Skandinaviska Enskilda Banken AB (publ) (SEBA) Earnings Call Transcript & Summary

Welcome to this presentation of SEB's updated green bond framework. My name is Philippa Allard, and I'm responsible for Debt Investor Relations at SEB. I have with me today, Hans Beyer, Chief Sustainability Officer; and Johan Nyberg, Head of Funding and Liquidity Management, who will present the highlights of our sustainability strategy and our updated green bond framework. At the end of the presentation, we will take questions. And there is a chat function where you will be able to send in your questions. Last week, we published our annual accounts for 2021, reporting a strong financial performance with good profitability and a solid capital position. We also communicated our Strategy 2030 and our business plan for 2022 to 2024, including what we will focus on and invest in, in the next couple of years. An important part of the Strategy 2030 is our sustainability strategy, which we communicated in November last year. I will leave over to Hans now to go through the highlights of the sustainability strategy.

Thank you, Philippa. Yes. So we built a sustainability strategy based on 2 major conclusions. The first one was that climate change poses a sincere challenge to society at large, and by that also, Sbanken, because we are an integral part of society in the geographical areas where we are represented. But the second conclusion is that climate change also poses a fantastic opportunity, providing that we take on that challenge, as society is taking on that challenge. Rarely have we seen such an alignment between investors, government representations, politicians and academia. And if you pair that together with the enormous amount of investments projected in order to fix this and the willingness to participate, we think that we stand in front of something that is no less than a major industrial change, almost an industrial revolution. And we like to label that the green super cycle or the sustainable super cycle. And it's, of course, a challenge, but Sbanken has participated in industrial change for the last 150 years-plus. This is our DNA to participate in this. But it also comes with a huge responsibility in how you do that. And let me switch page here. We deployed SEK 3,000 billion every day into society. It's very, very important that our responsibility is to make sure that, that ends up in the right place. We, of course, have also to take into consideration the disruptive forces that come with the industrial change, and we have to be very, very conscious of how we do this. But our approach is to engage rather than exclude. We don't have the luxury to exclude because we're such a big integral part of society where we operate. But we don't want to exclude. We believe that change will come -- positive change will come when we engage with our customers as long as we share a common vision of the future and what kind of desired goals we have out there for different industry sectors. And as long as we share those goals, our commitment is to be there to accelerate the pace towards a more sustainable future for all involved parties. Now that doesn't come without an effort. And we have decided that our enablers to actually make sure that this happens comes through these 4 major areas: product innovation, credit portfolio classification, sustainability policy frameworks and governance. And I will try to briefly go through these 4 areas. The first one concerns product innovation. We started this journey in 2008 when we developed the first green bond together with the World Bank. That was, of course, an important milestone, and we learned a lot through that process. But as you can see from the picture, on this side to the left, we have developed now a lot of different products that we offer our customers in order to make sure that the capital allocation becomes as efficient as possible and that we offer our customers an opportunity to deliver on their promises and their desired goals. And to the right, you see some of the people and some of the customers that we worked with during 2021 to make sure that they achieve them. It's not done in a short while. But this is a very, very important start. And I think that our true contribution to the daily life of this transition is through the services and adviser -- sorry, the services and the products that we deliver to our customers. Now this won't happen, I won't be correct if we don't have an appreciation of what our customers' sustainability goals and appreciation -- sorry, focus is aimed for. So we developed during the last couple of years something that we call the sustainability classification model. It is developed to understand our -- to start with customers, to start with greenhouse gas emission trajectory towards 2050 and to see whether they are in line with the goals of the Paris Agreement. This provides us with the mapping that then comes out in 5 different colors: brown, green -- sorry, brown, orange, yellow, light green and dark green, ranging from brown, which are economic activities that are not Paris-aligned today and where the customer don't show a lot of inclination to actually move from where they are. Orange is the same thing, economic activities that are not in line with the Paris Agreement, but where the customers have started on a trajectory towards it by planning. Yellow, the customer will come a little bit further. Green, the customer is on its way to Paris-aligned future and green customers that are already there. This provides us with the foundation to provide the correct advisory service as well as providing them with a view whether they are -- where they are compared to their peers on a relative basis as well on absolute levels. But it also provides us, as a company and as a bank, with a solid view of our credit portfolio. And to show you -- and then we can show you what the anatomy of our credit portfolio looks like. And if you look at this picture to the left, we have the TCFD report for 2020, which just shows our exposure towards different sectors that we lend to. But on the right, you see that we go down a level in granularity and show that all sectors have different companies in them. And for example, in the automotive industry, we have companies that are already there when it comes to tailpipe emission, while others that have still a lot of challenges. This forms the foundation for how we appreciate our exposure and what we will work with together with our customers going forward. And of course, this leads to important decisions, who will we continue to work with. What are their -- our customers' vision and does it drive with ours. We are in the business of long-term relationships. We have a history of sticking to our customers. We have not decided to change that in any way. However, our conviction is that we need to share the same vision of the future, not just from a credit perspective, but now also from a sustainability perspective. This will, of course, over time, needs to -- that we need to do an assessment of where we're heading with our customers. And to a very large majority, we will continue to engage. A little bit dependent on the nature of their business, we will be whole hard and involved in all their parts -- all parts of their business or we will do