Green finance
Banks perform a vital role in funding progress and at Arion Bank our focus is on funding projects on sustainability and green infrastructure. Arion Bank has adopted an environment and climate policy, and in the last few years we have offered our customers green financial services, such as green car loans, business loans, deposits and mortgages. We have issued a green financing framework which applies to the Bank’s financing and lending. The Bank has thereby pledged to use the capital it obtains on the credit markets through the green financing framework in green loans to corporate and retail customers as defined in the framework. In order to show how this capital is used in green projects, the Bank has created an impact and allocation report.
Green Financing Framework
The Green Financing Framework, which the Bank published in 2021, plays a key role in the Bank’s ability to finance green loans to individuals and companies. The Framework has been applied in the issue of green bonds and raising green deposits and also to reinforce the Bank’s range of environmentally friendly products. Projects eligible for green loans include energy savings, the transition to green energy in transportation, certified properties, sustainable fisheries, pollution controls and renewable energy.
In order for a project to be eligible for green financing from the Bank it needs to meet the requirements set out in the Green Financing Framework which include strict demands concerning information on non-financial areas indicators.
In connection with the Green Financing Framework, Arion Bank engaged the engineering firm Mannvit to analyze the Bank’s mortgage portfolio and to propose what could be categorized as a green mortgage in Iceland. It represents the first and only report of its kind in Iceland and it is a vital contribution to the discourse on green buildings and their future on the domestic property market. Approximately 12% of retail mortgages provided by Arion Bank match Arion Bank and Mannvit’s definition of green residential housing and are therefore classed as green mortgages.
The Green Financing Framework was assessed by the Norwegian ratings agency Cicero which rated the framework as Medium Green and rated governance as Good. Deutsche Bank advised on the framework. The Green Financing Framework is based on the latest Green Bond Principles of the International Capital Market Association, ICMA. It also draws on the EU Taxonomy and the UN Sustainable Development Goals.
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Green savings
In 2020 Arion Bank became the first Icelandic bank to launch a green deposit account, Green Deposits. At the same time the Bank developed a special financing framework for green deposits which was later incorporated into the Green Financing Framework. Green Deposits is a savings account designed for individuals, NGOs and companies wanting to contribute towards a greener future and it aligns with the UN Sustainable Development Goals. The account is a non-indexed demand account, which means savers can withdraw their money whenever they want.
The response to Green Deposits has been excellent and deposits have steadily grown since launch. By the end of 2023 approximately ISK 25 billion had been deposited into the account.
Growth of green deposits
Status of total committed
green finance at the end of 2023
At the end of 2023, green lending represented 10.7% of the Bank’s total loan portfolio. After two years of solid growth in 2021 and 2022, the figure fell slightly in 2023. The Bank’s original target was to increase the percentage of green loans under the Green Financing Framework to at least 20% by 2030. This target was revised at the beginning of 2024, and in the future it will apply both to green loans and loans which have a positive impact on society. Revisions of the financing framework also commenced during the year. Loans which have a positive impact on society will now also be incorporated into the framework. This work will be completed in 2024.
Since the Green Financing Framework was issued the Bank has held four green bond issues, both in Iceland and internationally. Total green instruments amounted to ISK 124.3 billion at the end of 2023, compared with ISK 118.7 billion at the end of 2022.
Total committed green finance was approximately ISK 128 billion at the end of 2023, compared with approximately ISK 151 billion at the end of 2022.
The main reason for the decrease in loans to green projects is due to the settlement of loans in sustainable fisheries and aquaculture. The trend in financing to other categories was positive. The percentage of loans for vehicles running on 100% renewables is now 21.5%, while the percentage for vehicles which either run or entirely or partly on renewables is almost 40% of the Bank’s total car loans, which is a positive development.
The Bank continues to encourage its customers to take more eco-friendly options where possible, for example by waiving loan origination fees on green car loans and environmentally certified housing.
Arion Bank’s green financing – total bond issues and deposits
Total committed green financing
Committed finance by category in 2023 | On balance | Off balance | Committed |
|---|---|---|---|
Sustainable fishery and aquaculture | 25.493 | 1.351 | 26.844 |
Renewable energy | 429 | 0 | 429 |
Clean transportation | 6.317 | 160 | 6.477 |
Green buildings | 67.484 | 0 | 67.484 |
Energy savings | 16.644 | 3.442 | 20.087 |
Pollution prevention and control | 6.523 | 332 | 6.855 |
Total | 122.890 | 5.286 | 128.175 |
Committed finance by category (on/off balance sheet)
Key figures on green financing
Total committed
to green financing
128.2
Billion
Total green
instruments
124.3
Billion
Percentage of car loans for vehicles which run entirely or partly on renewables is approximately
40%
of Bank’s total car loans.
