed the $135 billion levelreached in 20185, and the issuance of sustainabledebt overall surpassed $460 billion by the end of theyear.

Sustainable SurgeIssuance of sustainable debt surpassed $460 billion in 2019

2015 2016 2017 2018 2019

Source: Bond data by BNEF, loan data by Bloomberg

0

200

400

600

Green Bonds Sustainability Bonds Social BondsSustainability-Linked Bonds Sustainability-Linked LoansGreen Loans

The EU action plan on sustainable finance and the EUTaxonomy on Sustainable Activities also createsfurther incentive for financial institutions to preparefor expectations from regulators and stakeholders.

The Taxonomy is a classification system forenvironmentally sustainable economic activitiesdeveloped by the EU. The classification system helpsinvestors to determine if a financial product issustainable. It also provides the basis for the EUGreen Bond standard; however it does not cover allsectors, such as maritime shipping and aquaculture.Details on this is further described in Appendix 1

1.2.2 ECAs role in the transition

ECAs enable financing of exports by providing loansand guarantees that allow business partners in othercountries to make agreements with domesticcompanies seeking to export their goods andservices. ECAs step in to provide financing andguarantees and can also add security whencommercial banks deem a transaction too risky tofund. As are result, ECAs fill a key role in the financialmarket by de-risking projects, and mobilizing capitalthat otherwise might not enter the market,supporting domestic employment and internationaltrade in the process. This role also allows them toplay a determining role in which industries,technologies, products, and services will be availabletomorrow.

ECAs have historically been drivers of internationaltrade, growth, and financial stability in times ofturmoil. The first ECAs were originally established toimprove economic conditions caused by thedisruption of trade during WWII, and later played animportant role in response to the financial crisis9.

Meanwhile, as attention has increased regarding therole of financial institutions in supporting thetransition to a more sustainable path, ECAs havebeen criticised.

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Several voices point out that “official exportfinancing overwhelmingly benefits large-scale,carbon-intensive energy development”10.Additionally, “A number of ECAs have been criticizedfor undermining efforts to place developing countrieson a more sustainable energy path”11.

Many ECAs still largely finance carbon intensiveindustries. It was found that ECAs from the G20countries provide $32 billion per year to oil and gasprojects, which constitutes 88 percent of their totalsupport to energy projects12. In Norway this isevident in Export Credit Norway’s current portfolio,with Export Credit Norway acknowledging sectorconcentration as a key source of risk (see figurebelow).

In 2015, as part of the Paris Agreement, signatoriescommitted to article 2.1, to “[Make] finance flowsconsistent with a pathway towards low greenhousegas emissions and climate-resilient development”13.And on the 29th of November 2019, the EU declareda climate emergency, a symbolic gesture of themagnitude and severity of the climate crisis.Additionally, they called on all EU countries to phaseout all direct and indirect fossil fuel subsidies by2020.

In the context of these national commitments and thegoal to reorient capital to reduce the risk to thefinancial sector, ECAs could play an important role.Their historic role of mitigating risk and mobilizingcapital suggests that they are well positioned to driveand support the development and spread of climateresilient technologies and services globally. This is aposition that has been frequently discussed and wasan evident focal point during the interviewsconducted in relation to this report; however,challenges in the structure and mandate of the ECAshas limited opportunities and created hurdles to date.These hurdles are further explored in Chapter 2 —Findings and trends.

Figure: Volume of Export Credit Norway managed loans by industry as of 31 December 2018 (NOK Billion) Source: Export Credit Norway annual report, 2018 (p.32)

Ensuring that climate-resilient business and technologies receive the necessary funding to succeed is atthe heart of the climate finance challenge. It was noted during discussions with market participants thatthe transition to a climate-resilient economy is expected to require funding of new or previouslyuntested technologies, products, and business practices, often by small and medium-sized businesses.This is an area that can often fall outside the risk thresholds of commercial banks, and highlights a clearneed for ECAs to contribute financing and risk reduction in order to support the green transition.

0

20

40

Equipment for oil and gas Offshore vessels Passenger and merchant vessels Fishing and aquaculture Industry and renewable energy

14,6

41,6

1,6 1,1 2,4

1.3 Green finance: definition and landscape

While there is no single internationally-accepteddefinition of green finance, the above definition fromthe European Commission was used for the purposesof this report, with a specific focus on theenvironmental considerations. The Commission notesthat environmental considerations refer to climatechange mitigation and adaptation, as well as theenvironment more broadly (eg. Pollution preventionand control, protection of biodiversity, water, andmarine resources, etc…). Social considerations mayrefer to issues of inequality, inclusiveness, labourrelations, investment in human capital andcommunities; however, these have not beenaddressed in this report.

For the purposes of this report, sustainable finance isunderstood to be the umbrella term coveringenvironmental, social, and governanceconsiderations in financial decisions. Whereas greenfinance focuses solely on the environmentalconsiderations, including climate change mitigationand adaptation. As highlighted, the focus of thisreport is on green finance but it is worth noting thatthis is a subset of the rapidly evolving sustainablefinance space.

Green finance landscape

For further discussion it is useful to consider where inthe financial ecosystem green finance is relevant.Broadly, it is driving the development of newframeworks and regulation across the industry, butits specific impacts can be grouped into the followingareas:

These three focus areas will provide the structure forthe remainder of the report and guide the discussionof findings and trends in the next chapter.

As a backdrop for this discussion, please see thefigure below for a visualization of the current state ofthe green finance ecosystem, as researched anddescribed in this report. It aims to summarize thevarious sources of funding available, the financialactors which were the focus of the research, thedegree of ESG integration, and the range of lendingproducts identified.

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The European Commission defines sustainablefinance as “The process of taking due account ofenvironmental and social considerations whenmaking investment decisions, leading toincreased investment in longer-term andsustainable activities”14

1. Green funding sources;

2. Green lending products; and,

3. Integration of ESG considerations in thecredit process

Figure 1:Visualisation of the green finance ecosystem, as researched and described in this report.

The green finance ecosystem

• Strategy and mandate• Policy and processes• Competence and tools• Monitoring and reporting

3. ESG integration

• Commercial banks• MDB• ECA

• Commercial banks• MDB• ECA

• Commercial banks• MDB• ECAs

• Commercial banks• MDB• ECAs

Green/Social Bonds

Government Funding

1. Green/sustainable funding

• Widespread• Emerging• None identified

Financial actors

Commercial Banks

Multilateral Development Banks

Export Credit Agencies (ECA)

2. Green/sustainable lending

Branded green

Loan with same price or termsnot certified sustainable/green

Certified green

Loan with same price or termsbut certified sustainable/green

Green Advantage

Loan with better price or terms and certified green/sustainable

Sustainability-linked loans

Loans with terms determined by performance

Chapter 2

Findings and trends

Green funding, green lending products, and integration of ESG considerations

2.1 Funding

2.1.1 Closing the green funding gap

Transitioning the global economy away from high-emitting sectors towards climate resilience will havea cost. “The OECD estimates that, globally, EUR 6.35trillion will be required annually in order to meet theParis Agreement goals by 2030.”45. Within the EUalone, the investment gap is estimated to be EUR175 — 290 billion annually46 .

