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Residential Property Climate 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 Residential Property Climate Bonds. Version 1.0

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Page 1: Residential Property Climate Bonds Property... · Residential Property: A building that is used or suitable for use as a ... number of bedrooms, building type ... Standard for Residential

Residential 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 Residential Property Climate Bonds.

Version 1.0

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

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

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

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

3.1.Useofbuildingcodes,energylabellingschemesandratingtoolsinthecertificationprocess..5

3.2.Methodforevaluatingbuildingcodes,energylabellingschemesandratingtools...................7

3.3.Aggregationofassets..................................................................................................................9

Appendix1–Method1:Benchmarkingagainstlocalmarketcarbonperformance...........................10

Appendix2–Method2:Relativestringencyofenergylabelsandratingtools..................................13

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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. ExecutiveSummaryObjectiveDefineamethodologythatenablesthefollowingtobecertifiedasClimateBonds:1. ResidentialMortgageBackedSecurities2. BondsissuedagainstnewresidentialpropertydevelopmentGoalsProvideacomplimentaryframeworkforClimateBondsthat:1. Offers the greatest opportunity for directing finance to low-carbon and energy-efficient

residentialbuildings2. Maintains integrityof theClimateBonds Initiativebrandwithout relyingonongoing reporting

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

institutionalinvestors.2. Lowcostofapplication:toensurethatcompliancecostsdonotunderminetheattractivenessof

certificationandallowapplicationtoassetsindevelopingcountries.3. Use of climate-relevant metrics: to achieve compatibility with international frameworks for

financing1, relevance to corporate reporting frameworks2, and relevance to emerging citygreenhousegasabatementpolicies3

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

StructureofthispaperTheguidanceprovidedbytheLowCarbonBuildingsTechnicalWorkingGroupisorganisedintothefollowingsections:1. Useofbuildingcodes,energylabellingschemesandratingtoolsinthecertificationprocess2. Methodforevaluatingbuildingcodes,energylabellingschemesandratingtools3. Aggregationofassets

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 thecertificationmethodologyforResidentialPropertyClimateBonds:

1. Existing mechanisms (i.e. building codes, energy labelling schemes and rating tools) will be

leveragedforthecertificationofResidentialPropertyClimateBonds.2. TheClimateBondsStandardsBoardwillapprovebuildingcodes,energy labellingschemesand

ratingtoolsthatrequirealevelofcarbonperformanceconsistentwithClimateBondsInitiativetargets.

3. Thecertificationmethodologywillnotdisadvantagepropertiesbytheirattributes(e.g.age,size,numberofbedrooms,buildingtype,etc.).

4. Fornewproperties,wherecompliancewithapprovedbuildingcodes,energylabellingschemes,or rating tools is required as part of development or construction approval, approvalmay beusedtodemonstrateeligibilityforClimateBondsCertification.

5. Forexistingpropertiesdeliveredoutsidetherequirementsofapprovedbuildingcodes,approvedenergylabellingschemesorratingtoolswillbereliedupon.

6. Climate Bonds Certification will not be available for markets where building codes, energylabelling schemesand rating toolsdonotexistor arenot considered stringentenoughby theClimateBondsStandardsBoard.

7. Twomethodshavebeendevelopedforevaluatingbuildingcodes,energylabellingschemesandrating tools for use in the Climate Bonds Certification process. They can be applied to localmarkets where there are no existing mechanisms to assess eligibility of property assets forClimate Bonds Certification. Both methods are based on the same premise of positioning apropertyassetinthetop15%ofitslocalmarketintermsofcarbonperformance.

8. Where a mechanism for a particular market is approved for use in the Climate BondsCertificationprocess,ClimateBondsInitiativewilllistit(ontheClimateBondsInitiativewebsite)asanapprovedmechanismthatmaybeusedbyothers,alongwiththedatewhentheongoingefficacyofthatmechanismwillbereviewed.

