How far has the Swedish financial sector come in its work on climate-related risks?
Published: 4 May 2022
Financial companies’ core activities are increasingly adapted to climate aspects
The banks in Sweden have gradually worked to adapt their advice, credit granting and savings products to support projects with high climate benefit and to correctly price higher risk in the form of negative climate effects in projects. See the Swedish Bankers’ Association Climate Roadmap. However, incentives and transparency also need to be strengthened going forward to enable an efficient allocation of capital and to support the transition to a low-carbon economy. According to the Swedish Bankers’ Association, the Swedish banks aim to be in the forefront by taking into account the EU's taxonomy of sustainable investments in the granting of credit and to comply promptly with the TCFD recommendations on climate-related financial information. Several banks have already begun this work and others are being asked to follow suit. Earlier this year, the Swedish Bankers’ Association published a Climate Roadmap to complement the work already undertaken by banks to integrate climate aspects into their business operations. The Climate Roadmap contains a structure for following up how the banks’ action plans contribute at an aggregate level to the aims of the banking sector. However, the main climate work takes part in the respective bank, in that they compete to produce effective and reasonably priced green banking products.
Twelve Swedish banks, and now also the Bankers' Association, have joined as a supporting organisation to Principles for Responsible Banking - an initiative of the United Nations Environment Programme where banks commit to ensuring that their own strategy is consistent with the vision society has set for its future in the global goals for sustainable development and the Paris climate agreement. At present, 250 banks, which together represent 40% of bank assets worldwide, are affiliated to the Principles of Responsible Banking.
Finansinspektionen has received an additional assignment from the government to follow up how far Swedish financial companies have come in measuring and providing information about their climate risks and impact. Finansinspektionen’s survey, which it sent to the majority of insurance companies as well as a sample of major banks and UCITS, shows that the companies are still in a start-up phase. Only a few companies have processes in place for the entire chain of work to identify, measure, assess and manage climate risks. Companies indicate, among other things, that they lack tools and data, and that this is an important reason why it is taking a long time. The survey also shows that the TCFD is the most important voluntary recommendation that companies follow.
Finansinspektionen has also analysed in a pilot study, using the PACTA tool, the extent to which insurance companies' portfolios of financial assets are in line with the Paris agreement's climate targets. Overall, the analysis indicates that Swedish insurance companies' assets are not in line with them. The calculations indicate that a majority of insurance companies deviate negatively from a climate scenario in line with the Paris agreement. The analysis also shows that insurance companies generally have small exposures to carbon-intensive sectors in relation to their total assets. This may indicate that their direct transition risks are limited in the portfolio. However, there are individual insurance companies that have relatively large exposures, which may involve high direct transition risks.
As financial companies promote their environmental work, it is also important to avoid so-called greenwashing, where companies create a picture of themselves in their marketing as environmentally friendly, despite the fact that they have activities that, in practice, may be more or less harmful to the climate. According to Finansinspektionen, which has gathered information from Swedish funds to see how they meet the requirements imposed on them in the Disclosure Regulation, some fund managers may in future need to adapt their information to describe the fund's investment strategy better.
More companies need to report climate-related information
As mentioned above, better reporting of climate-related information is an important step in giving greater consideration to climate risks in the financial sector. To date, companies have applied TCFD recommendations to a very varied extent around the world. If one looks at the Swedish companies that the Riksbank has in its holdings of corporate bonds, only 7 out of 52 of them currently explicitly support the recommendations of the TCFD, even if there are more who use them or are working on beginning to do so. Of the three major Swedish banks, all have endorsed the TCFD's recommendations, which means that they intend to report their climate-related risks and opportunities. See the TCFD status report 2021 for information on which companies and organisations support the TCFD. However, it is difficult to compare these, as there are substantial differences between the Swedish banks with regard to their accounting, according to a recent pilot study carried out by the Riksbank, which followed Handelsbanken, SEB and Swedbank. The challenges include, on the one hand, the lack of basic data, particularly on indirect emissions, and, on the other hand, the fact that accounting is not yet standardised. The Riksbank has therefore advocated in its Financial Stability Reports that the banks should start reporting standardised measurements in accordance with TCFD's recommendations as a matter of urgency. See Financial Stability Report, 2021:2, Sveriges Riksbank.
Market for green bonds is growing
Major investments have been made to support the green transition, which has led to the development of new products by financial system participants to market sustainable investments. One such product that has grown rapidly in Sweden is green bonds. In recent years, the market for green bonds has grown significantly and, in Sweden, the market is large, seen from an international perspective. See also M. Ferlin and V. Sternbeck Fryxell (2020), “Green bonds – big in Sweden and with the potential to grow”, Economic Commentaries, No. 12, Sveriges Riksbank. Financially and technically, green and traditional bonds are similar, but there is a difference. With regard to green bonds, the issuer produces a so-called green framework, where they describe how the investments on which the issue is based are chosen, evaluated, reported and how their impact is reported. It is important for the continued development of the market for green bonds to have clear and common definitions of what are green and brown projects, and for investors to have good access to climate-related information. This is also necessary for investors to be able to allocate capital more efficiently from brown to green operations and thereby support a transition to a less fossil-based economy. During 2021, the European Commission has proposed a regulation regarding a voluntary EU standard for green bonds. The aim of this proposal is to create a “gold standard” for green bonds that can raise the level of ambition regarding the environment. It also aims to facilitate comparisons between green bonds and to avoid greenwashing.