Second Opinion on OBOS Forretningsbygg s Green Bond Framework 13 October 2017
Summary OBOS Forretningsbygg s (OFB) is a wholly owned subsidiary of OBOS BBL (OBOS), the largest Nordic cooperative building association. OFB owns and develops commercial real estate property. OFB s Green Bond Framework provides a clear and sound framework for climate-friendly investments, and is supported by a strong governance structure. OBOS has robust sustainability policies and the issuer has implemented many ambitious environmental practices in the organization. The Green Bond framework includes a list of project and asset categories that are important for low-carbon and climate change resilient growth. Eligible project categories are green buildings, renewable energy, clean transportation and pollution prevention and control. Proceeds will not be used to finance any fossil fuel projects. The issuer has informed us that proceeds from the first issue will go towards financing of the property Portalen in Lillestrøm, Norway. In a low carbon 2050 perspective the energy performance of buildings is expected to be improved, with passive and plus house technologies becoming mainstream and the energy performance of existing buildings greatly improved through refurbishments. Voluntary environmental certifications such BREEAM-NOR cover many important sustainability issues and the inclusion of an energy efficiency requirement (energy class B) is a strength. OFB takes good steps on energy efficiency and certifications, however they are not aiming for the highest levels. Impact reporting under the framework is minimal at this point, and we encourage the issuer to continue developing their progress in this area. CICERO finds OFB s Green Bond Framework to be in accordance with the Green Bond Principles. Based on the overall assessment of the assets and project types that will be financed by the OFB s Green Bond and governance and transparency considerations, OFB s Green Bond Framework is rated CICERO Medium Green. Second Opinion on OBOS Forretningsbygg s Green Bond Framework 2
Contents Summary 2 1 Introduction and background 4 Expressing concerns with shades of green... 5 2 Brief Description of OBOS Forretningsbygg s Green Bond framework and rules and procedures for climate-related activities 6 Definition:... 6 Selection:... 6 Management of proceeds:... 7 Transparency and Accountability:... 7 3 Assessment of OBOS Forretningsbygg s Green Bond framework and environmental policies 9 Eligible projects under the Green Bond Framework... 9 Strengths... 11 Weaknesses... 11 Pitfalls... 11 Appendix: About CICERO 12 Second Opinion on OBOS Forretningsbygg s Green Bond Framework 3
1 Introduction and background As an independent, not-for-profit, research institute, CICERO (Center for International Climate and Environmental Research - Oslo) provides Second Opinions on institutions framework and guidance for assessing and selecting eligible projects for green bond investments, and assesses the framework s robustness in meeting the institutions environmental objectives. The Second Opinion is based on documentation of rules and frameworks provided by the institutions themselves (the client) and information gathered during meetings, teleconferences and e-mail correspondence with the client. CICERO is independent of the entity issuing the bond, its directors, senior management and advisers, and is remunerated in a way that prevents any conflicts of interests arising as a result of the fee structure. CICERO has established the global Expert Network on Second Opinions (ENSO), a network of independent non-profit research institutions on climate change and other environmental issues, to broaden the technical expertise and regional experience for Second Opinions. CICERO works confidentially with other members in the network to enhance the links to climate and environmental science, building upon the CICERO model for Second Opinions. In addition to CICERO, ENSO members currently include Basque Center for Climate Change (BC3), International Institute for Sustainable Development (IISD), Stockholm Environment Institute (SEI), and Tsinghua University's Institute of Energy, Environment and Economy. A more detailed description of CICERO can be found at the end of this report. ENSO encourages the client to make this Second Opinion publically available. If any part of the Second Opinion is quoted, the full report must be made available. CICERO s Second Opinions are normally restricted to an evaluation of the mechanisms or framework for selecting eligible projects at a general level. CICERO does not validate or certify the climate effects of single projects, and thus, has no conflict of interest in regard to single projects. CICERO is neither responsible for how the framework or mechanisms are implemented and followed up by the institutions, nor the outcome of investments in eligible projects. This note provides a Second Opinion of OBOS Forretningsbygg Green Bonds Framework and policies for considering the environmental impacts of their projects. The aim is to assess the OBOS Forretningsbygg Green Bonds Framework as to its ability to support OBOS Forretningsbygg`s stated objective of promoting the transition to low-carbon and climate resilient growth. This Second Opinion is based on the green bond framework presented to CICERO by the issuer. Any amendments or updates to the framework