9. Propertiescompliantwithanapprovedbuildingcode,energylabellingschemeorratingtoolcanbeaggregatedthroughpoolingofassetsintoalargercombinedasset.Eachassetincludedinthepoolmustbecompliantinitsownright.ThisisknownasSimpleAggregation,whichdiffersfromthe Full Aggregation method that may be applied for Commercial Property where carbonperformancebaselines(kgCO2/m2)existforallassetsintheportfolio.

Thenextsectionprovidesfurtherdetailsandexplainstherationalebehindtheaboveguidance.

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3. DetailsofGuidance3.1.Useofbuilding codes,energy labelling schemesand rating tools in thecertificationprocess

A.LeveragingexistingmechanismsGuidance ExplanationThe certification methodology for ResidentialProperty Climate Bonds will leverage existingmechanisms.Buildingcodes,energy labellingschemesandratingtools4 that assess the energy and/or carbonefficiencyofresidentialpropertieswillbeleveragedto allow the certification of Residential PropertyClimateBonds.The Climate Bonds Standards Board will assessbuildingcodes,energy labellingschemesandratingtools to ensure that they are sufficiently stringent.The Board will only approve mechanisms thatrequire a level of carbon performance consistentwithClimateBondsInitiativetargets.This certification methodology of leveragingbuildingcodes,energylabellingschemesandratingtools differs from the measurement andverificationmethodology for Commercial PropertyClimateBonds.

The certification methodology for CommercialPropertyClimateBondsisunsuitableforResidentialProperty Climate Bonds due to ongoingmeasurementandverificationrequirementsthatareimpractical and challenging for homeowners tosatisfy.Energy efficiency requirements within residentialbuilding codes are becoming increasingly common.In certain jurisdictions, mandatory energy labellingprovides a means to demonstrate the relativeenergy efficiency of residential buildings. Also, insome jurisdictions, minimum energy performancestandards are assessed through dedicated energyratingtoolsreferencedinbuildingcodes.

B. ApplicationandfairtreatmentofassetsGuidance ExplanationThecertificationmethodologydoesnotdifferentiatebetweennewandexistingpropertyassets.Allassetsare required to demonstrate compliance with anapprovedbuildingcode,energy labellingschemeorratingtool.In the process of evaluating building codes, energylabelling schemes and rating tools for use in theClimate Bonds Certification process, considerationwill be given to property attributes such as size,number of bedrooms, and building type (house,apartment, etc.). This is done to ensure thatproperties are not disadvantaged based on thoseattributes.

There is potential for variation in the attributes ofpropertyassets(e.g.age,size,numberofbedrooms,building type, etc.) to cause the certificationmethodology to be perceived as unfair for someassets(e.g.comparingaonebedroomapartmenttoafivebedroomhouse).Buildingcodes,energy labellingschemesandratingtools generally consider size and building type inassessing compliance. To maintain simplicity andtransparency of the certification methodology, noadditionalcorrectionornormalisationwillbemadeforthevariationinpropertyattributes.

4ExamplesincludeEnergyPerformanceCertificatesintheUKandBASIXinNewSouthWales,Australia.

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C.DemonstratingeligibilityforClimateBondsCertificationGuidance ExplanationFor new properties, where compliance withapproved building codes, energy labelling schemesorratingtoolsisrequiredaspartofdevelopmentorconstructionapproval, theapprovaldocumentationforthedevelopmentorconstructionmaybeusedtodemonstrate eligibility for Climate BondsCertification.For existing properties, eligibility can bedemonstrated either through compliance with anapprovedbuilding codeat the timeof constructionor through compliance with an approved energylabellingschemeorratingtool.For jurisdictions where building codes, energylabellingschemesandratingtoolsdonotexistorarenot considered stringent enough, Climate BondsCertificationwillnotbeavailable.

