Financed emissions: A key lever in the net-zero transition

CSRD: The Corporate Sustainability Reporting Directive is the European Union (EU) regulation that requires large companies to report on their environmental and social risks, and on how their activities impact people and the environment. The new rules entered force in January 2023, and the first companies will have to start reporting for the first time for the 2024 financial year in 2025. The regulation is expected to increase the availability and scope of companies' reported sustainability data, which will help financial institutions in calculating their financed emissions.

Double materiality: Under the concept of "double materiality," companies must consider how sustainability affects their financial well-being as well as how their activities impact both society and the environment. The EU's CSRD requires companies to conduct a double-materiality assessment to identify their relevant disclosure requirements under the European Sustainability Reporting Standards (ESRS).

Enterprise value: A measure of a company's total value, including the book value of its equity and debt. A lender's share of financed emissions for a given company is calculated based on its relative share of the firm's enterprise value.

European Sustainability Reporting Standards: The European Sustainability Reporting Standards are a core component of the sustainability reporting landscape within the EU, providing the mandatory reporting framework to be followed under the Corporate Sustainability Reporting Directive. The ESRS was formally adopted by the European Commission under the CSRD in July 2023.

Financed emissions: Greenhouse gas emissions linked to the lending and investment activities of financial institutions. They reflect a lender's share of responsibility for a client's emissions, and are calculated based on the lender's share of the client's enterprise value. Financed emissions can increase if either 1) the company's absolute emissions increase, or 2) the lender's relative share of the company's capital structure increases.

GHG Protocol: The Greenhouse Gas Protocol is the world's most widely used set of greenhouse gas accounting standards and calculation guides.

GFANZ: The Glasgow Financial Alliance for Net Zero (GFANZ) was launched at the UN climate summit COP26 in 2021 to coordinate efforts across the financial system to accelerate the transition to a net-zero economy. Nordea is a member, along with over 600 financial institutions from around the world.

ISSB: The International Sustainability Standards Board (ISSB) is the independent standard-setting body launched by the International Financial Reporting Standards (IFRS) foundation to set global sustainability reporting standards. The ISSB in June 2023 launched its inaugural standards, IFRS S1 and IFRS S2, which come into effect for annual reporting periods starting on or after 1 January 2024. Unlike the ESRS, the ISSB standards are global, voluntary and focused on financial materiality, while the ESRS is based on a double materiality approach.

Net zero: Net zero refers to a state where greenhouse gases released into the atmosphere are balanced by their removal from the atmosphere, resulting in "net-zero" emissions. Committing to become net zero means that an entity aims to reduce its absolute emissions across all three emission scopes by 90-95% and only the final 5-10% that cannot be cut will be neutralised through carbon removals. Net-zero targets cover around 90% of the global economy. Nordea has adopted a target of achieving net-zero emissions across our value chain by 2050.

NZBA: The Net-Zero Banking Alliance (NZBA) aims to accelerate the transition of the global economy towards net-zero emissions by 2050. The alliance was formed by the United Nations Environment Programme Finance Initiative (UNEP FI) in 2021, and Nordea joined that same year. Members are committed to aligning their lending and investment portfolios with net-zero emissions by 2050 and setting intermediate targets for 2030 or sooner, using robust, science-based guidelines.

PCAF: The Partnership for Carbon Accounting Financials (PCAF) is a global partnership of financial institutions that work together to develop and implement a harmonised approach to assessing and disclosing their financed emissions - the emissions associated with their loans and investments. Nordea joined PCAF in 2020, and recently joined a core team of 15 experts to develop new accounting standards.

Scope 1 emissions: The direct GHG emissions from sources controlled or owned by an organisation, such as a company's buildings, facilities and vehicle fleet.

Scope 2 emissions: The indirect GHG emissions from the production of purchased energy, such as electricity, heating and cooling.

Scope 3 emissions: All other indirect GHG emissions in an organisation's value chain, both upstream and downstream. Examples include financed emissions, business travel and emissions from the use of a company's products. For a bank such as Nordea, financed emissions are treated as scope 3 emissions.

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