Figure based on presentation from Technical Expert Group onSustainable Finance for EU Taxonomy.49

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A large funding gap currently exists to fulfill the 2030 climate targets. Closing it will require both publicand private capital, and for the financial institutions considered in this report, the funds to fill this gapcan be sourced from either the international capital markets or public sources.

Minimum 50%-55%cut in GHG emissions

compared to 1990

At least 32% share of renewables in

final energy consumption

At least 32,5%energy savings compared with

business-as-usual

Annual investment gap:175 to 290 billion Euro

Public Private

At least €1 trillion

EU Budget

€503 billion for Climate and Environment

EU Emissions Trading System (ETS) Funds €25 billion

InvestEUGuarantee

Private & PublicInvestEU towards

climate and environment targets

=Mobilised investment of

€279 billion

National co-financing structural funds €114 billion

Just Transition Mechanism €100 billion (€143 billion over 10 years)

Where will the money come from?

InvestEU

EU budget

triggered by EU budget

*Without prejudice to the future multi-annual financial framework (MFF)

*The number shown here are net of any overlaps between climate, environmental and Just Transition Mechanism objectives.

As outlined by the Technical Expert Group onSustainable finance, both public and private capitalwill be needed to fund the transition. With this inmind, the European Commission launched the actionplan for financing sustainable growth, which sets outa comprehensive strategy to mobilize capital toachieve climate and sustainability goals. It recognizesthat “finance is a critical enabler of transformativeimprovements in existing industries in Europe andglobally45.

2.1.2 Public funding — new missions or newinstitutions

In order to cover the funding gap, there is a clearneed for public capital in the transition. TheEuropean Union alone, has estimated the cost tobecome a low-carbon economy by 2050 is estimatedat EUR 1 trillion (see figure below) 48 .

Here the EU budget alone is set to contribute EUR503 billion, with an additional EUR 114 billioncoming from the national governments of EUmember states. The remaining EUR 279 billionshould come from the private sector. The EU will alsosupport this through the European Investment Bank(EIB), which will encourage private greeninvestments through the provision of guarantees.47,48

European Investment Bank Group

National PromotionalBanks and International

Financial Institutions

EIB, EKF and NIB have experience evaluatinginvestment opportunities, allocating funds, andperforming the role of de-risking investments toattract further funds. These are all applicable skillsfor evaluating and providing green financing, whichthe respective governments chose to leveragethrough updated or amended missions.

New institutions with a purely green financemandate

There are also examples of choosing to not leverageexisting institutions, but instead creating a brandnew one, with a mandate focused purely on greenfinance.

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Example: EKF

Recently, the Danish government chose to leverage an existing institution’s capabilities by making EKF responsible for the distribution of government funding ear-marked for climate-resilient activities. This responsibility came in addition to EKF’s existing export-focused mandate.

“DKK 14 billion of the 25 billion allocated in the budget to Denmark’s Green Future Fund will be

used to finance exports of Danish climate technology via EKF”22.

Example: Nysnø (Norway)

In 2017 the Norwegian government established Nysnø, a sovereign climate investment company. It is administered by the Norwegian Ministry of Trade, Industry, and Fisheries, the same ministry responsible for Export Credit Norway.

Nysnø’s stated purpose is to invest “in companies that provide profitable and smart solutions to the challenges of climate change. This stimulates the development of sustainable businesses and technologies”20.

Nysnø’s ability to successfully evaluate potential investment opportunities relies on sector knowledge, subject matter expertise, and the ability to complete appropriate risk analyses. These are all similar competencies to those possessed by Export Credit Norway.

Green Climate Fund (GCF) (international)

In 2010 the Green Climate Fund was established through the UN’s work on climate change 21, and now serves an important role in achieving the goals of the Paris Agreement13.

Instead of leveraging existing institutions this new entity was created specifically because “It has the capacity to bear significant climate-related risk” and its “innovation is to use public investment to stimulate private finance”21.

Two approaches to mobilizing public capital

In researching this report, two primary approaches toallocating public capital for green finance wereidentified. Governments can either use existinginstitutions by updating or amending their mandate toprovide green financing, or create new institutionswith the sole purpose of providing or distributinggreen financing.

Mobilizing green finance through existing institutions

Under this approach governments identify an existinginstitution with the capability and relevant experienceto allocate green financing, and adjust the mandate tosupport this objective.

Example: European Investment Bank (EIB)

The EIB recently pledged to:

• Phase out loans to fossil fuel projects;

• Provide guarantees supporting greeninvestments under the European Green DealInvestment Plan;

• Align all financing activities with the goals ofthe Paris Agreement by the end of 2020; and,

• Double its climate-related lending by 2025

All of this is being completed in support of thebank’s mandated goal to become a true “climatebank”. 47,48

Growth of the green bond market has been aided bythe development of relevant and applicableguidance

The Green Bond Principles (GBP) were established in2014 by the International Capital Market Association(ICMA) and updated in 2018. It contains four corecomponents (1. Use of proceeds, 2. Process forproject evaluation and selection, 3. Management ofproceeds, and 4. Reporting) and high-levelcategories of green activities. It appears to be themost frequently used guidance for institutionswishing to issue green bonds, particularlycommercial financial institutions. This highlights atrend of industry organizations developing guidanceto support commercial financial institutions.

Green Bond Frameworks continue to evolve, withvarying degrees of diversification in the projectsconsidered eligible

This degree of diversification can depend on a rangeof factors including an institution’s lending portfolio,investor and market demand for green-labelledproducts, and maturity in the green finance space, toname a few. For example, DNB currently limits itsgreen bond issuance to covering residentialmortgages, while SEK covers eight categoriesranging from renewable energy to sustainabletransport. See the table below for a sample ofinstitutions reviewed, whether they are aligned to theGBP, and the diversification of projects consideredeligible:

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NameGBP Aligned?

