Property Upgrade Climate Bonds
Certification methodology
Low Carbon Buildings Technical Working GroupVersion 1.0

ABSTRACTThis paper sets out guidance by the Low Carbon Buildings Technical Working
Group on the certification methodology for Property Upgrade Climate Bonds.

ContentsDefinitions ............................................................................................................................................. 2
1.

Executive Summary ........................................................................................................................ 3

2.

Summary of Guidance .................................................................................................................... 4

3.

Details of Guidance ........................................................................................................................ 5
3.1. Carbon reduction target ............................................................................................................. 5
3.2. Methodology implementation.................................................................................................... 7

Appendix 1 – Deriving targets for shorter-term bonds ......................................................................... 8Page 1 / 8

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 tocatalyse 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 therequirements 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 forCertification of a bond under the Climate Bonds Standard.
Note: The Climate Bonds Standard Board is constituted, appointed and supported in line with thegovernance 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 orrental 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, industryand NGOs that develop Sector-Specific Criteria, which are detailed technical criteria for the eligibilityof projects and assets as well as guidance on the tracking of eligibility status during the term of thebond.

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1. Executive Summary
Objective
Define a methodology that enables property upgrade (or energy efficiency) projects to be certified
as Climate Bonds.
Goals
Provide a complimentary framework for Climate Bonds that:
1. Offers the greatest opportunity for directing finance to property upgrade (or energy efficiency)
projects
2. Maintains integrity of the Climate Bonds Initiative brand without onerous monitoring andverification requirements
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 ofcertiﬁcation and allow application to assets in developing countries.
3. Use of climate-relevant metrics: to achieve compatibility with international frameworks forﬁnancing1, relevance to corporate reporting frameworks2, 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 thefollowing sections:
1. Carbon reduction target
2. Methodology implementation

1

Such as the Kyoto protocol clean development mechanisms and its successor.
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.
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2. Summary of Guidance
The Low Carbon Buildings Technical Working Group has provided the following guidance on thecertification methodology for Property Upgrade Climate Bonds:
1. The certification methodology for Property Upgrades is different from Commercial Property andResidential Property. It requires a minimum carbon reduction target, which is adjusted according
to the term of the bond.
2. For a 30-year bond, a carbon reduction target of at least 50% is required to meet the ambition ofClimate Bonds Initiative. For a 5-year bond, the carbon reduction target is at least 30%.
3. Carbon reduction targets for different term bonds can be derived using a linear equation basedon a 50% target for a 30-year bond and a 30% target for a 5-year bond.
4. Property upgrade contracts specifying a percentage carbon abatement (relative to a business-asusual baseline) that meets the minimum carbon reduction target (e.g. 50% for a 30-year bond)will qualify for Climate Bonds Certification.
5. Property upgrade contracts that do not specify a percentage carbon abatement (relative to abusiness-as-usual baseline) can qualify for Climate Bonds Certification as long as the percentage
carbon abatement can be quantified (e.g. through modelling).
6. Property upgrade contracts that are unable to demonstrate or quantify the benefits of theupgrade(s) are not eligible for Climate Bonds Certification.
7. Climate Bonds Certification under the Property Upgrades methodology is available for any
project that seeks energy performance improvement through the application of energy
efficiency measures and technologies that relate to the built environment. Eligible projects arenot limited to improvements that are attached to buildings.
8. There are no additional monitoring and verification requirements beyond those required by theperformance contract or upgrade agreement.
9. There are annual reporting requirements for commercial property assets, in accordance with theterms of the performance contract or upgrade agreement of the relevant scheme. This is alignedwith the Low Carbon Buildings Criteria for Commercial Property.
10. There are no ongoing reporting and verification requirements for residential property assets.
This is aligned with the Low Carbon Buildings Criteria for Residential Property.
11. Property assets that individually meet the minimum carbon reduction target may be aggregatedinto a larger combined asset.

The next section provides further details and explains the rationale behind the above guidance.

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3. Details of Guidance
3.1. Carbon reduction target
A. Distinct approach from Commercial Property and Residential Property
Guidance
Property assets entering into performance contracts
or upgrade agreements where the carbon reduction
targets are considered significant enough to provide
environmental additionality are eligible for Climate
Bonds Certification.
The certification methodology for Property
Upgrades remains distinct from the methodologies
defined for Commercial Property and Residential
Property.

Explanation
Climate Bonds has identified a need to recognise
property assets that are currently unable to comply
with the eligibility criteria applied to Commercial
Property and Residential Property but are
endeavouring significant carbon reduction throughenergy efficiency upgrades. As such, a methodology
has been designed to provide Climate Bond
Certification of such assets.
The methodology is intended for use by Energy
Service/Saving Companies (ESCOs) and legislated
financing schemes such as Green Deal (UK), Property
Assessed Clean Energy (USA), and Environmental
Upgrade Agreements (Australia).

