According to a new report, increased transparency and clearer categorization of financial flows could facilitate the banking sector’s climate transition. The report by Stockholm Environment Institute (SEI), Stockholm Sustainable Finance Center (SSFC) and Mistra Center for Sustainable Markets (Misum) on behalf of the Swedish EPA shows limited alignment with the Paris Agreement by the five largest banks in Sweden.
The study has mapped the combined national and international capital flows of the five largest banks in Sweden to make the climate impact of capital flows visible. In total, Svenska Handelsbanken, Skandinaviska Enskilda Banken, Swedbank, Danske Bank and Nordea have facilitated around USD 150 billion worth of syndicated loans and bond issuance underwritings to high-emissions sectors since the Paris Agreement entered into force at the end of 2016. The banking sector plays an important role when it comes to tracking financial flows to ensure compliance with Article 2.1c of the Paris Agreement, which requires financial flows to be compatible with a path towards low CO2 emissions and a climate-resilient development.
” The financial markets must contribute to the transition to a sustainable society and it’s important to understand how the financial flows are linked to investments in the real economy. For Sweden to reach its climate and environmental goals and be able to develop cost-effective policy instruments, we need methodology and useful data to measure financial flows and understand how and to which sectors capital is allocated.”
Green capital flows are lower than brown and grey flows
The authors – Laszlo Sajtos from Misum at Stockholm School of Economics, George Marbuah and Aaron Maltais from Stockholm Environment Institute and SSFC – have categorized investment recipients in sectors with high emissions as “brown”, sectors with low emissions as “green” and the rest as “grey”. The grey category contains a mix of sectors with both low and high emissions from operations and the research shows that the largest increase in financial flows from these banks was made in grey sectors, including banks or real estate and business finance services.
Although green investments in the form of loans and bonds have increased, green capital flows are lower than both brown and grey sector flows. According to the data on which the study is based, brown capital flows amount to around 22%, while only 10% goes to more green sectors. The remaining part, roughly 67%, goes to the grey category and less than 1% to transitional investments.
According to the authors, the study needs to be considered in a larger context of markets and other activities before and after the adoption of the Paris Agreement in December 2015. A boom in both underwriting and loan issuance in 2014 means that new financial flows issued between 2015 and 2020 appear to be decreasing, despite the fact that the new flows in 2020 were significantly higher than in 2010, for example corporate loans to brown sectors.
“A complete picture of ‘Paris-compliant’ financial flows requires increasing the availability of more detailed data. The transformation of a sector and the entire economy cannot be fully mapped without transparency in financing (i.e. how funds are paid out and used) and how investment decisions are made. This can be achieved through active ownership and regulatory disclosure requirements.”
Lack of transparency and data
Lack of transparency and available data are factors that make it difficult to make a complete assessment. For example, there is a lack of data on the final destination of capital flows, especially for banks and other financial services, i.e. information on how the investment recipients allocate the capital. Lack of clear categories for what is classified as green or brown sectors is also problematic.
According to the report, Swedish banks would benefit from the globally enforceable and accepted accounting and sustainability disclosure standards under development by the International Sustainability Standards Board (ISSB) under the IFRS Foundation.
” Most banks participate in various industry initiatives regarding climate and the environment and have their own ambitious climate goals in line with Sweden’s goal of having no net emissions of greenhouse gases by 2045. There is also a lot of work going on in the area in terms of accounting standards, supervision of the financial markets and various regulatory measures and the study indicates that it is important that this work continues.”