Commercial Property Cl imate Bonds Certification methodology

Low Carbon Buildings Technical Working Group

ABSTRACT

This paper sets out guidance by the Low Carbon Buildings Technical Working Group on the certification methodology for Commercial Property Climate Bonds.

Version 1.0

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Contents Definitions.............................................................................................................................................2

1. ExecutiveSummary........................................................................................................................3

2. SummaryofGuidance....................................................................................................................4

3. DetailsofGuidance........................................................................................................................5

3.1.Establishingbaselinesuniquetolocalmarketandbuildingtype...............................................5

3.2.Minimumperformancetarget....................................................................................................7

3.3.Methodologyimplementation....................................................................................................8

3.4Approachforcitieswherenodataisavailabletoestablishbaselines.........................................9

Appendix1–Energyendusestobeincorporatedincalculationofbuildingownerconsumption....10

Appendix2–Calculationofstraight-linetargets................................................................................11

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DefinitionsClimate Bonds Initiative: An investor-focused not-for-profit organisation, promoting large-scaleinvestmentsthatwilldeliveragloballowcarbonandclimateresilienteconomy.TheInitiativeseekstodevelopmechanismstobetteraligntheinterestsofinvestors,industryandgovernmentsoastocatalyseinvestmentsataspeedandscalesufficienttoavoiddangerousclimatechange.

Climate Bond: A bond that is certified by the Climate Bonds Standard Board as meeting therequirementsofthisClimateBondsStandard.

Climate Bonds Standard: eligibility criteria for Climate Bond Certification, based on the currentversionaspublishedontheClimateBondsInitiativewebsite.

Climate Bonds Standard Board: a board of independentmembers that considers applications forCertificationofabondundertheClimateBondsStandard.

Note: The Climate Bonds Standard Board is constituted, appointed and supported in linewith thegovernancearrangementsandprocessesaspublishedontheClimateBondsInitiativewebsite.

ClimateBondCertification:allowstheissuertousetheClimateBondCertificationMarkinrelationtothatbond.ClimateBondCertificationisprovidedoncetheindependentClimateBondsStandardBoardissatisfiedthebondconformswiththeClimateBondsStandard.

Commercial Property: Abuilding that is intended to generate aprofit, either fromcapital gainorrental income.Therearesub-categoriesofCommercialPropertysuchasoffices,shoppingcentres,hotels,etc.

ResidentialProperty:Abuildingthatisusedorsuitableforuseasadwelling.

TechnicalWorkingGroup:Agroupofkeyexperts fromacademia, internationalagencies, industryandNGOsthatdevelopSector-SpecificCriteria,whicharedetailedtechnicalcriteriafortheeligibilityofprojectsandassetsaswellasguidanceonthetrackingofeligibilitystatusduringthetermofthebond.

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1. ExecutiveSummaryObjective

DefineamethodologythatenablesClimateBondsCertificationofcommercialpropertyassets.

Goals

ProvideacomplimentaryframeworkforClimateBondsthat:

1. Offers the greatest opportunity for directing finance to low-carbon and energy-efficientcommercialbuildings

2. Maintains integrity of the Climate Bonds Initiative brand through a transparent approach tomonitoringandverification

GuidingPrinciples

Thefollowingprinciplesunderpintheguidancepresentedinthispaper:

1. Simple aggregation of individual assets: to create bonds of sufficient size that attractinstitutionalinvestors.

2. Lowcostofapplication:toensurethatcompliancecostsdonotunderminetheattractivenessofcertificationandallowapplicationtoassetsindevelopingcountries.

