Residential Property Climate Bonds Certification methodology Low Carbon Buildings Technical Working Group Version 1.0 ABSTRACT This paper sets out guidance by the Low Carbon Buildings Technical Working Group on the certification methodology for Residential Property Climate Bonds.
Contents Definitions... 2 1. Executive Summary... 3 2. Summary of Guidance... 4 3. Details of Guidance... 5 3.1. Use of building codes, energy labelling schemes and rating tools in the certification process.. 5 3.2. Method for evaluating building codes, energy labelling schemes and rating tools... 7 3.3. Aggregation of assets... 9 Appendix 1 Method 1: Benchmarking against local market carbon performance... 10 Appendix 2 Method 2: Relative stringency of energy labels and rating tools... 13 Page 1 / 15
Definitions Climate Bonds Initiative: An investor-focused not-for-profit organisation, promoting large-scale investments that will deliver a global low carbon and climate resilient economy. The Initiative seeks to develop mechanisms to better align the interests of investors, industry and government so as to catalyse investments at a speed and scale sufficient to avoid dangerous climate change. Climate Bond: A bond that is certified by the Climate Bonds Standard Board as meeting the requirements of this Climate Bonds Standard. Climate Bonds Standard: eligibility criteria for Climate Bond Certification, based on the current version as published on the Climate Bonds Initiative website. Climate Bonds Standard Board: a board of independent members that considers applications for Certification of a bond under the Climate Bonds Standard. Note: The Climate Bonds Standard Board is constituted, appointed and supported in line with the governance arrangements and processes as published on the Climate Bonds Initiative website. Climate Bond Certification: allows the issuer to use the Climate Bond Certification Mark in relation to that bond. Climate Bond Certification is provided once the independent Climate Bonds Standard Board is satisfied the bond conforms with the Climate Bonds Standard. Commercial Property: A building that is intended to generate a profit, either from capital gain or rental income. There are sub-categories of Commercial Property such as offices, shopping centres, hotels, etc. Residential Property: A building that is used or suitable for use as a dwelling. Technical Working Group: A group of key experts from academia, international agencies, industry and NGOs that develop Sector-Specific Criteria, which are detailed technical criteria for the eligibility of projects and assets as well as guidance on the tracking of eligibility status during the term of the bond. Page 2 / 15
1. Executive Summary Objective Define a methodology that enables the following to be certified as Climate Bonds: 1. Residential Mortgage Backed Securities 2. Bonds issued against new residential property development Goals Provide a complimentary framework for Climate Bonds that: 1. Offers the greatest opportunity for directing finance to low-carbon and energy-efficient residential buildings 2. Maintains integrity of the Climate Bonds Initiative brand without relying on ongoing reporting from homeowners Guiding Principles The following principles underpin the guidance presented in this paper: 1. Simple aggregation of individual assets: to create bonds of sufficient size that attract institutional investors. 2. Low cost of application: to ensure that compliance costs do not undermine the attractiveness of certification and allow application to assets in developing countries. 3. Use of climate-relevant metrics: to achieve compatibility with international frameworks for financing 1, relevance to corporate reporting frameworks 2, and relevance to emerging city greenhouse gas abatement policies 3 4. Transparency of approach and methodology: to support market transparency and improve management of energy/carbon performance risk at the property level Structure of this paper The guidance provided by the Low Carbon Buildings Technical Working Group is organised into the following sections: 1. Use of building codes, energy labelling schemes and rating tools in the certification process 2. Method for evaluating building codes, energy labelling schemes and rating tools 3. Aggregation of assets 1 Such as the Kyoto protocol clean development mechanisms and its successor. 2 Examples include reporting frameworks developed by the Carbon Disclosure Project, Global Reporting Initiative, and Sustainability Accounting Standards Board. 3 Examples include cities such as New York, Tokyo, London, and other C40 cities. Page 3 / 15
2. Summary of Guidance The Low Carbon Buildings Technical Working Group has provided the following guidance on the certification methodology for Residential Property Climate Bonds: 1. Existing mechanisms (i.e. building codes, energy labelling schemes and rating tools) will be leveraged for the certification of Residential Property Climate Bonds. 2. The Climate Bonds Standards Board will approve building codes, energy labelling schemes and rating tools that require a level of carbon performance consistent with Climate Bonds Initiative targets. 3. The certification methodology will not disadvantage properties by their attributes (e.g. age, size, number of bedrooms, building type, etc.). 4. For new properties, where compliance with approved building codes, energy labelling schemes, or rating tools is required as part of development or construction approval, approval may be used to demonstrate eligibility for Climate Bonds Certification. 5. For existing properties delivered outside the requirements of approved building codes, approved energy labelling schemes or rating tools will be relied upon. 6. Climate Bonds Certification will not be available for markets where building codes, energy labelling schemes and rating tools do not exist or are not considered stringent enough by the Climate Bonds Standards Board. 