Feb 15, 2019 R&I Green Bond Assessment Methodology <1> R&I Green Bond Assessment: Definition "Green bonds" refer to bonds and other financial instruments issued for the purpose of financing projects that aim to resolve environmental issues, such as global warming. "R&I Green Bond Assessment" is R&I's opinion regarding the extent to which the proceeds from the issuance of green bonds are used to invest in projects with environmental benefits. R&I Green Bond Assessment aims to evaluate green bonds based on their approach to selecting eligible projects and managing green bond proceeds, among others, and to express the results in symbols for easy comparison. 1 In the course of evaluation, R&I also confirms whether the green bond under evaluation is in conformity to Green Bond Principles (GBP), etc. For the details of R&I s second opinions on green bond frameworks and sustainability bond frameworks, refer to p. 8 and p. 15, respectively. <2> R&I Green Bond Assessment: Symbols and Definitions Symbol GA1 GA2 GA3 GA4 GA5 Definition Green bond proceeds are used to invest in projects with environmental benefits to a significant degree. Green bond proceeds are used to invest in projects with environmental benefits to a large degree. Green bond proceeds are used to invest in projects with environmental benefits to a sufficient degree. Green bond proceeds are used to invest in projects with environmental benefits to a lesser degree. Green bond proceeds are used to invest in projects with environmental benefits to a limited degree. 1 R&I Green Bond Assessment does not certify the environmental benefits and other qualities of the eligible projects. Hence, R&I will not be held responsible for the effectiveness of the projects, including their environmental benefits. Moreover, R&I Green Bond Assessment is a not a credit rating, and mainly involves matters other than credit assessment. R&I Green Bond Assessment is therefore conducted as part of R&I's ancillary business. 1
<3> R&I Green Bond Assessment: Scope of Financial Instruments The scope of R&I Green Bond Assessment includes the following types of financial instruments: 1. Bonds (government bonds, supranational bonds, municipal bonds, government agency bonds, corporate bond, etc.) 2. Project bonds, asset-backed securities 3. Other financial instruments that resemble those mentioned above (loans, trust beneficiary interests, etc.) 4. Issuance programs (CP, MTN, etc.) <4> R&I's Green Bond Assessment: Evaluation Criteria R&I conducts a comprehensive evaluation regarding the extent to which green bond proceeds are used to invest in projects with environmental benefits, based on the following five criteria 2 : No. Evaluation Criteria 1 Use of Proceeds 2 Process for Project Evaluation and Selection 3 Management of Proceeds 4 Reporting 5 Issuer's Environmental Contribution Activities 1. Use of Proceeds For green bond proceeds to be used to invest in projects with environmental benefits, the eligible projects in which the funds are invested must be identified as being environmentally beneficial. To evaluate the eligibility of a green project, R&I reviews A) whether the project falls within of the scope of the ten project categories recognized by R&I, and B) whether the project description identifies the project as being environmentally beneficial. R&I also considers C) the project composition in the case where multiple projects are targeted. 2 R&I Green Bond Assessment is R&I's standalone opinion based on criteria that reference the Green Bond Principles and other expert sources. The evaluation methodology may be revised as necessary. 2
A) The ten project categories recognized by R&I are as follows 3 : No. Project Category 1 Renewable energy 2 Energy efficiency 3 Pollution prevention and control 4 Environmentally sustainable management of living natural resources and land use 5 Terrestrial and aquatic biodiversity conservation 6 Clean transportation 7 Sustainable water and wastewater management 8 Climate change adaptation 9 Eco-efficient and/or circular economy adapted products, production technologies and processes 10 Green buildings which meet regional, national or internationally recognised standards or certifications B) R&I conducts a comprehensive evaluation on the points described below, in order to determine whether a project's description identifies the project as being environmentally beneficial: (1) Whether the eligible project can be identified as being environmentally beneficial from the standpoint of environmental policies and other generally accepted viewpoints. (2) Whether the eligible project has obtained objective evidence in both quantitative and qualitative form that sufficient benefits can be anticipated with regard to key assessment items for judging the environmental impacts of each project. (3) Whether the plan for the eligible project is basically reasonable. C) Project composition In the case where there are multiple projects, R&I evaluates each project regarding their environmental benefits, and conducts an overall evaluation based on the allocation of funds to each project. 3 Project categories may be revised in line with changes to the Green Bond Principles, etc. 3
