How Gothenburg’s ‘pretty scary’ credit deal ties funding to sustainability targets

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?”