NIB Environmental Bond issuance likely to double in coming years

By Lars Eibeholm, Vice-President and Head of Treasury at NIB

Fighting climate change is very much on the political agenda of most today, including the fixed income market and its issuers and investors. The multilateral development banks (“supras”) have been the frontrunners in this area for quite a while by financing projects that enhance the environment, and since 2007 also by issuing green bonds.

At the Climate Financial Ministerial Meeting in Lima, Peru, hosted by the finance ministers of France and Peru, many supras used the opportunity to announce the allocation of more funds to mitigate global climate change.

NIB is no exception; it is contributing to this effort by providing loans for projects that help to limit climate change. The Nordic–Baltic owners of NIB have provided the Bank an explicit mandate: to improve competitiveness and the environment of the member countries. This means that, for many years now, the Bank has been assessing all its loans’ impact on the environment. Entering the green bond market was not, therefore, a big leap for us; rather, it meant just continuing the sustainability strategy the Bank had integrated long before.

Since 2011, the Bank has had its own NIB Environmental Bond (NEB, read more) framework, and so far it has issued the equivalent of some EUR 1.4 billion of NEB transactions. We are committed to continuing to issue NIB Environmental Bonds, and we estimate that we can easily double the issuance during the coming years. This is backed up by a good pipeline of eligible and sustainable projects.

The Bank believes that transparency and active, accurate communication are important for growing the green bond market. We aim to open dialogue with our stakeholders, sharing all relevant information on the NIB Environmental Bond framework. Hence, there are detailed descriptions of all the projects financed by NEBs—28 projects so far—and aggregated annual CO2 data on a portfolio basis can be found on our website (click here).

Being transparent also means putting our reputation on the line. With our environmental mandate and scrutinised internal processes in place, we feel confident in sharing how and why we have selected these projects as eligible. NIB’s Sustainability & Mandate Unit consists today of four environmental analysts with more than ten years’ experience in assessing the environmental impact of various projects. For a small institution with only 188 employees, this is a very fair resource input.

With the growing green bond market, investors require more sophisticated and detailed reporting, including information about the environmental impacts of projects. NIB agrees that standardisation and a more harmonised way of calculating and reporting on the environmental benefit are needed, and this work is continuing amongst international financial institutions.

This market, however, consists of different issuers of different sizes with different amounts of resources, and also diverse investors with dissimilar approaches to assessing the impact of green bonds. Therefore, we should avoid too much complexity at this point and be aware that comparing numbers doesn’t necessarily give the complete picture of the impact of each project.

One of the challenges today when putting a number on the contribution to emission reductions of a project is that different issuers apply different assumptions in their calculations. New renewable energy projects—like windfarms—are assumed to crowd out existing power generation in distribution networks. The grid emission factors vary greatly between different national grids. NIB uses average national grid factors for calculating greenhouse gas emissions missions, which means that an excellent wind power project in Norway—a country that already has a lot of renewable energy in its system—will have a lower impact value than if we were to compare it to the European average.

The estimate for outstanding green bonds on the market is over USD 70 billion so far, and the market is still growing at a good pace. One of the challenges of a rapidly accelerating market is that some stakeholders will decide to be just too fast and too creative, instead of doing everything properly. This should be avoided, and therefore NIB stresses the importance of being responsible and taking the time to prepare and set up a proper green bond framework that considers all the necessary aspects.

We need more of the right supply to meet investors’ growing demand.