Page 1 26.06.2016 ‘Second Opinion’ on Kommunalbanken Norway (KBN)’s Green Bond Framework Contents Summary ...................................................................................................................................................... 2 1. Introduction and Background ...................................................................................................... 2 Expressing concerns with ‘shades of green’ ................................................................................................3 2. Brief Description of KBN’s Bond Framework and Rules and Procedures for Climate- Related Activities ....................................................................................................................................... 3 3. Assessment of KBN’s Green Bond Framework and environmental policies ................ 5 Eligible projects under the Green Bond Framework ................................................................................5 Strengths ................................................................................................................................................................................... 7 Weaknesses ............................................................................................................................................................................. 7 Pitfalls ........................................................................................................................................................................................ 7 Transparency, monitoring, reporting and verification ...........................................................................7 References ................................................................................................................................................... 8 About CICERO .............................................................................................................................................. 8
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Summary KommunalbankenNorway(KBN)financesimportantwelfareservicesthroughprovidingcredittothelocalauthoritiesinNorway.KBNisdefinedasastateinstrumentality,havingapublicpolicymandatefromthecentralgovernmenttoprovidelowcostfinancingtotheNorwegianlocalgovernmentsector.KBN'slendingto the local government sector is funded by issuing securities in the international capital marketsmaintainingthehighestpossiblecreditrating.KBNisawhollyownedstatecompany.KBNhasalendingproductspecificallydesignedtofinanceinvestment inclimate-friendlyprojectsbythe localgovernmentsector.Theinterestrateonthis‘greenloan’productislowerthanKBN’sordinaryfloatingrate.
Overall,theKBN’SGreenBondFrameworkprovidesaspecific,detailedandsoundframeworkforclimate-friendlyinvestments.TheGreenBondFrameworklistseligibleprojectsthataresupportiveoftheobjectiveofpromotinga transitionto low-carbonandclimate-resilientgrowthand is supportedbyareasonablystrong governance structure. In common with many issuers, the standards for refurbishment of oldbuildings are going beyond required building standards today, but are not requiring best availablepractices(e.g.passivehousing)inthissector.
1. IntroductionandBackgroundAs an independent, not-for-profit, research institute, CICERO (Center for International Climate andEnvironmental Research - Oslo) provides Second Opinions on institutions’ framework and guidance forassessing and selecting eligible projects for green bond investments, and assesses the framework’srobustness in meeting the institutions’ environmental objectives. The Second Opinion is based ondocumentationofrulesandframeworksprovidedbytheinstitutionsthemselves(theclient)andinformationgatheredduringmeetings,teleconferencesande-mailcorrespondencewiththeclient.CICEROencouragestheclienttomakethisSecondOpinionpublicallyavailable.IfanypartoftheSecondOpinionisquoted,thefullreportmustbemadeavailable.
Expressingconcernswith‘shadesofgreen’CICEROtakesalong-termviewonactivitiesthatsupportalow-carbonclimateresilientsociety.Insomecases,activitiesortechnologiesthatreducenear-termemissionsresultinnetemissionsorprolongeduseofhigh-emitting infrastructure in the long-run. CICERO strives to avoid locking-in of emissions through carefulinfrastructureinvestments,andmovingtowardslow-orzero-emittinginfrastructureinthelongrun.
Theproject types thatwillbe financedby thegreenbondprimarilydefine theoverallgrading.However,governance and transparency considerations also factor in, as they can give an indication whether theinstitutionthatissuesthegreenbondwillbeabletofulfiltheclimateandenvironmentalambitionsoftheinvestmentframework.
KBN became a member of Transparency International in 2014. KBN has a lending product specificallydesignedtofinanceinvestmentinclimate-friendlyprojectsbythelocalgovernmentsector.Theinterestrateon this ‘green loan’ product is lower than KBN’s ordinary floating rate. The proportion of KBN’s lendingportfoliorepresentedbylendingatthisgreenrateincreasedfrom3.6%in2013to4.3%in2014.KBNprepares
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anannualenvironmentalreportwhichdetailsitsperformanceinrelationtoarangeofestablishedcriteria.KBN is Eco-Lighthouse certified, and is also a controlmember of theGreenDot (Grønn Punkt) recyclingscheme. KBN applies environmental criteria to its suppliers of goods and services, and actively preferssuppliersthathaveenvironmentalcertification.
KBN’sGreenBondeligibleprojectspromotethetransitiontoalow-carbonandclimateresilientPublicSectorand include bothmitigation and adaptation projects. Such projectsmay target (a)mitigation of climatechangethroughreductionofemissionsfrombuildings,transportationandenergyproduction,(b)adaptationtoclimatechange,includinginvestmentsinclimate-resilientinfrastructure,or(c)toasmallerextent(limitedto10%),projectsrelatedtoasustainableenvironmentonalocalscale.