require that CICERO undertake a new assessment. CICERO takes a long-term view on activities that support a low-carbon climate resilient society. In some cases, activities or technologies that reduce near-term emissions result in net emissions or prolonged use of high-emitting infrastructure in the long-run. CICERO strives to avoid locking-in of emissions through careful infrastructure investments, and moving towards low- or zero-emitting infrastructure in the long run. Proceeds from green bonds may be used for financing, including refinancing, new or existing green projects as defined under the mechanisms or framework. CICERO assesses in this Second Opinion the likeliness that the issuer's categories of projects will meet expectations for a low carbon and climate resilient future. Second Opinion on OBOS Forretningsbygg s Green Bond Framework 4
Expressing concerns with shades of green CICERO Second Opinions are graded dark green, medium green or light green, reflecting the climate and environmental ambitions of the bonds and the robustness of the governance structure of the Green Bond Framework. The grading is based on a broad qualitative assessment of each project type, according to what extent it contributes to building a low-carbon and climate resilient society. This Second Opinion will allocate a shade of green to the green bond framework of OBOS Forretningsbygg: Dark green for projects and solutions that are realizations today of the long-term vision of a low carbon and climate resilient future. Typically, this will entail zero emission solutions and governance structures that integrate environmental concerns into all activities. Medium green for projects and solutions that represent steps towards the long-term vision, but are not quite there yet. Light green for projects and solutions that are environmentally friendly but do not by themselves represent or is part of the long-term vision (e.g. energy efficiency in fossil-based processes). Brown for projects that are irrelevant or in opposition to the long-term vision of a low carbon and climate resilient future. The project types that will be financed by the green bond primarily define the overall grading. However, governance and transparency considerations also factor in, as they can give an indication whether the institution that issues the green bond will be able to fulfil the climate and environmental ambitions of the investment framework. Second Opinion on OBOS Forretningsbygg s Green Bond Framework 5
2 Brief Description of OBOS Forretningsbygg s Green Bond framework and rules and procedures for climaterelated activities OBOS Forretningsbygg AS (OFB) owns and develops commercial real estate property. OFB is a wholly owned subsidiary of OBOS BBL (OBOS), the largest Nordic cooperative building association. OBOS is owned by its more than 415 000 members, most of them in the Oslo-area. OFB was established in 1952 with the purpose of investing in and developing commercial spaces, to serve the needs of the members. Today, OFB operates in the commercial marked where it owns and manages 71 properties (three hotels, five shopping centers and 63 commercial buildings). In addition, OFB is engaged in nine joint ventures with other developers. OFB owns properties in Oslo, Bergen, Stavanger and Trondheim. Taking Environmental Responsibility is a core element of OBOS business strategy, and the issuer has robust sustainability policies. OBOS also has a program to give back two percent of its revenue after tax to research, development and projects that have a positive impact on the environment, examples include an urban garden project at Sandaker. OBOS also targets carbon neutral office activities by 2021. The issuer has informed us that they are in the process of determining strategies and outlining actions towards this goal. Definition: The Green Bond framework includes a list of project and asset categories that are important for low-carbon and climate change resilient growth. According to the green bond framework, eligible project categories are green buildings, renewable energy, clean transportation and pollution prevention and control. The issuer has informed us that proceeds from the first issue will go towards refinancing of the property Portalen in Lillestrøm. The property is certified BREEAMNOR Very Good, is classified as Energy class B 1 and has a number of sustainability features. Proceeds from future issuances can be used to finance both existing and new projects. The issuer has informed us that the share of refinancing for future issuances will be included in the green bond reporting. Selection: Eligible Assets and Projects will be evaluated and selected by the Board of OFB in collaboration with the Environmental director and the Treasury team. The Environmental director has the right to veto projects, as decisions will be made by consensus. Further, all decisions will be documented and filled to ensure traceability and legitimacy in the selection process. The Environmental director is an employee of OFB and leads the OBOS Sustainability team. The OBOS Sustainability team will work closely with both the board of OFB and the Treasury team in all matters related to 1 Energy classes range from A (lowest usage) to G (highest usage). For a full list of energy classes see: https://www.energimerking.no/no/energimerking-bygg/om-energimerkesystemet-og-regelverket/karakterskalaen/ Second Opinion on OBOS Forretningsbygg s Green Bond Framework 6
