Nordic Green Covered Bonds Market

Authors: Henrik Mattson, Maria Orrgard, Senni Mäki-Hallila, and Oscar Bengtsson

New European Standard for Green Covered Bonds

The European Commission is proposing a regulation to create the European Green Bond Standard, which would refer to the detailed rules of the EU Taxonomy to define what is considered a green investment. The European Green Bond Standard would be available to different types of bond issuers — including issuers of covered bonds — on a voluntary basis. One of the qualifications for the Standard is that the funds raised by the bond should be allocated 100% to projects aligned with the EU Taxonomy.

The Commission has high ambitions for the European Green Bond Standard. The overall aim is to create a ‘gold standard' that other market standards can be compared to and potentially seek to align with.

Covered Bonds in Finland

Covered bonds are highly regulated debt instruments secured by a cover pool of mortgage loans (property as collateral) or public-sector debt to which investors have a preferential claim in the event of default.[1] In October 2020, Finnish banks had issued covered bonds for approximately EUR 50 billion. Finnish covered bonds have traditionally been backed by residential mortgages.[2]

Finnish Covered Bond Legislation

The Finnish covered bond legislation is currently undergoing change following the implementation of the EU Covered Bond Directive ((EU) 2019/2162). The Finnish Act on Mortgage Credit Banks will be recast with a new Act on Mortgage Credit Banks and Covered Bonds, which is expected to apply from 8 July 2022. Based on the draft government proposal, the most significant changes to the Finnish covered bond legislation include:

• the introduction of a cover pool liquidity buffer covering net outflows over the next 180 days;
• restrictions to the use of ‘soft bullets’ (rules on extension of maturity);
• increase of the cover pool value of residential mortgages from 70% to 80% of the mortgage collateral’s net value; and
• removal of the requirement on remaining average maturity.

With the newly proposed EU green covered bond standards (discussed below), the new Finnish Act on Mortgage Credit Banks and Covered Bonds will unlikely include any rules on green standards.

Based on the draft government proposal, the wording of the new Act on Mortgage Credit Banks and Covered Bonds will be, in many aspects, different to the current Act on Mortgage Credit Banks. Investors and rating agencies are familiar and satisfied with the current Finnish covered bond rules after the 10 years they have been in force, so the new covered bond rules may take some time to get used to.  

Finnish Green Covered Bonds

The Finnish green covered bond market is only starting to develop, with the first green covered bond (backed by green residential mortgages) issued in March 2021.

It remains to be seen how the new legislation shapes the Finnish covered bond market and whether the new Standards will encourage new issuers to issue green covered bonds.

Swedish Covered Bonds

Similarly to Finland, Swedish covered bonds have a tradition of being backed by residential mortgages. Covered bonds are a key source of market financing for Swedish banks, with outstanding covered bonds amounting to approximately SEK 2 500 billion in 2020[3].  Covered bonds are regulated in the Swedish Covered Bond Issuance Act. The Swedish Covered Bond Issuance Act will be recast (the new legislation is expected to apply from 8 July 2022) following the previously mentioned EU Covered Bond Directive, and will include, among other things:

• provisions concerning information and reporting requirements;
• cover pool liquidity buffer;
• amendments to the Loan to Value ratio (LTV) provisions; and
• the over-collateralisation requirements.[4]

Swedish Green Covered Bonds

Currently, the designation ‘green covered bonds’ is not protected by any Swedish or EU law.[5]  However, the Swedish legislator has made it a priority to facilitate the issuance of green bonds and green covered bonds, which has been highlighted by the legislator appointing a committee aimed at promoting the development of the green bond market, thereby meeting the fast-paced growth in interest from investors.[6]  Swedish green covered bonds currently adhere, in addition to what is set out in the Swedish Covered Bond Act, to the principles set out in the Green Bond Principles (the ‘GBP’), which were created by the International Capital Market Association (‘ICMA’).[7]  The GBP was recast in 2021, following feedback from members of ICMA. The new version of the GBP has notably included principles concerning information disclosure with regards to the degree of alignment of projects with official or market-based taxonomies.

One of the first green covered bonds in SEK was issued in May 2018, and it was backed by sustainable Swedish forestry, contributing to reducing atmospheric CO2 levels and aiding biodiversity[8]. The first residential mortgage-backed green covered bond in Sweden was issued in January 2019.[9]

The number of issued green covered bonds is steadily increasing in Sweden.[10] Issuers have claimed that the issuance of green covered bonds may help improve the credibility of the issuer’s sustainability strategy, and the pros for investors is that investing in green covered bonds may help with diversifying portfolios and balance risk-adjusted returns with environmental benefits.[11]

[1] https://hypo.org/ecbc/covered-bonds/

[2] Draft government proposal VM/RMO 5/2021

[3] SOU 2020:61 Ändrade regler om säkerställda obligationer, page 20

[4] SOU 2020:61 Ändrade regler om säkerställda obligationer, page 73

[5] SOU 2020:61 Ändrade regler om säkerställda obligationer, page 179

[6] https://www.fi.se/contentassets/c57d42e3db024a3bb9aea30ded692f23/remissvar_grona_obligationer_20180427.pdf s 1

[7] SOU 2021:17 Grönt sparande, page 106

[8] https://www.landshypotek.se/om-landshypotek/hallbarhet/gron-upplaning/

[9] https://www.sbab.se/download/18.42cb708a168f06ca54b79/1550232369813/PM_190124%20SBAB%20emitterar%20Sveriges%20fo%CC%88rsta%20sa%CC%88kersta%CC%88llda%20gro%CC%88na%20obligation%20med%20bola%CC%8An%20som%20sa%CC%88kerhet.pdf

[10] SOU 2020:17 Grönt Sparande, page 107

[11] SOU 2017:115 Att främja gröna obligationer, page 256