ForaprojecttobeincludedintheEligibleProjectspool,itshallcomplywitha)thecategorieslistedinTable2belowandinthe“KBNGreenBonds:Supplementaryguidelinesforprojectselection,documentationandreporting” (document 2 in Table 1), b) theMunicipality’s Environmental Plan, and c)Norway’s IntendedNationallyDeterminedContributions (INDCs) according to theParisAgreement (document8 in Table 1).Applicants are required to declare eligibility by filling in a designated section in the loan document.Additionally, relevant documents indicating the Project’s estimated environmental performance shall beprovided.A project’s eligibility is assessedby the LendingDepartment and approvedby the theClimateController.ApprovedGreenProjectsareentitledtoKBN’sGreenLendingDiscountandincludedinthebank’sportfolioofGreenProjects.
Toenableinvestorstofollowthedevelopmentandprovideinsightintoprioritizedareas,KBNwillprovideanannualSocialResponsibilityIndicator(SRI)reportlinkedtotheannualfinancialresultsreport.TheSRIreportwillincludeasectionontheprogressoftheGreenBondprogram.KBNwillalsokeepthededicatedGreenBondwebpagescontinuouslyupdatedwith;1)alistofprojectsfinanced;2)aselectionofprojectexamples“GreenBondStories”and;3)asummaryof theKBNGreenBonddevelopment includingstatisticsonourGreen Project portfolio with impact reporting, aiming to comply with the issuer group’s “HarmonizedFrameworkforImpactReporting”(EIB2015).
3. AssessmentofKBN’sGreenBondFrameworkandenvironmentalpolicies Overall, theKBN’sGreenBondFrameworkprovidesadetailedandsound framework for climate-friendlyinvestments. The framework and procedures for KBN’s green bond investments are assessed and theirstrengths andweaknesses are discussed in this section. The strengths of an investment frameworkwithrespect to environmental impact are areas where it clearly supports low-carbon projects, whereas theweaknessesaretypicallyareasthatareunclearortoogeneral.Pitfallsarealsoraisedinthissectiontonoteareaswhereissuersshouldbeawareofpotentialmacro-levelimpactsofinvestmentprojects.
EligibleprojectsundertheGreenBondFrameworkAtthebasiclevel,theselectionofeligibleprojectcategoriesistheprimarymechanismtoensurethatprojectsdeliverenvironmentalbenefits.Throughselectionofprojectcategorieswithclearenvironmentalbenefits,greenbondsaimtoprovidecertaintytoinvestorsthattheirinvestmentsdeliverenvironmentalreturnsaswell as financial returns. The Green Bonds Principles (GBP, see ICMA 2015) state that the “overallenvironmental profile” of a project should be assessed and that the selection process should be “welldefined”.
StrengthsKBNas a funderof a varietyofprojects inNorwegianmunicipalities faces a challengewhen it comes todefiningwhatshouldbecountedaseligibleprojectsforgreenfinance.KBNanswerthischallengeinagoodmannerindocumentno.2(seeTable1):“KBNGreenBonds:Supplementaryguidelinesforprojectselection,documentationandreporting.”Here,examples,criteriaandrequireddocumentationisspelledoutindetailsinamannerthatmostlyconvinceusthatgreenfundingfromKBNgoestowardssecuringverygoodlongtermsolutionsrequiredforaclimatefriendlyandresistantsocietyinthefuture.However,thecriteriaforenergyefficiencyprojectsinexistingbuildingdonotgoallthewaytowardsbestpossiblepracticesasnon-passivehousingisincludedamongeligibleprojects.Ourgradingofthistypeofprojectsthereforis‘mediumgreen’–agoodgradingforprojectsonthewaytoalowcarbonsociety,butnotquitethereyet.
Impactsbeyondtheprojectboundary Duetothecomplexityofhowsocio-economicactivitiesimpacttheclimate,aspecificprojectislikelytohaveinteractionswiththebroadercommunitybeyondtheprojectborders.Theseinteractionsmayormaynotbeclimate-friendly, and thus need to be considered with regards to the net impact of climate-relatedinvestments.
Reboundeffects Efficiencyimprovementsmayleadtoreboundeffects.Whenthecostofanactivityisreducedtherewillbeincentivestodomoreofthesameactivity.FromtheprojectcategoriesinTable2anexampleisimprovedenergyefficiency,which inpartmay lead tomoreenergyuse.KBN shouldbeawareof sucheffects andpossiblyavoidGreenBondfundingofprojectswheretheriskofreboundeffectsisparticularlyhigh.
Transparency,monitoring,reportingandverificationTransparency,reportingandverificationarekeyinordertoenableinvestorstofollowtheimplementationof the KBN Green Bond Program. Without becoming too burdensome impact reporting enhancestransparency concerning the projects economic risk from climate change and the environmentaleffectivenessoftheprojects.
AboutCICERO CICERO(CenterforInternationalClimateandEnvironmentalResearch–Oslo)isNorway’sforemostinstitutefor interdisciplinary climate Research.We deliver new insight that help solve the climate challenge andstrengtheninternationalclimatecooperation.
Wehelptosolvetheclimateproblemandstrengtheninternationalclimatecooperationbypredictingandresponding to society’s climate challenges through research and dissemination of a high internationalstandard.Ourresearcherscollaboratewithtopresearchersfromaroundtheworld,andpublishtheirworkinrecognizedinternationaljournals,reports,booksandperiodicals.