Sustainability policies for different sectors
In 2023 we published sustainability policies on lending to different sectors of the economy and in the Arctic. The policies align with the Bank’s focus and commitments with respect to sustainability. We took into account the government’s climate plans and the plans and actions of companies with respect to ESG as we want to be in alignment with our customers and encourage them to continue to make a difference. The policies were approved by the Bank’s sustainability committee. In 2024 we will publish policies for some of Iceland’s key sectors.
Arion Bank's sustainability policy on seafood
Arion Bank’s Sustainability Policy on Industry, Energy and Manufacturing
Financed emissions
Arion Bank is a signatory to the Partnership for Carbon Accounting Financials (PCAF). This is a global partnership of financial institutions that work together to develop and implement a harmonized approach to assess and disclose the greenhouse gas emissions associated with their loans and investments. In conjunction with this Annual and Sustainability Report, Arion Bank is publishing its second report on financed emissions which is based on PCAF methodology. Assessing and disclosing the greenhouse gas emissions which are financed through lending and investments is a prerequisite for the Bank’s ability to set targets on reducing emissions.
At the end of 2023 the Bank pledged to follow the methodology of the Science Based Targets initiative (SBTi) when setting financed emissions reduction targets. The calculations of financed emissions using PCAF methodology will be used in setting these targets. Affirmation of these targets by SBTi means that the Bank’s targets are science-based and efforts to reduce emissions are based on scenarios where global warming does not exceed 1.5°C. The Bank has also joined the UN-convened Net-Zero Banking Alliance, a global group of banks committed to ambitious climate action.
Further information can be found here.
Impact and Allocation Report
At the beginning of 2023 the Bank published its Impact and Allocation Report for the Bank’s Green Financing Framework for 2022. The report specifies the allocation of funds raised through green bond issues and green deposits in 2022, and there is also a section on the positive environment and climate impact of green projects at Arion Bank. It is planned to publish an Impact and Allocation Report for 2023 in the first half of 2024.
Introduction of new sustainability legislation
A new act of law, Act No. 25/2023 on Sustainable Finance Disclosure, came into effect in 2023. It transposed two EU regulations into Icelandic law. Firstly, the Sustainable Finance Disclosure Regulation (SFDR); and secondly the regulation on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation).
The SFDR covers harmonized regulations for financial market participants and financial advisers concerning sustainability‐related disclosures in the financial services sector. The regulation requires that financial market participants and financial advisors publish information on how sustainability risk is incorporated into investment decisions and financial advice, and whether, and in such case how, the negative material impact on sustainability is taken into account. SFDR defines sustainability risk as an environmental, social or governance event or condition that, if it occurs, could cause a negative material impact on the value of the investment.
Arion Bank is considered to be a financial market participant and financial advisor as defined in SFDR and the Bank is currently implementing the legislation. See here for further details.
The sustainability legislation also obliges the Bank to disclose information in respect of EU Taxonomy. For the first time the Bank is disclosing information in accordance with EU Taxonomy in an annex to the consolidated financial statements for 2023. The annex contains general information on the taxonomy directive, its implementation in Iceland and the activities covered by the taxonomy.
Responsible fund management at Stefnir
The role of Arion Bank’s subsidiary Stefnir is to manage the financial assets of its clients as best serves their interests in the short and long term. The company has pioneered the development of new funds and investment options over the last decade and aims to be a market leader in terms of implementing good corporate governance and responsible investment.
Stefnir is a signatory to the UN Principles for Responsible Investment (UN PRI) and is an active participant in the discourse on responsible investment through IcelandSIF. Responsible and diverse investment options and thorough disclosure of information are central to the corporate social responsibility to which Stefnir is committed. By paying due attention to environmental and social issues and good corporate governance the company believes it can have a positive influence on our society, to the benefit of fund members and other stakeholders. Stefnir began to implement the Sustainable Finance Disclosures Regulation (SFDR) during the year, and the Financial Supervisory Authority of the Central Bank of Iceland (FSA Iceland) subsequently approved changes to the rules of the following funds:
- Stefnir – Green Selection
- Stefnir – Sustainable Arctic Fund
- Stefnir – Scandinavian Fund – ESG
- Stefnir – Sustainable Fixed Income Fund
When the changes to the rules have come into effect, the funds will be categorized in accordance with Article 8 of the directive and will factor in environmental and social factors in the investment process. These are the first Icelandic funds to have been categorized in this way and to have been approved by the FSA Iceland and we have high hopes for their future.
In 2023 Stefnir published its first report on financed emissions. The calculations apply to funds for retail clients and two funds for qualified investors. The report can be seen here.
Further information on responsible investment at Stefnir can be found here.