ESG Impact Investing and Reporting European Investment Bank

ESG, Impact Investing and Reporting – European Investment Bank Group Stephen Hart, Head of Office Copenhagen 9 October 2017 European Investment Bank Page 1

Agenda 1. Responsible lending 2. Responsible borrowing 3. Impact Investing European Investment Bank Page 2

RESPONSIBLE LENDING European Investment Bank Page 3

The EU Bank • Largest multilateral lender and borrower in the world – Raise our funds on the international capital markets – Pass on favourable borrowing conditions to clients • Some 450 projects each year in over 160 countries • Headquartered in Luxembourg and has 40 local offices • Around 3 000 staff: – Not only finance professionals, but also engineers, sector economists and socio-environmental experts – Almost 60 years of experience in financing projects • Close cooperation with the European Commission European Investment Bank Page 4

EIB Group financing in 2016 • EUR 83. 8 bn • EUR 280 bn • Total investment supported European Investment Bank • 24/09/202 • 5 Page 5

Climate finance pioneer EUR 19 bn USD for climate in 2016 European Investment Bank • European Investment Bank 100 bn 2016 -2020 • 24/09/202 • 6 Page 6

EIBs most IMPORTANT STAKEHOLDERS: Investors (bond-holders) European Investment Bank Page 7

“ESG” at EIB EU institution under EU LAW and policies (differs from corporate) • Policy objectives governing sectoral eligibility (eg. Paris / SDGs) • Treaty: sound projects (environment, ERR including externalities) • Environmental compliance based around EU Directives • E&S Safeguards • Best Practise European Investment Bank Page 8

Calculation and reporting the Impact of EIB Lending All projects inside and outside the EU are subject to an assessment of impact in the form of sector-specific and horizontal indicators. They are aggregated for annual / sustainability reports. http: //www. eib. org/infocentre/publications/all/2016 -annual-report-on-eib-operations-inside-the-eu. htm http: //www. eib. org/infocentre/publications/all/eib-rem-annual-report-2016. htm EIB has teamed up with JRC, applying a model for economic impact of structural funds (that takes into account wider geographical effects) to EIB lending (RHOMOLO). It looks at short and long term effects: European Investment Bank Page 9

The Climate Bank In everything we do …. … so prove it! European Investment Bank Page 10

EIB's Climate Strategy: The European Investment Bank adopted its Climate Strategy on 22 nd September 2015, following a comprehensive review, including a formal public consultation: “Mobilising finance for the transition to a low-carbonand climate-resilient economy” http: //www. eib. org/infocentre/publications/all/eib-climate-strategy. htm • Forward looking statement describing the Bank’s future direction and developments of its climate action • i) reinforcing the impact of EIB climate financing • ii) increasing resilience to climate change • iii) further integrating climate change considerations across all of the Bank’s standards, methods and processes • …. innovative financial instruments, outreach and cooperation with stakeholders, the development of standards and methodologies and the provision of advisory services. • Assessing and managing portfolio climate change risks • Defines Climate Action project lending eligibilities • 25% Lending Target for Climate Action • Sector lending policies : integrating climate objectives and climate sensitive sector screening criteria in major sectors • Carbon Pricing and Greenhouse Gas Emissions European Investment Bank Page 11

Climate Action Definitions, Calculation of GHG Emissions Climate Action sectors: • Energy Efficiency • Renewable Energy • Forestry and Land Use • RDI • Adaptation • Other: Any activity in a sector not included in this list with demonstrable substantial reductions in GHG Renewable Energy and Energy Efficiency are a subset of Climate Action that are eligible for proceeds from EIB’s Climate Awareness Bonds Methodologies for the Assessment of Project GHG Emissions and Emission Variations: • the absolute GHG emissions of the project, and; • the variation in emissions compared to a baseline, referred to as the relative emissions, which can be either positive or negative. European Investment Bank Page 12