3. Use of climate-relevant metrics: to achieve compatibility with international frameworks forfinancing1, relevance to corporate reporting frameworks2, and relevance to emerging citygreenhousegasabatementpolicies3

4. Transparency of approach and methodology: to support market transparency and improvemanagementofenergy/carbonperformanceriskatthepropertylevel

Structureofthispaper

TheguidanceprovidedbytheLowCarbonBuildingsTechnicalWorkingGroupisorganisedintothefollowingsections:

1. Establishingbaselinesuniquetolocalmarketandbuildingtype2. Minimumperformancetarget3. Methodologyimplementation4. Approachforcitieswherenodataisavailabletoestablishbaselines

1SuchastheKyotoprotocolcleandevelopmentmechanismsanditssuccessor.2ExamplesincludereportingframeworksdevelopedbytheCarbonDisclosureProject,GlobalReportingInitiative,andSustainabilityAccountingStandardsBoard.3ExamplesincludecitiessuchasNewYork,Tokyo,London,andotherC40cities.

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2. SummaryofGuidanceThe Low Carbon Buildings Technical Working Group has provided the following guidance on thecertificationmethodologyforCommercialPropertyClimateBonds:

1. Statisticalanalysisoflocalmarketcarbonperformancewillbeperformedtoestablishbaselines(set at the top 15% of the local market). Unique baselines will be established for differentbuildingtypesindifferentgeographiclocations.Baselineswillbecheckedevery3yearsandonlyrecalibratedunderexceptionalcircumstances.

2. Thecarbonperformancemeasurementofabuildingmustonlyincludeitemsthatarewithinthebuilding owner’s control. For instance, energy utilised for central services provided to servetenant process loads should not be included in themeasurement. Greenhouse gas emissionsfactors applied to determine the carbon performance of a building are locked in at thecommencement of the bond to isolate the positive effect of decarbonisation of the grid on abuilding’sperformance.

3. Thecarbonperformanceofabuildingshouldhaveanareadenominator(kgCO2/m2)ratherthananoccupancydenominator.Thisisbecauseareacanbemoreeasilyandrobustlymeasuredandaudited.

4. Buildings must achieve a minimum performance target to be eligible for Climate BondsCertification. Thisminimumperformance target is determinedbyderiving straight-line targetsfromthebaselinethroughapplicationofalineartrajectorytowardszerocarbonin2050.

5. Minimum performance targets will be adjusted using a year-on-year climate correctionmethodologysothatbuildingsarenotpenalisedduetoaparticularlyhotorcoldyear.

6. Where there is alignmentwith the Climate Bonds Standard,work carried out to complywithexistingratingtools,benchmarkingtoolsor reportingschemeswillbe leveragedtoreducetheworkandcostsincurredbytheissuertodemonstratecompliancewiththestandard.

7. Ongoing monitoring and verification should be self reported according to a well-establishedmethodologyandsupportedbyanindependentauditor’ssignoff.

8. Climate Bonds Initiative will initiate spot audits of monitoring and verification reports. Thefrequencyandproportionofreportsauditedwillbedependentontransactionvolume.

9. Propertiescanbeaggregatedthroughpoolingofassets intoa largercombinedasset.Anarea-weightedaggregationmethodology,knownastheFullAggregationmethod,willbeappliedtoaportfolio of multiple property assets to establish the aggregated baseline and actual carbonperformanceoftheportfolio.ThisdiffersfromtheSimpleAggregationmethodthatisappliedtoResidentialPropertywherebyeachassetincludedinthepoolmustbecompliantinitsownright.

10. Aninterimsolutionhasbeenproposedtoenablecertificationincitieswherenodataisavailabletoestablishbaselines.Themethodology leveragestheperformanceratingsofexistingbuildingstandards such as LEED and has two other requirements pertaining to minimum emissionsperformanceimprovementandmaximumbondterm.

Thenextsectionprovidesfurtherdetailsandexplainstherationalebehindtheaboveguidance.

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3. DetailsofGuidance

3.1.Establishingbaselinesuniquetolocalmarketandbuildingtype

A. AnalysisofactualoperationalbuildingdataGuidance ExplanationBaselineswillbederivedfromtheanalysisofactualoperationalbuildingdata.

Statisticalanalysiswillbeperformedtoestablishthecarbon performance distribution of each buildingtype(e.g.office,retailstore,etc.)ineachgeographiclocation,withthebaselinesetatthetop15%ofthelocalmarket.

Unique baselines will be established for differentbuilding types in different geographic locationsbased on the same methodology. This approachmeans that baselines are established as and whenreliabledatabecomesavailable.