7. Two methods have been developed for evaluating building codes, energy labelling schemes and rating tools for use in the Climate Bonds Certification process. They can be applied to local markets where there are no existing mechanisms to assess eligibility of property assets for Climate Bonds Certification. Both methods are based on the same premise of positioning a property asset in the top 15% of its local market in terms of carbon performance. 8. Where a mechanism for a particular market is approved for use in the Climate Bonds Certification process, Climate Bonds Initiative will list it (on the Climate Bonds Initiative website) as an approved mechanism that may be used by others, along with the date when the ongoing efficacy of that mechanism will be reviewed. 9. Properties compliant with an approved building code, energy labelling scheme or rating tool can be aggregated through pooling of assets into a larger combined asset. Each asset included in the pool must be compliant in its own right. This is known as Simple Aggregation, which differs from the Full Aggregation method that may be applied for Commercial Property where carbon performance baselines (kgco 2 /m 2 ) exist for all assets in the portfolio. The next section provides further details and explains the rationale behind the above guidance. Page 4 / 15
3. Details of Guidance 3.1. Use of building codes, energy labelling schemes and rating tools in the certification process A. Leveraging existing mechanisms Guidance The certification methodology for Residential Property Climate Bonds will leverage existing mechanisms. Building codes, energy labelling schemes and rating tools 4 that assess the energy and/or carbon efficiency of residential properties will be leveraged to allow the certification of Residential Property Climate Bonds. The Climate Bonds Standards Board will assess building codes, energy labelling schemes and rating tools to ensure that they are sufficiently stringent. The Board will only approve mechanisms that require a level of carbon performance consistent with Climate Bonds Initiative targets. This certification methodology of leveraging building codes, energy labelling schemes and rating tools differs from the measurement and verification methodology for Commercial Property Climate Bonds. B. Application and fair treatment of assets Guidance The certification methodology does not differentiate between new and existing property assets. All assets are required to demonstrate compliance with an approved building code, energy labelling scheme or rating tool. In the process of evaluating building codes, energy labelling schemes and rating tools for use in the Climate Bonds Certification process, consideration will be given to property attributes such as size, number of bedrooms, and building type (house, apartment, etc.). This is done to ensure that properties are not disadvantaged based on those attributes. Explanation The certification methodology for Commercial Property Climate Bonds is unsuitable for Residential Property Climate Bonds due to ongoing measurement and verification requirements that are impractical and challenging for homeowners to satisfy. Energy efficiency requirements within residential building codes are becoming increasingly common. In certain jurisdictions, mandatory energy labelling provides a means to demonstrate the relative energy efficiency of residential buildings. Also, in some jurisdictions, minimum energy performance standards are assessed through dedicated energy rating tools referenced in building codes. Explanation There is potential for variation in the attributes of property assets (e.g. age, size, number of bedrooms, building type, etc.) to cause the certification methodology to be perceived as unfair for some assets (e.g. comparing a one bedroom apartment to a five bedroom house). Building codes, energy labelling schemes and rating tools generally consider size and building type in assessing compliance. To maintain simplicity and transparency of the certification methodology, no additional correction or normalisation will be made for the variation in property attributes. 4 Examples include Energy Performance Certificates in the UK and BASIX in New South Wales, Australia. Page 5 / 15
C. Demonstrating eligibility for Climate Bonds Certification Guidance For new properties, where compliance with approved building codes, energy labelling schemes or rating tools is required as part of development or construction approval, the approval documentation for the development or construction may be used to demonstrate eligibility for Climate Bonds Certification. For existing properties, eligibility can be demonstrated either through compliance with an approved building code at the time of construction or through compliance with an approved energy labelling scheme or rating tool. For jurisdictions where building codes, energy labelling schemes and rating tools do not exist or are not considered stringent enough, Climate Bonds Certification will not be available. Explanation Properties need to demonstrate compliance with an approved building code, energy labelling scheme or rating tool in order to be certified as Residential Property Climate Bonds. Climate Bonds Initiative relies on the requirements of approved building codes, energy labelling schemes and rating tools to avoid the cost of having to perform a dedicated assessment of each residential property associated with the bond. Page 6 / 15