Diversification of eligible projects

DNB Yes Low

Nordea Yes High

SEB Yes High

ING Yes High

ABN AMRO Yes Moderate

SEK (ECA) YesHigh (Supported by Swedish Cleantech)

EDC (ECA) PartialHigh — not fully aligned to the GBP

2.1.3 Private funding - green bonds and beyond

When it comes to sourcing funding from theinternational capital markets, the concept of linkingsustainability criteria to funding sources is not new.“The Green Bond concept was developed in2007/2008 by SEB and the World Bank as a responseto increased investor demand for engagement inclimate-related opportunities”15. Additionally, thereputational benefits and strong demand availablefrom green bonds provides issuers with addedincentive to establish an approach to evaluating theirloan portfolio and tagging green lending.

Green funding products have rapidly grown inpopularity and diversified since 2015

The rise in popularity of green bonds was rapidlyfollowed in 2017 with social bonds, and the even-broader sustainability bonds, “with SDG bonds alsoemerging as issuers and investors started adoptingpolicies and strategies linked to the UN’s 17Sustainable Development Goals”16.

While a price premium or “greenium” has beendifficult to observe, it may be emerging and it iscertainly evident that demand is strong for productsthat link funding to specific green projects.

“The green bond universe has topped $500 billion —but still accounts for just 0.5% of global bonduniverse”17. Additionally, “the bonds have somethingof a built-in customer base of socially consciousinvestors including pensions and nonprofits. Theseinvestors tend to snap them up — most new greenbond issues are oversubscribed — and hold them untilthey come due”18.

A representative example is Hong Kong’s May 2019issuance of a $1 billion green bond “attracting over$4 billion in orders from investors globally”19.

Source: BloombergNEF

0

A New Green MarketSustainable debt issued by instrument type

Green bond

Sustainability bond

Social bond

Sustainability-linked loan

Green loan

50

100

150

200

$250B

2018201720162015201420132012

2.2 Green lending products

Investor and market demand for sustainable lendingproducts has led to the recent release of the GreenLoan Principles and Sustainability-Linked LoanPrinciples, supporting the rapid development of arange of sustainability-focused lending products.

As these products have grown in popularity, therehas been a general perception that green lending isassociated with lower interest rates, as a reward forfinancing a green asset. However, few examples ofthis were noted in practice, and when identified, thesupply/demand imbalance for suitable green assetsappeared to be the primary driver. Through thisstudy, the following four categories ofgreen/sustainable lending products where identified:

1. Branded Green: Loan with same price or terms(not certified sustainable/green)

2. Certified Green: Loan with same price or termsbut certified sustainable/green

3. Green Advantage: Loan with better price orterms and;

4. Sustainability-Linked Loans.

In this section each product will be described,alongside examples from the different financialinstitutions. Changing characteristics in these loansare “price”, “terms” and “certification”:

• Price is self explanatory, and often involves adiscounted interest rate.

• Terms: refer to terms & conditions, may includeamount borrowed, repayment plan, collateral,covenant or penalties/fees.

• Certification, in this context, means that anindependent third party verifies that the lendingis in accordance with the issuing organization’sgreen lending framework.

2.2.1 Product 1 – Branded Green

The first type of product we called “Branded Green”.In this case the loan is merely called a green orsustainable loan, without receiving independentverification from a third party or improved pricing orterms & conditions. It effectively only receives a“green stamp” from the financial institution issuingthe loan. It was identified that these loans aretypically branded as green as a result of fulfilling theeligibility criteria in the issuing bank’s greenlending/finance framework. If eligible, these loans areoften funded by the green bonds the lender hasissued.

The primary identified benefit of these products is areputational benefit for the borrower, as they canhighlight to the market and investors that they haveobtained a green loan for a specific project.

A retail version of this product (green mortgage),from DNB and SpareBank1 Boligkreditt, has recentlydrawn criticism in Norway from environmentalorganization Framtiden i våre hender. There wasconcern over the risk of greenwashing, as the greeneligibility criteria could have had a higher threshold,resulting in the likelihood that a new building wouldsooner get a green loan over a loan to retrofit anexisting house, of which the latter would be“greener”23.

Among the financial institutions, most commercialbanks provided this type of product, and one casewas identified among the ECAs.

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“Branded Green” is a type of green finance product that was found to be widely offered among commercial banks.

Example: SEB

The Swedish bank SEB offers green loans which fall under the product category of “Branded green”. SEB uses its Green Bond Framework to establish the criteria for green lending. The green loans are also funded by proceeds form the Green Bonds that SEB issues. In 2017, SEB has raised 500 million euros from a green bond, which were earmarked for loans to green initiatives. On SEB’s website it is stated that the financial terms of green bonds and green loans are the same as for standard bonds and loans24.

The proven investor demand for green bonds,coupled with the natural progression of globalclimate policy and environmental governance,has led to an emergence and diversity ofsustainable lending products.

Commercial banksMDBECA

Branded greenLoan with same price or

terms not certified sustainable/green

2.2.2 Product 2 — Certified Green

The second product type identified we called“Certified Green”. Similar to product type 1,“Certified Green” does not offer improved price orterms & conditions. However, it’s green credentialsare certified by an independent third party,confirming that the use of proceeds aligns to theissuing institution’s framework and that the activitybeing funded is in fact green. This serves to increasethe credibility of the loan’s green credential.

This product type appears to be a naturalprogression from “Branded Green”. As the greenfinance market has evolved, the awareness and needto provide trust in the product is now supportedthrough external certifications.

Among the financial institutions, only commercialbanks provided this type of product. DNB offers“certified green” loans to projects that meet thecriteria established in their green lending framework,which was created in collaboration withSustainalytics, a third-party ESG ratings agency. Thecertification is provided by DNV GL, which assesseseach loan and issues a green certificate for eligibleloans based on objective criteria.

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Examples of the product type “Certified Green” provided by commercial banks

Example 1: Largest Green Credit Facility (as at Sept 2019)

Borrower: Noor Energy 1, a concentrated solar power plant development in Dubai.

Amount: A project finance loan totaling $2.7bn, with different maturities going up to around 25 years.

Lender: A consortium including Bank of China, ICBC, Agricultural Bank of China, Standard Chartered, Natixis, and Union National Bank.

Certified: According to the Solar Criteria of the Climate Bonds Standard26.

Example 2: In 2019 DNB has arranged the first green loan to the seafood sector

Borrower: Atlantic Sapphire, world’s first onshore salmon facility, Florida.

Amount: 60 million USD

Lender: debt facility by DNB and EKF. The loan was found to conform to DNB’s Sustainable Product Framework under the “Sustainable Food, Agriculture, Forestry” category.

Certified: by DNV GL27

Example 3: In 2018 Nordea launched a green loan program to promote sustainable investments among Small- and Medium sized Businesses (SMBs) across several industries

When a company applies for a loan Nordea conducts an internal evaluation to determine whether the loan can be classified as green.

