The Swedish bank that brought the first green bond to the world over a decade ago is now forcing corporate clients to prove they’re clean enough to stay on its books.
SEB AB Chief Executive Officer Johan Torgeby, who spent years as a corporate banker pitching green bonds to issuers back when “no one” wanted them, says the bank will work with clients to improve their sustainability credentials. But if they don’t step up, he says SEB will sever ties.
“You have very many long-term relationships,” Torgeby said by phone. “Today, you view those relationships in a different light than you might have done 10 years ago.” Though it’s not “an easy thing…you have to decide if you want to disengage completely.”
SEB’s line in the sand comes as a growing number of banks review their loan books to purge their portfolios of polluters. And though the Swedish bank has gone further than most, growing pressure from investors and regulators suggests more lenders may follow.
At the same time, European authorities are working on new reporting requirements that force firms to disclose risk measured in terms of environmental, social and governance goals. That will make it easier for banks to assess how clean their clients are.
Since ESG became a buzzword in finance, Scandinavia has been at the forefront of the movement. Pension funds in the region, which manage about $1.3 trillion in combined assets, are driving the shift, while Norway’s $1.2 trillion sovereign wealth fund is also growing increasingly activist in the area.
For Torgeby, a blanket shift toward sustainability ultimately amounts to following the smart money, even as record monetary stimulus buoys stock markets across the board.
“When it comes to the difference between sustainable assets or not, I would vote — maybe even now, but certainly in the medium term — they will perform better,” he said.
SEB, which is about 20% owned by the investment vehicle of Sweden’s Wallenberg family, stands out as a pioneer in climate-friendly funding. Back in 2008, the bank arranged the first ever green bond, on behalf of the World Bank.
Corporate clients were slower to catch on. Torgeby recalls spending the next six years, from 2009, “trying to convince corporates that there’s a new tool for capital out there which is earmarked for doing good.” He made clear they’d miss out on a financing opportunity if they didn’t issue them, but “for six years no one wanted to,” he said.
Those clients now understand what’s at stake, and the market for ESG financing has exploded. A record $403 billion was raised in ESG bonds by governments and businesses this year, 70% more than in 2019. There’s also a growing number of instruments being designed to allow more issuers into the market, such as sustainability-linked debt and transition bonds.
Read More: Blue Covered Bond Adds More Color to Europe’s Environmental Debt
Torgeby says SEB is now looking for ways to help finance the United Nation’s 17 sustainable development goals to meet what he describes as “huge demand” from investors. That includes doing business with so-called brown and black industries such as oil, gas and shipping.
Last year, the bank worked with Teekay Shuttle Tankers, which transports oil, on a green bond framework to invest in emission-reduction measures. The deal was “something that we debated and debated,” Torgeby said. In the end, SEB decided some progress is better than no progress.
“If you want to take full responsibility for this very difficult problem, I think we need to say [that] we need some of these products that are harmful for some time to come,” Torgeby said. That’s even acknowledged in the Paris agreement on climate change, he said.(Adds CEO’s comment on return potential of sustainable assets in 7th-8th paragraphs)© 2021 Bloomberg L.P.