Nordea Explains How Sustainability-Linked Financing Works

Sustainability-linked financing, where loan and bond terms are tied to a company's environmental and social goals, has rapidly gained traction in the Nordic region. Catrine Birkevold Liem, acting head of Nordea’s Sustainable Finance Advisory team, explains this financing mechanism, which differs from traditional green financing by allowing proceeds for general corporate purposes.

In sustainability-linked financing, a company's financial terms, such as the interest margin, can change based on whether the firm meets its set sustainability targets. These targets, known as key performance indicators (KPIs), are typically strategically important and core to the company's business, covering areas like emissions reduction or social metrics.

If a company achieves its annual targets, it may receive a small discount on its loan margin for the following year. Conversely, failing to meet targets results in a premium. For bonds, there is no discount, but failing to meet targets may incur a penalty fee.

The most common KPIs are related to reducing climate emissions, including both the company's own direct and indirect emissions (Scope 1 and 2) and value chain emissions (Scope 3). A growing trend is the expectation of absolute emission reduction targets for direct operations. Social KPIs, such as reducing workplace injuries or improving gender balance in leadership, are also relevant.

Nordea emphasizes that targets must be measurable using reliable data and standardized methodologies. Data quality, particularly for Scope 3 emissions, remains a challenge that the industry is addressing through collaboration.