Climate mainstreaming in EIB investment projects At the appraisal stage, projects are screened by analysing the following: • Adjusted economic and financial rates of return: When appraising the economic case for a project resulting in a significant change of greenhouse gas emissions (GHG) we incorporate an economic cost of carbon. For high emitting sectors (i. e. energy, industry, transportation), we require a higher economic rate of return. • Carbon footprint exercise: An assessment of GHG emissions of the investment projects we finance is carried out based on sector-specific methodologies. We publish project level data on our Public Register and aggregated data for each year’s financing in our Sustainability Report. • For all fossil fuel generation projects, a specific emissions performance standard is applied in order to screen out investments whose carbon emissions exceed a threshold level. • Climate change risk and vulnerability: For projects, sectors and areas particularly vulnerable to climate change impacts, we require the promoter to consider climate risks and to incorporate adaptation measures into project design and operation. We are rolling out a climate risk management system as part of our climate strategy implementation. • Climate finance tracking – Transparency and credibility are key in mitigation finance reporting. In 2015, the EIB and other multilateral development banks (MDBs), as well as the International Development Finance Club (IDFC), established a set of common principles, definitions and guidelines for climate mitigation finance tracking. European Investment Bank Page 13

Guidance on Climate ADAPTATION Need to fulfil the 3 criteria set out in the MDB adaptation methodologÿ: Step 1: Show that your project is vulnerable and/or addresses vulnerability MDB language: ‘provide context of vulnerability’ • A project is vulnerable if it is: – a) sensitive to climate change – b) exposed to current or future impacts of climate change Step 2: Show that your project addresses vulnerability MDB language: ‘provide statement of purpose or intent’ • Aim should be to improve the climate resilience of the project or to improve the adaptation effectiveness. It should become clear that the vulnerability of the project results from being in this specific location where it is exposed to a very specific climate risk. This characteristic distinguishes the project form a ‘good practice/development’ project that takes more general risks into account and instead qualifies it as a project with adaptation elements. Step 3: Show that there is a link between the project activity and the vulnerability What are the specific project activities that address the climate vulnerabilities identified? Final question: How much to count towards adaptation COP objective? • Count only those activities or components of the project which are additionally required to make the project resilient to current or future climate. European Investment Bank Page 14

RESPONSIBLE BORROWING European Investment Bank Page 15

EIB the is world’s first issuer of Green Bonds the Climate Awareness Bond European Investment Bank Page 16

EIB’s CABs: Use of proceeds and project eligibility criteria Green Bond Principles - § 1. Use of proceeds Eligible projects include: • Renewable energy such as wind, hydropower, wave, tidal, solar and geothermal • Energy efficiency such as district heating, cogeneration, building insulation, energy loss reduction in transmission and distribution and equipment replacement with significant energy efficiency improvements Special conditions/exclusions • Nuclear and coal excluded • Equity and intermediated equity investments excluded • GHG emission threshold of 550 g CO 2/k. Wh-e European Investment Bank Page 17

Breaking new ground in the Green Bond market - Evolution of Reporting European Investment Bank 2015: EIB leads 11 IFIs to harmonise climate reporting for COP 21 First comprehensive impact report March 2015 First allocation report May 2009, using portfolio approach New rules for EU institution ex-post reporting First allocation report by project and by bond October 2015 Non-financial rating agencies: was it switched on? First postcompletion project report April 2016 2013: Green Bond market takes off with institutional investors EIB Working with China for harmonised climate definitions March 2017 (for COP 23) EIB issues world’s first green bond, the CAB, July 2007 First Independent Reasonable Assurance Report, including External Review Form September 2016 Page 18

Key questions - Impact reporting Background Investors increasingly eager to assess the environmental impact of their investments (qualitatively and quantitatively) First reports in late 2014 / early 2015: Kf. W publishes aggregate impact reporting, in March 2015. EIB is the fist issuer to publish a project specific report with quantitative metrics such as GHG emissions avoided Harmonized template for Impact Reporting in RE / EE developed by 11 IFIs • The full document can be accesses under the following link: http: //www. eib. org/attachments/press/20151202 -0530 -finalrevised-proposal. pdf European Investment Bank Page 19