Propertiesneedtodemonstratecompliancewithanapprovedbuildingcode,energy labellingschemeorrating tool in order to be certified as ResidentialPropertyClimateBonds.Climate Bonds Initiative relies on the requirementsof approved building codes, energy labellingschemesandratingtoolstoavoidthecostofhavingto perform a dedicated assessment of eachresidentialpropertyassociatedwiththebond.

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3.2.Methodforevaluatingbuildingcodes,energylabellingschemesandratingtools

A. DemonstratingeffectivenessofthemechanismGuidance ExplanationWhereamarketdoesnotalreadyhaveanominatedmechanism to demonstrate eligibility for ClimateBonds Certification, an applicant can seek approvalof an appropriate local building code, energylabellingschemeorratingtoolbydemonstratingitseffectiveness in positioning a property asset in thetop 15% of its local market. Effectiveness can bedemonstratedbyeitherofthetwomethods:

1. Method 1: Benchmarking against the localmarketcarbonperformance

2. Method 2: Establishing the relative stringencyofanenergylabellingschemeorratingtool

Once a mechanism for a particular market isapproved foruse in theClimateBondsCertificationprocess, Climate Bonds Initiative will list it (on theClimate Bonds Initiative website) as an approvedmechanismthatmaybeusedbyothers,alongwiththe date when the ongoing efficacy of thatmechanismwillbereviewed.

Offering the opportunity to demonstrate theappropriateness of local building codes, energylabelling schemes and rating tools for newmarketparticipants enables the Low-Carbon BuildingsStandard for Residential PropertyClimateBonds togrowinnewmarketsasdemandforcertifiedgreenbondsincreases.

Two methods have been developed as Method 1(benchmarking against local market carbonperformance)isnotalwayspossible.Accordingly,analternativemethod(Method2)hasbeenprovided.

B. Method1:BenchmarkingagainstlocalmarketcarbonperformanceGuidance ExplanationAny approved building code, energy labellingschemeorratingtoolmusthaveindependentthird-party verification (i.e. it cannot be self-assessed orself-reported) and be able to be benchmarkedagainst the local market carbon performance forresidentialdwellings.

Carbon performance measurements should beconducted based on a consistent unit of intensity(areaorhabitableroom)andforafullfuelcycle.Thelocal market benchmarking should be taken for astatistically representative sample and the 15thpercentileoflowestcarbonperformancecalculated.Thiscarbonperformanceofthe15thpercentilehelpsto establish baselines for evaluating theeffectiveness of a building code, energy labellingscheme or rating tool. Baselines are developed byapplying a linear trajectory towards zero carbon in2050tothe15thpercentile.

After appropriate baselines are established, theproposedbuildingcode,energy labellingschemeorrating tool must be able to demonstrate that itmeetsorexceedsthosebaselinestobeapprovedbytheClimateBondsStandardsBoard.

Appendix 1 demonstrates how Method 1 can beapplied.

The carbon performance associatedwith a type ofproperty is influenced by a number of factors. Theprocess for benchmarking against the spread ofcarbon performance in a local market allows theinfluences external to the control of a residentialproperty developer, constructor or owner to beisolated.

Climate Bonds Initiative has an overall ambition ofzero carbon by 2050. This ambition is reflected inthe method for developing baselines, which areusedtoevaluatetheeffectivenessofbuildingcodes,energylabellingschemesandratingschemesforuseintheClimateBondsCertificationprocess.

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C.Method2:RelativestringencyofenergylabelsandratingtoolsGuidance ExplanationWhere carbon performance profiling of the localmarket is not possible or the best-available toolsmeasure incompatible elements (such as envelope-only5buildingcodes),therelativestringencymethod(Method 2) can be used to demonstrate theeligibility of a mechanism for use in the ClimateBondsCertificationprocess.To demonstrate the required stringency, thenominated energy label or rating tool score (e.g. 5stars or A rating) should be demonstrated to be inthetop15thpercentileofall ratingsawardedunderthelabellingschemeorratingtool.Effortshouldbemade to ensure the sample set for percentileanalysis is representative for the residential sectorasawhole.Appendix 2 demonstrates how Method 2 can beapplied.

