BNG BANK SUSTAINABILITY BOND - 2015 SECOND PARTY REVIEW BY SUSTAINALYTICS October, 2015 www.sustainalytics.com Vikram Puppala (Toronto) Manager, Advisory Services vikram.puppala@sustainalytics.com (+1) 647 317 3694 Tim Langer (London) Responsible Investment Adviser, Institutional Relations tim.langer@sustainalytics.com (+44) 20 3695 9525
INTRODUCTION BNG Bank, a Dutch public sector agency that provides financial services to local authorities and public sector institutions, is planning to issue its second Sustainability Bond BNG Bank Sustainability Bond 2015, which takes an innovative approach of directing bond proceeds to best-in-class sustainable municipalities in The Netherlands. BNG is using the methodology developed by the Tilburg Sustainability Center of Tilburg University (TSC-Telos) for ranking municipalities based on their sustainability performance. In October 2014, BNG Bank introduced its first Sustainability Bond using this approach. For BNG Bank s Sustainability Bond 2015, TSC-Telos developed the framework based on the methodology and results of the Dutch National Monitor of Sustainable Municipalities 2015 ( Nationale Monitor Duurzame Gemeenten 2015 ). 1 The 2015 monitor assesses all 393 municipalities collectively, based on three sustainability pillars (ecological, socio-cultural and economic aspects). Sustainalytics reviewed the updated TSC-Telos framework and provided an opinion on the robustness of the methodology in assessing sustainability performance of the municipalities. Analysis of TSC-Telos sustainability rating methodology: The criteria for the selection of best-in-class sustainable municipalities for the bond are defined in the Sustainability Framework document for Best-in-Class Municipality Investment developed by TSC-Telos in 2015. TSC-Telos compares and rates municipalities on their sustainability performance annually. The TSC-Telos methodology is suited for rating the Dutch municipalities and is based on the Reference Framework for European Sustainable Cities (RFSC) as defined by the European Union (EU). The 2015 TSC-Telos methodology incorporates three pillars of sustainability indicators: Social-Cultural Capital, Ecological Capital and Economic Capital. The updated methodology covers 19 themes and increased the number of indicators from 90 in 2014 to 107 in 2015 to accommodate new insights and data resources. The themes covered by the indicators include energy and waste, nature and water, labour and education to health and infrastructure. Newly added indicators cover relevant sustainability themes such as flood risk and light pollution. Furthermore, each indicator has a unit of measure and a target. Each municipality is rated on actual performance vis-a-vis the indicators. The indicator scores subsequently reflect the achievement percentage of the target. For the Dutch National Monitor of Sustainable Municipalities 2015, TSC-Telos grouped the 393 Dutch municipalities into fourteen classes, of which three are quantitative classes (based on city size) and eleven qualitative classes (based on typology). Based on this methodology, TSC-Telos has identified the top 15 municipalities within all fourteen municipality classes. After adjusting for overlap, TSC-Telos identified 97 or 24.6% of the total Dutch municipalities as best-in-class. A methodological challenge is that, it is not always clear if the differences in the scoring of the municipalities can be attributed to pre-existing sustainability resources or having better sustainability performance. For example, municipalities with low economic resources and/or ecological infrastructures may not score well, even though these municipalities may have implemented advanced sustainability approaches. 1 Dutch National Monitor Sustainable Municipalities 2015 ( Nationale Monitor Duurzame Gemeenten 2015 ), available via: http://www.telos.nl/telos/medewerkers/mmommaas/downloads_getfilem.aspx?id=506225 1
Furthermore, the methodology measures three capital domains using indicators that also correlate with factors like economic activity. For this reason, it is difficult to attribute improved environmental outcomes to the impact of the bond. For example, a better environmental score might not only be a result of improved policies in the municipalities but can also be an outcome of reduced economic activity. The 2015 methodology attempts to address the above challenges by introducing a refined typology structure and increasing the number of municipality classes to fourteen. The 2015 methodology has been further improved by benchmarking municipalities against similar municipalities within and across typologies, using both a quantitative and a qualitative approach. Based on a detailed review of the pillars, themes and indicators used by the improved TSC-Telos methodology, Sustainalytics is of the opinion that, despite the challenges described above, it is a fairly robust approach to rating