To achieve agreed aims on climate and sustainable development, private actors and governments need to cooperate to steer finance flows into sustainable projects.
The Nordic Investment Bank, Nordic Environment Finance Corporation and Nordic Development Fund have been showing remarkable results in this area since before "sustainable financing" was in our vocabularies.
Now the market is growing for sustainable financing because it works financially, environmentally and socially.
What do energy efficiency projects in daycare centers in Ukraine, wind farms in Denmark and gender equality in developing countries have in common? First, they contribute to a sustainable future. Second, they are partially financed by three Nordic finance institutions.
The market for sustainable financing is growing because it works financially, environmentally and socially.
The Nordic Investment Bank (NIB), Nordic Environment Finance Corporation (NEFCO) and Nordic Development Fund (NDF) are frontrunners in different areas of sustainable financing. They have been at it long before “sustainable financing” was in our vocabularies, and with quite remarkable results. Now the market is growing for sustainable financing because it works financially, environmentally and socially.
The global community has acknowledged that there are no alternatives to sustainable development, and a set of agreements reached in the past few years puts the need into specific terms. The 2030 Agenda provides integrated Sustainable Development Goals that aim to achieve a balance among the economic, social and environmental dimensions of development. As agreed at the Paris Climate Change Conference in 2015, a green transition is required to limit global temperature rise. In 2018, the European Commission issued an Action Plan with an EU strategy for sustainable finance. To achieve any of these agreed aims, private actors and governments need to cooperate to steer finance flows into sustainable projects.
One way of doing this is to bring private investors on board, as Denmark’s Prime Minster Mette Fredriksen called for in September 2019, in order to reach the country’s recently established goal of reducing carbon dioxide (CO2) emissions by 70% by 2030. Danish pension funds answered this call, and have announced their intention to allocate 350 billion Danish kroner to green investments by 2030.
Another step is for governments to involve international financial institutions with clearly defined mandates, such as NIB, NEFCO and NDF.
Nordic Investment Bank: Finding Sustainable Growth in Renewable Energy and Leaving No One Behind
Sustainable finance is not just about green solutions. Nordic governments share a common understanding that sustainable financing has to be a broad pallet of tools with different mandates and target groups. Let’s start at the top with the Nordic Investment Bank (NIB).
NIB, which is owned by the eight Nordic and Baltic states, gives loans with sound banking principles to projects that improve competitiveness and the environment. The main drivers for NIB when considering a project are sustainable growth, climate change, marine environment, pollution prevention and productivity improvement.
According to Henrik Normann, CEO and President at NIB, the Nordic and Baltic countries recognize that “alone we can only achieve so much, but together as ‘The Nordics’ we carry weight.” We have developed environmentally sound solutions that can be replicated and scaled in other parts of the world.”
As part of these efforts, NIB has been investing heavily in Denmark’s transition from coal and fossil fuel-based energy production to renewable wind energy, such as by supporting the Anholt Wind Farm in Kattegat. The offshore wind farm consists of 111 wind turbines, each with a capacity of 3.6 MW, making it one of the largest offshore wind farms in the world. With a capacity of 400 MW, Anholt provides CO2-free energy corresponding to the annual power consumption of 400,000 Danish households, or 4% of Denmark’s total power consumption.
In the increasingly polarized debate on climate action, Normann cautions about effects on the “victims of green solutions” – those who could lose their jobs when industries change – noting that in the US and elsewhere, globalization policies that did not account for workers paved the way for populist leadership. These politicians now obstruct climate action with claims that workers will pay the price.
Sustainable finance means measuring more than just capital, credit and dividend, but also impact. The cost of leaving people behind can jeopardize the change we need.
Medium, Small and Higher Risk: From Freezing Cold to State of the Art
While NIB focuses on large projects, Nordic Environment Finance Corporation (NEFCO) takes on small and medium-sized green projects and with somewhat higher risks, in both the private and public sector. For 30 years NEFCO has been providing loans, grants and equity-type financing with a focus on projects’ environmental side rather than the economic side. In addition to its own capital, NEFCO also manages a number of trust funds to develop and de-risk green investments. The projects, while relatively small, aim to become replicable and scalable.