This is followed by an external evaluation relying on well-established environmental certifications approved by Oekom Research, Nordea’s independent auditor.

The first company to receive a certified green loan, was the environmental housing company K2A28.

Example: SEK (Branded green):The Swedish ECA, Svensk Exportkredit (SEK) provides a green lending product, where a selected pool of projects which promote the transition to low-carbon and climate resilient growth qualifies for funding. This is determined by SEK through an evaluation process conducted by SEKs Sustainability Department, that assesses whether a project qualifies as an Eligible Project and validates reported reductions of greenhouse gas emissions. In 2015, SEK set a target to provide 10 billion Swedish kroner in green lending over the next three years25.

Commercial banksMDBECA

Certified greenLoan with same price or

terms but certified sustainable/green

2.2.3 Product 3 — Green Advantage

The third product type identified we called “GreenAdvantage”, is a loan that offers better price orterms & conditions, and meets green criteria.

This product most closely resembles the marketperception in terms of improved pricing and terms &conditions for loans financing green projects.

Linklaters LLP, a multinational law firm, appears tosupport this notion by stating that green tranchesget better rating than regular tranches. They statethis without referencing specific examples; however,in their role as corporate lawyers they posses goodoverall insight into loan contracts. Identifyingspecific examples where the green nature of a loanhas directly led to improved pricing and terms &conditions has proven difficult, as loan terms can beconsidered confidential information of a competitivenature29.

In the case of ECAs, the OECD has developed a sectorunderstanding for projects in renewable energy,climate technology and water projects (“SectorUnderstanding on Renewable Energy, ClimateChange Mitigation and Adaptation, and WaterProjects”), which permits more favorable terms. Thepurpose is to offer special incentives, including loanperiods of up to 18 years and more flexiblerepayment structures, to climate-friendly projects50.This matches the market standard for these projects,but may no longer be competitive in areas such asoffshore wind in mature markets.

However, this report has identified that improvedpricing and terms & conditions due to a loan’s greencharacteristics are perhaps not currently aswidespread as perceived. Rather, only a fewexamples were identified where improved pricing orterms were publicly stated.

Among the financial institutions, examples were onlyidentified among commercial banks, with the otherexample being a possible improvement in terms &conditions for climate finance by the Danish ECA,EKF.

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Examples of the product type “Green Advantage” provided by commercial banks

Example 1: ABN AMRO: publicly states that they offer improved pricing through Groenbank, no other further specifics provided other than offering “low-interest loans for sustainable projects”30.

Example 2: ING Groenbank: publicly states that they offer improved pricing for real-estate loans with a 0,5% discount on interest rate for projects meeting the criteria of compliance with Dutch Green Project Regulation.

Projects eligible are:

(1) New Buildings, (2) Investments to improve buildings, housing and monuments and (3) Investments to improve specific areas which leads to energy reduction e.g., solar panels and LED light plans31.

Example 3: Kommunalbanken: offers loans with lower interest rates to projects that provide a documented reduction of energy consumption, greenhouse gas emissions, or increases local resilience through adaptation efforts. The “green discount” as they call it may give a discount of 0,1 percent of original margin for loans that are eligible under Kommunalbanken’s categories and criteria. An example is the loan provided to IVAR IKS biogas plant and Bybanen in Bergen32.

Smaller banks are more innovative within development of green finance products

To date, smaller banks appear to have been more innovative than their larger counterparts in creating green products and publicly disclosing pricing/benefit details. Two examples from Norwegian banks are Sparebank 1 HallingdalValdres and Sparebanken Vest.

Example 4: Sparebank 1 Hallingdal Valdres: offers green corporate loans (grønt næringslån) at up to 0,75% discount on the interest rate, stating specific terms for six sectors (buildings & real estate, energy & climate friendly industry, low emission transport, renewable energy systems, sustainable tourism and sustainable forest & agriculture)33.

Commercial banksMDBECAs

Green AdvantageLoan with better price or

terms and certified green/sustainable

16

2.2.3 Product 3 — Green Advantage (Cont’d)

Example from Export Credit Agencies with flexibility to alter risk appetite for green export

Example: EKF: Danish Export Credit Agency on varying risk appetite for climate finance

EKF does not offer better price, nor directly improved terms & conditions; however, the Explanatory Memorandum for the Act on EKF states that EKF’s risk appetite may vary in the case of climate finance related export.

“[it] is presupposed that the risk appetite of EKF Denmark’s Export Credit Agency may vary depending on the specific area. Within special focus areas such as climate, energy and small and medium-sized enterprises, the Board of Directors

may thus decide to take greater risks than would be the case in other areas”35.

Example 5: Sparebanken Vest opens up for lower interest to companies that cuts emissions

The CEO of Sparebanken Vest recently launched the bank’s new climate targets, where the bank will reduce the emissions from the companies they provide loans to. There are specific reduction targets for their major lending sectors in maritime, aquaculture, and real estate.

In order to reach these targets the bank opens up for cheaper financing through reduced interest.

The bank is ambitious and acknowledges the risk of losing business by setting these requirements. On the other side, the bank also anticipates stronger requirements from the capital markets and refers to Barclays which has shareholder expectation that the bank will not provide support to companies that do not follow the Paris Agreement34.

15,828,7 38,1 45,6

55,9

14,8

10,6

43,2

36,1

0

20

40

60

80

100

2014 2015 2016 2017 2018 2019YTD

Green loans Sustainability linked loans

2.2.4 Product 4 — Sustainability-Linked Loan

The fourth product type “Sustainability-Linked Loan”(SLL) is the most recent product offered withingreen/sustainable finance.

They are credit instruments (most often a revolvingcredit facility), with the interest rate linked to ESGkey performance indicators (KPIs). For the purposeof this report all examples have environmental KPIs.

The primary difference between this product and theothers is that funds are not restricted to financing aspecific activity or project.

17

To date, the link to ESG KPIs has only been throughthe interest rate, with SLLs using one or two-waypricing. The borrower can receive a reduced orincreased interest rate depending on whether theymeet or miss the KPI. ING describes the pricing fortheir Sustainability linked loans as “Improvement ordeterioration of performance results in adiscount/premium to the applicable margin, typically5-10%”36.

Since SLLs entered the market in 2017, they haveexperienced rapid growth due to the additionalflexibility they provide borrowers in choosing how tomeet the ESG KPIs (see figure below). SLLs were alsoon the radar of several of the financial institutions wespoke with, as they recognized the potential as anattractive green product.