3.2. Method for evaluating building codes, energy labelling schemes and rating tools A. Demonstrating effectiveness of the mechanism Guidance Where a market does not already have a nominated mechanism to demonstrate eligibility for Climate Bonds Certification, an applicant can seek approval of an appropriate local building code, energy labelling scheme or rating tool by demonstrating its effectiveness in positioning a property asset in the top 15% of its local market. Effectiveness can be demonstrated by either of the two methods: 1. Method 1: Benchmarking against the local market carbon performance 2. Method 2: Establishing the relative stringency of an energy labelling scheme or rating tool Once a mechanism for a particular market is approved for use in the Climate Bonds Certification process, Climate Bonds Initiative will list it (on the Climate Bonds Initiative website) as an approved mechanism that may be used by others, along with the date when the ongoing efficacy of that mechanism will be reviewed. B. Method 1: Benchmarking against local market carbon performance Guidance Explanation Any approved building code, energy labelling scheme or rating tool must have independent thirdparty verification (i.e. it cannot be self-assessed or self-reported) and be able to be benchmarked against the local market carbon performance for residential dwellings. Carbon performance measurements should be conducted based on a consistent unit of intensity (area or habitable room) and for a full fuel cycle. The local market benchmarking should be taken for a statistically representative sample and the 15 th percentile of lowest carbon performance calculated. This carbon performance of the 15 th percentile helps to establish baselines for evaluating the effectiveness of a building code, energy labelling scheme or rating tool. Baselines are developed by applying a linear trajectory towards zero carbon in 2050 to the 15 th percentile. After appropriate baselines are established, the proposed building code, energy labelling scheme or rating tool must be able to demonstrate that it meets or exceeds those baselines to be approved by the Climate Bonds Standards Board. Appendix 1 demonstrates how Method 1 can be applied. Explanation Offering the opportunity to demonstrate the appropriateness of local building codes, energy labelling schemes and rating tools for new market participants enables the Low-Carbon Buildings Standard for Residential Property Climate Bonds to grow in new markets as demand for certified green bonds increases. Two methods have been developed as Method 1 (benchmarking against local market carbon performance) is not always possible. Accordingly, an alternative method (Method 2) has been provided. The carbon performance associated with a type of property is influenced by a number of factors. The process for benchmarking against the spread of carbon performance in a local market allows the influences external to the control of a residential property developer, constructor or owner to be isolated. Climate Bonds Initiative has an overall ambition of zero carbon by 2050. This ambition is reflected in the method for developing baselines, which are used to evaluate the effectiveness of building codes, energy labelling schemes and rating schemes for use in the Climate Bonds Certification process. Page 7 / 15
C. Method 2: Relative stringency of energy labels and rating tools Guidance Where carbon performance profiling of the local market is not possible or the best-available tools measure incompatible elements (such as envelopeonly 5 building codes), the relative stringency method (Method 2) can be used to demonstrate the eligibility of a mechanism for use in the Climate Bonds Certification process. To demonstrate the required stringency, the nominated energy label or rating tool score (e.g. 5 stars or A rating) should be demonstrated to be in the top 15 th percentile of all ratings awarded under the labelling scheme or rating tool. Effort should be made to ensure the sample set for percentile analysis is representative for the residential sector as a whole. Appendix 2 demonstrates how Method 2 can be applied. Explanation This alternative method has been developed to apply to situations where carbon performance data is not available. 5 Envelope-only building codes assess the thermal efficiency of the building envelope only and do not consider all the aspects that dictate the operational energy efficiency, such as type and quality of heating and cooling plant. Page 8 / 15
3.3. Aggregation of assets A. Simple aggregation Guidance Properties compliant with an approved building code, energy labelling scheme or rating tool can be aggregated through pooling of assets into a larger combined asset. Each asset included in the pool must be compliant in its own right. Explanation As the certification methodology for Residential Property Climate Bonds is a simple pass or fail test, assets can only be pooled on the basis that they have passed. This is known as the Simple Aggregation method whereby each asset in the pool must be compliant. The Full Aggregation method or area-weighted approach to portfolio aggregation offered for Commercial Property Climate Bonds is not available for residential property assets due to the lack of data to establish carbon performance baselines. Page 9 / 15
Appendix 1 Method 1: Benchmarking against local market carbon performance Where robust carbon performance data exists for residential assets in a local market, it may be possible to benchmark local building codes against this data, to determine whether building code compliance positions an asset in the top 15% of its market. Once it is determined that building code compliance does this, any property asset compliant with that building code is considered eligible for Climate Bonds Certification. The method for evaluating local building codes for use in the Climate Bonds Certification process is outlined in the following steps. Step 1. Identify Relevant Building Codes Building codes are only useful for the Climate Bonds Certification process if the minimum standards required by the building code are based on an absolute measure of carbon. Where the minimum standards required by the building code are based on a relative measure, for example where performance is modelled against a reference building, the building code cannot be benchmarked against local market carbon performance and it cannot be used for the Climate Bonds Certification process. Step 2. Determine 15 th Percentile of Local Market Carbon Performance Calculate the 15 th percentile from the local market carbon performance distribution for dwellings with the same number of bedrooms. Figure 1 below for instance illustrates a 15 th percentile of 2,170 kgco 2 -e for three-bedroom dwellings in a local market. Page 10 / 15