selective engagements. But for the very, very few customers where we do not share the same view of the future, we will disengage over time. And this could be done in a more speedily way or a more slow way. But it's our responsibility to make sure that it's done in an order way because we have no interest and we have very responsibility to make this disruptive, and we have a responsibility to think about the future for the customers that we work with today and for their customers and their employees. So for our sake, it's important that we do this in an orderly way. Now in order to make sure that the integration of sustainability into our Sbanken is efficient, we work with something that we call industry sector policies. They serve 2 purposes: primarily to give our bankers and our product owners a direction of where we want to be and where we're going. This is the desired direction for us as a bank in the respective industry, based on materiality factors that we've developed together with external help for all different industries that we engage in. It also gives a threshold based on both ESG or what we think is acceptable for each industry that we cover. In this way, we have an efficient framework that helps our bankers and product owners on a daily basis to understand where we, from a management perspective, want to go with the bank and how we will progress with our credit portfolio going forward. It does also provide us with a way of communicating to the outside world what we stand for, where our direction is going and what they should assess us for. So this is a communication tool together with -- for our stakeholders as well, which we think is equally important. And if this was for efficiency, we also have to make sure that we integrate sustainability throughout our organization. Our goals will not be achieved if we don't work together, all the 15,500 colleagues of Sbanken, and to make sure that our balance sheet is in a coherent way moving in the right direction. The first thing we did when we launched the new sustainability organization in SEB was to install something that we call the Group Executive Sustainability Committee, or the GESC. This is where we take all sustainability decisions concerning the whole bank. In GESC, all division heads are represented as well as the Chief Risk Officer and the CFO. And this is to ensure that when we take decisions about sustainability, it's cascaded throughout the bank in a coherent way. From a sustainable banking perspective, we are, of course, present together with all the divisions to make sure that this happens in practice. And the Group Executive Sustainability Committee is at par with the Group Executive Committee, and its next level is the Board. It's chaired by our President and CEO, Johan Torgeby, as is the Group Executive Committee. And this is our way of showing that integration of sustainability in our organization is at the forefront of necessities in order to make things happen the way we want them. But as we all know, sustainability is a complex area and it's quite a new discipline. So in order for us to see a little bit long term and to understand what might be around the corner, we've also installed something that we're very happy with, which is called the Sbanken External Sustainability Advisory Board. And we invited 4 prominent persons that are not bankers to help us understand where are we heading next. What does biodiversity mean? What is the banks' role in the future? And what do other banks do in other parts of the world? This is extremely helpful for us to navigate the long term, if you want to gain in understanding what kind of impact out and outpaced in effect we can expect for sustainability changes and the challenges that comes with climate change, and then, of course, expanded into other areas than just climate. But we felt that when we established this, we also needed a way to communicate around our progress, both for external as well as internal use. We needed a way to show people what our contribution was. So we decided to develop 3 different indices, which we can continuously talk about our efforts in. The first one is the brown, the second one is the green and the third one is the future. The brown is an activity index addressing our efforts to mitigate the effects of our footprint. The green one is actually an activity index to -- an index that shows the support that we provide to society through financial instruments and financial advisory. And the third one is how well we succeed with this together with our customers. If we dive a little bit deeper into them and looked at to the brown. It's measuring the fossil fuel credit exposure in our energy portfolio and how we foresee it to progress over time. And the way we've chosen to do this, there is no exact way how to do this. But we choose to look at the NGFS and the International Energy Association and so how they require -- what they require from the world's energy mix going forward in order to make sure that we reach the goals of the Paris Agreement. And then we apply that to our energy portfolio, say that how does that need to change in order to be compliant with their scenarios. And that means that we have an ambition until 2030 to decrease our fossil footprint in our energy portfolio by almost 50%. The green activity index is an index that encompasses all 4 areas that a bank actually deliver on a daily basis: savings measured as Article 9 funds; advisory, ECM, DCM, M&A investments through primarily our Greentech fund; and not the least lending, which we will talk later on when we talk about the green bond framework. When we aggregate these 4 and look at what we believe that we can achieve over time, we think that we can 6 to 8x fall double this activity -- volume-based activity index until 2030, which will be something that we think we should be extremely proud of if we succeed with. And if we look at the future, it's easy in concept but a little bit complex to deliver. The thought is that we would define our exposure towards companies and customers that are already on their way towards the goal of the Paris Agreement and divide that by the total exposure. Then we get a baseline for where we are today. And then as that measure moves forward and increases, that shows the result of our collective efforts together with our customers and how we contribute to more resilient society and future. And we hopefully will then fulfill our ambition of becoming the leading catalyst in the transition towards a sustainable society. And by leading, it's about financing the transition, be there for our customers with whom we share this future -- vision of the future, that we will lead the development of products that will actually help this transition to take place, to make sure that capital allocation becomes efficient. But not forgetting that we transform our own business at the same time and make sure that our goals happens. But we can't do this alone. It's not up to Sbanken only. We're a catalyst, which together where our customers will need to a much, much more resilient future, at least that's what we hope with our efforts. And by that, I think I covered most parts of our sustainability strategy that you can also look at on sbgroup.com. Yes. And by that, I'll leave it back to you, Philippa.