Baselines help to establish minimum performancerequirements a property asset must achieve todeliver a satisfactory level of environmentadditionality and be eligible for Climate BondsCertification.

Uniquebaselines areestablished to account for (1)variations in the energy/carbon intensities ofdifferent building types in different geographicallocationsand(2)theabilitytoaccesspropertydataof different geographic locations. With regards toaccessing property data, cities with mandatoryenergy/carbondisclosureschemesaremorelikelytohavedatathatisaccessible.

B. BoundariesforassessingcarbonperformanceGuidance ExplanationThe measured carbon performance of a buildingshould alignwith theboundariesof ownership andcontrolthatexist inthepropertysector.Onlyitemswithin the building owner’s control should beincluded in theassessmentof carbonperformance.Energyutilisedforcentralservicesprovidedtoservetenant process loads shouldnot be included in theassessment.

Accordingly, buildings should have separatemeteringtoallowforthepartitionofbuildingownerandtenantenergyconsumption.

The measured carbon performance of a buildingshould not include energy end uses, e.g. lighting,that are not within the control of the buildingowner.

Appendix 1 provides guidance on the energy enduses that shouldbe incorporated in the calculationofbuildingownerconsumption.

C. AreadenominatorforassessingcarbonperformanceGuidance ExplanationThe measured carbon performance of a buildingshouldhaveanareadenominator(kgCO2/m

2)ratherthananoccupancydenominator.

Thisapproachisadoptedbecauseareacanbemoreeasilyandrobustlymeasuredandaudited.

D. RecalibratingbaselinesGuidance ExplanationOncebaselines are setbasedonactualoperationalbuilding data, they are not updated unless inexceptionalcircumstancessuchaswhen(1)thesizeand quality of the underlying data set improvessignificantly and (2) when there is significantdecarbonisationofthegrid.

CBIwill undertake a review every 3 years to checkfor these two circumstances and whether theywarrantarecalibrationofcitybaselines.

Baselinesestablishthe ‘top15%’ofmarketandareused to set the performance targets that bondsmust achieve to qualify for Climate BondsCertification.

Themechanism to setperformance targets alreadyassume a linear trajectory to zero carbon in 2050such that performance thresholds become morestringent over time. For that reason, baselines donothavetobeupdatedeachyear.

However,therearetwocircumstancesthatwarrantresettingofthebaselines.Inthefirstcase,thedata

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setoriginallyusedtoestablishacity’sbaselinecouldsignificantly increase in size and/or quality. In thesecond case, significantdecarbonisationof thegridcould lead to a largepercentageof buildings beingable to achieve performance thresholds set in anearlierpointintime.Inthesetwocases,itwouldbeprudent to recalibrate baselines so that theyaccurately represent the ‘top15%’ofbuildings inalocalmarket.

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3.2.Minimumperformancetarget

A. 2050zero-carbonlineartrajectoryGuidance ExplanationOncethe15%baselineisestablished,theminimumperformance target to achieve Climate BondsCertification is determined by assuming a lineartrajectory towardszerocarbon in2050 (henceforthknownas2050zero-carbonlineartrajectory).

Toavoidyear-on-yearmovingperformance targets,straight-line targets are set at themid-point of thebond term, along the 2050 zero-carbon lineartrajectory. Thismeans that aproperty asset is onlyrequired to achieve the same performance targetyear-on-year and is not required to improve itsperformance over time to achieve Climate BondsCertification.

Thecomputationofstraight-linetargetsisillustratedinAppendix2.

For cities where 15% baselines have beenestablished by Climate Bonds Initiative, there is atool on the Climate Bonds Initiative website thatenablesonetocomputetheminimumperformancetarget for a commercial property asset based on aparticular issuanceyearandbondterm.This tool isknownastheCO2TargetCalculator.

Greenhouse gas emissions factors applied todeterminethecarbonperformanceofabuildingarelocked in at the commencement of the bond toisolate thepositiveeffectofdecarbonisationof thegridonabuilding’sperformance.

