ESG opportunities and risks

ESG is an opportunity to throw light on our strong ESG qualities and not least those of our customers and the projects we finance and to convert these qualities into funding at the lowest possible cost.

Providing funding for local public welfare, growth and the green transition in municipalities and regions across Denmark implies that most of KommuneKredits funding is targeted at green or social projects. Kom­mu­ne­Kre­dit's Green Bonds are an example of this.

Our approach guarantees equal opportunities across the country, promoting cohesion and enabling municipalities and regions to maximise growth and development – for the benefit of Danish citizens.

No matter the scale or location in Denmark of the project, we provide financing on equal terms for all qualified customers and appropriate loan purposes.

At KommuneKredit, our approach to ESG and sustainability is guided by the principle of ‘double materiality’. This means that ESG risks are understood in two ways:

On the one hand, ESG risks are seen as external risks driven by environmental, social and governance factors that could impact our customers' ability to meet their obligations to us. An example is climate risks where buildings and infrastructure are flooded. However, as the TCFD assessment also concludes, these risks are not considered to be material risks since all obligations are guaranteed by municipalities or regions. 

On the other hand, internal ESG risks are those where KommuneKredit could directly or indirectly have a negative impact on environmental and social conditions through our direct operations such as business travel and energy consumption, or indirectly through our financing if, for example, we finance activities with a significant 

negative environmental impact. We monitor direct adverse impacts with data, have set a goal for GHG-reduction from direct operations and seek to improve our data on financed adverse impacts. KommuneKredits financed activities are ultimately a reflection of the political ambitions of Danish municipalities and regions for more sustainable communities.    

The increased focus on ESG risks in society adds to our reputational risk. There is a growing expectation that we must account for our ESG risks although we are not subject to the EU's sustainable finance regulations. In turn, the need for data also entail additional operational risks related to collecting, processing and reporting data. We mitigate these risks by having a strong governance in place. It is lead by our ESG committee, ensuring involvement by both Management Board and crosscutting competencies of operations. 

In 2021, we conducted a high-level assessment of the financial implications of climate-related risks and opportunities for our business and the relevance of reporting in line with the recom­men­da­tions of the Task Force on Climate-related Financial Disclosures (TCFD). The assessment demonstrated that external risks do not turn into financial risks for KommuneKredit.

Clearly, climate change presents financial risks to both the Danish and the global economy. Municipalities and regions in Denmark are – and increasingly will be – affected by climate change, such as storms and flooding. They will also be affected by reforms related to financing, infrastructure etc. as Danish society transitions to a low-carbon society.

Over the past couple of years, our members have been taking up loans with KommuneKredit to finance the mitigation of greenhouse gas emissions and to adapt to a changing climate to protect their communities and businesses.  Consequently, we continue to increase our green funding offerings and have introduced a sustainable finance target towards 2025. 

However, climate risks may result in losses at the local level but will not translate into financial losses for KommuneKredit. In our 125 years as a financial vehicle for local development, we have never suffered losses on loans.