Green financing the Nordic way

By Sven Hegelund, Member of NIB’s Board of Directors

In September, the Nordic Council of Ministers published a report on the Nordic experiences and practices in the green transition and green finance: Green Financing—the Nordic Way.

The authors of this report, Ash Sharma, an environmental expert at the Nordic Environment Finance Corporation (NEFCO), and myself produced this report for NEFCO and the Nordic Council of Ministers to be presented to the G20. The background was that the G20, under its current Chinese presidency, has prioritised sustainability and policies to protect the environment, and has expressed an interest in how these issues have been handled—and in particular financed—in the Nordic region, with its reputation for successful green policies.

The Nordic region indeed has a good story to tell about its sustainable development over the last 40 years.

The situation back in the mid-1970s was rather worrying. As in other industrialised countries, emissions of greenhouse gases were increasing in line with GDP growth, to a large extent consisting of the growth of fossil-fuelled industries, transport, heating and energy generation. Emissions into water from municipal treatment plants, at best offering rudimentary treatment processes, and from increasingly fertilised agriculture, were leading to increased eutrophication, dead seabeds and depleting fish stocks in the Baltic Sea. The risk of further biological damages to the sea—with enormous social and economic consequences for the whole of Northern Europe—was high.

Forty years on, we can look back on impressive development. First of all, the relationship between economic growth and CO2 emissions in the region has been broken. Between 1995 and 2013, emissions diminished by a fifth while the region’s economy grew by 129%. This is a result of the combined effects of structural changes in the economies, with growth coming mainly from the service sectors, and a large-scale movement away from fossil fuels to biofuels and electricity, increasingly generated from hydro-, nuclear and wind power as well as biomass.

The emissions of the two main pollutants of water—nitrogen and phosphorus—have reduced significantly since their peak in 1981. Although improving the water quality is a slow process, positive signs are already visible. Emissions into the air have been reduced by pioneering initiatives, such as introducing catalytic converters, as well as by action taken collectively with other countries. The Nordic countries have taken the lead to reduce emissions of chemicals and heavy metals, such as sulphur, pesticides, lead, cadmium and mercury.

The most important conclusions for the wider world to draw from the Nordic experiences are rooted in the successful combination of regulatory measures and economic incentive systems in the Nordic region— economic incentive systems basically meaning making the polluter pay and subsidising renewable energy generation.

A special Nordic feature, the Nord Pool integrated electric power grid and exchange system, is helping to improve energy efficiency and facilitating the introduction of renewables, i.a., through backing up intermittent availability of mainly wind power as well as other sources, such as hydropower, where energy can be stored in reservoirs until needed. This system can be replicated in other environments and play the same role for other renewable energy sources as solar power—as is currently happening in southern Africa—with positive effects on costs and the environment alike.

The functioning of the Nordic “green” financial institutions—NIB and the four municipal banks—could provide interesting experiences for similar institutions elsewhere. These institutions are able to raise funds on favourable conditions given their high ratings as well run public institutions. Their role is to finance projects from often smaller and lower-rated investors with the market taking the risk on the green banks rather than on the individual investor. In addition, their ability to provide funding for long-term projects through loans with longer terms than are generally available on the financial markets should be emphasised. NEFCO plays an important role as a small green bank in Eastern Europe with special financing from the Nordic governments.

The role of local governments in the Nordic countries in developing and funding environmental projects is also worth noting. They have carried out much of the practical work, including financing many of the necessary investments. The relative economic independence of Nordic municipalities allows them to raise their own funds from tariffs, taxation and borrowing. This has been crucial for promoting the green transition in the Nordic societies.

The new market for green bonds (bonds with additional conditions for the proceeds to be used exclusively for financing green projects) is now rapidly expanding globally. The Nordic countries were pioneers in this, and the Nordic role in this market is still much larger than the Nordic influence in the world economy. One important Nordic experience in this field is the need for “green” ratings to create confidence in the market that green bonds really are green. The experiences of the Norwegian “green rating” institute CICERO, which dominates the rating of green bonds issued in the Nordic market, could be useful also elsewhere.

The expansion of the green bond market should be welcomed as it broadens the investor base for green projects. It should be noted, however, that the pricing of green bonds has so far not been different from “brown” bonds, which means that there has been no cost benefit from financing green projects with green bonds so far. Whether that will happen depends on the development of supply and demand for green bonds, including whether pension and saving funds will be willing to pay premiums on green bonds in the future.

Report Green Financing—the Nordic Way