DNB, ING and BNP Paribas are among the commercial banks that have issued Sustainability-Linked Loans

Example 1: DNB: recently publicly announced two instances of providing SLLs, without any details on the percentage discount on interest

1. Hydro received a loan where the interest is tied to their GHG emissions, where lower emission grants a lower interest: In December 2019, Norsk Hydro signed a new $1.6 million sustainability linked revolving credit facility with the margin linked to Hydro’s greenhouse gas emissions target. The facility “is available for general corporate purposes, carries a five-year tenor with two one-year extension options and replaces Hydro’s undrawn $1.7 million revolving credit facility signed 2013. The margin under the facility will be adjusted based on Hydro’s progress to meet its target to reduce greenhouse gas emissions by 10% by the end of 2025”37.

2. DNB has also provided the Finnish industrial company, Metsä Board, with a loan where the interest is linked to the target of cutting water and energy consumption, and similarly, lower consumption results in lower interest38.

Example 2: ING: website on sustainability-linked loans notes that it uses two-way pricing, typically in the range of 5-10% of the applicable margin39.

Example: BNP Paribas: has provided several sustainability-linked loans to a variety of sectors

Sectors that have received loans include chemicals, utilities, hotels & hospitality, education and housing.

Solvay, a Belgian Chemical company, has received 2 billion euro tied to a target of reducing greenhouse gas emissions of one million tonnes CO2 by 202540.

Figure 1: Aggregate volumes of announced green and sustainability linked loans, 2014 — 2019 YTD (US$bn)

Figure 2: Aggregate volumes of announced sustainability linked loans 2017 — 2019 (extrapolated from YTD data) (US$bn)

Source: Bloomberg. 2019 data covers the period 1 January 2019 — 12 June 2019.

10,6

43,2 36,1

45,2

0

20

40

60

80

100

2017 2018 2019Extrapolated volumes for the rest of the year

Announced aggregate loan valueSource: Bloomberg. 2019 data covers the period 1 January 2019 — 12 June 2019.

Commercial banksMDBECAs

Sustainability-linked loansLoans with terms

determined by performance

2.3 Integration and organization of credit process

Ethical exclusions are now considered a hygienefactor

Development banks were early movers in thedevelopment of guidelines as a hygiene factor toavoid negative environmental impacts. Moremainstream investors followed suit with exclusioncriteria to avoid investing in companies that havesevere impacts on the environment and society. TheNorwegian Investment Bank was among the first tointroduce these in the early 2000s. These exclusioncriteria were based on ethical considerations and areunrelated to the impact on returns. Most financialinstitutions now have some form of exclusion criteria.

ESG risk-based exclusions/inclusions and activeownership

The approach to green finance that we see emergingtoday is not based on an ethical imperative, butrather a realisation that environmental and socialaspects may impact risk and return, in particular inthe long term. Mainstream green finance nowconsiders climate and environmental risks andopportunities to be relevant perspectives in thesearch for better financial returns. DNB has “riskbased exclusions” of specific activities at the level ofthe EU Taxonomy (Eg. fossil fuel basedtransportation and supporting infrastructure underthe category urban transportation).

Need to define what is considered “green”

In order to integrate climate and environmentalconsiderations, an agreed definition of what isconsidered “green” is required. Emergingframeworks, such as the EU Taxonomy, establish abasis for this, which institutions should apply toevaluate their own activities.

The EU Taxonomy represents the most thorough andwidely agreed upon classification system to date,with detailed and quantitative performance metricsand thresholds for economic activities responsible for93% of emissions in the EU.

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2.3.1 Awareness of climate risk, now how tointegrate into credit processes?

A key takeaway from the research has been that bothcommercial financial institutions and MDBsincreasingly consider ESG and sustainability factorsrelevant to understanding financial and credit riskover longer investment horizons. All that wereinterviewed for this report were making efforts tointegrate these considerations in their credit riskassessments. However, we are seeing a divergence inhow climate considerations are tackled by differentfinancial entities. Broadly we are seeing four keyelements; a) Adjustment of strategy and mandate, b)Policies and processes, c) Develop ESG competenciesand tools d) Reporting.

a) Strategy and mandate: Climate and greenagendas explicitly part of the strategy and mandateof financial institutions

The institutions most mature in the integration ofclimate risk are making large-scale changes to theirgovernance and aligning their activities and portfoliosto a climate-resilient economy. The EIB’s recent shiftto become a “climate bank” and overhaul its fossil fuellending policy to “end financing for fossil fuel projectsfrom the end of 2021”41 is a prime example. In theNordics, separate financial institutions such as Nysnøhave been established by the Norwegian governmentto help drive this agenda. Commercial banksincreasingly integrate environmental and climate riskin their strategies, but they stop short of declaring afull-scale shift to a “climate-bank”. A study of the paceof the green transition in Norway in 2019, found that10/10 of the largest banks and investors in Norwayhave established a climate strategy anchored at thetop management level42.

b) Policies and processes: Most mature institutionsintegrate environmental and climate risk in systemsand processes

A 2018 EY survey of 320 investors globally foundthat 98% consider ESG information in their investmentdecisions43. All financial institutions interviewed inthis research also integrate ESG considerations andspecifically climate risk in their credit processes tosome degree.

Leading actors share characteristics in howsustainability considerations are integrated, withfinancial institutions developing sector criteria andguidelines to assess risks in specific sectors.

Financial institutions are increasingly understanding how climate risk can translate into credit andfinancial risk. With this developing awareness they are increasingly attempting to incorporate climaterisk into existing risk assessments, and build in-house competence on the topic. This section examinesthe approaches taken and progress of integration to date.

Example: SEB: has well-developed guidancePolicies: Corporate Sustainability, Environmental, and Human Rights;Position papers: Child Labour, Freshwater, and Climate Change; and,Sector-specific guidance: Arms and defense, Forestry, Fossil fuels, Mining and metals, Renewable energy, and shipping44.

c) Competencies and tools

Leading actors shares characteristics in howsustainability competence is integrated in the creditprocess. This includes: (i) In-house expertise —having specialized personnel working on ESGconsiderations in the credit process, (ii) Member incredit committee — ESG specialist representative incredit committee, and (iii) external consultants anddata providers.

Multilateral Development Banks (MDBs) were first-movers at a time when minimal guidance existedand developed strong internal competencies

The MDBs were the first among the financialinstitutions to attempt categorization of theirlending activities, as this corresponded well with theenvironmental and productivity elements of theirmandates. As there was limited guidance availableat the time, categorization often followed theprocess of: (1) Review own portfolio; (2) Reviewrelevant guidance and scientific findings, and; (3)Refer to professional networks to share and learnfrom other MDBs and relevant organizations.

Our research found that MDBs, as early actors inthis space, typically had a wealth of historical dataand internal competency, which they supplementedwith the newer industry association guidance andstandards as they have been released.