2. Process for Project Evaluation and Selection For green bond proceeds to be used to invest in projects with environmental benefits, the issuer's rationale and process regarding the selection of eligible projects must be clear and reasonable. R&I evaluates the reasonableness of the decision-making process regarding the selection of eligible projects, based on the following key points: Item Key Points Reasonableness of Availability of selection criteria (or selection concept) for criteria for eligible eligible projects. projects Sufficiency of the criteria to select projects with environmental benefits. Decision-making process regarding the criteria for (and/or approach to) selecting eligible projects Selection process for eligible projects Consideration on environmental and social risk associated with projects. Reasonableness of the decision-making process regarding the criteria for (and/or the approach to) selecting eligible projects. Involvement of experts (such as an internal group or committee that specializes in environmental issues) in the decision-making process. Clear and reasonable positioning of eligible projects under an issuer's environmental policy and strategies. Established framework for selecting eligible projects. Availability of internal checking capability concerning the selection of eligible projects. 4
3. Management of Proceeds For green bond proceeds to be used to invest in projects with environmental benefits, the proceeds must be allocated to the eligible projects and must not be invested in projects other than the eligible projects. R&I evaluates whether a framework, such as the segregation of green bond proceeds from other funds, is established to ensure that the proceeds are allocated to eligible projects, based on the following key points: Item Key Points Reasonableness of Adequacy of the plan to allocate the green bond the plan to allocate proceeds. funds Management of funds Established framework to manage the green bond and monitoring proceeds. framework External audit procedures to monitor the status regarding the use of the green bond proceeds. Alternatively, sufficiency of internal monitoring procedure instead of external audit. Segregation of funds Segregation of the green bond proceeds in a dedicated bank account; a framework for tracking proceeds in the absence of a dedicated bank account. Use of unallocated Rules regarding the appropriate use of unallocated funds, funds if any. 5
4. Reporting To ensure that green bond proceeds are used to invest in projects with environmental benefits, the issuer is expected to provide a brief description of the eligible projects, the timing of investments, and the environmental impacts of the projects. R&I evaluates the issuer's disclosure policy regarding the allocation of green bond proceeds and the environmental impacts of the projects, among other items, based on the following key points: Item Key Points Disclosure at Disclosure on the initial list of the projects, the green issuance bond framework, the expected environmental impacts, etc. Disclosure after Status regarding the allocation of proceeds to eligible issuance projects (details and frequency). Environmental benefits (details and frequency). 5. Issuer's environmental contribution activities The extent to which green bond proceeds are used to invest in projects with environmental benefits will be affected by the issuer's involvement and track record regarding environmental contribution activities. Issuers with strong interest and a robust track record in terms of environmental contribution activities are more likely to allocate the proceeds to and execute investments in projects with environmental benefits. R&I evaluates the issuer's track record regarding environmental contribution activities based on the following key points: Item Key Points Issuer's involvement Involvement and organizational structure regarding in environmental environmental contribution activities. contribution activities Track record regarding environmental contribution activities. Disclosure regarding environmental contribution activities. 6
<5> R&I Green Bond Assessment: Monitoring R&I conducts appropriate and ongoing monitoring of an evaluated product by way of regular review and analysis, until the product is redeemed/ cancelled or the R&I Green Bond Assessment assigned is withdrawn. In monitoring a R&I Green Bond Assessment, R&I regularly confirms whether the items defined under the initial framework are executed appropriately. 7
(Appendix) Second opinion for a green bond framework <1> Introduction If requested, R&I provides a second opinion that was of the confirmation of conformity to the GBP, etc. Second opinion is aimed to assess if a green bond framework established by an issuer (or related entities) is in conformity to the Green Bond Principles (GBP), etc. A green bond framework is a policy developed by an issuer on the use of proceeds, the process for project evaluation and selection, management of proceeds, and reporting, etc. Please note that provision of a second opinion alone is not within the scope of this announcement. <2> Concept Conceptual figures of R&I Green Bond Assessment and the R&I Green Bond Assessment that includes the provision of second opinion are as follows: (1) R&I Green Bond Assessment R&I Green Bond Assessment 8