Climate Bonds Initiative has an overall ambition ofzerocarbonby2050.Minimumperformancetargetsarethereforesetbasedonthispremiseandthe15%baselineestablished for theparticularbuildingtypeandlocalmarket.

Adopting the2050 zero-carbonambition throughalinear performance trajectory leads to increasedperformancestringencyovertime,contrastingmostbuilding energy/carbon assessment tools that doincrease in stringency over time. To avoid theuncertainty/risk associated with movingperformance targets (due to a linear trajectory),straight-linetargetsarecomputedsothatapropertyassetisrequiredtoachievethesametargetyear-on-year.Aclear,unambiguousbutaggressivetrajectoryis more attractive to investors than an ambiguoustrajectorywithuncertaintyoverexpectations inthenearandlong-termfuture.

B. ClimatecorrectionmechanismGuidance ExplanationPerformance targets will be adjusted using a year-on-year climate correction methodology such asthatusedbyEnergyStar in theUSAorDECC in theUK so that buildings are not penalised due to aparticularlyhotorcoldyear.

A year-on-year climate correction mechanism isemployedtoavoidthecasewhereabuildingfailstomeet its performance target and funding is pulleddue to climate impacts that are not within thebuildingowner’scontrol.

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3.3.Methodologyimplementation

A. LeveragingExistingInstrumentsGuidance ExplanationThe Climate Bonds Standard will leverage workcarried out to comply with existing rating tools,benchmarkingtoolsorreportingschemestoreducethe work and costs incurred by the issuer todemonstratecompliancewiththestandard.

Thedegreeofwork (data collection, energyaudits,etc.) already undertaken by building owners tocomplywithexistingenergyand/orgreenhousegasrating tools, benchmarking tools or reportingschemes should be leveraged in the ClimateBondsCertification process to avoid the duplication ofefforts.

The extent to which tools can be leveraged willdepend on the degree of alignment of theinstrumentwiththeClimateBondsStandard.

B. Monitoring&VerificationGuidance ExplanationOngoingmonitoring and verification should be selfreported according to a well-establishedmethodology and supported by an independentauditor’s sign off with respect to the process andrecordkeeping.

To maintain credibility of the Climate BondsStandard and brand, Climate Bonds Initiative willinitiatespotaudits.Thefrequencyandproportionofreports audited will be dependent on transactionvolume.

Ongoing monitoring and verification requirementsare critical for credibility of the Climate BondsStandard. On the one hand, they need to ensuretransparency and assurance that performanceambitionsaremet.Ontheotherhand,theyhavetobe sufficiently light-touch to ensure that ongoingcostsarekepttoanabsoluteminimum.

The proposed approach to monitoring andverificationwill greatly reduce the cost of year-on-year compliance and will remove the need toestablish a ClimateBonds accreditation scheme forassessors.

C. AggregationofassetsGuidance ExplanationAnarea-weightedaggregationmethodology,knownastheFullAggregationmethod,willbeappliedtoanenergy efficiency project that consists of multiplepropertyassets.

An aggregated baseline will be computed on aweightedaveragebasis.Similarly,theactualcarbonperformanceofaportfolioofmultipleassetswillbecomputed on a weighted average basis andcomparedtothisaggregatedbaselinetodetermineeligibilityforClimateBondsCertification.

Energy efficiency projects have generally beenconsidered too small to be commercially attractivetolargeinvestors.Toovercomethishurdle,thereisa need to enable aggregation of energy efficiencyprojectsintolargerscaleopportunities.Assuch,thecertification methodology for the Climate BondsStandard has defined an aggregation methodologyfor energyefficiencyprojects consistingofmultiplepropertyassets.

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3.4Approachforcitieswherenodataisavailabletoestablishbaselines

A. LeverageexistingbuildingstandardsGuidance ExplanationBuildings must achieve a LEED Gold or Platinumcertificationorequivalentperformanceratingunderother buildings standards such as BREEAM andGreenStarwithinthelast5years.

