Sustainable finance is a swiftly growing industry, with new innovations arising rapidly from all over the world. In conversation with an author of SEB’s Green Bond Report, Finextra considered the latest advancements in the sustainability sector leading up to our annual Sustainable Finance Live conference.
The flagship report does not singularly discuss green bonds as its title suggests, but is called the Green Bond report in reference to SEB’s role alongside the World Bank in issuing the green bond in 2007/2008. The September 2023 edition of the report examines new EU regulation, nature-related risk and action, and new developments in the carbon removal market amongst other topics.
Touching on new regulation in place, lead scientist, climate and sustainable finance advisor SEB and co-author of the report, Gregor Vulturius, is confident that the building blocks for a taxonomy on sustainable reporting have been laid out by the European Sustainability Reporting Standards (ESRS), inferring that with more time reporting can become standardised, but the terms used in these regulations need to be clearly defined.
Vulturius highlights that the new EU sustainable finance platform was given a clear mandate from the EU Commission and will have a higher focus on increasing the usability of the EU taxonomy there needs to be an increase in usability. He emphasises that there should be clarity in the definitions of terms such as biodiversity and pollution in a real economy sense, and a solid definition of actions such as transition finance.
He adds that there is a “silent period” in the EU Commission at present, and that there will be an election for the European Parliament next year which will hopefully build on current effort. It will no longer focus on setting up the foundation for sustainable regulation, but ensuring the sector understands what sustainability actually means in practice.
One section of the report highlights how ESG may need to take up a revised role in guiding investments. Vulturius expands: “In the past, investors had to rely on ESG rating agencies to conduct a thorough assessment of their portfolio's risk exposure and investment opportunities. Now that investors will have entity level information, not through voluntary standards, but through regulation, investors can rely more on bottom-up data. That is something that they have been asking for. We expect aggregated ESG ratings at the portfolio level to become less important because investors can now actually look under hood of their individual companies that they are invested in.”
The increase in data availability may shift the need for ESG into a different area for understanding and changing valuations of financing instruments. Vulturius notes that ESG is still very much relevant, however, having environmental risk and governance risk lumped together is not the best option for a thorough assessment.
Moving on to carbon removals, Vulturius highlights that carbon removals are the final frontier for companies. It has become a necessity to neutralise emissions and carbon removals is the next step. He states that SEB considers removals as necessary in addition to science-based emission reductions. However, checks and balances must be established to create a successful and thriving carbon removal market, and the current market is more like the wild west. From both regulators and stakeholders, the carbon removal market requires more effort and engagement.
“All companies that want to be net zero, or have confirmed that they're going to do it in the future, are essentially short carbon removals. To address that need we believe that they need to enter the market now. It is vital for companies to understand the market to build a portfolio of carbon removal credits in a fashion that will help generate a transparent and liquid market for carbon credits.”
He explains that big buyers which are striking deals with carbon removal suppliers are not sharing the prices of these deals or the duration. Vulturius emphasises that in order to build up the carbon removal market, there needs to be a culture of transparency so that the market can be scalable and reasonable for new entrants. He adds that the market is growing rapidly and several deals for multiple millions have been announced this year.
Another section of the report focused on an increasingly relevant topic, nature-related risk and biodiversity. Vulturius explains that working with companies in the biodiversity sector, it can be complicated placing benchmarks and forming a sustainable framework. He mentioned working with a big forestry company, Stora Enso, which integrated biodiversity into its updated green and sustainability-linked finance framework.
Citing a use case, he points out that when companies examine their impact, they learn more about their suppliers and gain insight to their place in the value-chain: “SEB has provided support to REWE, one of the largest grocery retailers in Europe, in developing its sustainability-linked bond framework. REWE understood that the largest part of their inventoried emissions comes from suppliers, and were able to set a target to reduce scope 3 emissions from forest, land-use, and agriculture. That facilitates a better understanding of your value chain; managing your value chain and value chain risks, which aside from a new exposure to scope 3 emissions, you also get to see the challenges they are facing. If you go into the biodiversity you have a payoff that isn't just focused on the risk-related, but in general you get a better understanding of where your suppliers are at.”
Vulturius also mentions a lesser known aspect of sustainable finance that was discussed in the report – bluetech. Bluetech focuses on improving the quality and quantity of water, bringing more attention to the water sector to be included in this clean energy assessment for investors.
Overall, Vulturius expects more growth and innovation to come out of the sustainable finance sector, and hopes that the Green Bond Report will inform and guide initiatives that need more attention and continue to strategise on how the sector can improve.
Learn more and register for Finextra's annual Sustainable Finance Live conference, that will bring together industry experts to examine strategies to build a sustainable city on 10 October 2023.