(2) R&I Green Bond Assessment that includes the provision of second opinion R&I Green Bond Assessment R&I Green Bond Assessment(Second Opinion) Reports of R&I Green Bond Assessment are divided into the following sections: (1) R&I Green Bond Assessment Evaluation of individual green bonds: Their conformity to the GBP, etc. and the extent of environmental benefits thereof (2) R&I Green Bond Assessment that includes the provision of second opinion Evaluation of a green bond framework: Its conformity to the GBP, etc. (second opinion) Evaluation of individual green bonds: Conformity of an issuance of individual green bonds to the green bond framework (evaluation based on issue size and maturity, etc.) and the extent of environmental benefits thereof 9
The following table shows the comparison of major items of R&I Green Bond Assessment and provision of second opinion. R&I Green Bond Assessment R&I Green Bond (provision of second Assessment opinion: optional part) Evaluation of the extent the green Check if the green bond framework Concept bond proceeds would be used to established by an issuer is in invest in projects with conformity to four standards of the environmental benefits Green Bond Principles, etc. Assessment result Expressed on a scale from GA1 to GA5 Conformity to the Green Bond Principles, etc. Individual green bonds, including Framework of a green bond Assessment corporate bonds, loans, and bond established by an issuer target issuance programs Evaluate individual green bonds Evaluate a green bond framework based on the following five based on the following four Assessment methodology evaluation criteria 1 Use of Proceeds 2 Process for Project Evaluation and Selection 3 Management of Proceeds 4 Reporting 5 Issuer's environmental contribution activities evaluation criteria 1 Use of Proceeds 2 Process for Project Evaluation and Selection 3 Management of Proceeds 4 Reporting The consistency of an issuer's environmental contribution activities with selection criteria for eligible projects shall be confirmed on the process of "2. Process for Project Evaluation and Selection". 10
Timing of provision (release) (general case) Monitoring Preliminary evaluation: Date of submission of revised shelf registration statement Official evaluation: Pricing date Date of submission of revised shelf registration statement: Deadline for an issuer to fix the term of a green bond framework Pricing date: Date of an issuer to fix the conditions (size and term, etc.) of individual bonds Monitoring shall continue until the maturity of the green bond Second opinion: Date of submission of revised shelf registration statement Date of submission of revised shelf registration statement: Deadline for an issuer to fix the term of a green bond framework Pricing date: Date of an issuer to fix the conditions (size and term, etc.) of individual bonds Monitoring shall not be conducted. <3> Assessment methodology for checking the conformity to Green Bond Principles, etc. R&I provides the second opinion based on the following assessment methodology to check the conformity of a green bond framework established by an issuer to the GBP, etc. Conformity to the GBP, etc. shall be checked based on the following four assessment criteria. No. Evaluation Criteria 1 Use of Proceeds 2 Process for Project Evaluation and Selection 3 Management of Proceeds 4 Reporting 11
3-1. Use of Proceeds Conformity of the use of proceeds to the GBP, etc. shall be checked in accordance with the following procedure. A) R&I reviews whether the project falls within of the scope of the ten project categories recognized by R&I. B) R&I reviews whether the project description identifies the project as being environmentally beneficial. A) The ten project categories recognized by R&I are as follows 4 : No. Project Category 1 Renewable energy 2 Energy efficiency 3 Pollution prevention and control 4 Environmentally sustainable management of living natural resources and land use 5 Terrestrial and aquatic biodiversity conservation 6 Clean transportation 7 Sustainable water and wastewater management 8 Climate change adaptation 9 Eco-efficient and/or circular economy adapted products, production technologies and processes 10 Green buildings which meet regional, national or internationally recognized standards or certifications B) R&I conducts a comprehensive evaluation on the points described below, in order to determine whether a project's description identifies the project as being environmentally beneficial: (1) Whether the eligible project can be identified as being environmentally beneficial from the standpoint of environmental policies and other generally accepted viewpoints. (2) Whether the eligible project has obtained objective evidence in both quantitative and qualitative form that sufficient benefits can be anticipated with regard to key assessment items for judging the environmental impacts of each project. (3) Whether the plan for the eligible project is basically reasonable. 4 Project categories may be revised in line with changes to the Green Bond Principles, etc. 12