Key Questions: Ex-ante vs. Ex-Post reporting What kind of reporting is needed? • Reporting needs to be manageable, and there is limited added-value in repetitively reporting the same information on a project for its lifetime or for the lifetime of a bond Ex-post vs Ex-ante reporting • Ex-ante reporting is based on estimates (e. g. for GHG savings) before a projects enters into operation whereas ex -post reporting is based on actual operational data of a project after completion • Ex-post reporting implies a time-lag before the first reports become available • EIB is among the first issuers to make available ex-post information on Green Bond projects through completion sheets (see example on the right) • Best practice: Combine ex-ante and ex-post reporting European Investment Bank Page 20

IMPACT INVESTING European Investment Bank Page 21

Impact Investing = Investing for Impact + Returns European Investment Bank Page 22

Impact Investing – Theory of Change and Indicator Development Theory of change: Hypothesis for causality from action to outcomes and impact Impact: Conceptually the difference between outcomes and what would have happened anyway Lock-in: Returns and Impact intrinsically linked under a scalable business model European Investment Bank Page 23

Impact Investing – Return/Risk, Impact/Impact Risk Measurability? Impact for Risk? Source: Innpact European Investment Bank Page 24

Impact Investing – Indicators and Performance Impact investors have been trying to identify means of making transparent social impact within the performance of an investment. Several challenges have proven sizeable obstacles on that way: 1. The relevance of metrics for the impact pursued by an investment 2. The comparability of the impact between individual investments 3. The relative importance of impact performance versus the financial performance of an investment Approaches used in the past have been favouring single impact measures seeking to express social impact objectives and results for the entirety of actors and stakeholders in an undifferentiated way. European Investment Bank Page 25

Impact Investing – The Social Impact Accelerator European Investment Bank Page 26

The Social Impact Accelerator – 3 layers Innovation of the SIA is the development of framework philosophy of impact measurement to suit the 3 -layer situation • • • The Social Enterprises, who need impact indicators that align with their scalable approaches and serve and management tools. The investee funds, who need to demonstrate capital efficiency in their investment approach to the SIA and other investors, by providing a relative performance measures in relation to operational objectives set at the level of the enterprises. The measures are aggregated and used to calculate performance incentives for the fund managers. The SIA fund of funds, who aggregates performance of the funds in capital weighted fashions across the portfolio of funds European Investment Bank Page 27

THE SOCIAL IMPACT ACCELERATOR – Performance and Carry A. Measure of the social impact performance The fund manager should commit to: 1. Define for each SMEs the fund invests in social impact indicators 2. Define for each social indicator a target value 3. Disclose in the first Advisory Board meeting the social impact indicators defined and their respective target values 4. Calculate on a regular basis (at least once a year) the impact multiple for each social impact indicator (ie initial target value / observed realized value) 5. Monitor and report on a regular basis (at least once a year) the progress of the social performance of the Fund’s entire investment portfolio by aggregating the overall social impact indicators European Investment Bank Page 28

THE SOCIAL IMPACT ACCELERATOR – Performance and Carry B. Application of the Fund’s Social Impact Performance to the carried The financial performance incentive of the Fund Manager (carried interest) will be subject to the Social Impact Performance of the Fund as follows: - If the Fund’s Social Impact Performance Indicator equals or exceeds the value of 0. 8 then the Fund Manager will be entitled to 100% of the Carried Interest - If the Fund’s Social Impact Performance Indicator equals or exceeds the value of 0. 6 but is inferior to 0. 8 then the Fund Manager will be entitled to a prorated Carried Interest between 50% and 100% - If the Fund’s Social Impact Performance Indicator is inferior to the value of 0. 6 then the Fund Manager will not be entitled to any Carried Interest Modification In justified circumstances triggered by external effects beyond the control of the Social SME that affect the ability of the Social SME to deliver on its social mission or require a fundamental review of the Social SMEs business model, the Fund Manager may suggest an adaptation of the Social Impact Indicators selected for such Social SME to the Advisory Board. European Investment Bank Page 29

Future work • • • New technologies – new metrics Impact for risk? How to measure? Portfolio approach to non-financial indicators? Harmonisation of calculation methodologies Transaction costs and regulation Sustainable Finance and Assets European Investment Bank Page 30

Q&A Stephen Hart, hart@eib. org Thank you! European Investment Bank • European Investment • 24/09/202 • 31 Page 31