Issuers seeking to apply the ratings of otherbuildings standards must demonstrate that thoseratings deliver a level of performance in line withLEEDGoldorPlatinum.

In cases where no data is available to establishbaselines, an interim solution has been proposed,leveragingtheratingsofexistingbuildingstandards.

Climate Bonds has collaborated with LEED andestablishedthatGoldorPlatinumcertification isanadequate proxy to demonstrate that a buildingachieves an adequate level of performance in linewithClimateBonds’overallobjective.

ClimateBondsiscurrentlyworkingwithBREEAMtoestablish the equivalent ratings that measures upagainstLEEDGoldorPlatinumcertification.

B. MinimumemissionsperformanceGuidance ExplanationBuildings must achieve a minimum 30% emissionsimprovement against the ASHRAE 90.1 criteria (apartof theLEEDstandard)orequivalent stringencyof additional emissions improvements under otherbuildingstandards.

For emerging market cities, the alternative is tomeetthecarbonhurdlessetinIFC’sEdgeTool.

To ensure robustness in the certificationmethodology, buildings must achieve anothercriterion relating specifically to emissionsperformance.

AsLEEDmaynotbewellutilisedinemergingmarketcities,analternativeapproachleveragingIFC’sEdgeToolhasbeenproposed.

C. Maximumbondtermof6yearsGuidance ExplanationThegreenbondthat is issuedwillhaveamaximumtermof6years.

Climate Bonds appreciates the challenges inobtaining data to establish baselines and as such,has developed an interim solution for thecertification of bonds in cities where no baselinesareavailable.

The timeframe for thebond termhasbeen limitedto 6 years as Climate Bonds realises that theproposedsolutionisnotidealandbecomesweakasthebondtermextendsoveralongerperiodoftime.

D. Monitoring&VerificationGuidance ExplanationOngoing monitoring but no ongoing verificationbeyondthatrequiredbythebuildingstandardusedisrequired.

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Appendix1–Energyendusestobe incorporated incalculationofbuildingownerconsumptionLandlord energy loads (also known as base building energy loads) typically comprise theenergyconsumedbylandlord-ownedplantandequipmentthatarerequiredtoservicethebuildingandarenotcontrolledbythebuilding’stenants.Suchenergyendusesinclude:

• Heating,ventilationandairconditioning• Liftsandescalators• Carparklightsandventilation• Commonarealightandpower• Exteriorlightingandsignage

Landlordloadsexcludesenergyendusesthatarecontrolledbythebuilding’stenants,suchas:

• Lightingwithintenantareas• Tenantpower• Tenantsupplementarycooling• Tenantdatafacilities

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Appendix2–Calculationofstraight-linetargets

1. Thebaselineissetat15%ofthelocalmarketcarbonperformance.Pleasenotethatthis15%baselinewill be in terms of carbon emissions (kgCO2/m2) rather than percentageterms(ofthelocalmarket)asdisplayedinthechart.Thechartisdisplayedinpercentagetermsasitismeanttoserveasageneralillustration.

2. Thestartingpointofthe2050zero-carbonlineartrajectoryissetatthis15%baseline(inthe year that it is established by Climate Bonds) and the end is set at zero carbonemissions(inthiscase,0%onthechart)intheyear2050.

3. Thestraight-linetargetsarethenderivedfromtheintersectionofthemid-pointofthebond’stermandthe2050zero-carbonlineartrajectoryline.

4. For a 10-year bond issued in 2015, the mid-point of the bond’s term is 2020 and astraight line is drawn from the year 2020 (on the x-axis) up towards the 2050 zero-carbonlineartrajectoryline.Thestraight-linetargetisequivalenttothey-axisvalue(intermsofcarbonemissions)oftheintersectionpoint.

OnceClimateBondshasestablishedabaseline for a city, itwill be loadedon to theCO2TargetCalculatoravailableontheClimateBondswebsite.

This calculator automatically calculates the minimum performance target for a propertyasset inaparticularcitybasedonthe issuanceyearandtermof thebond.Thiscalculatorsimplifiestheprocessofdeterminingminimumperformancetargetsforthebondissuer.