3-2. Process for Project Evaluation and Selection Conformity to the GBP, etc. shall be checked primarily on the following items. Item Key Points Reasonableness of Availability of selection criteria (or selection concept) for criteria for eligible eligible projects projects Sufficiency of the criteria to select projects with environmental benefits. Decision-making process regarding the criteria for (and/or approach to) selecting eligible projects Selection process for eligible projects Considerations on environmental and social risk associated with projects. Reasonableness of the decision-making process regarding the criteria for (and/or the approach to) selecting eligible projects. Involvement of experts (such as an internal group or committee that specializes in environmental issues) in the decision-making process. Clear and reasonable positioning of eligible projects under an issuer's environmental policy and strategies. Established framework for selecting eligible projects Availability of internal checking capability concerning the selection of eligible projects 3-3. Management of Proceeds Conformity to the GBP, etc. shall be checked primarily on the following items. Item Key Points Reasonableness of Adequacy of the plan to allocate the green bond the plan to allocate proceeds. funds Management of funds Established framework to manage the green bond and monitoring proceeds. framework External audit procedures to monitor the status regarding the use of the green bond proceeds. Alternatively, sufficiency of internal monitoring procedure instead of external audit. 13
Segregation of funds Use of unallocated funds Segregation of the green bond proceeds in a dedicated bank account; a framework for tracking proceeds in the absence of a dedicated bank account. Rules regarding the appropriate use of unallocated funds, if any. 3-4. Reporting Conformity to the GBP, etc. shall be checked primarily on the following items. Item Key Points Disclosure at Disclosure on the initial list of the projects, the green issuance bond framework, the expected environmental impacts, etc. Disclosure after Status regarding the allocation of proceeds to eligible issuance projects (details and frequency). Environmental benefits (details and frequency). <4> Monitoring of a second opinion Monitoring our second opinion concerning the framework of green bond is not within the scope of R&I's service. If individual green bonds are issued several times under the same framework, R&I checks if the framework is in conformity to the GBP, etc. on an issuance of individual green bonds. With regard to the R&I Green Bond Assessment of individual green bond issued under a framework, R&I monitors on a periodic basis if matters based on a predetermined framework are carried out appropriately. (See p.7 <5>.) 14
(Appendix2) Second opinion for a sustainability bond framework <1> Introduction Sustainability bonds refer to bonds and other financial instruments issued for the purpose of financing projects that aim to provide solutions to both environmental and social issues. From now on, if requested, R&I will additionally provide a second opinion on a sustainability bond. R&I Green Bond Assessment (Sustainability Bond Second Opinion) is to assess if a sustainability bond framework established by an issuer (or related entities) is in conformity to Sustainability Bond Guidelines (SBG), etc. Individual sustainability bonds are checked for the conformity to their sustainability bond frameworks as to the issue size and maturity date, etc. <2> Assessment methodology for checking the conformity to Sustainability Bond Guidelines, etc. R&I Green Bond Assessment (including second opinions) has evaluated green bonds on the conformity to GBP, etc. and the extent of environmental benefits thereof. The proceeds of sustainability bonds are invested to social projects as well as environmental projects, and are expected to have social benefits as well as environmental benefits. However, sustainability bonds are subject to the same criteria as green bonds, including process for project evaluation and selection, management of proceeds, and reporting. Since the structure of SBG refers to that of GBP, the conformity of a sustainability bond framework to SBG, etc is checked on many points in common to the conformity of a green bond framework to GBP, etc. that has been performed traditionally by R&I. R&I will provide the second opinion of sustainability bonds based on the following assessment methodology to check the conformity of a sustainability bond framework established by an issuer to the SBG, etc. 15
