How the ESG* analysts should think – Dilemmas in the Nordic savings bank sector

Many of the elements in this article are also very relevant for banks in general.

When doing ESG research on this sector, there are a certain number of dilemmas the ESG analyst meets. Is this really having an impact? They say that they do this, but there are no KPIs, should I take it into account?

Capital structure – Equality of shareholders and take over hurdles

Equality of shareholders is part of the Governance factors ESG analysts are considering.

The structures in the Nordic countries differ and it can differ among the banks as well, due to deregulation in newer time.

1. Norway – Part of the equity of a savings bank that has issued equity certificates is ownerless. This means that savings banks cannot be taken over by an acquisition. This is regulated by law and structural changes require the consent of the authorities. Permission must be sought from the Financial Supervisory Authority of Norway for acquisitions of equity certificates that result in ownership stakes of more than 10 % of the capital.
2. Sweden – Sparbankstiftelser (Trusts) own most banks and have no mandate to sell their ownership. The only company that owns stakes in Swedish savings banks is Swedbank, that is owned around 15% by savings bank trusts. They can agree to mergers though.
3. Finland – The savings banks are owned by trusts, but some have been transformed to publicly traded companies. The cooperative banks that are owned by the clients dominate.
4. Denmark – The savings banks are originally self-owned. Over time, however, many savings banks have been transformed into joint stock companies as they have merged with other savings banks.

For Nordic savings banks the capital is for the most very stable and most are not listed on the stock exchanges. The most problematic structure is the Norwegian with self-ownership combined with Equity Certificate holders that do not “own” the bank only a right to the financial performance pay out. How can they be equal?

ESG analysts like to see no anti take over initiative, and the Nordic savings banks seems by capital structure and regulatory hurdles well protected from this.

Should the banks suffer from these elements in the ESG scoring? We think not, as this is just a result of the historic capital structure and societal role of these banks. And the societal position is probably weighing in more positively.

Talent retention – Equity options not possible, and when possible, not used?

In general, we like to see talent attraction and retention tools. Good salary, bonus and working conditions are of course important. But tying talents closer to the company with option schemes or equity plans as part of the bonus is even better. If there are no shares available this is a problem.

In Finland and Norway this is technically possible, through ECs and normal equity, while in Sweden and Denmark this is impossible. None of the Norwegian saving banks in this research report (soon – link to sector report) offer this though. And we wonder why?

Should they be negatively impacted on the ESG score for this? We think so, as not using this strong talent attraction and retention tool is a weakness for the sustainability of the company. Watch out, a new tool is the freedom of choosing remote work! (More on the latter here: Remote Work option as talent attraction)

EU Financial Suitability assessment – Good, but we will do our own assessment of the BOD please

The suitability of Board of Directors members for financial regulated entities must be approved by the local regulator.

What we notice is that despite approved, we sometimes see very little representation of Digitalisation, IT security and Legal skills on the BOD. If the skillset of the directors on the board is specified at all.

It is important that the banks (like any other sector really) publish full information on their Board members, skill set, education, experience, current other commitments (jobs, other Board memberships, etc.).

Should the banks that do not present the details of the Board of Director members get negatively impacted on the ESG score? Absolutely, as the skill set (and availability) of the Board members is crucial for the sustainability of the company and we need the details to do our own assessment.

Global problem – How to measure the Scope 3 of the financed activities?

Scope 3 is a difficult issue for many industries and companies. How to get the visibility and how to get correct numbers. The standards and data availability are regularly changing to the better, but it will take a lot of effort and time before we have a good “solution” to this.

It’s through their loan books and investment portfolios that banks and asset managers make their biggest contribution to climate change.

According to the CDP: “The greenhouse gas emissions associated with financial institutions’ investing, lending and underwriting activities are more than 700 times higher, on average, than their direct emissions.”

While banks generate emissions from heating their buildings and flying executives to meetings “almost all climate-related impacts and risks of global financial institutions come from financing the wider economy,” CDP said in a statement.

Should banks not releasing estimates on their Scope 3 from financing and investment be impacted negatively on their ESG scoring? Absolutely, even if there are no exact numbers, doing it would show seriousness in the bank’s sustainability strategy.

Scope 3 and financing – How to estimate the banks’ part?

Most banks state that their biggest impact on the environment is through the financing they do of other companies. And for many it ends there.

It is hard to estimate the Scope 3 today, see point above.

Some banks though, do an effort of estimating it, with the risk of being wrong. But really, it is to their advantage to try to put a number on it, and we recommend doing so. It makes all words carry more weight.

Then the question is how to do this?

Read more about our suggestion here: ESG* Reporting – How to split the “responsibility” of CO2 emissions for those financing a company – A suggestion for the banks and asset managers

Green Bond Framework – good looking, but how much do the banks contribute?

There are several issues with the current use of Green Bonds.

Green bonds – Qualification of Residential and commercial real estate – Difficulties ahead?

Today each bank defines their Green Financing Framework, and it is always assessed by an external third party like Sustainalytics, Cicero, etc.

Some are stricter than others, and we have seen some examples that the strictest have loosened their requirements on the housing or other real estate they finance. When loosening the requirements, the “impact” (see below) is less obvious, but the lending volumes are increasing. No surprise that the loosening then happens.

Is there a risk of new standards with EU Green Bonds – Will requirements to become harder and tightened over time and no longer permit a free choice of Green Bond Framework? As seen in the recent publication by the EU, in for instance Norway the real estate industry is now worried their building standards will not qualify as “green” enough according the EU definitions, and therefore not qualify for EU defined green bond financing. (In Norwegian: https://www.nrk.no/norge/norske-byggeregler-ikke-tilpasset-nye-eu-regler-1.15573367)

The non-green bond financed remains…

Green Bond requirements on mortgages and other financing is good, but what about the rest? Those offering green financing also as part of the green bond framework supply reporting on what is financed through the program, that is the environmental impact. But the same banks do not report the rest of their mortgage/other financing portfolio. To make this job complete and approach a sensible Scope 3 reporting the banks should also do this effort.

Do the Green loans imply cheaper financing for the companies and retail clients? With other words do you lower your margin to “contribute” to the SDGs you highlight?

What is the real impact from the green financing stemming from then banks, i.e., for which they can claim contributing to the one or the other SDGs?

It seems that banks starting with green bonds, just lift over the current portfolio that is qualifying to the green bond framework. In that case, there is absolutely no change or positive impact on the environment.

Now, if the bank really wishes to contribute, they could lower their margins on this kind of mortgages and loans to incentivise the loan takers to go for more environmentally friendly solutions. Notice; margins. If the total cost of the mortgage/loan is lower because the green bons investors are ready to take them on at a lower spread, it is the bond investors that can claim the impact, not the bank. Few banks give any transparency on this. But of course, making this possible is a good thing they can claim.

A different ESG rating for the Covered Bond specialist subsidiaries?

How to rate a Mortgage Covered Bond company owned by a bank when the bank is sourcing the lending business and the subsidiary is emitting the covered bonds? As we see it the CB emitting subsidiary is only doing a part of the mortgage value chain and hence cannot be researched alone.  We therefore think the closest is to analyse the mother banks including the CB subsidiary and use the mother banks ESG assessment or scoring.