Boligkreditt

Illustration photo

By and large the question of issuing a green bond is a question whether an appropriate set of data can be isolated in order to designate certain assets as green. In the area of Norwegian residential finance, market participants expected that there would be ample scope to issue a green covered bond due to that the country covers all its electricity needs (for all sectors) with renewable carbon emission free hydroelectric power. We also know that Norwegian houses are heated to a very high degree with electricity and that fossil fuels have been phased out over several years and are banned in the latest building code, as well as being made generally illegal from 2020. A strict building code applies for the whole country. Norway is very long and has a northern and southern climate, but also a coastal and an inland climate. There is however only one building code which exist to ensure ever- increasing energy efficiency for residential buildings no matter where they are located. Norwegian lenders have therefore for some time been eager to access the data on specific residences contained in the Energy Performance Certificate (EPC) database. ENOVA, which is the government agency responsible for effecting green policies operates and maintains this database. Energy certificates must by law be produced for any residence in Norway built or transacted in 2010 or later. The certificate database is however subject to privacy laws, which means that no bank has wholesale access to it in order to link its portfolio of mortgage loans to the best performing buildings. This was the fundamental challenge which we faced when considering identifying green assets.

We sought the advice of ING, which has extensive competencies in the area of green finance, as well as Norwegian engineering consultancy Multiconsult. The latter was also involved when the current EPC system was designed and building code was developed and has a unique insight in exactly the area of identifying green residences. The approach taken was to define, in the absence of the EPC data, a proxy which would identify residences that are within the 15% most energy efficient residences in Norway. This limit is established by the Climate Bond Initiative for various markets and the idea is that it is a constant limit whereby as more energy efficient residences are created, others will drop out of the so defined green universe. Multiconsult identified residences constructed in accordance with the building code from 2007 as starting point. In 2007 the code was amended and this tightened energy efficiency criteria significantly. In order to ensure that the houses and apartments are also built in accordance with this code, only such units which are constructed after January 2009 are considered. This effectively limited the selectable universe for the SpaBol green assets to within 8% of the overall building stock (residential units built 2009 to 2017), a lower limit than 15% as per the CBI. In Norway, when building, there is no choice of whether to construct a house according to the strict energy efficiency demands of the code or to a different, lesser standard; it must be in accordance with the code. A house constructed in accordance with the code would normally expect to fetch a C-EPC rating. A and B are then normally designations for houses where additional measures have been taken beyond the code requirements.

At present, we plan to expand and/or replace the criteria to include other buildings with an energy label of A, B and C at a future time when the EPC database may be made available as well as to include renovated buildings with a minimum 30% calculated energy efficiency improvement. It is the calculated energy requirement to heat the buildings which is important, independent of the actual occupants use/behavioural characteristics. From the calculated energy use the CO2 emissions result, based on the assumptions for how electricity is produced. In Norway the essential source is emissions free hydroelectric power, but assumptions are included when calculating CO2 emissions which address the interconnectedness of the power grids across the Nordic countries.

The SpaBol portfolio which was identified during the project phase was just over NOK 21 bn of green mortgages (approximately EUR 2.2 bn):

According to the ICMA Green Bond Principles, which we have adopted, we will report on the development of these green assets on a portfolio basis, as part of the regular cover pool, measured against the green bonds outstanding. The reporting will also contain the energy savings and CO2 emission savings vs. the Norwegian average building stock. The figures for the green assets at the time of the inaugural issuance show that the green assets have a 57% reduction in emissions as expressed by kg CO2 / m2 heated space. Second party opinion provider DNV has opined on the adherence to the Green Bond Principles. Both DNV and Multiconsult are approved verifiers under at Climate Bond Initiative and verification of this project is under way.

By issuing the green bond the SpareBank 1 Alliance wanted to take an early lead in developing the green covered bond market from the Norwegian point of view, rather than waiting another few years for the EPC database to become available. This provides investors with an early opportunity to invest in Norwegian green covered bonds, it provides additional investor diversification for the issuer and it gives an early impetus for the SpareBank 1 banks to focus on developing their share and the overall market for more energy efficiency in Norwegian housing. Ultimately, this contributes to the agreed CO2 emissions reductions under the Paris Agreement of 40% reduction by 2030 compared to 1990 levels.

All documents pertaining to our green covered bond project are available on the “Green Bond” section or our website; spabol.no