R&I will confirm the conformity to SBG, etc. based on the following four assessment criteria: As is described above, apart from assessing social projects in addition to environmental projects, the assessment methodology is similar to R&I s traditional methodology for checking the conformity of a green bond framework to GBP, etc. No. Evaluation Criteria 1 Use of Proceeds 2 Process for Project Evaluation and Selection 3 Management of Proceeds 4 Reporting 2-1. Use of Proceeds Conformity of the use of proceeds to the SBG, etc. shall be checked in accordance with the following procedure. A) R&I reviews whether the project falls under the category of environmental or social projects certified by R&I. B) R&I reviews whether the project description identifies the project as being environmentally and/or socially beneficial. A) The social projects certified by R&I are six projects described below: 5 For environmental projects, refer to 3-1 Use of proceeds of Appendix p.8 Second opinion for a green bond framework. No. Project Category 1 Affordable basic infrastructure 2 Access to essential services 3 Affordable housing 4 Employment generation including through the potential effect of SME financing and microfinance 5 Food security 6 Socioeconomic advancement and empowerment 5 Project categories may be revised in line with changes to the Social Bond Principles, Sustainability Bond Guidelines, etc. 16
The people targeted by the above projects may include, but are not limited to, the following. The projects may also target the general public. No. Target People 1 Living below the poverty line 2 Excluded and/or marginalised populations and / or communities 3 Vulnerable groups, including as a result of natural disasters 4 People with disabilities 5 Migrants and /or displaced persons 6 Undereducated 7 Underserved, owing to a lack of quality access to essential goods and services 8 Unemployed B) R&I conducts a comprehensive evaluation on the points described below, in order to determine whether a project's description identifies the project as being environmentally and/or socially beneficial: (1) Whether the eligible project can be identified as being environmentally and/or socially beneficial from the standpoint of environmental and/or social policies and other generally accepted viewpoints. (2) Whether the eligible project has obtained objective evidence in both quantitative and qualitative form that sufficient benefits can be anticipated with regard to key assessment items for judging the environmental and/or social impacts of each project. (3) Whether the plan for the eligible project is basically reasonable. 17
2-2. Process for Project Evaluation and Selection Conformity to the SBG, etc. shall be checked primarily on the following items. Item Key Points Reasonableness of Availability of selection criteria (or selection concept) for criteria for eligible eligible projects projects Sufficiency of the criteria to select projects with environmental and/or social benefits. Decision-making process regarding the criteria for (and/or approach to) selecting eligible projects Selection process for eligible projects Considerations on environmental and social risk associated with projects. Reasonableness of the decision-making process regarding the criteria for (and/or the approach to) selecting eligible projects. Involvement of experts (such as an internal group or committee that specializes in environmental and/or social issues) in the decision-making process. Clear and reasonable positioning of eligible projects under an issuer's environmental and/or social policy and strategies. Established framework for selecting eligible projects Availability of internal checking capability concerning the selection of eligible projects 2-3. Management of Proceeds Conformity to the SBG, etc. shall be checked primarily on the following items. Item Key Points Reasonableness of Adequacy of the plan to allocate the sustainability bond the plan to allocate proceeds. funds Management of funds Established framework to manage the sustainability bond and monitoring proceeds. framework External audit procedures to monitor the status regarding the use of the sustainability bond proceeds. Alternatively, sufficiency of internal monitoring procedure instead of external audit. 18
Segregation of funds Use of unallocated funds Segregation of the sustainability bond proceeds in a dedicated bank account; a framework for tracking proceeds in the absence of a dedicated bank account. Rules regarding the appropriate use of unallocated funds, if any. 2-4. Reporting Conformity to the SBG, etc. shall be checked primarily on the following items. Item Key Points Disclosure at Disclosure on the initial list of the projects, the issuance sustainability bond framework, the expected environmental and/or social impacts, etc. Disclosure after Status regarding the allocation of proceeds to eligible issuance projects (details and frequency). Environmental and/or social benefits (details and frequency). <3> Monitoring Monitoring our second opinion concerning the framework of sustainability bond is not within the scope of R&I's service. If individual sustainability bonds are issued several times under the same framework, R&I checks if the framework is in conformity to the SBG, etc. on an issuance of individual sustainability bonds. After individual sustainability bonds are issued, R&I regularly confirms whether the items defined under the initial framework are executed appropriately. 19