Commercial banks are relatively new and placegreater reliance on third party consultants anddata providers while internal competency isdeveloped

Commercial banks have largely followed the sameapproach, but usually placing less reliance onscientific publications. Instead commercial bankshave more frequently made use of third-partyconsultants or data providers, due to a lack ofinternal expertise and limited dedicated resourcesas the green finance market remains immature incomparison to traditional banking services andproducts.

Following agreement on the definition and approachto identify suitable green activities, training onsustainability considerations was provided to CreditRisk Analysts and potential members of thetransaction team. Increasingly, commercial bankshave taken steps such as assigning sector specialistsrespsonsible for ensuring relevant sector ESGcompetence.

19

From a systems perspective, tools and software

associated with the credit process are updated to

facilitate the tagging of a loan as green and

documentation of sustainability considerations in the

credit risk assessment.

It was noted that the amount and depth of training

varied among organizations, with some assigning a

dedicated sustainability resource to the transaction

team and others providing a high-level training

session to members of the credit risk department.

Institutions more mature in the field of green finance

typically also had a sustainability specialist on the

credit committee. There was a consensus among

those interviewed that the incorporation of

sustainability considerations provided a more holistic

and accurate assessment of the credit risk, which in

turn could favourably impact the pricing and terms.

d) Reporting: Institutions more mature in greenfinance have established reporting procedures

Following completion of the lending activity, a processis required to track the green loans in order tofacilitate monitoring and reporting. All financialinstitutions reviewed had some form of process toachieve this, although the level of maturity andformality varied dramatically. More matureinstitutions had an established and documentedprocess outlining the related governance andreporting. However, only a small fraction of thefinancial institutions had coordinated the criteriadefining eligible green activities with the criteriarequired for inclusion in green bonds.

2.4 Summary: Opportunities and challenges

2.4.1 Opportunities for financial institutionsand export credit agencies:

Avoid risks

• Providing green finance helps protect againstrapid shifts that may come as the world acts tomitigate climate change through suddenregulatory changes, changes in marketpreferences, and technological disruptions. As theneed to cut emissions is becoming more urgent,this is likely to be become a disorderly transition.

Direct funds towards future market leaders

• Green finance, done well, may also allow theinstitution to direct funding towards the marketleaders of tomorrow.

Meet customer and investor demand

• Customers and investors increasingly expect tofind green finance products.

• Providing strong green finance products may alsodifferentiate the institutions with investors andcustomers seeking green opportunities.

• The EU Taxonomy provides a basis to define greenthat allows for greater credibility if appliedcorrectly.

2.4.2 Challenges for financial institutions:

• The rapid development of green finance bringsthe risk of green washing, a term defined as“making misleading claims about environmentalpractices, performance or products”51. There is arisk that institutions could be accused of falsemarketing if the criteria are not sufficientlydetailed, understood, or verified. The EUTaxonomy, and accompanying regulation thatprovides the Taxonomy with a legal framework, isa direct measure that financial institutions canuse to tackle this challenge, as it represents themost advanced and credible definition of greenactivities available to today’s global capitalmarkets52.

• As the definition of green shifts with increasedknowledge and information, the expectations ofwhat is deemed green are also likely to develop.Financial institutions will need to adapt quickly toensure they remain current.

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This report has highlighted the recent and rapid emergence of green finance in the internationalfinancial markets. Further, it aimed to provide an overview of trends identified, and the associatedopportunities and challenges. Below is a summary of the opportunities and challenges that financialinstitutions and export credit agencies face as they look to align to a climate-resilient future.

• As the criteria of “green” becomes moredetailed, the risk of applying these incorrectlyincreases.

2.4.3 Challenges for export credit agencies:• Green finance is developing rapidly and the

ECA model has been notably slower than otherfinancial institutions to adapt.

• ECAs reliant solely on public funding are notdriven by market or investor demand, and aredependent on their national governments forclear strategic guidance on how to contributeto climate resilience, which has generally notmaterialized.

• ECAs’ compliance with the OECD Arrangementand respective national mandates limitsflexibility to develop new products and/or tooffer favorable pricing or terms & conditions toincentivize green projects.

• With the EU indicating it intends to eliminateindirect subsidies to fossil fuel projects, ECAswith portfolios that are not aligned to the EUTaxonomy may face reduced internationalcompetitiveness unless a concerted effort ismade to develop climate resilientproducts/industries for export.

• As financial institutions increasinglyincorporate climate considerations in theirlending, there is a risk that many borrowers forless sustainable or non-Taxonomy alignedprojects will increasingly turn to ECAs forfunding, increasing the risk that these ECAsare left holding a disproportionate amount ofstranded assets.

Appendix 1

Defining green lending

Observed approaches to defining green lending among commercial banks, multilateral development banks, and export credit agencies

22

During the research for this report EY reviewed and summarized the guidance that different standards provided when defining green, and how commercial banks, multilateral development banks, and export credit agencies are applying this guidance in practice. This section outlines the results of this review for four sectors in particular (Renewable energy, Oil and gas, Shipping, and Aquaculture). Selected examples included from draft EU Taxonomy.

Guidance:Green Lending Principles Category: Renewable Energy (No description, indicators, or thresholds)Climate Bonds Initiative (CBI) Category: Energy (see below)EU Taxonomy Category: Electricity, gas, steam, and air conditioning supply (see below)

CBI Description Screening Indicator

PV generation or concentrated solar powerfacilities (onshore)

No more than 15% of electricity generated from non-renewable sources

Onshore wind farms No more than 15% of electricity generated from non-renewable sources

Geothermal electricitygeneration facilities

Direct emissions less than 100gCO2/kWh

Electricity generationfacilities such as biomasspower station

(i) Emissions of electricity generated must be lower than 100gCO2/kWh AND (ii) Biofuel must be sourced from a sustainable feedstock (the only timber feedstock allowed is waste wood)

Run of river, Impoundment, pumpedstorage

Proposed: power density > 5W/m2; OR emissions of electricity generated < 100gCO2e/kWh AND Must perform an assessment, based on recognised best practice guidelines, of environmental and social risks and incorporate measures to address risks. Only for pumped storage: facility will not be charged with carbon intensive energy OR facility is contributing to a grid which has at least 20% share of intermittent renewables

Offshore wind and solarFossil fuel back up can only be used for restart capability and monitoring, operating or resilience measures in the event of no power in the system

EU Activity Desctiption Specific Screening Criteria

Production of electricity from Solar PV or concentrated solar

PV installation (except rooftop PVs) must not be sited on protected natural areas, such as land designated as Natura 2000, or equivalent outside the EU as defined by UNESCO and/or the International Union for Conservation of Nature (IUCN) under the following categories: • Category Ia: Strict Nature Reserve • Category Ib: Wilderness Area • Category II: National Park PV installation must not be sited on arable or greenfield land of recognised high biodiversity/eco-system value and land that serves as habitat of endangered species (flora and fauna) listed on the European Red List and/or the IUCN Red List.

