7. Nefco – Nordic Environment Finance Corporation

Nefco is an international financial institution founded by the five Nordic countries in 1990. It focuses on financing the initial scale-up of Nordic green solutions for scale-up on international markets. Nefco finances both private and public projects and primarily provides finances for Nordic SME’s entering the international market and to municipalities in Eastern Europe through green public sector projects. It has also financed projects across the globe. Moreover, it manages funds for governmental organisations and green development programs.

Nefco has an explicit sustainability focus and works with requirements from the EU taxonomy, the Paris Agreement, the EU Green Deal, the Nordic vision 2030 and the SDGs in its investments, as well as its own sustainability criteria. Biodiversity is included in the Environmental and Sustainability Policy, where Nefco states that it strives to work in alignment with the EU Biodiversity Strategy. The institution has also recently started a Biodiversity Pilot Programme for small and medium-sized companies focusing on concrete conservation measures, which is described in section 7.3.2.

Nefco works in several sectors including:

Nefco’s Strategy from 2021 to 2025 states that Nefco’s primary purpose is to accelerate the green transition by:

Biodiversity and ecosystems are mentioned frequently in the strategy, and the strategy communicates that Nefco wishes to align with the Nordic priorities of a biodiversity-positive economy.

Nefco’s overall sustainability policy is defined by the Environmental and Sustainability Policy

Nefco (2021A)

. The policy document has guidelines tied to it, outlining the more concrete implications of the policy on project financing

Nefco (2022B)

. In Nefco’s Environmental and Sustainability Policy it is clearly stated that it wants to commit to work towards a biodiversity-positive economy. According to the policy, Nefco’s investments should be sustainably designed and implemented to protect biodiversity.

Nefco monitors projects and makes annual disclosures on the impacts of its financing and its own operations.

Nefco has developed its own procedures for sustainability assessments for investment projects. The assessment procedure is split into three parts – initial screening of a potential project, sustainability assessment, and finally sustainability monitoring

Nefco (2022B)

. In the initial screening step, Nefco assesses the potential environmental benefits of the project, and ensures that project activities are not included on the Exclusion list (below). If a project passes the initial screening and is accepted for funding, Nefco performs a sustainability assessment in collaboration with the client. The biodiversity relevant parts of the sustainability assessment include the EU taxonomy (described under EU taxonomy below) and Nefco’s own criteria.

After project completion, Nefco monitors projects by collecting annual impact reports from clients. The reports are based on indicators defined by Nefco, which vary between projects and sector. Clients are also expected to report on an Environment and Social action plan in case that has been developed for the project.

Nefco has developed a Biodiversity Roadmap in which it is stated that during 2023, Nefco will perform a portfolio and process screening with focus on impacts and dependencies on nature. The aim of the screening is to identify potential high-risk sectors and risk areas in Nefco’s investment portfolio. High-risk portfolio assets identified through the screening will be subject to further evaluation

Nefco (2023B)

. Moreover, Nefco aims to develop an internal biodiversity action plan based on the process.

Nefco has initiated a two-year Biodiversity Pilot Programme in 2022 aimed at small and medium-sized companies

Nefco (2023C)

. The aim of the programme is that it will create and test biodiversity solutions that can be applied by companies in the private sector. Through the programme, four selected client companies are offered consulting services and capacity building which will support them in developing a biodiversity management plan and in mapping their biodiversity impacts and dependencies

Nefco (2023D)

. This also serves as an opportunity for Nefco to understand its clients’ needs for biodiversity management.

Sectors and activities that Nefco do not finance are formally defined through an exclusion list. An excerpt of the biodiversity relevant aspects of the exclusion list can be seen in Table 7. The table describes selected criteria and additional information as defined by Nefco, which has been matched with the relevant driver of biodiversity loss (see Background). Biodiversity is directly included in the exclusion list through the point “Activities prohibited in relation to the protection of biodiversity resources or cultural heritage”. Biodiversity is also clearly considered through “Commercial activities relating to primary and old-growth forests” and “Destruction of High Conservation value areas”. Moreover, the exclusion list contains many elements that have direct or indirect impact on biodiversity loss drivers. The relevant biodiversity loss drivers are added in the third column for overview (Table 7).