R&I Green Bond Assessment is R&I's opinion regarding the extent to which the proceeds from the issuance of green bonds are used to invest in projects with environmental benefits. In R&I Green Bond Assessment, R&I may also provide a second opinion on a green bond framework. R&I Green Bond Assessment does not certify the environmental benefits and other qualities of the eligible projects. Hence, R&I will not be held responsible for the effectiveness of the projects, including their environmental benefits. R&I Green Bond Assessment is not the Credit Rating Business, but one of the Ancillary Businesses (businesses excluding Credit Rating Service but are ancillary to Credit Rating Activities) as set forth in Article 299, paragraph (1), item (xxviii) of the Cabinet Office Ordinance on Financial Instruments Business, etc. With respect to such business, relevant laws and regulations require measures to be implemented so that activities pertaining to such business would not unreasonably affect the Credit Rating Activities, as well as measures to prevent such business from being misperceived as the Credit Rating Business. R&I Green Bond Assessment is not, in any sense, statements of current, future, or historical fact and should not be interpreted as such, and R&I Green Bond Assessment is not a recommendation to purchase, sell, or hold any particular securities and does not constitute any form of advice regarding investment decisions or financial matters. R&I Green Bond Assessment does not address the suitability of an investment for any particular investor. R&I issues R&I Green Bond Assessment based on the assumption that each investor will investigate and evaluate the securities which they plan to purchase, sell, or hold for themselves. All investment decisions shall be made at the responsibility of the individual investor. The information used when R&I issues R&I Green Bond Assessment is information that R&I has determined, at its own discretion, to be reliable. However, R&I does not undertake any independent verification of the accuracy or other aspects of that information. R&I makes no representation or warranty, express or implied, as to the accuracy, timeliness, adequacy, completeness, merchantability, fitness for any particular purpose, or any other matter with respect to any such information. R&I may suspend or withdraw R&I Green Bond Assessment at its discretion due to insufficient data or information, or other circumstances. R&I is not responsible or liable in any way to any party, for all or any damage, loss, or expenses arising out of or in relation to errors, omissions, inappropriateness of, or insufficiencies in the information used when issuing R&I Green Bond Assessment, R&I Green Bond Assessment or other opinions, or arising out of or in relation to the use of such information or R&I Green Bond Assessment, or amendment, suspension, or withdrawal of R&I Green Bond Assessment (regardless of the nature of the damage, including direct, indirect, ordinary, special, consequential, compensatory, or incidental damage, lost profits, non-monetary damage, and any other damage, and including expenses for attorneys and other specialists), whether in contract, tort, for unreasonable profit or otherwise, irrespective of negligence or fault of R&I. As a general rule, R&I issues R&I Green Bond Assessment for a fee paid by the applicant. The Assessment Methodologies R&I uses in connection with evaluation are R&I's opinions prepared based on R&I's own analysis and research, and R&I makes no representation or warranty, express or implied, as to the accuracy, timeliness, adequacy, completeness, merchantability, fitness for any particular purpose, or any other matter with respect to the Assessment Methodologies. Further, disclosure of the Assessment Methodologies by R&I does not constitute any form of advice regarding investment decisions or financial matters or comment on the suitability of any investment for any party. R&I is not liable in any way for any damage arising in respect of a user or other third party in relation to the content or the use of the Assessment Methodologies, regardless of the reason for the claim, and irrespective of negligence or fault of R&I. All rights and interests (including patent rights, copyrights, other intellectual property rights, and know-how) regarding the Assessment Methodologies belong to R&I. Use of the Assessment Methodologies, in whole or in part, for purposes beyond personal use (including reproducing, amending, sending, distributing, transferring, lending, translating, or adapting the information), and storing the Assessment Methodologies for subsequent use, is prohibited without R&I's prior written permission. Japanese is the official language of this material and if there are any inconsistencies or discrepancies between the information written in Japanese and the information written in languages other than Japanese the information written in Japanese will take precedence. 20