How Nordic Municipality Funding Agencies are Building Credibility and Trust in Green Investment

Financing Welfare and Sustainability­

For local municipalities in the Nordics, most green investment is financed by government funding agencies. Kommuninvest is the largest credit institution in Sweden serving the market for local government borrowing. MuniFin is the leading provider of finance for municipalities, affordable social housing, and wellbeing services by counties in Finland. KommuneKredit is a special public purpose credit institution in Denmark that provides cost-efficient financing for municipalities and regions, and associated entities responsible for municipal or regional tasks. In Norway, Kommunalbanken finances important welfare services by providing credit to local authorities.

While there are regional differences, these agencies are responsible for a large share of the local governments’ long-term debt. Part of this financing comes from issuing sustainable bonds, which allow the agencies to support projects that benefit both local communities and the environment.

“We see our role as enabling the sustainable welfare society in Finland”, says Mikko Noronen, Sustainability Manager of MuniFin. “By fulfilling our core mission as a public sector financier, we can also indirectly make the sustainable way of living more attainable for all people.”

The financing that the agencies provide enables local governments to invest in social welfare areas and essential services while also meeting their commitments to sustainability.

Among many initiatives that the agencies finance using the proceeds of green bonds are social welfare, local government services, clean transportation, energy-efficient buildings, renewable energy, sustainable water management, renewable energy, energy efficiency, and climate change adaptation.

What are the challenges you face as issuers?

Mikko Noronen, Sustainability Manager, MuniFin: “For some use of proceeds categories, the impact indicators are not always similar, so it is not always easy for investors to compare impacts of green bonds from different issuers. We are also facing challenges when it comes to developing consistent best practices -- our portfolios consist of projects that have been approved as green at different times and within different frameworks, and hence according to different criteria. Frameworks need to be updated as market practices develop.”

Guri Weihe, Head of Sustainable Finance, KommuneKredit: “We are dependent on third-party input for our reporting, i.e. data from our members and customers, which is provided to us on a voluntary basis. However, since our inaugural green bond issuance in 2017, we have seen only goodwill and cooperation from these parties, so this has not been a major hindrance.”

Venil B. Sælebakke, Climate and green finance advisor,Kommunalbanken: “There is significant qualitative impact associated with welfare investments, but it is not always easily quantifiable. As a result, effectively communicating the total impact of our green portfolio can be challenging. Impact reporting is continuously evolving, and we believe that part of our role is to quantify the value that these investments create.”
 

Mikko Noronen, Sustainability Manager at Munifn

Advancing Transparency and Standardization Through Collaboration

Transparency and shared standards are crucial for the green bonds market. Better reporting practices help investors evaluate green bond programs and make informed decisions, which ultimately leads to a stronger market and more financing available for important societal causes. Recognizing the importance of these factors, the Nordic local government funding agencies – together with other Nordic public sector issuers – have collaborated to develop the Nordic Position Paper on Green Bond Impact Reporting.

First launched in 2017, the Nordic Position Paper has recently been updated to reflect decarbonization trends in the real economy as well as regulatory changes – including the introduction of the EU Taxonomy and the EU Green Bond Standard. The aim is to foster robust, transparent, and pragmatic reporting practices for green bonds. The paper addresses both allocation and impact reporting, providing a practical user guide for issuers. It reflects best market practices and aligns with international reporting guidance such as from the ICMA Green Bond Principles, IFI Framework, and Greenhouse Gas Protocol.

As some of the region's largest credit institutions, the Nordic municipality funding agencies felt it was natural to lead the way in advancing the role of finance in the transition towards sustainability. By developing the Position Paper, they have sought to support green bond investors and contribute to the continued credibility of the sustainable bond market. It also helps set boundaries and frames within which to operate, while acknowledging the differences between these agencies.

“The Position Paper is a form of self-help tool”, says Björn Bergstrand, Head of Sustainability at Kommuninvest, who has led the initiative since the outset. “It enables us as issuers to engage in discussions with peers on a range of challenges related to reporting and arrive at common approaches. This includes methodological approaches to calculating impact from new, saved or used electricity capacity, which is instrumental to the quantification of the green merits of many of the projects that Nordic issuers finance.”

By harmonizing practices, the Nordic local government funding agencies help direct investments towards worthy causes and provide market participants with the information they need to make investment decisions.