the sustainability performance of Dutch municipalities. FRAMEWORK Sustainalytics evaluated the BNG Bank Sustainable Bond -2015 framework and concluded as follows: Use of Proceeds: The Sustainability Bond proceeds will be used by BNG to lend to best-inclass sustainable municipalities in the Netherlands, as identified by the 2015 TSC-Telos methodology. The eligibility criterion is defined as the top 15 municipalities within each of the fourteen municipality classes. It should be noted that the proceeds of this bond are for general purposes for the eligible sustainable municipalities. This is a deviation from the Green Bond Principles in that the eligibility criteria for the use of proceeds are based on the sustainability performance of the borrowing entity rather than on the nature of the projects to be funded. Nonetheless, Sustainalytics is of the opinion that the Bond will encourage municipalities to become more sustainable and strive to become best in class municipalities. Selection Process: The bond proceeds will be disbursed to 2015 s best-in-class municipalities, identified as Elected Sustainable Municipalities by Telos. Selecting the top 15 sustainable municipalities as rated by TSC-Telos from each of the fourteen municipal classes is a simple and consistent process. The top 15 municipalities within each class, adjusting for overlap, constitute top quartile of all Dutch municipalities, which is a typical best-in-class approach. Despite that the fact that, in 2015, municipalities have a higher chance of being eligible (given that the number of types has expanded from 8 to 14), Sustainalytics believes that the methodology captures the relevant best-in-class municipalities. This is evidenced by the fact that the eligible municipalities often qualify in multiple classes and that the total number of eligible municipalities for 2015 has not increased significantly. For the 2015 bond, 97 out of 393 municipalities (24.6%) are eligible. In 2014, 96 out of 403 (23.8%) municipalities were eligible. 2
Management of Proceeds: The loans to which the proceeds will be allocated are to be earmarked separately, which will facilitate auditing by external auditors. BNG s commitment to have annual audits carried out by external auditors is in line with best practice for green bonds. Reporting: BNG indicates in its documentation that disbursements and impact reports will be provided. BNG Bank commissioned TSC-Telos to provide the yearly impact reports, based on its yearly National Monitor Sustainable Municipalities report. The first impact report covering the years 2014-2015 was published in September 2015. 2 However, it should be noted that the nature of such reporting does not directly link the bond proceeds to the impact achieved by the municipalities, and therefore, the reporting cannot be regarded as an indicator of the impact of the use of the proceeds of the bond. This limitation exists because of the way in which municipalities receive and allocate funds: funds from varied sources, such as the Dutch government, taxation and loans from financial institutions including BNG, are not separated. BNG has limited influence on the municipalities to create separate accounts. Investors and other stakeholders will be able to view aggregate impacts achieved by the municipalities by reviewing publicly disclosed impact information published by TSC-Telos. CONCLUSION Sustainalytics views that the BNG s approach as innovative noting that funding only best-in-class municipalities will encourage Dutch municipalities to improve their overall sustainability performances. Sustainalytics is of the opinion that the evaluation methodology being applied and the selection process will result in the bond proceeds being directed towards municipalities that are more likely to use the funds towards sustainable purposes. 2 First Performance Report (2014-2015) of Elected Dutch Sustainable Municipalities of the BNG Bank Sustainability Bond of October 2014, available via: https://www.bngbank.nl/documents/investors/first_performance_report_2014-2015_sustainability_bond_telos.pdf 3
APPENDIX: Documents reviewed: No. Name Source Purpose 1 BNG Sustainability Bond Presentation (BNGDOCS-#1748804-v1- Presentatie_SRI_bond_in_2015.pptx) BNG 2 BNG Bank BNG Sustainability Bond 2015 - Sustainability Framework document for Bestin-Class Municipality Investment BNG BNG Sustainability Bond Framework BNG Sustainability Bond Framework 3 Sustainability Monitoring of European Cities TSC-Telos Sustainable Municipality Rating Methodology 4 Dutch National Monitor Sustainable Municipalities 2015 ( Nationale Monitor Duurzame Gemeenten 2015 ) TSC-Telos Sustainable Municipality Rating for 2015 5 First Performance Report (2014-2015) of Elected Dutch Sustainable Municipalities of the BNG Bank Sustainability Bond of October 2014 TSC-Telos Sustainable Performance Report 4
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