Wood construction should not forget sustainable financing

Tuupala school: MuniFin granted its first green loan to the City of Kuhmo to build a new school. Photograph: Mikko Auerniitty

When exploring funding options for wood construction projects, it worth taking a look at sustainable financing instruments. Wood construction can reduce construction emissions and increase carbon handprints, and these are positive factors when applying for construction project financing.

Finland has recently seen a significant slowdown in the construction industry, and financiers are increasingly unwilling to fund new projects. At the same time, investors and financiers are steering more and more of their capital towards sustainable activities. As a result, the present-day market now has new financing frameworks, such as the EU taxonomy for sustainable activities, and new financial instruments such as green loans and sustainability-linked loans. By actively using these new opportunities for sustainable financing, companies can gain better access to financing and/or a better price.

The goal of the EU taxonomy is to channel capital into climate friendly and environmentally sustainable activities, which in turn will advance the green transition in Europe. The taxonomy includes criteria for identifying whether an activity falls under the umbrella of the taxonomy at all, as well as whether the activity is in actual compliance with the taxonomy’s criteria. Danske Bank has produced a report on the taxonomy reporting of Nordic companies (Danske Bank Research). This report has determined that over 90% of the turnover in the real estate sector would be within the scope of the taxonomy, but only 24% of the turnover or income meets the relevant criteria and thereby complies with the taxonomy. This result indicates that the real estate and construction sector has a lot of untapped potential for improving its financing under the provisions of the EU taxonomy.

The EU taxonomy has a detailed and somewhat strict set of criteria for defining sustainability, but many financiers also have their own sustainability reference frameworks for evaluating activities. Overall, it can be said that sustainability criteria and economic criteria are now coequal considerations for financiers. This is why it is good practice to be prepared to discuss the environmental and social impacts of projects in a financing negotiation even if your company is not required to report on whether its activities comply with the taxonomy.

When exploring funding options for wood construction projects, it worth taking a look at sustainable financing instruments. Green loans are typically tied to a specific investment, and financiers consider how well the investment can help achieve jointly agreed environmental targets. In contrast, loans tied to sustainability criteria are not necessarily dependent on a specific investment. In these cases, a developer’s entire strategy for corporate responsibility can be considered, in other words the funding opportunity is not limited to an individual reference framework.

This is how sustainable financing can increase the funding sources for wood construction, even when a company is not specifically applying for green financing. However, they do need to be able to discuss the climate and environmental impacts of the project with financiers and to indicate possible social outcomes.

Read the article in Finnish here.

Sustainable financial instruments

Green loan

A loan that is used for projects or business activities that have a positive environmental impact.

Green bond

A special kind of bond used to finance projects or business activities that have a positive environmental impact. Special reference frameworks are used to define the intended purpose of green bonds. Examples of these frameworks include the Green Bond Principles of the ICMA (International Capital Market Association) and the EU Green Bond Standard.

Sustainability criteria loan

A loan with predefined sustainability targets for the loan’s recipient. When the targets are achieved, the loan’s interest rate decreases.

Sustainability criteria bond

A special kind of bond whose financial characteristics are linked to the bond initiator’s predefined sustainability targets. ICMA principles on sustainability criteria bonds define the relevant criteria.


Author Mirka Lummaa serves as an advisor on responsible investing and sustainable financing for the Gaia Group. Lummaa believes that sustainable development is a decisive factor in ensuring the long-term profitability of business and that the financial sector plays a vital role in supporting companies in their sustainability efforts.Mirka Lummaa will be attending Puupäivä on November 2, 2023.