NIB Environmental Bonds: How we select and evaluate projects

NIB’s mandate to improve the environment and competitiveness of the Nordic and Baltic countries has given it extensive experience of assessing projects and their impact on the environment, says Magnus Andersson, Senior Environmental Analyst at NIB.

The Bank established its environmental bond framework in 2011 to offer investment products to the growing number of investors willing to support sustainable environmental investments. The NIB Environmental Bond (NEB) was seen as an efficient way of communicating the Bank’s existing sustainable financing. As the Bank already had a scrutinised internal process for assessing projects, it was only a small leap for NIB to enter the green bond market.

The NEB framework outlines how NIB selects, assesses and reports on the projects that the Bank finds eligible for green bond financing.

As recognised by the Green Bond Principles—widely recognised voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the green bond market—one of the key components is how well the issuers’ processes are set up for evaluating and selecting projects eligible for using proceeds from green bonds.

At NIB, the Sustainability & Mandate unit identifies and preselects projects considered eligible for the proceeds of NEBs. Eventually, the Bank’s Credit Committee decides which loans are deemed eligible for financing through NEBs.

Magnus Andersson is senior environmental analyst in NIB’s Sustainability & Mandate unit, and is involved in the project evaluation and selection process at an early stage.

What are the benefits of evaluating the environmental aspects right from the start?

“Since we are involved so early, we can in fact sometimes manage to convince project owners to raise the bar of their projects towards having a greater positive environmental impact”.

How is the process for project evaluation and selection at NIB?

“Due to the Bank’s environmental mandate, we start the assessment of a project by giving it a mandate rating. The mandate assessment consists of two main components: an assessment of the project’s potential environmental impact, and an assessment of the risk that the project’s potential impacts do not materialise.”

“The potential impact is rated on a six-grade scale from ‘Negative’ impact to ‘Excellent’ environmental improvement. Once the potential impact has been determined, we also assess on a four-grade scale the risk that the project’s expected impact will not materialise”.

“Only projects that reach the two highest levels on the potential impact and have low realisation risks are eligible to be allocated as eligible for NEB proceeds.“

“Basically, only the best of the best projects are chosen”, says Mr Andersson.

During the assessment, do you also conduct a sustainability review?

“We do, and the objective is to ensure that only projects that comply with the requirements of NIB’s Sustainability Policy and Guidelines are financed.”

NIB’s sustainability review also includes defining the project’s environmental borders, collecting information, assessing the quality of the information and benchmarking the project’s environmental performance against, for instance, the EU’s definitions of the best available techniques. In addition, NIB’s Sustainability Policy and Guidelines includes an exclusion list with project types that the Bank’s Board of Directors has decided not to finance at all.

How do you ensure that projects really are eligible for NEB financing?

“We have found that the written material provided by project owners is not always enough to give us the full picture. Among other things, it is a matter of finding out if all the relevant environmental issues have been included in the documentation and checking that all the information is up to date.”

The quality assurance of the environmental documentation—which is essential to avoid “green-washing”—is done by visiting the project sites and interviewing the project owners and other stakeholders.

“In addition to the quality assurance, you need to visit the project site to see for yourself and to discuss matters face-to-face. Only by doing so can we ensure that all the relevant issues have been taken properly into consideration. Such visits are also opportunities for us here at NIB to learn more and, sometimes, even to be able push the project owner towards more sustainable solutions.”

“The result of this analysis enables us to identify and assess possible reputational and credit risks related to environmental issues”, says Mr Andersson.

Eye-to-eye with investors

Since investors are increasingly taking the environmental aspects into consideration, the Bank believes they should get full insight into NEB framework. The Bank’s Funding and Investor Relations team therefore invites its environmental analysts to accompany them to investor meetings.

In 2015, NIB issued an inaugural EUR 500 million NIB Environmental Bond. Ahead of the seven-year bond, the funding team conducted several investor roadshows with NIB’s environmental experts.

“It has been very interesting to see how the funding professionals at NIB work, and it is quite rewarding to meet investors that gradually become interested in investing in improving the environment. I am positively surprised about their sincere interest in learning more about environmental issues, and I am happy to contribute to this process”, says Mr Andersson.

“I clearly see a positive link between environmentally ambitious investors and project owners, which may enhance the environment. By bringing the two groups together we may be able to boost the growth of the green sector, which is fully in line with NIB’s mission.”

Monitoring and reporting

Monitoring and reporting on the project is a key focus for many investors, and NIB acknowledges the need to follow up on its projects.

NIB can interfere, and even cancel a loan, if a project is not implemented as intended. However, a more likely approach is for NIB first to try getting the project back on track again with the project owner.

“We also report aggregated CO2 data annually on a portfolio basis”, says Mr Andersson.

“The challenge is that different green bond issuers use different calculation methodologies based on different assumptions, which can lead to situations where comparing and interpreting their CO2 numbers is often very difficult.”

In 2013, NIB and nine other international financial institutions therefore took a first step to agree on a harmonised approach to project-level greenhouse gas accounting. The work is still in progress and a technical working group is currently developing sector specific calculation methodologies.

In your opinion, what are the biggest challenges and opportunities concerning the environment?

“When I meet with representatives of industry and commerce, environmental communication is sometimes not enough balanced, meaning that positive—often relative—environmental improvements are presented instead of an overall picture that also includes the negative impacts in absolute terms.”

“Even for us environmental specialists, it is sometimes challenging to see through these ‘green smokescreens’, and it must be even more difficult for people who aren’t in direct contact with the projects.”

“I can also see a great opportunity for the environment as the green bond market grows further, making more funds available for green investments.”

NIB Environmental Bonds