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Nordic climate financing – a global effort

Securing funding that supports low-emissions and resilient development around the world – not least in developing countries – is crucial in order to limit global warming to 2°C. Three Nordic financial institutions – NDF, NEFCO and NIB – commit significant sums to everything from grants for climate-change and development projects to loans and capital investments. The focus is on both environmental and financial viability.

By Páll Tómas Finnsson

Strong commitment to environmental mandate
The Nordic Development Fund (NDF), the Nordic Environment Finance Corporation (NEFCO) and the Nordic Investment Bank (NIB) all meet the need for climate financing in different ways.

At one end of the spectrum is NDF, a joint Nordic development-finance institution that provides grants for climate-change activities in low-income countries in Africa, Asia and Latin America. Then there is NEFCO, which invests in green-growth projects in Russia, Ukraine, Belarus and Georgia, as well as climate initiatives around the world. At the other end of the spectrum, NIB provides loans and capital investments on commercial terms, mainly in the Nordic and Baltic regions.

“The common characteristic is that we take our environmental mandate very seriously,” says Per Lagerstedt, Senior Environment Analyst at NIB. “All three institutions have extensive environmental expertise when it comes to assessing and evaluating projects in terms of their environmental benefits and risks.”

NIB promotes direct improvements to the environment
The largest of the three organisations is the Nordic Investment Bank (NIB), which is jointly owned by the Nordic countries, Estonia, Latvia and Lithuania. Its declared vision is to contribute to a sustainable and prosperous Nordic-Baltic Region.

“Our role is to work towards improving both competitiveness and the environment in the member states,” says Lagerstedt. “All the projects we enter into, including those outside our member countries, must pursue this mandate.”

The environmental focus means that a large share of the bank’s portfolio is climate-related, but Lagerstedt emphasises that NIB only enters into projects that comply with its financial policy and are consistent with sound banking principles.

“Basically, this means that we don’t take on too much risk and the client must be able to pay back the loan,” he explains. The only exception to this rule is when the member countries, the bank’s owners, provide state guarantees for certain high-risk environmental projects of mutual benefit, e.g. in Russia or Ukraine.

Many of NIB’s climate projects are related to the generation of renewable energy, such as wind farms, hydropower projects and solar-power facilities. The bank also finances waste-to-energy plants, biofuel plants and new energy-saving technologies. In addition, NIB has participated in energy-efficiency programmes, albeit mainly outside the member states. Public transport, in particular train transport, and larger infrastructure and transmission projects are also prominent.

“Investment in transmission projects often makes it easier for investors to invest in new renewable energy plants,” says Lagerstedt. “Moreover, we see a need for a much larger transmission capacity in Europe in order for us to be in a position to implement the EU2020 goals.”

Strict rules apply to which projects qualify for NIB’s green bonds and financing under its environmental mandate.

“The basic rule for all environmental projects is that the environmental situation must improve, in absolute terms, after implementation,” Lagerstedt explains. “For example, if you want to enlarge a factory that produces wood pulp, it’s not enough to state that following our modernisation programme, each ton of pulp will emit less and consume less energy. If the factory’s total emissions are larger after the project than before, it doesn’t qualify as an environmental project. This is an important principle.”

NEFCO – a one-of-a-kind financial institution
The Nordic co-operation’s climate financing is not solely limited to the Region itself, but is also oriented towards enabling social, environmental and economic progress in other areas. NEFCO, for instance, was established 25 years ago, in the wake of the Soviet Union’s demise, as a vehicle to engage more actively in environmental issues in the neighbouring region to the east.

“A lot of outdated technology needed to be replaced, and most of the pollution in the Baltic Sea came from this area,” says NEFCO’s Communications Manager, Mikael Sjövall. “We could either invest more and more money in upgrading waste-water treatment plants and industrial facilities in the Nordic countries, or shift our focus towards the neighbouring region, where we could, more cost-efficiently, prevent harmful substances from damaging the environment.”

Similar principles apply to the current climate issues. Sjövall states that such issues cross national boundaries, and therefore, developed countries must live up to their responsibility to develop and finance new international climate solutions.