This alternative method has been developed toapply tosituationswherecarbonperformancedataisnotavailable.

5Envelope-onlybuildingcodesassessthethermalefficiencyofthebuildingenvelopeonlyanddonotconsideralltheaspectsthatdictatetheoperationalenergyefficiency,suchastypeandqualityofheatingandcoolingplant.

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3.3.Aggregationofassets

A.SimpleaggregationGuidance ExplanationProperties compliant with an approved buildingcode,energy labellingschemeorratingtoolcanbeaggregated through pooling of assets into a largercombined asset. Each asset included in the poolmustbecompliantinitsownright.

As the certification methodology for ResidentialPropertyClimateBondsisasimple‘passorfail’test,assets can only be pooled on the basis that theyhave ‘passed’. This is known as the SimpleAggregationmethodwherebyeachassetinthepoolmustbecompliant.The Full Aggregation method or area-weightedapproach to portfolio aggregation offered forCommercialPropertyClimateBondsisnotavailablefor residential property assets due to the lack ofdatatoestablishcarbonperformancebaselines.

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Appendix1–Method1:BenchmarkingagainstlocalmarketcarbonperformanceWhererobustcarbonperformancedataexistsforresidentialassetsinalocalmarket,itmaybe possible to benchmark local building codes against this data, to determine whetherbuilding code compliance positions an asset in the top 15% of its market. Once it isdeterminedthatbuildingcodecompliancedoesthis,anypropertyassetcompliantwiththatbuildingcodeisconsideredeligibleforClimateBondsCertification.Themethod for evaluating local building codes for use in the ClimateBonds Certificationprocessisoutlinedinthefollowingsteps.Step1.IdentifyRelevantBuildingCodesBuildingcodesareonlyuseful for theClimateBondsCertificationprocess if theminimumstandardsrequiredbythebuildingcodearebasedonanabsolutemeasureofcarbon.Where the minimum standards required by the building code are based on a relativemeasure, for example where performance is modelled against a reference building, thebuilding code cannot be benchmarked against local market carbon performance and itcannotbeusedfortheClimateBondsCertificationprocess.Step2.Determine15thPercentileofLocalMarketCarbonPerformanceCalculate the 15th percentile from the local market carbon performance distribution fordwellingswiththesamenumberofbedrooms.Figure1belowforinstanceillustratesa15thpercentileof2,170kgCO2-eforthree-bedroomdwellingsinalocalmarket.

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Step3.BenchmarktheBuildingCodeDetermine the minimum carbon performance required to achieve compliance with therelevantbuildingcodefordwellingswiththesamenumberofbedrooms.Ifthisminimumcarbonperformancefallsbelowthatofthe15thpercentileidentifiedearlier,itisdeemedthatcompliancewiththebuildingcodepositionspropertyassetsinthetop15%oftheirlocalmarket.Accordingly, demonstrating that a property asset is compliant with the building code issufficienttoproveitseligibilityforClimateBondsCertification.Step4.EvaluatingBuildingCodeefficacyovertimeAlineartrajectorytowardszerocarbonin2050isappliedtothe15thpercentiletoestablishbaselines for evaluating the ongoing effectiveness of building codes, energy labellingschemesandratingtools.

Thismeans that baselines becomemore stringent over time and a building codemay nolonger be useful for the Climate Bonds Certification process if compliance no longerpositionsanassetbelowtherelevantbaseline.Thisisillustratedinthecasestudyoverleaf.

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CaseStudy1

A localbuildingcodehasestablishedanaveragecarbonperformancebenchmarkof4,650kgCO2-eforthree-bedroomdwellings.In2015,residentialhousesarerequiredtoachieveaminimum60%reductionagainstthisaveragebenchmarktocomplywiththelocalbuildingcode. A three-bedroom housemust therefore demonstrate a carbon performance below1,860kgCO2-e(60%improvementfrom4,650kgCO2-e)tocomply.