Table 7. Nefco Exclusion criteria and their relevance for biodiversity loss drivers.

Nefco does not yet target investments directly towards projects labelled as Nature-based solutions, but some of its financial activities can fit under the Nature-based solutions umbrella, especially projects under certain funds such as the Baltic Sea Action Plan Fund. Nature-based solutions are included in the Nefco strategy under a description of Nordic environmental priorities.

Nefco has financed a project on controlled drainage from agricultural soils in Southern Sweden to reduce eutrophication in the Baltic Sea. The project received funding through the Baltic Sea Action Plan Fund, which is co-financed by NIB and Nefco. A new drainage system made up of multifunctional water reservoirs, through which water can be recycled as irrigation to the crops, is supposed to contribute to decreased soil runoff and nutrient losses while also functioning as climate change adaptation. The project was funded in two phases, first through a pre-study, and afterwards through full-scale implementation running from 2022.

Nefco has adopted the EU taxonomy in 2021 and now uses it as the primary classification system for identification of investment projects. The aim is to increase alignment with the taxonomy objectives continuously.

All investment projects are assessed according to the EU taxonomy. According to its own assessments, 80% of its active investments agreed before 2022 are taxonomy eligible, meaning that the activities of the investee company are listed in the EU taxonomy and make a substantial contribution to the taxonomy objectives.

Nefco (2021B)

Nefco judges whether the economic activity is aligned with the EU taxonomy through three criteria: Technical screening criteria, Do No Significant Harm, and Minimum Social Safeguards. If these are all met, the project is considered aligned. In the 2021 self assessment, Nefco did not include the Do No Significant Harm principle, as data for assessment was not available from the projects which started before the taxonomy was adopted. Since 2022, Nefco has included the Do No Significant Harm principle in the assessment and found that while no investments could be considered fully aligned, 63% of the investments agreed in 2022 are considered partly aligned.

Nefco is currently in the process of developing more specific biodiversity assessment practices, based on the portfolio screening and the Biodiversity Pilot Programme projects. It is not yet decided whether Nefco will make use of one of the biodiversity reporting frameworks that are already available, or if it will design its own assessment practices which can build a safeguards framework

Nefco (2023B)

.

In general, Nefco applies a risk based approach to its projects

Nefco (2022A)

. For certain projects of higher risk, Nefco demands development of an Environmental and Social Action Plan to secure that the project has concrete plans for mitigation of significant risks

Nefco (2022B)

.

According to the Environmental and Sustainability Policy from 2022, “Nefco aims to minimise the negative impacts of its financing: In the case that adverse impacts cannot be avoided, these should be appropriately reduced, mitigated, or compensated for, and a plan for doing so developed. “. It thereby applies the mitigation hierarchy to its projects

Nefco (2022A)

.

Environmental requirements are set at the planning stage. At every first meeting with a potential investee there is an environmental analyst present in order to assess the sustainability risks and positive environmental impact of the potential project

Nefco Vice President of Origination (16 March, 2023). Personal Interview.

.

Indicators for monitoring are defined specifically for each project

Nefco (2022B)

. Projects that are subject to an Environment and Social Action Plan shall also report on the progress of these actions, including mitigation actions. All projects are subject to core indicator reporting: However, these core indicators do not include biodiversity or biodiversity relevant indicators such as land use change or habitat impact. In case it is considered relevant, biodiversity indicators can be added on top of the core indicators. Final monitoring is carried out three years after project implementation, with the aim to understand the long-term environmental impacts.

Table 8: Maturity assessment of Nefco

The maturity of Nefco is assessed using the maturity tiers (Appendix A).