Production of electricity from wind

• Facilities operating at life cycle emissions lower than 100gCO2e/kWh, declining to 0gCO2e/kWh by 2050, are eligible.

• Comply with national threshold for underwater noise. Apply relevant mitigation measures to be decided on a case by case basis.

• Consider and minimise the amount of composite waste from wind turbine blades at their end of life (carbon and glass fibers). Metric: % recyclable materials of wind turbines at the end of their life.

• Ensure that an Environmental Impact Assessment (EIA), done to recognisedstandards (e.g.EIA Directive 2011/92/EU), has been completed

• Follow the procedure for Appropriate Assessment as laid down in the Directive 2009/147/EC “Birds Directive” and Council Directive 92/43/EEC known as the Habitats Directive.

1. Renewable Energy

23

How are organizations classifying this activity in practice?

Institution Definition applied by the institution Exclusions/additional criteria

Nordea

“Renewable Energy” means generation and transmission of energy from renewable sources and manufacturing of the related equipment for: wind power; solar power; hydro power (small scale plants, run of river plants or refurbishments of existing larger hydro power plants in the Nordic countries without any increase in the size of its impoundment facility) and; integrating renewable energy sources into the transmission network

DNB

The generation of electricity which comes from: wind power, geothermal, solar power, biomass or biogas power that does not decrease biomass or carbon pools in soil, ocean power, small-scale run-of-river hydropower.

• Run-of-river, storage (reservoir) and pumped storage hydropower projects that are large-scale (>20MW), except for hydro power plans in boreal climate regions with less than 4.2 CO2eq/kWh and third-party environmental risk assessments.

• Geothermal energy production from sources that emit more than 100gCO2/kWh

SEB

Renewable energy means wind, solar, small scale hydro power, tidal, geothermal and bio energy, and any related infrastructure;

Small scale hydro power = less than 10 megawatts (MW) of generating capacity.

The refurbishment of an existing hydro power plant without any increase in the size of its impoundment facility as well as the use of any such existing impoundment facility for a pump and storage hydro power facility.

Multilateral development banks

• Wind power

• Geothermal power

• Solar power (PV or concentrated)

• Biomass or biogas power

• Ocean power (wave, tidal, ocean currents, salt gradient)

• Hydropower plants

• Renewable energy power plant retrofits

• Geothermal and hydro power: only if net emission reductions can be demonstrated

• Biomass or biogas: Only if they result in net reductions in emissions, taking into account production, processing, and transportation

SEK

• Bioenergy

• District heating and cooling

• Hydro and Marine Power

• Solar

• Wind

• Consideration will be given to potential social and environmental impact of large hydro projects.

EDC • Renewable energy

24

Guidance:

Green Lending Principles Category: No category

Climate Bonds Initiative (CBI) Category: No category

EU Taxonomy Category: No category

Based on the above, the oil and gas sector has been evaluated from the perspective of energy efficiency, as it is the only applicable guidance identified.

Green Lending Principles Category: Energy efficiency (No description, indicators, or threshold)

Climate Bonds Initiative (CBI) Category: Multiple (see below)

EU Taxonomy Category: Multiple (see below)


Cargo ships Use of low GHG fuel (e.g., hydrogen, ammonia, electric, high % of biofuel), delivering substantial reduction in gCO2 e/tonne/km

Commercial buildings An emissions footprint in the top 15% of emissions performance in the local market OR A substantial reduction in gCO2/m2 because of upgrade or retrofit

Urban infrastructure: building, maintaining or upgrading utility tunnels for cables or pipelines

Significant resource and energy efficiency improvements

Oil takers or other ships solely transporting coal or oil

Excluded/Not Eligible

Products dedicated to the clean-up or efficiency of fossil fuel energy


Offshore wind and solar Fossil fuel back up can only be used for restart capability and monitoring, operating or resilience measures in the event of no power in the system

EU Activity Desctiption

Specific Screening Criteria

Manufacture of low carbon technologies

1. Manufacture of products, key components and machinery that are essential for eligible renewable energy technologies (Geothermal Power, Hydropower, Concentrated Solar Power (CSP), Solar Photovoltaic (PV), Wind energy, Ocean energy)

2. Water transport • Zero direct emissions waterborne vessels.3. Manufacture of the following products (with thresholds where appropriate) for

energy efficient equipment for buildings and their key components is eligible (see Taxonomy)

4. The manufacture of low carbon technologies that result in substantial GHG emission reductions in other sectors of the economy (including private households) is eligible if they demonstrate substantial higher net GHG emission reductions compared to the best performing alternative technology/ product/ solution available on the market on the basis of a recognised/standardised cradle-to-cradle carbon footprint assessment (e.g., ISO 14067, 14040, EPD or PEF) validated by a third party.

2. Oil and gas

25

EU Activity Desctiption

Specific Screening Criteria

Retrofit of gas transmission and distribution networks

Retrofit of gas transmission and distribution networks whose main purpose is the integration of hydrogen and other low-carbon gases is eligible: • Any gas transmission or distribution network investment which enables the network to

increase the blend of hydrogen in the gas system is eligible

• The repair of existing gas pipelines for the reduction of methane leakage is eligible if the pipelines are hydrogen-ready

Retrofit of gas networks whose main purpose is the integration of captured CO2 is eligible, if the operation of the pipeline meets the criteria outlined for the transportation of captured CO2

Construction of new buildings

There is no single specific metrics defined, as the thresholds rely on requirements set in the national regulation and building codes for NZEB transposing the EPBD in each Member State. The calculation methodology for the measurement of floor area (m2) shall be disclosed with clear definition of what is within boundary.402



Nordea “Energy Efficiency” means infrastructure, equipment, technology and processes related to smart grids, energy storage and district heating including: • Automation and intelligence in the power transmission network, distribution and related systems

DNB • Industrial processes and supply chains

• Transmission and distribution systems

• Energy efficiency technologies

• Transportation

• Replacement of fossil fuel driven technology with low carbon emission technology

• Industrial processes and supply chain projects/systems where 25% or more of electricity transmitted is fossil-fuel generated.

• Technologies that increase the energy efficiency of fossil fuel production and/or distribution

• Fossil fuel-based transportation, supporting infrastructure and transportation dedicated to fossil fuel transport (For shipping, any energy efficiency improvement financed should be quantified and should not contribute to a lock-in in fossil fuel energy. The improvements must go hand in hand with a shift away from fossil fuel energy use. However, efficiency improvements in shipping logistics systems are clearly eligible).