Analysis of localmarket carbon performance distribution data for three-bedroom housesshows that the 15th percentile is 2,170 kgCO2-e. This means that the minimum carbonperformancerequiredforlocalbuildingcodecompliance(1,860kgCO2-e)positionsanassetin the top 15% of the local market (2,170 kgCO2-e). Local building code compliance istherefore sufficient to demonstrate that a property asset is eligible for Climate BondsCertification.Beyond2020,theillustrationshowsthatbuildingcodecomplianceisnolongersufficienttodemonstrate that a property asset is eligible for Climate Bonds Certification because theapplication of a 2050 zero-carbon trajectory to the 15th percentile creates a moredemandingbaseline.

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Appendix 2 –Method 2: Relative stringency of energy labels andratingtoolsWhereenergylabellingschemesorratingtoolsexistforresidentialassetsinalocalmarket,itmaybepossible to leveragethese instruments toassesswhetheranasset ispositionedwithinthetop15%oflocalmarket.Theachievementofaverifiedenergylabelorratingtoolscorecanthenbeusedtodemonstratethatapropertyasset iseligible forClimateBondsCertification.

The method for evaluating energy labels and rating tools for use in the Climate BondsCertificationprocessisoutlinedinthefollowingsteps.

Step1.IdentifyDatabaseForanenergylabellingschemeorratingtooltobeusefulfortheClimateBondsCertificationprocess, theremustbeanunderlyingregisterordatabaseofverifiedcarbonperformancedataavailabletoenableanalysisandcomparisontothelocalmarket.

Step2.ConfirmSampleSizeSufficientThe register or database must be of a sufficient size to enable statistically significantconclusionstobederived.

Step3.ConfirmDatasetisRepresentativeThedatasetmustincludeasufficientspreadofperformancelevels.Thatis,adatasetthatisskewedtowardsthetop-endorbottom-endofthemarketmaynotbeused.

Typically,energylabellingschemesthatareusedformandatoryreportingrequirementscanbeconsideredrepresentativeofthemarketspread.

Step4.DetermineMinimumCriteriaforClimateBondsCertificationWhere dataset analysis shows that by achieving a particular energy label or rating toolscore,theassetispositionedinthetop15%ofthelocalmarket,thentheenergylabellingschemeorratingtoolmaybeleveragedfortheClimateBondsCertificationprocess.

Thecasestudyoverleaffurtherillustratesthisprocess.

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CaseStudy2

Aperformancelabellingschemeassessestheperformanceofresidentialassetsonacarbonbasis.LabelsareawardedfromAthroughtoGbasedonthecarbonefficiencyofanasset.Thedatabaseofthislabellingschemeencompasses2.5millionrecordsfromatotalpoolof7.5millionassetsnationally.Thissamplesizeisconsideredsufficient.

The localmarket distribution of labels (in Figure 1) shows a good spread of performancelabels fromAtoG.Aperformance label isalsoamandatoryreportingrequirementat thepointofsaleor leaseofaproperty,andassuchthedata isconsideredtoprovideamoreaccuratereflectionofmarketperformancethanforschemeswherereportingisvoluntary.

Analysis of the dataset shows that 9% of assets achieve the highest efficiency ‘A’ label(Figure2).Assuch,achievementofaverified‘A’performancelabel(orhigher)isconsideredto position any property asset in the top 15% of the market and may be used todemonstratethattheassetiseligibleforClimateBondsCertification.

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Achievementofa‘B’labelisshowntopositiontheassetinthenext13%ofassets(i.e.inthetop10-22%ofthemarket).Whilesomeofthe‘B’labelassetswillbepositionedinthetop15%,achievementofa‘B’labeldoesnotguaranteethis.Assuch,a‘B’labelcannotbeusedtodemonstratethatapropertyassetiseligibleforClimateBondsCertification.