As a consequence, alongside its activities in Russia, Ukraine, Belarus and Georgia, NEFCO now makes more active efforts to pursue climate investment on a global scale. Moreover, NEFCO’s carbon facilities are at the forefront of ensuring emissions reductions as part of the UN’s emissions-trading system. In 2014, its carbon procurement facility, NorCap, successfully acquired 19 million carbon credits for the Norwegian Government.

NEFCO’s climate portfolio comprises projects related to renewable energy, energy efficiency, more efficient material use, and initiatives aimed at replacing harmful substances with environmentally friendly alternatives in production. In 2014, 154 new projects were approved by NEFCO, worth €89 million in total.

“NEFCO is the only international financial institution in the world that exclusively finances environmental investments,” says Sjövall. “All of our projects result in emissions reductions. At the initial stages, we look at the emission-reduction potential and assess how costly it would be compared to Nordic shadow prices. This dimension is present in all project preparations and in the handling and administration of our clients’ project enquiries.”

NEFCO’s participation is conditional upon involvement from at least one Nordic business or organisation, which means that Nordic expertise is strongly represented in its portfolio. As an example, Sjövall points out that Sweden and Finland are at the forefront of using logging residues for renewable energy, Denmark is a world leader in wind energy, and Norway and Iceland possess valuable hydropower expertise.

“Each Nordic country has key strengths in certain sectors,” he says. “By pooling these resources, we’re in a much better position to support Nordic companies in their internationalisation efforts and to promote transfer of Nordic environmental technology to global markets.”

Climate and development in the world’s poorest countries
The Nordic Development Fund (NDF) provides financial support to a wide range of mitigation and adaptation efforts in some of the world’s poorest countries in Africa, Asia and Latin America. NDF’s capital is allocated from the development budgets of the Nordic countries. It is the only Nordic finance institution focusing on climate change and development in low-income countries.

The projects focus on three key areas: infrastructure, including energy, transport, urban development, water management and climate resilience; national resources, such as water resources management, sustainable land use and forestry and coastal zone management; and climate capacity building in the partner countries. Most of the funding is done through co-financing with multilateral development finance institutions and Nordic bilateral development organisations and agencies. NDF’s contributions range from €2 – 5 million. In 2014, a total of €38.9 million was awarded to 14 new projects worldwide.

“NDF has successfully developed innovative financing arrangements to catalyse additional financing from other development finance partners and the private sector,” says Hannu Eerola, Country Programme Manager at NDF. “The fund has also showed the ability to pilot interventions that have a high level of risk, which enables the testing of new approaches and technologies in order to develop high-impact solutions to climate change.”

International partnerships through the Nordic Climate Facility
One of NDF’s financing instruments is Nordic Climate Facility (NCF). Each year, NCF launches a €4 million call for proposals on a selected theme related to climate change in developing countries. In 2015, the call focused on climate resilience in urban and private-sector contexts.

“We were looking for projects addressing urban adaptation, which is one of the more complex issues we’re facing,” says Eerola. “Despite the issue’s complexity, we received 65 project applications, 30 of which were shortlisted. In the end, eight projects will receive funding.”

NCF’s objective is to transfer knowledge and climate technology, but also – and equally importantly – to build partnerships with local partners in developing countries. The calls for proposals are open to all types of organisations – consultants, companies, NGOs, universities, etc. – but to be eligible for support, all applicants must team up with a local partner. To increase their ownership of the projects, these local partners are required to finance at least 10% of the project’s budget.

The Nordic Climate Facility has funded a wide scope of projects since it was established in 2009. In 2013, an independent evaluation of the mechanism highlighted its ability to combine innovation, private leverage and partnerships in a cost-effective manner.

“The Nordic countries have been faced with our own climate problems, so we are able to offer many innovative approaches, new technologies and solutions,” says Eerola. “Providing applicants with the opportunity to test and pilot their products and solutions in these countries can upscale their activities considerably.”

“Our mitigation projects address energy efficiency, renewable energy and low-carbon development, while the adaptation projects have dealt with issues such as climate resilience in urban or rural environments,” he continues. “These projects will help the countries and partners to build climate resilience and participate in mitigation activities.”

“Our role is to work towards improving both competitiveness and the environment”

Per Lagerstedt, Senior Environment Analyst, NIB

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