SEB Energy efficiency means district heating/cooling, smart grid technology and/or infrastructure, and energy recovery projects, as well as investments in technologies and processes, together with the manufacturing of products, in each case leading to energy efficiency gains of at least 25 per cent

Additional criteria for green buildings.

26


Multilateral development banks

• Reduction of gas flaring or methane fugitive emissions in the oil and gas industry

• Projects for carbon capture and storage technology that prevent the release of large quantities of CO2 into the atmosphere from fossil fuel use in power generation and process emissions in other industries

• Research and development of renewable-energy or energy-efficiency technologies, or low-carbon technologies

• Existing vehicle, rail or boat fleet retrofit or replacement (including the use of lower-carbon fuels, electric or hydrogen technologies), or new vehicle, rail or boat fleets with ultra-low carbon emissions, exceeding available standards

• Industrial energy-efficiency improvement though the installation of more efficient equipment, changes in processes, reduction of heat losses and/or increased waste-heat recovery and/or resource efficiency

• The general principle for brownfield energy efficiency activities involving the replacement of technologies or processes is that: (i) the old technologies are replaced well before the end of their lifetime and the new technologies are substantially more efficient; or (ii) new technologies or processes are substantially more efficient than those normally used in greenfield projects.

SEK • Energy storage

• Smart grids

• Transmission systems

• Heating and Cooling

• Lighting

• Considerations will be given to potential rebound effects.

• No nuclear power projects are eligible.

EDC • Smart Grid Energy Infrastructure

Guidance:Green Lending Principles Category: Clean transportation (No description, indicators, or thresholds)Climate Bonds Initiative (CBI) Category: Transport: Water-bourneEU Taxonomy Category: Considered in Technical Expert Group but work not concluded


Cargo ships Use of low GHG fuel (e.g., hydrogen, ammonia, electric, high % of biofuel), delivering substantial reduction in gCO2 e/tonne/km

Passenger ships (eg. Cruise ships or ferries)

Use of low GHG fuel (e.g., hydrogen, ammonia, electric, high % of biofuel), delivering substantial reduction in gCO2 e/passenger/km

Supporting infrastructure (eg. Ports or manufacture)

Requires further review before it can be screened.

Oil takers or other ships solelytransporting coal or oil


3. Shipping

27



Nordea “Clean Transportation” means projects or activities and related equipment, technology and processes towards clean transportation infrastructure, including expansion and improvements of train and metro networks, stations and rolling stock for passenger or freight transportation, such as: • electric vehicles, e.g., trains, busses, cars and ferries

DNB • Vehicle or rail fleet retrofit or replacement with technologies including electric or hydrogen

• Boat fleet retrofit or replacement with ships than run on electric power, renewables, biofuel, hydrogen, ammonia, and ships that include the possibility to transition to alternative fuels in the design

• R&D for low carbon transportation with the intention to reduce carbon emission, such as in alternative fuel technology, e.g., hydro and ammonia, energy-efficient ship designs, smarter logistics systems, and “wind-assisted” technologies, such as spinning rotor sails.

• Development or improvement of water transport

• LNG should be seen as a transition technology, which should go hand in hand with other measures and risk mitigation to achieve a significant reduction in CO2 emissions, which aligns with the IMO aspirational targets to reduce CO2 emissions per transport work, as an average across international shipping, by at least 40% by 2030, pursuing efforts towards 70% by 2050, compared to 2008: http://www.ics-shipping.org/docs/default-source/resources/reducing-co2-emissions-to-zero-the-paris-agreement-forshipping.pdf?sfvrsn=7. In addition, the risk of methane leakages in LNG ships should be mitigated.

• For R&D: light materials and slender design, propulsion improvement devices, bulbous bow design, heat recovery, etc.

• Development of water transport excludes fossil fuel-based transportation modes.

SEB Clean transportation means transport solutions/systems based on non-fossil fuel/hybrid technologies supporting infrastructure

MDBs • Existing vehicle, rail or boat fleet retrofit or replacement (including the use of lower-carbon fuels, electric or hydrogen technologies), or new vehicle, rail or boat fleets with ultra-low carbon emissions, exceeding available standards

• Research and development of renewable-energy or energy-efficiency technologies, or low-carbon technologies

• The general principle for brownfield energy efficiency activities involving the replacement of technologies or processes is that: (i) the old technologies are replaced well before the end of their lifetime and the new technologies are substantially more efficient; or (ii) new technologies or processes are substantially more efficient than those normally used in greenfield projects.

SEK • Fuels and Vehicles

• Transport Management

• Potential for emission reduction will be assessed on degree of urbanization, fuel type, and competition with private transportation. Considerations will be given to rebound effects and lockins due to infrastructure investments.

EDC • Alternative Energy Transportation and Public Ground Transport

28

Guidance:Green Lending Principles Category: Environmentally sustainable management of living natural resources and land use (No description, indicators, or thresholds)Climate Bonds Initiative (CBI) Category: Fisheries and aquacultureEU Taxonomy Category: No category


Wild fisheries and farmed fish

Must hold certification for sustainable management

Machinery and equipment to manage and harvest in fisheries and fish farms e.g., fishing vessels

Eligible if the fishery or aquaculture operation adheres to its certification for sustainable management

On shore and off shore fish processing and storage facilities connected to eligible fisheries and fish farms


Associated management, information systems and other technologies




Nordea Not covered

DNB • Improving energy efficiency of

aquaculture farming and processing facilities

• Development of aquaculture projects that meet the following certificates or improve existing projects that result in: • Aquaculture Stewardship Council (ASC) certification, Marine Stewardship Council (MSC) certification, Best Aquaculture Practice (BAP) certification, or Friend of the Sea certification

• Production of biofuels from waste products

• Energy efficiency improvements for fish farms that are not ASC, MSC, BAP or Friend of the Sea certified or facilities that have achieved certification with a variance from the standard

• ASC, MSC, BAP or Friend of the Sea certified activities for which a variance from the standard has been approved.

SEB Not covered

MDBs Reduction in energy use or resource efficiency in aquaculture

SEK Not covered

EDC Not covered

4. Aquaculture

Appendix 2

References

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References:

1. Thwaites et al., 2018. Aligning Finance Is the Forgotten Goal of the Paris Agreement, But It Is Vital to Successful Climate Action. WRI. Available at: https://www.wri.org/blog/2018/12/aligning-finance-forgotten-goal-paris-agreement-it-vital-successful-climate-action

2. Fink, L, 2020. “A Fundamental Reshaping of Finance”, Larry Fink’s 2020 Annual letter to CEOs —https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

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