Green Bonds. OBOS Energy may manage or consult on OFB financed renewable energy projects, and will report on these projects to the management of OFB. Management of proceeds: CICERO finds the management of proceeds to be good and in accordance with the Green Bond Principles. The net proceeds of any Green Bond issue will be kept separated from other proceeds to ensure and enable separate monitoring and tracking of the specific green proceeds. If, for any reason, an Asset or Project no longer qualifies as Eligible according to the Eligibility Criteria, the funds will be reallocated to such Assets or Projects that do meet the criteria. Any excess proceeds in the earmarked account may at any time be managed according to OBOS overall liquidity management. Transparency and Accountability: OFB will provide an annual report (investor letter) to stakeholders that includes a list of projects financed by Green Bonds, amounts invested in each Eligible Asset and/or project and potential funds still available in the earmarked account. The report will also include detailed descriptions of specific projects, including certifications. The issuer has informed us that their intent is to report on energy usage for projects, pending availability of tenant energy usage. At a minimum, energy usage for communal areas will be disclosed. The issuer is committed to transparency on methodologies and limitations of energy metrics. The investor letter will be publically available at OBOS s website. The table below lists the documents that formed the basis for this Second Opinion: Document Number Document Name Description 1 OBOS Forretningsbygg Green Bond Framework (27.10.2017) 2 OBOS BBL Annual Report 2016 OBOS BBL is the issuers mother company 3 OBOS BBL Finansprospekt 2017 financial presentation of OBOS BBL and its daughter companies, including OBOS Forretningsbygg. 4 OBOS BBL Financing strategy Financing Strategy of the OBOS group, including the issuer Second Opinion on OBOS Forretningsbygg s Green Bond Framework 7
5 OBOS Forretningsbygg Annual Report 2016 6 http://www.obosforretningsbygg.no/ledigelokaler-kontorlokaler-portalen-lillestrom Information on property to be financed 7 https://www.obos.no/dette-er-obos/grontobos. More information on OBOS s Green approach Table 1. Documents reviewed Second Opinion on OBOS Forretningsbygg s Green Bond Framework 8
3 Assessment of OBOS Forretningsbygg s Green Bond framework and environmental policies The framework and procedures for OFB s green bond investments are assessed and their strengths and weaknesses are discussed in this section. The strengths of an investment framework with respect to environmental impact are areas where it clearly supports low-carbon projects, whereas the weaknesses are typically areas that are unclear or too general. Pitfalls are also raised in this section to note areas where issuers should be aware of potential macro-level impacts of investment projects. Eligible projects under the Green Bond Framework At the basic level, the selection of eligible project categories is the primary mechanism to ensure that projects deliver environmental benefits. Through selection of project categories with clear environmental benefits, green bonds aim to provide certainty to investors that their investments deliver environmental returns as well as financial returns. The Green Bonds Principles (GBP) state that the overall environmental profile of a project should be assessed and that the selection process should be well defined. Category Eligible project types Green Shading and some concerns Green buildings Investments into new and/or existing commercial properties, housing projects financed by OFB or other projects are eligible for Green Bond funding as long as they meet one of the following minimum requirements: BREEAM-NOR very good Energy Class B Medium green Building criteria are good, but not the highest standard levels. In addition to climate issues, BREEAM covers a broader set of issues, which is important to overall sustainable development. In a low carbon 2050 perspective the energy performance of buildings is expected to be improved, with passive and plus house technologies becoming mainstream and the energy Second Opinion on OBOS Forretningsbygg s Green Bond Framework 9
performance of existing buildings greatly improved through refurbishments Renewable energy OFB may invest in renewable energy initiatives which are eligible for Green Bond funding. OBOS Energy may manage renewable energy projects financed by OFB. Solar energy Geothermal energy Local energy solutions Wind energy Dark green Local energy solutions exclude the use of excess heat from fossil fuel based sources Consider supply chain impacts Consider local environmental impacts Clean Transportation OFB may invest in clean transportation initiatives in relation to their properties and activities that are eligible for Green Bond funding. Dark green Fossil fuel vehicles excluded from mass transportation Electrical bike pools Electrical car pools Bike sharing systems/bicycle pools Mass transportation (e.g. local public transportation busses, trams, trains etc.) Consider supply chain and life cycle impacts Waste management and recycling Some residential areas have an increased focus and stricter requirements with regards to environmental considerations such as waste. Underground waste transportation systems Local mass waste collection Dark green Local systems that reduce the environmental impact of waste collection Consider local environmental impacts Table 2. Eligible project categories Second Opinion on OBOS Forretningsbygg s Green Bond Framework 10
