Lending is the core business of a bank. For the bank to be well-functioning and sustainable it is critical that the lending is made responsible. A key objective for Swedbank is to provide credit and lending facilities, as well as advisory services or access to capital markets, to enable the transition to a low-carbon economy and to help clients manage transition risk. To enable this we continuously integrate environmental, social and governance (ESG) criteria’s into our lending process.
We believe that the foundation for a sound and sustainable economy begins with loan amortisation and manageable debt levels. In recent years Swedbank has introduced more extensive amortisation requirements on its mortgages in Sweden. Today we are seeing a change in attitude among customers. The desire to pay off mortgages has increased. Amortisation is now seen more as savings and less as an expense. This is a view the bank shares. Therefore, the customers have an option to amortise up to additional 20 per cent of their loans each year without prepayment fees.
Integrating ESG criteria in our business processes
It has become increasingly important for both private customers and corporations to operate in a sustainable way. For corporate customers, an environmental certification or codes of conduct that regulates social responsibility are often requirements in commercial contracts. Also, customers have great power in their selection of sustainable products and services. In Swedbank, environmental issues have been integrated in the bank’s Swedish lending process since the early 2000s. A more extensive sustainability analysis of corporate customers was launched in 2010. Since January 2012 it has been used in all of Swedbank’s home markets and for all business loans exceeding SEK 5m in Sweden and EUR 0,8m in the Baltic countries.
A key factor in our general lending processes is to verify the identity of our customers and analyse the customer's ability to fulfill its obligations to the bank, a so-called Know Your Customer (KYC) analysis. For corporate customers the analysis should create an understanding of how the customer's business operations create the conditions for fulfilling the commitments that the credit entails on an ongoing basis. Creating a good understanding of how values in the company are created and how cash flow and earnings are generated in the day-to-day operations is central. Our assessment is also based on an understanding of the owner's purpose with the company, its competence in the area, the owner's private finances as well as historical actions and future plans. Further aspects that incorporated in the analysis are ESG-related issues such as business ethics, environmental impact etc. Thus, sustainability risks at the bank's credit decisions are regarded as an integral part of the bank's risk analysis.
The corporate loan application process in Swedbank includes a special assessment of sustainability risks. Using an analysis model, we look closely at a company’s impact on human rights and the environment as well as how it handles corruption. We also look at what the company is doing to guarantee respect for human rights in its supply chain, among employees and in the local community. And we find out whether there is structured environmental work going on and analyse how it delegates responsibility, its routines and how it follows up issues. The aim is to see how risks related to these areas could impact the customer’s profitability and reputation, as well as our own. By dialoguing with the customer, we can also identify new opportunities, such as investment needs tied to the specific sector’s sustainable development. All in order to ensure long-term sustainable development for both our customers and for the bank.
For our large customers, we have integrated a specific ESG risk rating into the KYC process using an external rating provider. The ESG risk rating is designed to help identify financially material ESG risks within portfolio companies and understand how those ESG risks could affect long-term performance. The ESG risk rating is a valuable tool in our corporate lending as it enables us to measure a company’s exposure to industry-specific material ESG risks and how a company is managing those risks.
We engage with our clients on ESG related risks and opportunities
It is important for Swedbank to engage with our clients on ESG related risks and opportunities. We have developed extensive internal guidelines for thirteen sectors we consider high risk from a sustainability standpoint. The guidelines are a tool to provide better insight into the sustainability problems facing various industries as well as suggestions and advice on which aspects should be addressed by the customer. In addition Swedbank has created a checklist for real estate-related sustainability risks. The checklist serves as a tool to dialogue with customers on property-related risks. Because real estate accounts for nearly half of Swedbank’s lending, this is a strategic sector to maximise the impact of the bank’s sustainability risk management.
Sustainable Products and Services
To support a sustainable economy Swedbank has developed wide and diversified offers of sustainable financing products and services as follows:
Sustainable Products and Services – Private Customers
• Green mortgage loans: To encourage a sustainable choice of housing Swedbank has launched a green mortgage loan for private customers. The loan implies an additional deduction of ten basis points on the customer’s mortgage, if the customer’s home fulfill the green mortgage criteria’s for environmental certification.
• Green car loans: Swedbank wants to encourage private customers to choose environmental friendly cars, to lower the total emissions. Thus, customers are offered interest discounts if the car fulfills certain criteria’s.
• Solar panel loans: Interest discount offered on loans to solar panels that enable lowered electricity use and electricity costs.
• Energy loans: Energy loans are available to customers in Sweden and used to finance residential energy savings.
Sustainable Products and Services – Corporate Customers
• Green, social and sustainability bonds: Swedbank is active in the green bond market, both as an issuer and as an issuing institute. Green bonds create value for the company, investors and society as a whole. In 2017 Swedbank established a framework for green bonds and has issued two green bonds so far. The invested capital will mainly be used to finance sustainable investments in properties and renewable energy sources that produce a lower carbon footprint. Swedbank is also strongly focused on green products for capital market customers. Swedbank Debt Capital Market offers green bonds, social bonds and sustainability bonds. This benefits issuers that seek green financing, e.g. companies and municipalities, as well as investors who actively demand sustainable investments e.g. insurance companies, pension managers and fund managers.
• Sustainability-linked bonds: Swedbank Debt Capital Market also offers sustainability-linked bonds with coupon linked to a certain environmental KPI or an ESG rating. The structure is different from traditional green bonds since the proceeds are used for general purposes, and it does not require a green bond framework or regular reporting.
• Green loans: A flexible financing solution whose purpose is to promote a positive environmental impact while building sound and sustainable businesses. Our green financing is characterised by a high level of flexibility in terms of type, tenor, volume, and so on, where specific terms are dependent on the individual borrower and the purpose of the financing.
• Sustainability improvement loans: Sustainability Improvement Loans differ from ordinary green loans in the sense that they can be used for general corporate purposes rather than for a specific purpose. Sustainability Improvement Loans are linked to the borrower's sustainability performance measured against Environmental and/or Social and Governance criteria ("ESG").
• Advisory and research for sustainable financing: Swedbank offers ESG research through our partnership with Kepler Cheuvreux. Our Sustainability Indicators measure progress towards the UN Sustainable Development Goals and are included in research such as our flagship macroeconomic report, Swedbank Economic Outlook.
• ESG related advisory: Swedbank Debt Capital Market offers ESG related advisory to issuers. One of the offers is ESG peer review based on data from external ESG suppliers.