Yes. Thank you very much, Hans. And it is with this approach to sustainability in mind and the ambitions that we have set that we have developed and updated our green bond framework. And here, I'll hand over to Johan to go through the highlights of the updated framework. .

Thank you, Philippa. To start off, I would like to go into briefly just the rationale for why we issue green bonds and why we have this framework to begin with. And to start off, it supports the SEB sustainability strategy to offer financing to green assets and projects and to support our customers in their transition journeys to more sustainable business models. Additionally, it also supports 10 of the 17 UN SDGs and all 6 of the EU Taxonomy Environmental Objectives. It also contributes to a great diversification of funding sources as well as broadening our investor base, which is something we've seen over the past 5 years. And as a leader in sustainable financing, it is a great catalyst for customer dialogues throughout the bank, but also a great support in internal conversations. And this is also something we've seen over the last few years, that the interest in the organization has grown exponentially in the last few years. If we then move on to the framework itself. It exclusively finances or refinances eligible green assets that correspond to the long-term vision of a low-carbon and environmentally sustainable society. This new framework is more inclusive and enables us to engage in sustainability-related matters with a wider set of clients. including those which may not be at advanced stage in their transition journeys already. The framework allows our clients to benchmark where their solutions stand with respect to the transition towards the Paris Agreement. And the updated framework also is aligned with the ICMA Green Bond Principles as of 2021, and it is broadly aligned with the substantial contribution part of the technical screening criteria of the EU Taxonomy as of December 2021. As this is an update, the new framework also expands from the 7 criteria that we had in the old framework to now cover 10 different categories. We have engaged once again with CICERO Shades of Green to provide a second-party opinion on this framework, similar to what we did in 2016. And they have given the framework a medium shade of green, and SEB as an organization a governance score of excellence. Here, I think it's important to mention that in 2016, we were one of the first banks to come out with the green bond framework. And the markets and the standards was at the time not as well developed as they are today. We took a conservative approach back in 2016 when the fine work was green. And CICERO at the time gave us a dark green shading on that framework. We have since realized, now more than 5 years later, that we will not be able to reach the goals of the Paris Agreement by just focusing on the dark green investments and are very happy with this new strategy that we have outlined. On this next slide, you see the different categories that the framework and finance, together with the UN SDGs as well as the EU Taxonomy alignments and CICERO shading. Through the framework, it is -- it gives us the potential to support solutions that address the many different challenges society is facing today. And the new categories of the framework compared to the old one are terrestrial and aquatic biodiversity, climate change adoption and circular economy. I will be honest and say we don't expect a massive growth of assets near term in these 3 categories, but it is very good to have them here because it gives us the opportunity to engage both with our clients and our investors on these very important topics. On average, the CICERO shading of the 10 categories is leading -- leaning somewhere towards medium to dark. But the overall shading, as I said before, medium. Now I thought we would dive into the green asset portfolio and the green loans, which is part of our sustainability activity index. On the left here, you see how our green pool has developed over time since the inaugural issuance of our green bond back in 2017. I think important to highlight is that in connection with Brexit, we had to remove all U.K. assets from our pool given the old framework had a regional restriction, only accepting assets located within the EU and the Nordics. So those numbers there on the left are for the old framework. And on the -- more importantly, I should say, the green assets under the new framework are SEK 29 billion as of end of last year. And this figure should not be confused then with the number that will be seen in the impact report, soon to be published, because that will be under the old framework. Every green loan in the old portfolio has been reevaluated and reassessed and reapproved against the updated framework, and the U.K. assets will be reincluded. The 4 largest categories by allocation are renewable energy, green