In the region that ushered in the world’s first green bond, banks are now building private databases to help their clients navigate the dark side of ESG.
Nordea Bank Abp, the biggest Nordic lender, says it’s on track to rate 250 companies by the end of the year based on their performance on environmental, social and governance metrics.
The ratings — the combined work of ESG, quantitative and equity research teams — draw on over 60,000 data points, and come as the bank responds to clients increasingly desperate at the lack of transparency.
One customer described the current ESG landscape as not just “the Wild West,” but “a jungle within the Wild West,” says Jacob Michaelsen, head of the sustainable finance advisory unit in Nordea’s investment banking operations.
Other banks are also trying to build ESG metric models, as the area remains relatively untouched by cross-border regulation. Already two years ago there were more than 600 different “ratings and rankings,” according to the advisory firm SustainAbility. (Bloomberg LP, the parent of Bloomberg News, also provides ESG data, analysis and indexes.)
The European Union is in the process of rolling out a new taxonomy to help bring more transparency, and business groups, including the ‘Big Four’ accounting firms, have come together to push for single ESG standards. But those measures aren’t moving fast enough for investors or issuers.
SCRATCHING THE SURFACE
For now, asset managers can’t always trust the information they’re getting from issuers, according to Martin Frandsen, co-lead portfolio manager of Danske Bank A/S’s new Global Sustainable Future Fund.
Most companies think they’re green, Frandsen said in an interview. “It’s just a different case when you start to scratch the surface.”
Danske has created its own ESG ratings tool, which includes qualitative assessments of the companies ranked, he said. Among companies that were rejected for inclusion in the new sustainable fund were Facebook Inc., Amazon.com Inc and Apple Inc., amid debates over social media and supply chains.
“We don’t believe we can come to any definitive conclusions based just on data,” Frandsen said. “We need to do our fundamental analysis of the companies.”
Banks are also looking at their own books, as regulators prepare to test in a few years the industry’s ability to withstand potential shocks from climate-related losses. In Denmark, the supervisor already has stepped up stress tests for banks, making agricultural loans amid an increased risk of droughts.
Nordic countries are ahead of the pack when it comes to pursuing ESG goals through public policy. It was also SEB AB that arranged the world’s first ever green bond, back in 2008.
The Stockholm-based bank was among 137 financial institutions that earlier this week joined a campaign to pressure high carbon-emitting companies to reduce emissions in line with keeping the global temperature increase to 1.5 degrees.
And so far this year, issuance in the Nordic region of green, social and sustainability bonds is outpacing other markets, at 7% of the total compared with a global figure of 4%, according to data compiled by Bloomberg.
Among ESG products that are likely to see growth is transition financing, Johan Torgeby, SEB’s chief executive officer, said at a sustainable finance conference on Wednesday. Such financial innovations can help push companies toward change, he said.
Companies issuing stocks and bonds are asking for help. That includes figuring out how to live up to international reporting standards, such as those set by the Task Force on Climate-Rated Financial Disclosures, Michaelsen at Nordea said.
“People on both sides of the table” are “almost equally confused,” he said.
Despite the confusion, it’s clear investors aren’t losing interest in ESG. What’s more, the demand for greater transparency is set to filter through to all kinds of funding.
Michaelsen says investors increasingly want to know what a company plans to use the proceeds of a bond sale for, “even if it’s not a green bond transaction.”