2020 is predicted to be the hottest year on record, and July 2019 was the warmest month ever recorded. In 2015, the world agreed in the Paris Agreement to do all it could to stop global average temperatures from rising more than 1.5°C above levels at the end of the 19th century. In 2019, we were already 1.1 +/- 0.1°C above that level. This means that what we do during the next years and decades will be key to mitigate and adapt to the consequences of climate change. As we know, this also presents substantial business opportunity as the world tries to grasp what this means and how to make the low-carbon transition.
Nordea’s Sustainable Finance Advisory unit, a unit within Large Corporates & Institutions (LC&I), advises large corporate customers on sustainability-related products and framework structuring.
“We can see a great demand for various sustainability products like bonds, loans and sustainability-linked lending – the interest for and understanding of sustainability is growing all the time, both internally and externally”, says Veronica Palmgren, LC&I Sustainability Lead, Group Sustainable Finance.
Why Sustainability Taxonomy is important to Nordea
Nordea is in a unique position to advise our customers on the EU Sustainability Taxonomy with first-hand insight from the EU Technical Expert Group, as we have been actively participating and supporting the initiative from the start. We experience that customers are very interested and actively seek guidance on how to apply the Taxonomy framework to their business and operations with the ambition to become sustainable.
Sustainability Taxonomy concerns all corporate customers
The Taxonomy is a framework for identifying “green”. It defines for a number of key industries – those which are responsible for over 90% of EU carbon emissions – the technical criteria for aligning production with a low-carbon society by 2050. For instance, in energy production that includes renewable energy, and in real estate that means low-energy buildings.
A company in itself is not Taxonomy aligned, it is the economic activities that it undertakes which are assessed, for instance, the construction of low-energy buildings. The share of Taxonomy-aligned activities is then based on turnover derived from, or capital expenditure invested to reach technical thresholds for, low-energy buildings.
There are three components that an economic activity needs to meet in order to be aligned: the technical thresholds (e.g. energy efficiency limits or limit on carbon emissions per output), the need to operate without causing harm to the environment, and the need to conduct business in an ethical manner (e.g. no violations to human rights). Today, the Taxonomy only looks at climate, but we will see further criteria over the next couple of years, which concern biodiversity and water management, as examples.
Currently, work is ongoing both in large corporate entities as well as in the financial industry to develop methodologies for how to assess alignment of economic activities with Taxonomy criteria. For financial institutions like Nordea, some economic activities are easier to analyse whereas in others we may ultimately need to ask our customers if the data is not available and cannot be reasonably assessed.
In some cases, we may be able to make simplifying assumptions, for instance, if a company operates fully within the EU or countries with equivalent standards and has all the needed environmental permits in place, we could assume that the company does not cause harm to the environment. For smaller, very local companies, certain assessments can more easily be based on assumptions, whereas for larger companies we need to carefully look into the details. In 2022, Nordea will report how we as a bank align with the Taxonomy, in line with all other large corporates.
Many of the sustainability initiatives we can see on the market are driven by a quest for transparency, comparable data and disclosures, that will help investors, consumers, regulators and society broadly, to assess the sustainability performance of companies. The regulatory interest is increasing on climate in particular, as evidenced through the recent European Central Bank guidance on its expectations for how banks handle climate-related and environmental risks.
Find more information on sustainable finance below.
World Economic Forum: 2020 is predicted to be the hottest year on record, according to NASA
World Meteorological Organisation: WMO Statement on the State of the Global Climate in 2019
European Central Bank: Guide on climate-related and environmental risks
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