Nordea says it has no plans to shut polluters out from its sustainable finance services.
"It's just such a new area that we're venturing into that setting very high, strict definitions on the requirements is basically infeasible," Jacob Michaelsen, head of sustainable finance advisory at the investment banking unit of Nordea, said in an interview.
Nordea expects to make the "biggest impact" on the climate not by forcing clients to go from being "a little bit green to being super green", but from "being dirty to being less dirty, and maybe a little bit green," Michaelsen said.
The distinction goes to the heart of a debate on what sustainable finance should be. That's as issuers and investors adapt to Europe's disclosure regulation, which is due to take effect on March 10. Meanwhile, a growing number of climate groups say the finance industry isn't doing nearly enough to defend environmental, social and governance issues.
When it comes to financing firms that pollute, but who say they plan to pollute less, there's a growing range of products that investment bankers can offer their clients. So-called sustainability-linked bonds can provide access to ESG investors for companies that aren't clean enough to issue a green bond or who want to raise funds to use across their business rather than to finance a particular green investment.
On the asset management side, there's plenty of demand for transition products. Mika Leskinen, who oversees just under USD 13bn at FIM Asset Management in Helsinki, says he even prefers emerging-market firms that aren't yet clean, as there's more scope to make money.
"We see the most potential in emerging markets when it comes to ESG," Leskinen said in an interview.
"In that part of the world, "it's easier for companies to stand out by being a little bit better," whereas in western Europe, most companies are already "more or less good"," he said.
Sustainability-linked debt, both loans and bonds, really took off in 2019. According to BloombergNEF, sales of various types of sustainable debt rose to a record USD 732bn in 2020, up 29 percent on the previous year, and are set to climb to USD 900bn this year.
At Nordea, the transaction volume in sustainability-linked loans increased more than threefold to EUR 21.6bn (USD 26bn) last year. Green corporate loan volumes were just a 10th of that.
Sustainability-linked deals are usually structured with pricing adjustments that make them more expensive for issuers if targets aren’t met, but cheaper if borrowers exceed the metrics. Existing guidelines for such loans require targets to be ambitious and meaningful, but those terms can be quite subjective.
"If we're honest, the key performance indicator structures that we set up are not always that dramatic, it's always just a few basis points we're working with," Michaelsen said.
The definition of ambitious targets called for by the sustainability-linked loan principles will vary by company, a problem illustrated by looking at emissions among car makers, Michaelsen said.
"What is considered ambitious for BMW probably is not going to be ambitious for Tesla,” he said. "But then you can go further into detail and talk about materiality of supply chain. Electric vehicles use cobalt and other minerals that are very hard to mine and need to be transported across the world. When you buy a Tesla in Norway or Denmark, that car -- in terms of its body parts -- has already been around the world a couple of times."
Michaelsen says there’s clearly room to refine the existing ESG definitions.
"We need obviously to work with transparency and we need to be sincere," he said.
"But we also need to allow some flexibility for the market in the coming months and years."
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