How Gothenburg’s ‘pretty scary’ credit deal ties funding to sustainability targets
Sweden’s second city has entered an innovative borrowing arrangement that awards it discounts if the municipality hits sustainability goals and imposes financial penalties if it misses. It could catch on
Could avoiding fines for failing to hit sustainability goals prove the motivational key to solving the climate crisis? Gothenburg thinks so, having become the first municipality in the country to tie climate and social goals to its financing.
The Swedish city’s local authority, Göteborgs Stad, has recently renegotiated its SEK8bn (£645m) revolving credit facility with six banks – a flexible arrangement that allows it to withdraw, repay and withdraw again – based on four targets, three of which are climate-related. If these targets are met, Göteborgs Stad will receive a discount. If it misses them by more than a set margin in each case, it will have to pay extra interest on its borrowings.
With the city aiming for carbon neutrality by 2030, some of the incremental goals it has set on its way towards that target are looking highly ambitious. It seems unlikely that Göteborgs Stad will avoid getting penalised next year, for instance. Since half a dozen banks are keeping a close eye on proceedings, there is unlikely to be much lenience.
The toughest of the three climate goals is to remove all fossil-fuelled vehicles from Göteborgs Stad’s fleet by next year, according to its portfolio manager, Fredrik Block. He is confident that this will happen by 2025 and hopes that the discount promised for the achievement will negate any fines incurred on the way.
The second climate target is also challenging – to provide fossil-fuel-free heating for the district by 2025 – because the vagaries of Gothenburg’s climate will have a strong influence. In 2020, for instance, Göteborgs Stad managed to achieve 94% renewable because there was an unusually warm winter. Contrast this with 63% in 2019, as extremely low temperatures forced the city’s own energy company, Göteborg Energi, to lean heavily on its fossil-fuel generators for backup. Today, it’s 79% of the way there, giving Block grounds for optimism.
The climate target that looks most achievable concerns cutting the energy consumption of buildings managed by Göteborgs Stad. About half of these are municipal property, including administrative buildings, schools and care homes. The plan is to reduce their consumption from just over 175kWh per year in 2022 to 142kWh per year in 2029 (about 19%), by making buildings more energy efficient and converting many of them to solar power.
Reaching carbon neutrality by 2030 is, of course, the ultimate target. For Block, this is also about establishing the credentials to secure further sustainability-based funding in the longer term, while inspiring other local authorities to follow suit.
He is due to make a presentation about Gothenburg’s credit deal to officials from municipalities across western Sweden and has even received an inquiry from a city council in another European country. But, despite his city’s progress, Block expects to see a significant difference between the current level of interest and eventual uptake, not least because local authorities tend to be risk averse when it comes to handling public funds.
“Signing a deal of this nature means that you’ll have the spotlight on you, which is pretty scary,” Block admits. “Everyone wants to be sustainable, but no one wants to be accountable. Everyone hopes that everyone else is going to save the planet. So it is a bit stressful for the companies and administrations that would attract attention concerning whether they’re going to make it or not.”
Swedish bank SEB has taken the lead for Göteborgs Stad as sustainability coordinator. It agreed its first sustainability-linked loans (SLLs) in 2019 in the private sector, which led to what the bank’s senior adviser on sustainability products, Mats Olausson, calls “an explosion” in activity in 2021.
Prominent companies that have agreed SLLs with SEB include Electrolux, which secured a €1bn (£850m) loan in December 2021 against its goal of becoming carbon neutral by 2030; and Husqvarna, which in March 2022 tied a SEK5bn loan to a target of cutting its carbon emissions by 35% before 2025.
“The extent to which our clients seek advice when it comes to articulating their sustainability strategy in their funding has skyrocketed over the past five years. We think this trend will continue,” Olausson says. “A few years ago, many of them had a business strategy here and a sustainability strategy on the side. These two things are merging now. So, when we get the chance to advise our clients on their sustainability strategies, we can better understand their business strategies.”
He adds that finance teams in business have a stronger mandate than their civil service counterparts to demand that their finances become sustainably accountable. Despite the differences of approach between the public and private sectors, Robin Millington, CEO of environmental and financial think-tank Planet Tracker, believes that the Gothenburg initiative signals the start of a new era in which such deals “will form the basis for restructuring the global financial system”.
Millington points to another Swedish city, Helsingborg, which in March became the first municipality to issue a sustainability-linked bond tied to cutting its carbon emissions (similar to an SLL but sourcing funds from the wider investment market). In the same month, Chile became the first nation to use sovereign debt to fund its long-term climate policies in the form of a $2bn (£1.6m) bond.
Municipal authorities are making bigger advances in sustainability finance than larger governments, notes Angela Hultberg, global director in the sustainability team at US consultancy Kearney, who was born and bred in Gothenburg. They are leading the way in cooperating with other city councils, finance providers, energy suppliers, transport companies, construction firms and other important stakeholders.
With the clock ticking on the climate crisis, the crucial question, according to Hultberg, is: “Will we be able to find the right partnerships – and scale them up in time?”