B. Minimum target
Guidance
A carbon reduction target of at least 50% for a 30year bond and 30% for a 5-year bond are required tomeet the ambition of Climate Bonds Initiative.
The 50% target has been derived from analysis ofdata in the Australian cities of Sydney andMelbourne, along with consideration of local rating
tools in both Australia and the USA. The target isconsistent with repositioning a property asset in thebottom 15% of the market to the top quartile of themarket in both Sydney and Melbourne. The target isalso equivalent to moving an asset at the medianperformance level to the top 5%.
The 30% target has been agreed by the Technical
Working Group to be acceptable for bonds with aterm of 5 years.

Explanation
A minimum carbon reduction target is necessary toensure that the property upgrade is providing a levelof environmental additionality that is consistent
with the ambition of Climate Bonds Initiative.
When tested against local rating tools for typical
office buildings, the 50% carbon reduction target
appears to set the appropriate level of ambition. InAustralia, a carbon reduction of approximately 50%
is required to move from a 2-star NABERS rating(below average performance) to a 4.5-star NABERS
rating (very good performance). Similarly, EnergyStar (based on whole building data) requires a 51%
carbon reduction to move from the bottom 15thpercentile to top quartile and a 53% carbon
reduction to move from median performance to top
5th percentile.
The 30% target for 5-year bonds is based on industry
practice for ESCO contracts, where best practicetends towards a 30% performance improvement.

C. Adjusting target for different term bonds
Guidance
The target will be adjusted for bonds with terms
different from 5 years and 30 years. This adjustment
will be made using a linear equation between 30%
for a 5-year term and 50% for a 30-year term.
Appendix 1 illustrates how targets are derived for
different bond terms.

Explanation
The carbon reduction target of at least 50% has
been proposed to set the appropriate level ofambition for a 30-year bond. Shorter-term bonds
may however have difficulty achieving this carbon
reduction target. As such, the carbon reduction
target will be adjusted according to the term of thebond.

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D. Alignment of property upgrade with target
Guidance
Where the contract for the property upgrade
specifies a percentage carbon abatement relative toa business-as-usual baseline and this meets theminimum performance target (e.g. 50% for a 30year bond), the project will qualify for Climate Bonds
Certification.

Explanation
To be certified against the Low Carbon Buildings
Criteria, property upgrades will need todemonstrate that the percentage carbon abatement
resulting from the upgrades will meet the minimum
carbon reduction target applicable to the term ofthe bond.

Where the contract for the property upgrade does
not specify a percentage carbon abatement relative
to a business-as-usual baseline, but the percentage
carbon abatement can be quantified (e.g. throughmodelling), the project will qualify if thedemonstrated abatement meets the minimum
performance target.
For instance, if upgrades for an office building
2
currently emitting 795tCO /year have been2
modelled to show a 180tCO saving from lighting
2energy consumption and a 220tCO saving from
HVAC energy consumption, it can be demonstrated
that the resulting percentage carbon abatement will
be 50% and the project qualifies for Climate Bonds
Certification.
Where the property upgrade contract does not
specify a percentage carbon abatement and thebenefit of the upgrade cannot be demonstrated orquantified, the project is not eligible for ClimateBonds Certification.

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3.2. Methodology implementation
A. Scope of projects covered
Guidance

Explanation
Eligible projects are not limited toThe upgrades criteria apply to any project that
improvements that are attached to buildings.
seeks energy performance improvement
As long as the project leads to energy
through the application of energy efficiency
performance improvement through themeasures and technologies that relate to theapplication of energy efficiency measures andbuilt environment (e.g. LED lights, heat pumps,technologies that relating to the built
micro combined heat and power, renewableenvironment, they can qualify for Climate
micro-generation, etc.).
Bonds Certification.
B. Monitoring & Verification
Guidance
There will not be any additional monitoring andverification requirements beyond those required by
the performance contract or upgrade agreement.
Annual reporting will be required for commercial
property assets, in accordance with the terms of theperformance contract or upgrade agreement of therelevant scheme. This is aligned with the Low
Carbon Buildings Criteria for Commercial Property.
Ongoing reporting and verification will not berequired for residential property assets. This isaligned with the Low Carbon Criteria for Residential
Property.

Explanation
Performance contracts and upgrade agreements
require annual reporting of energy performance forthe duration of the contract or agreement. Climate
Bonds Initiative will not impose monitoring andverification requirements on top of theserequirements.
Ongoing reporting and verification is consideredunsuitable for residential property assets because
they are impractical and challenging forhomeowners to satisfy. As such, they will not be
required for residential property assets.

C. Aggregation of assets
Guidance
Property assets that individually meet the minimum
carbon reduction target may be aggregated into alarger combined asset.

Explanation
There is a need to enable aggregation of property
assets to create the commercial scale necessary to
attract bond investors.

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Appendix 1 – Deriving targets for shorter-term bonds

1. The carbon reduction target for a 5-year bond and 30-year bond has been determinedby Climate Bonds Initiative as 30% and 50% respectively.
2. A straight line can be plotted between these two points or carbon reduction targets toderive the relevant target for bonds with alternative terms.

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