buildings, clean transportation and environmentally sustainable management of living natural resources and land use, which we from here on will call sustainable forestry. Renewable energy and clean transportation account for roughly 2/3 of the portfolio today and both have a dark green shading from CICERO. By excluding the many forms of hybrid transport, this framework actually goes beyond the requirements outlined in the EU taxonomy. Green buildings is the second largest category, accounting for around 1/5 of the portfolio today. And it is closely aligned with the EU Taxonomy, but has still been given a light green shading from CICERO. When it comes to sustainable forestry, there is not a consensus view in society today on how to properly interpret the technical screening standards of the Taxonomy. However, the criteria appear to be largely on the global well-recognized forestry certification schemes, FSC and PEFC. For ease of use with our clients, we have chosen to align with the certification schemes rather than Taxonomy on this criteria, and CICERO assigned a medium to dark shade of green for this category. Finally, on the right, you see the geographical distribution on our -- of the green loans with 38% being located in Sweden and the rest split between our home markets. Here on this slide, we wanted to share some examples of projects that we have financed. And depicted here on the screen is SEB's share of financing for those projects where that's applicable. And you also see some numbers on the environmental impact of these projects. In the green building section there, for example, you see our own head office in Arenastaden constructed by Fabege. I will not go into more detail here, but if you have any questions, please feel free to ask them in the Q&A. Now on this slide, you see the process for project evaluation and selection as well as for management of proceeds, which is basically unchanged since 2017 and has served us very, very well over the last few years. In short, all potential assets must undergo SEB's regular credit processes. That includes, for example, customer acceptance standards and create risk assessments. And in these areas, we have already included sustainability as an essential part of the assessment process, making it a core part of every judgment of a loan in the bank. If the potential asset is aligned with the sustainability policy framework of SEB, then the Environmental and Sustainable Product Steering Committee, from here on called the ESPS Committee, will evaluate the asset to see if it meets the criteria of the framework. This will include an assessment of the potential lock-in and rebound effects of the assets as well as life cycle considerations. All eligible green assets should have clear, net positive and long-term environmental impacts. The ESPS Committee may refrain from approving the assets if, for example, there is a risk that significant harm is done to other sustainability objectives, be that environmental or social. Following the approval in the committee, our environmental function has the right to veto any assets. So there are several layers of approvals in order to make sure no assets that should not be in the pool end up there. Proceeds from our green bonds will be earmarked to an eligible green asset portfolio and monitored regularly within the internal systems of the bank. And it is probably needless to say, but we will, of course, only issue green bonds when we are certain that we have enough assets in the pool, and that is both from -- when we look at the pool today and with a forward-looking perspective. As mentioned before, we will soon publish our 5th annual green bond investor report on our web page. The green box on the right here gives a snapshot of some impact data from our previous investor reports. And the updated framework will commit to annual reporting in a similar fashion but includes a list of examples that was not present in the old framework. And by examples, we talk impact indicators that we have exemplified in the new framework. The report will cover both allocation and impacts reporting, which will take guidance from ICMA and the Nordic public sector issuers impact reporting paper. And on a best effort basis, the report will include information on the green assets alignment with the substantial contribution part of the technical screening criteria of the EU Taxonomy. I will finish off my presentation with once again mentioning that we engaged with CICERO for this framework and received a medium green shading. And CICERO also gave SEB a governance score of Excellent, and they confirm that the framework is aligned with the ICMA Green Bond Principles. From the second-party opinion, we would just like to highlight that they praise SEB for our strong sustainability credentials and ambitions and that they found no material weakness in the framework. I will stop there and hand it over to you, once again, Philippa.

