Nordic Investment Bank is exploring issuing bonds to fund its fast-growing pool of sustainability-linked loans. The move follows an earlier SLL-linked bond initiative by Nordea, one of the region’s largest lenders, and comes as other banks weigh similar moves.
NIB ranks as one of the longest established supranational green bond issuers, with its “environmental bonds” series dating back to 2011.
Now the Helsinki-headquartered Triple A institution is investigating the scope for a dedicated SLL-linked capital markets instrument. With a debut deal possible this year, this would finance its SLLs in the same way its green bonds fund its green lending.
“We are thinking, is there appetite to get investors in the capital markets to join the transition journey of our clients with us as an intermediary?” said Luca De Lorenzo, head of sustainability and mandate at NIB.
While the supra’s green loan and bond programme will continue, De Lorenzo said “we still need some innovation in the sustainable finance world”.
“The big task for the next decade is really going to be to continuously push green but at the same time to enlarge the scope of sustainable finance and really get the transition going with the big emitters and hard-to-abate sectors.”
For this, NIB sees SLLs as key – along with a recently broadened ESG assessment of its borrowers. It has now signed seven SLLs totalling some €350m, in sectors from food retailing to chemicals and power.
Nearly 70% of the loans, which NIB’s annual report says “incentivise clients to reach ambitious and verifiable environmental and social sustainability goals” and allow NIB “to align its lending portfolio with the Paris Agreement in the long term”, were disbursed last year.
The total is set to keep rising rapidly. “We see quite a strong pipeline” for SLLs, De Lorenzo said.
More than half the current SLL volume sets key performance indicators aligned with a 1.5 degree pathway verified by the Science Based Targets initiative, and more than €300m references Scope 3 indirect emissions.
In addition, NIB operates a 12-month maximum lookback period on its green expenditures, in contrast to the two and even three-year periods applied by other green bond issuers. It expects to maintain this best-practice approach for SLL-linked bonds.
The supra is still weighing whether the potential bonds should mirror the underlying loans’ step-up/step-down ratchet structure. Given the complexity of this on a portfolio with differing margins, tenors and observation dates, it is inclined to take the advice of some investors to keep the new instruments as simple as possible, De Lorenzo said.
More generally, NIB’s approach will emphasise a “robust and credible framework” and significant transparency over the underlying loans. Given its “line-by-line” disclosures, it would be unlikely to use a third-party provider to select the SLLs, De Lorenzo said – but would "for sure" have a second-party opinion on the framework.
NIB has also yet to decide whether to offer deals in regional or international currencies. This will depend on investor appetite and market conditions.
No banks have yet been appointed as structuring advisers.
Supra switch
The move potentially lends NIB’s heavyweight endorsement to a product that stood out as an ESG bond innovation last year, but has yet to be adopted by other banks or move beyond the Nordic region. Some commercial banks are considering the concept, however, according to ESG bankers.
Some of NIB’s supranational peers are moving into SLLs too, especially those in Europe. This could eventually see them also seek dedicated capital market funding, though none has yet indicated interest in doing so.
The European Investment Bank’s SLLs include several to Italian corporates. Among these are its first KPI-linked facility for a water sector borrower – a €150m loan to Iren in April. Similarly, the European Bank for Reconstruction and Development recently made the first SLL in Morocco – up to €200m for state-owned utility Office National de l'Electricite et de l'Eau Potable. Its other recent SLLs include up to €75m to Turkish corporate Ulker Biskuvi Sanayi.
International expansion?
Nordea has not yet built on its innovation. It is replenishing the initial €600m portfolio of eligible SLLs under its framework after last year’s €400m-equivalent debut issue in Norwegian kroner and Swedish kronor.
These comprise loans aligned with the Sustainability-Linked Loan Principles and whose targets have been verified by ISS ESG as ambitious and material.
The bank aims to issue this year in international currencies against the updated asset portfolio. Major institutions outside the region have requested the product in euros and US dollars, officials reported. They forecast that Nordea’s SLL-linked bond volume could eventually exceed that of its green bonds since the underlying lending is growing faster.
News on the product’s expansion beyond the Nordics should emerge “hopefully soon”, said Petra Mellor, head of bank debt at Nordea.