Strengths Overall, the OFB green bond framework provides a detailed and sound framework for climate-friendly investments. OBOS has incorporated ambitious environmental policies in the organization. All of OBOS s business areas and locations are certified by either ISO 14001 (Environmental Management Systems) or Miljøfyrtårn 2. All new property developments are required to develop a unique environmental strategy with a minimum requirement to deliver above regulatory requirements for environmental issues. This may include, but is not limited to, improved energy classifications and the use of green building standards such as BREEAM. Since 2014, OBOS has, as a result of the Miljøfyrtårn certification, constantly monitored and improved energy management throughout the entire portfolio. This effort includes the removal of fossil fuels as a source of energy. All of OFB s properties are scheduled to phase out fossil fuels by 2019. The issuer is also investing in solar panels on six of its commercial properties. OBOS Energy, another company in the OBOS group, invests and develops local energy plants that reuse the energy surplus from nearby industries, to heat hot water in OBOS s buildings. The OFB framework lists eligible categories of assets that are supportive of the objective of promoting a transition to low-carbon and climate-resilient growth. The exclusion of potential fossil fuel elements from the framework is a clear strength. Voluntary environmental certifications such BREEAM-NOR cover many important sustainability issues, but fall short of guaranteeing low carbon buildings. The inclusion of an energy efficiency requirement is a strength. According to Enova SF, the agency that manages energy classifications, the energy class B equals an energy usage for office space below 115 kwh/m 2. The first issuance will fund the Portalen development in Lillestrøm. In addition to meeting the framework requirements, the building is close to a public transit hub and has facilities to accommodation bicycle transport. Weaknesses There are no obvious weaknesses in OFB s green bond framework. Pitfalls In a low carbon 2050 perspective the energy performance of buildings is expected to be improved, with passive and plus house technologies becoming mainstream and the energy performance of existing buildings greatly improved through refurbishments. The OFB framework is not quite there yet, but is taking valuable steps towards this long-term vision. OBOS thoroughly evaluates all of its suppliers and subcontractors to ensure that they fulfill all regulatory requirements. However they do not screen their supply chain for any additional environmental considerations, and building projects are associated with environmental impacts beyond the boundary of the building itself. Impact reporting is limited at this point to available energy efficiency data. We encourage the issuer to be transparent on the methodology and data availability. 2 Miljøfyrtårn is a Norwegian environmental certification for businesses, see more https://www.miljofyrtarn.no/ Second Opinion on OBOS Forretningsbygg s Green Bond Framework 11
Appendix: About CICERO CICERO Center for International Climate Research is Norway s foremost institute for interdisciplinary climate research. We deliver new insight that helps solve the climate challenge and strengthen international climate cooperation. We collaborate with top researchers from around the world and publish in recognized international journals, reports, books and periodicals. CICERO has garnered particular attention for its work on the effects of manmade emissions on the climate and the formulation of international agreements and has played an active role in the UN s IPCC since 1995. CICERO is internationally recognized as a leading provider of independent reviews of green bonds, since the market s inception in 2008. CICERO received a Green Bond Award from Climate Bonds Initiative for being the biggest second opinion provider in 2016 and from Environmental Finance for being the best external review provider (2017). CICERO Second Opinions are graded dark green, medium green and light green to offer investors better insight in the environmental quality of green bonds. The shading, introduced in spring 2015, reflects the climate and environmental ambitions of the bonds in the light of the transition to a low-carbon society. CICERO works with both international and domestic issuers, drawing on the global expertise of the Expert Network on Second Opinions. Led by CICERO, ENSO is comprised of trusted research institutions and reputable experts on climate change and other environmental issues, including the Basque Center for Climate Change (BC3), the Stockholm Environment Institute, the Institute of Energy, Environment and Economy at Tsinghua University and the International Institute for Sustainable Development (IISD). ENSO operates independently from the financial sector and other stakeholders to preserve the unbiased nature and high quality of second opinions. cicero.oslo.no/greenbonds Second Opinion on OBOS Forretningsbygg s Green Bond Framework 12