Okay. Thank you very much, Johan. Now we will open up for any questions that you may have. You can send them in through the chat function on the stream. But I can start with just a question to you, Hans, on the sustainability strategy. What is the main focus for 2022?

Thank you, Philippa. Well, as you've seen, there's been a lot of work to establish this framework and this strategy. And now so kind of nailing the situation, where we want to go and how we will be organized and so forth and how we will direct our troops, all our colleagues. And now it's about to scale it to make sure that this actually happens, to be out there working with our customers. That's the 2022 aim, make sure that this is scaled to the extent that we can actually contribute to a more resilient society going forward.

Okay. And when it comes to the green bond framework, we are, I mean, broadly aligning with the EU Taxonomy definitions, but which categories would you say are the ones where we are deviating mainly from?

I would actually go back to say the specifics, but I will say we deviate in the sustainable forestry part as well as -- let me see here, sustainable water and waste management, for example. But I would probably direct this question to some of our environmental experts who are on the line with us.

Okay. I call in Mats Olausson, if you want to highlight the key deviations from the EU Taxonomy.

Yes. As Johan said, forestry is one category where we do not follow the Taxonomy, but we stick to the standard definition in the sustainable finance market using the well-recognized global standard certification schemes. Another area is in clean transportation, where, unlike the Taxonomy, SEB framework does not allow for tail pipe emissions up to 50 grams until 2025. We include only fossil-free transportation solutions. And then there are a few of the categories which are not covered by the Taxonomy yet. The Taxonomy, as you know, is focusing on climate mitigation and climate adaptation. So for instance, biodiversity is not aligned. When the Taxonomy is updated, we will take a look at that.

Okay. Thank you very much. And then I think we conclude this presentation, and thank you very much for listening in.