The Nordic bank has developed a carbon exposure index to measure its climate transition progress, and suggests that all companies need to develop their own feasible plan.
All companies need to put in place credible climate transition plans, says the Nordic bank SEB. Without them, it is extremely difficult to be sure that carbon claims stand up or whether they are little more than greenwashing, argues Gregor Vulturius, climate and sustainable finance advisor at SEB.
SEB vaunts its credentials as a sustainable bank: in 2007-08, it helped create the World Bank’s first green bond. It is among the 42 founding signatories of the Net Zero Banking Alliance and one of only two banks – the other being Crédit Agricole – in the EU Platform on Sustainable Finance, a European Commission advisory body.
To help make its business increasingly sustainable and measure progress, SEB has developed a carbon exposure index, a set of three metrics which it labels “the brown”, “the green” and “the future”.
“The brown” measures the bank’s exposure to fossil fuels, with the goal of reducing its exposure to oil and gas by 45 to 60 per cent by 2030, compared to 2019. “The green” looks at the sustainability of the bank’s activities with the aim of growing its clean work by six to eight times compared to 2021. “The future”, meanwhile, provides an overview of how well the bank’s customers’ transition plans are aligned with the Paris Agreement.
As part of its transition towards a cleaner business, SEB has set 2030 sector targets for its credit portfolio against a 2020 baseline. For oil and gas, the bank aims for a 55 per cent reduction in absolute financed emissions. For power generation, SEB plans a 43 per cent decrease in financed emission intensity; a 30 per cent fall for steel; a 60 cent drop for car manufacturing; and a 30 per cent reduction for Swedish household mortgages.
Meeting these targets would be much easier if every company had a “credible” transition plan, suggests Vulturius. “There are a lot of indicators and target washing, and it is really frustrating and makes it really hard,” he says. The bank has drawn up its own methodology to ensure its 2030 goals are aligned with a 2050 net zero target.
SEB head of research of climate and sustainable finance Thomas Thygesen is clear that ‘sustainable’ does not simply mean investing in wind and solar power, and other technologies that are already considered clean.
“I might sound a bit cynical, but if sustainable finance means putting a label on something that would have been done already at the same price, I don’t see the point,” he says. “A massive amount of capital is needed where investors are not normally willing to go. To make a difference, you need to go where the markets don’t want to go.
“There is no shortage of capital for the Ørsteds, for the pure green players,” he adds, referring to the Danish energy company. As Dong Energy, the firm made its money from fossil fuels, notably coal. Since its rebirth as Ørsted, it has become the world’s largest producer of offshore wind energy and raised its renewable generation share to 86 per cent. “Everybody wants to bid for those wind and solar farms,” says Thygesen, acknowledging that investing in such projects will “get you a good reputation”.
If a 2050 net zero economy is to become reality, “it is not enough just to build a supply of clean electricity”, he says. What should be more interesting than focusing on the easy wins is finding ways to help sectors such as mining or shipping, which are difficult to decarbonise and are, for the moment, rather more brown than green, he says.
“How do you make capital available for mining companies that are willing to take a gamble and try to operate without emissions?” he asks. The technology may be available to make such industries low-carbon, but it is not widespread and remains highly expensive: “This is an area where the markets are not likely to go.”
It is in this context that a credible transition plan is vital, says Thygesen. “For companies that want to bank with us, it is not about them coming up with miracles, but about them mapping out what is actually feasible. There needs to be an understanding that this is not easy, that you need a generation, at least, to secure successful new industries and new companies, and that some kind of systematic approach is necessary to allocate money to where it is needed.”
Thygesen describes the bank’s way of working as a “bit similar to what they do at the Science-Based Targets initiative”, the organisation set up by the UN Global Compact and various not-for-profit organisations to show companies and financial institutions by how much and how quickly they need to reduce their greenhouse gas emissions to prevent the worst effects of climate change.
“We take into account what technological opportunities exist today and when replacement technologies with lower emissions are likely to be available,” says Thygesen. “Some sectors need a longer time horizon and some sectors … need to be zero emissions in five, not 25, years.”
In short, “each sector has to convince us they will reduce emissions in time to not blow up the planet”, he adds.
This article first appeared in The Banker