Trade finance can enable the Nordic climate transition, building a more sustainable tomorrow

The Nordic region is widely recognised as a global leader in sustainability, known for its commitment to emission-free industries, advancing circular economy initiatives, and an almost clean power system. Their progress is largely driven by government policies, corporate commitments to environmental, social, and governance (ESG) principles, and pioneering financial innovations.      

However, for the Nordics to maintain their position at the forefront of global sustainability efforts, financial institutions within the region must play their part. By providing innovative financing solutions, sustainability-focused advisory, and promoting collaboration, banks play a key role in supporting corporate transition efforts and advancing sustainability across society. 

A commitment that is particularly crucial in the light of the current shifting geopolitical dynamics, as the wind of change might reshape the pre-established pathways to sustainability. 

For instance, Danske Bank aims to achieve net-zero emissions by 2050 or earlier. The bank has committed to reducing its exposure to the oil and gas sector and will only provide financing to exploration and production (E&P) companies that are not expanding into new oil and gas fields and that have a credible transition plan aligned with the Paris Agreement.

How trade finance mitigates risks in sustainability projects

Trade finance instruments have become enablers for corporates in the region to support investments and economic growth. Tailored financing solutions for projects within climate transition are increasingly incorporating trade finance instruments, such as bank guarantees, standby letters of credit (SBLCs) and letters of credit (LCs), as a part of the larger financing package.

Trade finance products are becoming more frequently used among the Nordic corporates to manage and reduce risks in large-scale sustainability projects. 

Initiatives within renewable energy, such as wind, solar, or hydropower, often involve substantial investments, complex stakeholder structures, and extended timeframes. 

To provide security in such projects, banks issue various instruments, including bank guarantees and SBLCs, which secure contractual obligations throughout the project’s lifecycle. 

In the event of contractual breaches, these instruments help safeguard the value chain by ensuring financial compensation. They build confidence among stakeholders while supporting the seamless execution of projects.

Financing flexibility and feeding domestic demands

The use of trade finance isn’t just for risk mitigation. The observed trend in the Nordic region is that banks allocate capital for businesses that align with their environmental standards, and trade finance products serve as essential components of payment structures in sustainability projects.     

Rather than drawing on loans that risk triggering higher costs, especially in a high-interest rate environment, or freezing collateral for committed payments, payment securities can be issued to guarantee the execution of predefined payment schedules. This approach enhances liquidity for contractors while reducing overall costs.      

Equally, issuing of advance payment guarantees can enable smaller Nordic suppliers to secure necessary funds upfront, facilitating their participation in large sustainability projects. This, in turn, promotes greater diversity among participants and contributes to long-term corporate growth within the region. 

Government policies in the region also trigger the demand for trade finance solutions. In particular, environmental permits often require the issuance of local bank guarantees, which assure authorities that contractors will fulfil all regulatory and compliance obligations associated with the project. 

Similarly, landowners frequently demand financial securities to ensure the appropriate payment, use, and restoration of land utilised for the project.

Development of new products to enhance the sustainable transition 

Sustainability is becoming a regular topic of conversation at trade finance industry events, given the growing interest among companies in exploring how sustainable banking products, such as green solutions, can be integrated into trade finance activities. 

In line with this trend, the International Chamber of Commerce (ICC) has introduced the Principles for Sustainable Trade and Trade Finance. These principles provide a framework to align trade finance offerings with sustainability objectives, similar to those seen in loan and bond markets. 

The ICC’s Principles can be applied to trade finance products such as bank guarantees, using methodologies based on either the ‘use of proceeds’ approach or sustainability-linked structures. 

This demonstrates how trade finance is evolving to meet the growing demand for sustainable solutions and offering businesses new opportunities to situate their financial operations in line with their environmental and social goals. 

The Nordic market has adhered to this global development, with both corporates engaging and incorporating sustainability in their trade finance operations, and banks expanding their product portfolio to meet this demand.      

Steady as she goes, or new directions on the horizon? 

Ongoing geopolitical tensions may have shifted focus away from sustainability and disrupted progress, leaving many Nordic corporates uncertain about where to direct their efforts. Investment decisions are pending, and sustainability projects in the region are postponed, leading to slower development than expected.

Businesses in the Nordics often face difficulties in achieving profitability from their transition efforts due to uncertain market demand. While the commitment, engagement, and capability to drive the climate transition remain strong, the willingness to absorb the higher costs associated with a sustainable business ecosystem appears limited when demand is unpredictable.      

Both in the Nordic region and globally, end-users and buyers tend to demonstrate a fragile willingness to pay the increased costs for goods and services that support the climate transition. Consequently, large-scale sustainability initiatives by Nordic companies risk being slowed down as they prioritise securing long-term profitability.

However, this isn’t the first time the sustainability wave has been hit by storms. It has previously endured backlash, economic downturns, and political resistance, yet each time, proved its resilience. 

Demonstrable commitment to the climate transition

The Nordics are uniquely positioned to contribute to the global climate transition. They are home to an abundance of renewable energy resources, responsible for almost half of all primary production of renewable energy in the European Union (EU) in 2020. 

With a policy-driven approach and an independent governance structure, strong institutions, and stable market conditions, a commitment to sustainability has been rooted in the region for a long time.                                                        

This has allowed corporates in the region to develop and become frontrunners in the field. The insights gained and the outcomes achieved through their long-standing efforts present an opportunity to inspire the rest of the world and contribute to the global transition.

Multilateral collaboration between governments, businesses, and investors, while maintaining a commitment to ESG principles, is essential to ensuring the Nordic market continues to grow sustainably and sets the benchmark for the rest of the world.