Impact Reporting: Introducing the Nordic Model

As the green bond market has evolved over the last few years, impact reporting has increasingly become an expectation of investors and other stakeholders. Impact reporting ensures transparency into the projects financed but also represents a headache to issuers: What is environmental impact, and how may it be reported upon in a meaningful way?

Signatories

In 2016, a group of ten public sector issuers in the Nordic region formed a co-operation with the aim to jointly develop a practical guide to impact reporting. The result was published in October 2017: Nordic Public Sector Issuers: Position Paper on Green Bonds Impact Reporting ("NPSI Position Paper").

The paper builds on the approaches laid out in the "Harmonized Framework for Impact Reporting" released by a group of international financial institutions (IFIs) in November 2015, and impact indicators suggested by the Green Bond Principles' working group on impact reporting, while supplementing with additional guidelines where needed.

Notably, the NPSI position paper covers eight different project categories, including renewable energy, green buildings and clean transportation, as well as water management and waste management. To our knowledge, this is the most comprehensive guideline on impact reporting currently available.

This article seeks to provide an overview of key recommendations of the NPSI position paper. The full document is available from the web pages of the signatory issuers, including the Nordic local government funding agencies Kommunalbanken, Kommuninvest and Munifin. Please note that the signatories consider this a live document, subject to annual updates and adjustments. Any comments or suggestions are warmly welcomed as we move on to our first review.

General recommendations of the NPSI position paper

The recommendations in the position paper may be divided into general recommendations, applying to all types of projects financed, and category-specific recommendations.

The key general recommendations are summarised in table 1.

Outstanding amount: Issuers are recommended to report impact on their outstanding lending to a project as a share of the entire project cost. Illustrated by an example: If a project has an impact of 200 impact units, and issuer X has financed 50 percent of the project, they should report 200*0.5 = 100 impact units in year one. If this loan amortises so that issuer X's outstanding credit amounts to 30 percent of the total project cost in year three, they should then report 200*0.3 = 60 impact units in year three. This is important in order to avoid double-counting of impact between issuers, and also between monetary units whenever a loan is repaid and hence funds are freed up to finance new projects.

Qualitative and quantitative measures: While we are aware that many investors favour quantitative metrics and indicators such as CO2 reduced or avoided, the position paper recognises that not all projects may be measured in such terms and that quantitative data in many cases only paint a part of the picture. Thus, the position paper recommends the use of qualitative information to supplement quantitative data and in some cases even replace it. For instance, it may be challenging or simply irrelevant to calculate CO2 emission reductions from a climate change adaptation project such as a storm water management system.

Estimated impact: The first version of the position paper recommends issuers to commit to report expected impact (ex ante), and to strive to report on actual, measured impact (ex post) when feasible. The estimated impact approach is in line with the forward looking nature of green bonds, as it emphasises the environmental ambitions of projects. It also eases the reporting burden of issuers; especially for those who have some degrees of separation from the projects financed, e.g. as lenders. Impact reports should clearly distinguish between estimated and actual impact.

Yearly basis: Issuers are recommended to release an impact report each year, listing the projects, amounts and impacts related to the portfolio in a given year. When estimated impact is reported, issuers may report the expected impact per average operational year; for actual impact, the measured impact in that given year should be stated. For static portfolios with no changes since the last report, issuers may choose to release a statement confirming status quo.

This information is collected on a project-by-project basis, and the position paper recommends issuers to share impact data on project level, unless confidentiality matters or other issues constrain them from doing so. It is also useful to aggregate information to project category and portfolio level. In aggregating data, issuers should be careful not to combine apples and oranges; for instance, figures for avoided and reduced emissions, and expected and measured impact, should be kept apart.

Baselines and points of reference

A decisive factor in impact reporting is the baseline or reference point in relation to which impact is calculated. Different baselines may result in very different impacts calculated, without the reader necessarily being aware of the assumptions made. Generally, the NPSI Position Paper advises issuers to choose conservative baselines and to disclose which baselines are applied in each project or project category. For some project types, the position paper recommends specific baselines. As an example, the impact of a new green building should be calculated as the net benefit of the building (e.g. kilowatt hours of energy avoided) compared to the applicable national building requirements.

One of the key questions in this regard is how to calculate emissions from different types of energy, such as electricity from the grid, or heat or cooling from district heating systems. For the latter, Kommuninvest has developed an emission factor of 158 grams of CO2e per kWh, based on Swedish national averages for district heating systems. This may be relevant to other issuers financing projects in Sweden. As there are large regional differences in the input and efficiency of district heating systems, there would be a need to develop individual emission factors for other regions and markets. Nonetheless, the methodology employed by Kommuninvest may be a relevant point of departure.

For electricity, the distribution system is much more interlinked. Hence, it makes sense to consider the Nordic electricity market as one, while at the same time bearing in mind the high degree of interconnectivity with the grid of mainland Europe. Based on this, the NPSI Position Paper proposes a common CO2 emission factor of 380 grams of CO2e per kWh for all Nordic issuers (see box on previous page).

Project boundaries

Another crucial discussion for impact reporting is where to draw the outer boundaries of a project, and which aspects of it to report upon. The NPSI Position Paper recommends issuers to include all activities, facilities, or infrastructure of a project financed through a green bond, in their impact reporting (hence, avoid 'cherry picking' the parts with the highest impact).

In terms of greenhouse gas emission scopes as defined by the Greenhouse Gas Protocol, the position paper recommends reporting to include Scope 1 (direct emissions from e.g. on-site combustion or vehicles owned by the enterprise) and 2 (indirect emissions from purchased electricity, heat, cooling, or steam).

Scope 3, which covers all other indirect emissions related e.g. to products and services purchased by the enterprise, remains voluntary to report in this version of the NPSI Position Paper. We would like to emphasise that there are currently several uncertainties associated with calculating Scope 3 emissions, including the risk of double-counting emissions as one entity's Scope 3 emissions are another entity's scope 1 emissions, for instance.