The landmark transaction is just the latest in an illustrious track record in green bonds for one of Sweden’s largest banks. 

Team 1120

From left: Olle Billinger, Hans Beyer, Mats Olausson © Louise Nylund/SEB

Sweden is the eighth greenest nation in the world, according to the 2020 Environmental Performance Index, which ranks 180 countries according to their sustainability. Skandinaviska Enskilda Banken (SEB) has been a pioneer in the green bond market, where it has always punched above its weight. The two came together in Sweden’s first sovereign green bond, for which SEB was a “special adviser”, as well as a joint lead manager.

SEB – still controlled by Sweden’s most famous family, the Wallenbergs – has been a leader in green finance for more than a decade. In 2008, it structured the World Bank’s first green bond, largely the work of its present head of climate and sustainable finance, Christopher Flensborg. Mr Flensborg’s colleagues describe him as “the father of the green bond” and he remains a highly-regarded figure in the climate bond universe.

SEB only just scrapes into The Banker's Top 1000 World Banks ranking’s top 100, where it is ranked 98th by Tier 1 capital. Yet last year it was the world’s seventh largest underwriter of green bonds, with a global volume of $7bn.

As a country, Sweden also punches above its weight in green bonds. Last year, while the Swedish economy was only the 22nd biggest in the world, it was the world’s sixth largest issuer of green bonds by value. By number of issuers, it came fourth, outdone only by the US, China and Japan.

Before the sovereign’s debut, Swedish issuers were corporate and – since 2014, when Gothenburg became the world’s first municipality to issue green bonds – municipal. The largest Swedish issuer is Kommuninvest, which raises capital for local and regional governments.

It is part of Swedish corporate culture to want to create a better world

Christopher Flensborg

In 2019, Kommuninvest was the world’s 10th largest issuer of green bonds in developed markets, excluding supranationals. “Over 90% of Swedish municipalities and regions have access to funding via green bonds, through Kommuninvest and/or as part of their treasury function,” explains Hans Beyer, SEB’s chief sustainability officer.

The engagement of Swedish companies and citizens with sustainability issues is higher than in many other countries. “It is part of Swedish corporate culture to want to create a better world,” Mr Flensborg observes. “Swedish companies generally embrace society in their business models.”

The green bond has played an important part in changing thinking around finance, argues Mats Olausson, a senior adviser in SEB’s climate and sustainable finance unit. “It has contributed to a shift in focus away from general corporate purpose lending and risk-adjusted returns to looking also at the purpose of providing finance,” he says.

Government-led ambitions

Twenty years ago, the Swedish parliament adopted a set of environmental quality objectives which created the framework for all subsequent initiatives on the environment and climate change. More recently, as part of its budget proposals for 2016, the Swedish government promised to create a more sustainable society, adding that the financial system needed to contribute to this goal.

A government-commissioned enquiry into how best to support the green bond market resulted in a recommendation that the state should issue its own. So the government instructed the Riksgälden, or Swedish National Debt Office, to issue a sovereign green bond before the end of 2020.

“The National Debt Office joined hands with SEB in October 2019,” says Olle Billinger, an adviser in SEB’s climate and sustainable finance division. “SEB was the only green structural adviser, and we worked very closely with different ministries and the Debt Office to make this a success.”

Surprisingly, given the bank’s standing in this part of the bond market, this has been the first sovereign green bond it has worked on. It was, however, structural adviser to Ontario when the province became the first in Canada to issue green bonds, in 2014. The four-year C$500m ($377m) deal had a 1.75% coupon and was nearly five times oversubscribed. The proceeds helped to finance transit and other environmentally friendly projects across Ontario.

Christopher Flensborg

Christopher Flensborg © Louise Nylund/SEB

In 2017, SEB was the green structuring agent on Quebec's first green bond, a five-year C$500m transaction whose proceeds were again devoted mainly to public transit projects. It had a 1.65% coupon.

For Sweden’s inaugural sovereign issue, a framework was drawn up in line with the Green Bond Principles laid down by the International Capital Market Association. The framework, adopted by the government in June this year, specified the use of proceeds, key to any green bond.

Eligible expenditures included those aimed at mitigating climate change, strengthening biodiversity, promoting renewable energy or reducing carbon emissions in the transport sector. Investments in nuclear or hydro power were not included.

SEB advised the Debt Office on how to assemble a portfolio of the greenest possible expenditures, in line with the goal of carbon neutrality by 2045. “The guidelines said that the state should issue at the lowest possible cost,” Mr Flensborg says. “So our first task was to see what existing infrastructure could be leveraged to make a lean, green, smart issue.”

A guiding principle here was to find existing projects and workflows, not to create new ones. The government was very conservative in its selection criteria, according to Mr Olausson. “Eligible expenditures are limited to central government budget expenditures,” he explains. “They do not include forgone tax revenues or local government spending.”

The framework was classified as dark green, the highest grade of green-ness, by the second-opinion provider, the Centre for International Climate and Environmental Research. SEB was mandated as a joint lead manager for the transaction, together with Barclays, Danske Bank, NatWest Markets and Swedbank.

Environmental quality objectives

The deal was digitally road-showed for two full days, with opening statements from the Minister for Financial Markets and the director general of the National Debt Office, and one-on-one calls for those who preferred it. Investors’ questions were centred on gaining a better understanding of Sweden’s environmental quality objectives. “Their categories and criteria are based on a 20-year old system, and the definitions are relatively broad compared to other frameworks,” Mr Olausson says.

Investors were invited to voice their opinion

Mats Olausson

Investors were told that the National Debt Office would publish a report no more than a year later, specifying how the proceeds were spent. This would include output and impact statements outlining the positive environmental effects of the green expenditures.

It was decided to go with a 10-year tenor. “The issuer wanted to issue at between seven and 10 years maturity but had no strong preference,” Mr Olausson says. “So investors were invited to voice their opinion, and their preference was for 10.”

Initial price thoughts were released at mid-swaps minus 29 basis points (bps). Demand was strong and, after they had been open for 24 hours, the order books totalled SEK47bn ($5.3bn), from 70 individual investors. The pricing range was tightened to -30bps to -32bps, and finally set at -32bps. That was 1bp through Sweden's current curve. The re-offer yield was 0.09% with a coupon of 0.125%.

With the appetite for sustainable investments increasing, some green bonds have priced considerably tighter than a vanilla bond from the same issuer. Yet green bond holdings tend to be more stable than conventional bonds, and Mr Flensborg believes there is a case for issuers not to be too greedy on price. “You have the option to price at comparable levels, which enables broader engagement,” he says.

The issue was sized at SEK20bn. Much of the demand was domestic, with 61.5% of the deal going to Swedish investors. The UK took 17.9%, Europe, the Middle East and Africa took 8.4%, other Nordics 7.2%, the Americas 4.5% and Asia 0.5%. Investors were overwhelmingly institutional, with pension funds accounting for 45.6% of the transaction, asset managers 32.9% and insurance 8.5%. Bank treasuries took 8.1%.

Will Sweden do more of the same? “As underwriters, we were very happy,” Mr Flensborg says. “But the National Debt Office will evaluate the exercise and, based on the outcome, may issue more or refrain.”

That evaluation was part of the clear instructions from the government. The Swedish public sector tradition has always been to move slowly and gradually, to proceed step by step, the bankers say. This, they chorus, is “the Swedish way”.



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