It is debatable who issued the first green bond. The European Investment Bank suggests its €600m Climate Awareness Bond in 2007 was the first, while the World Bank claims the crown for its Skr2.325bn (€205m) 3% November 2014 deal the following year.
ESG has, historically, been more pronounced in the Nordics than anywhere else in the world
But for Jens Hellerup, head of funding and investor relations at the Nordic Investment Bank in Helsinki, one thing is clear — Nordic investors nurtured both issues. In fact, the World Bank’s first green bond was sold entirely to Scandinavian investors, through SEB.
“The Nordic investor base have been a part of this market since it started,” says Hellerup. Environmental, social and governance investing has “historically, been more pronounced in the Nordics than anywhere else in the world.”
These investors “have a clear sustainability focus,” says Gustaf Winberg, head of financial institutions debt capital markets at Nordea in Stockholm. “For many funds, the highest return is not always the key objective, with investors instead having high ESG guidelines. This has fostered a great market for innovation — from [supranational, sovereign and agency issuers] to high yield, everyone wants to be green.”
On the issuer side, the Nordic Investment Bank has “been active in the green bond market since 2011 and has had an environmental mandate since 2005,” Hellerup says.
For many funds, the highest return is not always the key objective, with investors instead having high ESG guidelines. This has fostered a great market for innovation — from SSA issuers to high yield, everyone wants to be green
Gustaf Winberg, head of FIG DCM at Nordea
It was also a Swedish borrower that issued the first green corporate bond in 2013 — a Skr1.3bn bond from real estate firm Vasakronan, again through SEB.
Since then, the Nordic labelled debt market has grown. Nordic borrowers in all asset classes have issued €28bn-equivalent of green, social and sustainable notes so far this year, according to Dealogic data.
As a result, 2024 is already the fourth busiest year for Nordic labelled issuance, and it is on track to come close to last year’s €48.9bn-equivalent record high.
“By the end of the first half, close to half of all Nordic corporate bonds issued this year were in a sustainable format,” says Lars Mac Key, global head of sustainable products at Danske Bank. “This is not a niche market anymore — more issuers are trying to raise a large part of their debt in a sustainable format.”
Time to transition
But the focus is shifting away from straight labelled bonds to those that incentivise a transition. To this end, many companies are considering sustainability-linked loans and bonds.
These are used by borrowers that do not want to commit to using all the proceeds for green purposes, but are willing to tie their cost of funding to whether they achieve certain ESG performance targets. These instruments are therefore a way for companies to advertise the progress they are making in their transitions to becoming more sustainable.
The market has grown since the first Nordic sustainability-linked bond was issued in 2021. Nordic borrowers issued €3.5bn-equivalent of SLBs in 2021, rising to €5.2bn-equivalent last year, according to Dealogic. Supply has slowed slightly in 2024, with only €1.5bn issued so far.
The bulk of this has come to the euro market: €11.5bn of the €15.2bn-equivalent of Nordic SLBs outstanding. These deals range from small privately placed notes to large dual tranche benchmarks like those issued by Vestas, the Danish wind turbine maker, in March 2022.
“We see a trend in Nordic corporate issuers complementing their green bond frameworks with the SLB format, to cater for only sustainable debt, as green assets are limited,” says Mac Key. “To this, we see a shift in a few names that now believe the SLB format is a better fit.”
Of course, sustainability-linked bonds are not suitable for every issuer. Banks, for instance, find it very hard to issue them, for regulatory reasons.
“SLBs are complex for banks — banks have a broad set of assets, which are difficult to report on,” says Winberg. “Issuing SLBs is a lot easier for corporates.”
What to do with SLLs
However, banks own large quantities of sustainability-linked debt — in particular loans to corporate borrowers — that need financing. “Nordic banks have slightly larger portfolios of SLLs compared to European banks, as more Nordic corporates are looking for the product,” says Winberg.
These are sustainable assets — but can they be used to back sustainable finance bonds? Sustainability-linked loans do not themselves have a green use of proceeds, so it would be difficult to argue bonds referencing them were green bonds.
One Nordic lender, Nordea, came up with a novel approach to this — issue a bond with its use of proceeds earmarked for funding sustainability-linked loans. The issuer did not call it a green bond, but an SLL financing bond.
Nordea debuted this structure with a €400m-equivalent dual tranche senior preferred deal in Swedish kronor and Norwegian kroner in late 2022.
But the debate over the viability of the product did not take off until it launched its first euro deal in the format — a €1bn 4.375% September 2026 non-call 2025 bail-in bond, issued in August 2023.
Nordea got around the pitfalls of issuing debt based on sustainability-linked loans by having “a clean use of proceeds, normal senior language and no step-up or step-down complications,” says Winberg, who worked on the transaction.
The deal has turned heads in the Nordic region, and other issuers are expected to follow. “We’ve had a lot of good discussions on the back of this successful transaction,” says Danske's Mac Key, who was not involved with the trade.
But perhaps the next innovation could come from the SSA sector — as the Nordic Investment Bank is considering whether it, too, should repackage its sustainability-linked loan portfolio into a similar trade.
The supranational signed its first SLL in October 2021, a €60m deal with Swedish white goods manufacturer Electrolux. Its portfolio has since grown to more than €965m, with the most recent loan signed on June 10 with Electrolux.
“We are looking into how we can finance our SLL portfolio,” says Hellerup. “We cannot use a straight green bond as they do not strictly fit into the use of proceeds language. It is still a work in progress, but ICMA has just released some guidelines on how to finance sustainability-linked loans.”
New guidelines
The International Capital Markets Association updated its Green, Social, Sustainability and Sustainability-Linked Bond Principles in late June to include guidance on issuing bonds solely to finance sustainability-linked loans.
SLL bonds “make sense as long as the transparency is there, and the portfolio of assets fit into the transition story,” says Mac Key. “We should encourage innovative and transparent ideas that allow investors to make their own decisions as to whether [a use of proceeds] is in line with their mandate.”
“From a bank perspective, I like this asset class as it gives a small edge on senior issuance, although I’m not claiming there’s a huge greenium available on it,” says Winberg. “The added label does, however, increase investor interest and diversification.
“We can tell corporate clients that if they sign up for an SLL and we include it in the asset pool on the funding side, then they can use it in their marketing and thus increase their own sustainability branding and perception,” adds Winberg.
If SLL financing bonds take off, there is plenty of collateral available — many hundreds of these loans have been signed in the past seven years.
Just as the Nordic region helped pioneer green bond financing almost 20 years ago, thanks to the receptivity of its issuer and investor base, it is now shaping the next generation of ESG-linked financing.