Step 3. Benchmark the Building Code Determine the minimum carbon performance required to achieve compliance with the relevant building code for dwellings with the same number of bedrooms. If this minimum carbon performance falls below that of the 15 th percentile identified earlier, it is deemed that compliance with the building code positions property assets in the top 15% of their local market. Accordingly, demonstrating that a property asset is compliant with the building code is sufficient to prove its eligibility for Climate Bonds Certification. Step 4. Evaluating Building Code efficacy over time A linear trajectory towards zero carbon in 2050 is applied to the 15 th percentile to establish baselines for evaluating the ongoing effectiveness of building codes, energy labelling schemes and rating tools. This means that baselines become more stringent over time and a building code may no longer be useful for the Climate Bonds Certification process if compliance no longer positions an asset below the relevant baseline. This is illustrated in the case study overleaf. Page 11 / 15
Case Study 1 A local building code has established an average carbon performance benchmark of 4,650 kgco 2 -e for three-bedroom dwellings. In 2015, residential houses are required to achieve a minimum 60% reduction against this average benchmark to comply with the local building code. A three-bedroom house must therefore demonstrate a carbon performance below 1,860 kgco 2 -e (60% improvement from 4,650 kgco2-e) to comply. Analysis of local market carbon performance distribution data for three-bedroom houses shows that the 15th percentile is 2,170 kgco 2 -e. This means that the minimum carbon performance required for local building code compliance (1,860 kgco 2 -e) positions an asset in the top 15% of the local market (2,170 kgco 2 -e). Local building code compliance is therefore sufficient to demonstrate that a property asset is eligible for Climate Bonds Certification. Beyond 2020, the illustration shows that building code compliance is no longer sufficient to demonstrate that a property asset is eligible for Climate Bonds Certification because the application of a 2050 zero-carbon trajectory to the 15 th percentile creates a more demanding baseline. Page 12 / 15
Appendix 2 Method 2: Relative stringency of energy labels and rating tools Where energy labelling schemes or rating tools exist for residential assets in a local market, it may be possible to leverage these instruments to assess whether an asset is positioned within the top 15% of local market. The achievement of a verified energy label or rating tool score can then be used to demonstrate that a property asset is eligible for Climate Bonds Certification. The method for evaluating energy labels and rating tools for use in the Climate Bonds Certification process is outlined in the following steps. Step 1. Identify Database For an energy labelling scheme or rating tool to be useful for the Climate Bonds Certification process, there must be an underlying register or database of verified carbon performance data available to enable analysis and comparison to the local market. Step 2. Confirm Sample Size Sufficient The register or database must be of a sufficient size to enable statistically significant conclusions to be derived. Step 3. Confirm Dataset is Representative The dataset must include a sufficient spread of performance levels. That is, a dataset that is skewed towards the top-end or bottom-end of the market may not be used. Typically, energy labelling schemes that are used for mandatory reporting requirements can be considered representative of the market spread. Step 4. Determine Minimum Criteria for Climate Bonds Certification Where dataset analysis shows that by achieving a particular energy label or rating tool score, the asset is positioned in the top 15% of the local market, then the energy labelling scheme or rating tool may be leveraged for the Climate Bonds Certification process. The case study overleaf further illustrates this process. Page 13 / 15
Case Study 2 A performance labelling scheme assesses the performance of residential assets on a carbon basis. Labels are awarded from A through to G based on the carbon efficiency of an asset. The database of this labelling scheme encompasses 2.5 million records from a total pool of 7.5 million assets nationally. This sample size is considered sufficient. The local market distribution of labels (in Figure 1) shows a good spread of performance labels from A to G. A performance label is also a mandatory reporting requirement at the point of sale or lease of a property, and as such the data is considered to provide a more accurate reflection of market performance than for schemes where reporting is voluntary. Analysis of the dataset shows that 9% of assets achieve the highest efficiency A label (Figure 2). As such, achievement of a verified A performance label (or higher) is considered to position any property asset in the top 15% of the market and may be used to demonstrate that the asset is eligible for Climate Bonds Certification. Page 14 / 15
Achievement of a B label is shown to position the asset in the next 13% of assets (i.e. in the top 10-22% of the market). While some of the B label assets will be positioned in the top 15%, achievement of a B label does not guarantee this. As such, a B label cannot be used to demonstrate that a property asset is eligible for Climate Bonds Certification. Page 15 / 15