Could you imagine sending your child to a daycare center or school where the indoor temperature drops to below 15°C in the winter? In many municipalities in Ukraine parents don’t have any choice. Most schools and daycare centers in capital city Kyiv were built in Soviet times. These buildings are far from meeting modern standards, especially for energy efficiency. This means high energy consumption to heat the buildings and often very low indoor temperatures.
In order to solve this problem, the Kyiv City State Administration initiated cooperation with NEFCO to implement energy-efficiency measures in more than 200 public buildings, primarily daycare centers and schools. Trond Moe, Managing Director at NEFCO, explains, “We saw a need for alternative ways of financing. At the same time there was a huge need for improving energy efficiency. Since climate action is one of our main goals it felt natural to start with financing the renovation and improving energy efficiency of these buildings.”
One example of a refurbished building is daycare center No. 431 located west of the center of Kyiv. It was in almost full decay: “There were cracks in the façade, the tiles were falling off and the visual appearance in general was unattractive. Our roof was full of holes. We had temperatures of 15-18°C and we could only raise it by using electrical radiators, but then the wiring was burning,” reported Acting Head of Day-care Center 431 Olena Patrik.
These issues are a distant memory after six months of construction for thermal rehabilitation. The project demonstrated that with relatively simple means municipalities can finance and implement needed work, and this is replicable and scalable all over Ukraine.
Small and Agile: Leveraging Gender Equality to Support the Climate
Poor people are the most vulnerable to the consequence of climate change such as hurricanes, flooding or drought. The mandate of the Nordic Development Fund (NDF) is to get people out of poverty. Through the years the meaning of this mandate has shifted from a development focus to the nexus between development and climate. Karin Isaksson, Managing Director at NDF, highlights the relationship between the two aspects: “If we don’t stop climate change, another 120 million people will remain in absolute poverty.”
NDF is the smallest of the three Nordic finance institutions, but also the most agile. NDF finances projects in Asia, Africa and Latin America usually in cooperation with bilateral, multilateral and other development institutions. The model is based on “soft loans,” which means that if a project fulfills agreed goals and criteria, the loan will be turned into a grant.
NDF started out back in the late 1980’s with a credit stock of just EUR 4 million. Today the total of climate change financing by NDF is EUR 375 million. Isaksson notes, “To us sustainable finance is to pay attention to the environmental, social and governance (ESG) aspect. This is an area where both the public and private sector has found common ground in the last ten years or so. ESG is something that should not only be seen in a compliance perspective but as a value creator for everyone.”
NDF is engaged in a variety of different projects, one being the West Africa Coastal Areas Program (WACA). The objective of the NDF funding is to improve climate resilience in coastal regions of Benin and Senegal. “This is a really good example of how we work with adapting people and region to the consequence of climate change. This area is the home of millions and millions of people and they are already affected by the impact of climate change,” says Leena Klossner, Deputy Managing Director at NDF.
In the beginning NDF provided an early state grant to prepare WACA. The programme has now grown to a multimillion project in which the World Bank and a number of international investors are also involved as financers, and which has been highlighted by France’s President Emmanuel Macron at the One Planet Summit.
Another NDF project is the Energy and Environment Partnership Trust Fund for Southern and East Africa. This project has demonstrated that prioritizing gender equality in development projects positively affects environmental matters. As Isaksson explains, “women are often more reliant on energy when cooking and other household chores and all of this is made much more efficient if clean and reliable energy is made available to them. And of course it has huge implication for education which can be understood as an important tool to empower women.”
Also, approximately 600,000 women and children die each year as a result of poisonous gas from cooking over open fire inside houses. Therefore, NDF is supporting a project that promotes and distribute clean cookstoves and biogas solutions. Engaging women as design, sales and distribution agents for clean cooking products has also proven very effective.
“Women can provide valuable inputs in the design, manufacturing, sales and distribution of these products. Women have had particular success in the sales and distribution of such products, in many cases, outperforming male counterparts. Being female and a sales agent selling to other women, lends to their credibility to promote and sell cooking products,” according to a 2017 report.
The journey towards a sustainable future does not follow a straight line, but a network of paths leading to a common goal. Sustainable financing is one of these paths, and it actually works. We just need more finance institutions who understand that in order to create big change, we need to recognize the value and importance of even the smallest piece in this natural mechanism we call Mother Earth.
The author of this guest article, André H. Jamholt, is Senior Adviser for Communication at the Nordic Council of Ministers.