“Establishing transparent and standardized reporting principles is crucial for achieving credibility and maintaining the attractiveness of our green bonds and reporting to investors. Our experience has shown that collaborating with issuers who are similar to us has been beneficial, as it enables us to learn from one another and strengthen the integrity of our reporting practices.”

           - Venil B. Sælebakke, Climate and green finance advisor, Kommunalbanken

While the paper is written by public sector issuers, it can also be used by the private sector and issuers from foreign markets. Several major Nordic banks have already adopted its recommendations in their green bonds reporting. While the indicators are currently focused on green bonds, the issuers hope similar approaches to harmonizing reporting practices can be adopted to social bonds in the future, as that market further matures.

The Role of Voluntary Standards in an Era of Increased Regulation

In late 2023, the European Union (EU) introduced the European Green Bond Standard, which is seen as a milestone in sustainable finance markets. The Standard’s stated aim is to become the gold standard for green bonds, based on the detailed criteria defined in the EU Taxonomy for sustainable activities. The European Green Bond Standard will also include standardized templates for allocation and impact reporting.

The Nordic agencies welcome this effort, but do not believe that adoption of the Standard negates the necessity for developing reporting guidelines – especially in the interim period, when many issuers are gradually striving towards taxonomy alignment.

“Regardless of whether bond issuance is aligned with the EU standard or with the currently dominating ICMA principles, there is still a need for issuance to be complemented by robust and reliable reporting,” says Björn Bergstrand.

In any case, the Nordic Position Paper includes recommendations for issuers who will issue bonds under both regulatory and industry standards.
 

Björn Bergstrand, Head of Sustainability at Kommuninvest

Shaping the Green Bond Market of Tomorrow

As the green bond market continues to evolve, the Nordic municipality funding agencies identify several key challenges and developments that will shape its future. One of the most significant factor to watch is the adoption of the EU Taxonomy among European issuers and the potential momentum of EU Green Bonds as a financing instrument, as well as increased focus on new environmental initiatives such as biodiversity and sustainable water management.

What challenges or developments do you think will be most important in the green bond market?

Björn Bergstrand, Head of Sustainability, Kommuninvest: “It will be interesting to follow the take-up of the EU Taxonomy amongst European issuers and their clients, and whether EU Green Bonds becomes a financing instrument that gains momentum. We expect green bond frameworks to become increasingly adapted to the Taxonomy, if not completely aligned, which raises the question on how to manage a green bonds framework with assets approved under different framework vintages.”

Mikko Noronen, Sustainability Manager, MuniFin: “We should keep an eye out for further harmonization, the implementation of the EU taxonomy, possible stricter criteria in the updated Green Bond Frameworks and the link between green finance and sustainability strategies as well climate and environmental risk management. The main challenges the market faces right now include keeping up with the regulation requirements and adopting a mindset of double materiality.”

Guri Weihe, Head of Sustainable Finance, Kommunekredit: “It will be interesting to follow how our customers, as well as other issuers, will work with the EU taxonomy in practice, in particular with regards to data availability and data requirements meant to ensure uniformity in methods and transparency.”

Venil B. Sælebakke, Climate and green finance advisor, Kommunalbanken: “In recent years, there has been a welcome increase in attention towards biodiversity conservation and sustainable land management. We are curious to see how the market will translate the Montreal Global Biodiversity Framework into action by integrating it into frameworks and reporting, and we will follow the development closely. Ensuring that investments do not have substantial negative impact on nature and biodiversity is important to uphold the integrity of the green bond market.”

Nasdaq’s Role in Increasing Transparency

The global sustainable debt market and its investors have become increasingly sophisticated in terms of their ESG analysis in recent years. Access to structured, comparable, and machine-readable information has increasingly become a necessity for issuers and investors alike.

In 2019, Nasdaq launched the Nasdaq Sustainable Bond Network - a unique data platform that analyzes the impact and allocation of a global universe of sustainable bonds. The platform has drawn inspiration from the Nordic public sector’s recommendations in designing its unified data structure.

Nasdaq is fully aligned with the goal of increasing credibility and trust in green bonds – in Nordic markets and elsewhere – and believes it will be key to the continued growth of sustainable investing practices. We look forward to working with issuers and data partners to promote transparency and standardization.