Review of Sustainable Mortgage Bonds and Securities

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Canada Mortgage and Housing Corporation

Review of Sustainable Mortgage Bonds and Securities

Final Report

January 2021

Note to Reader

Deloitte LLP (“Deloitte”) was engaged by Canada Mortgage and Housing Corporation (“CMHC”) to review the scope and potential impact of sustainable mortgage bonds and

securities (“SMBs”) in Canada. This final report outlines the outcomes of our primary and secondary research and analysis, stakeholder consultations, and modelling of

impacts on environmental, social, and economic indicators.

Deloitte does not assume any responsibility or liability for losses incurred by any party as a result of the circulation, publication, reproduction or use of this analysis contrary

to its intended purpose. This analysis has been made only for the purpose stated and shall not be used for any other purpose. Neither does this analysis (including references

to it) nor any portions thereof (including without limitation the identity of Deloitte or any individuals signing or associated with this report, or the professional associations or

organizations with which they are affiliated) shall be disseminated to third parties by any means or included in any document without the prior written consent and approval

of Deloitte. Our report and work product cannot be included, or referred to, in any public or investment document without the prior consent of Deloitte.

The analysis is provided as of November 25, 2020 and we disclaim any undertaking or obligation to advise any person of any change in any fact or matter affecting this

analysis, which may come or be brought to our attention after the date hereof. Without limiting the foregoing, in the event that there is any material change in any fact or

matter affecting the analyses after the date hereof, we reserve the right to change, modify or withdraw the analysis. No opinion, counsel, or interpretation is intended in

matters that require legal or other appropriate professional advice. It is assumed that such opinion, counsel, or interpretations have been, or will be, obtained from the

appropriate professional sources. To the extent that there are legal issues relating to compliance with applicable laws, regulations, and policies, we assume no responsibility

therefore.

Observations are made on the basis of economic, industrial, competitive and general business conditions prevailing as at the date hereof. In the analyses, we may have made

assumptions with respect to the industry performance, general business, and economic conditions and other matters, many of which are beyond our control, including

government and industry regulation.

The outbreak of COVID-19 will have a significant impact on the economic outlook. The analysis presented in this report was based on the economic situation prior to the

COVID-19 outbreak and does not include any consideration of the likely impact of either of these events or the related fiscal stimulus measures (unless explicitly stated

otherwise). As a result, readers should carefully consider the relevance of the views and findings contained in this report as the basis for any decisions made in the current

economic climate against the backdrop of heightened uncertainty.

We believe that our analyses must be considered as a whole and that selecting portions of the analysis or the factors considered by it, without considering all factors and

analyses together, could create a misleading view of the issues related to the report. Amendment of any of the assumptions identified throughout this report could have a

material impact on our analysis contained herein. Should any of the major assumptions not be accurate or should any of the information provided to us not be factual or

correct, our analyses, as expressed in this report, could be significantly different.

Table of Contents

Introduction and Context

Overview of Sustainable Mortgage Bonds and Securities

Key Features of Sustainable Mortgage Bondsand Securities

Investor Characteristics and Motivations

Key Insights on ESG Investment Performance

ESG Policy Environment for Canada’s Housing Market

Leading Guidance on Housing Sustainability Objectives

Observations on Potential Eligibility Criteria in Canada 36

Observations on Potential Role of Government 41

Global Sustainable Mortgage Funding Frameworks

Introduction to Global Sustainable Mortgage Funding Frameworks 45

Case Study: Fannie Mae’s Multifamily Green Bond Framework 49

Case Study: NWB Bank’s SDG Housing Bond Framework 56

Alignment to ICMA’s Sustainability Bond Guidelines 62

Implications for Canada 65

Report Appendices

109

Appendix 1: Comparison of SMBs and Similar FinancialProducts 109

Appendix 2: Our Approach to Rank Global Sustainable Mortgage Funding Frameworks 111

Appendix 3: Review of Additional Sustainable Mortgage Funding Frameworks 113

Appendix 4: Additional Model Outcomes from Regression Analysis 135

Appendix 5: Additional Information on EconometricAnalysis 138

Appendix 6: ESG Bond Index Construction andDefinitions 144

Appendix 7: Information on Third-Party DataReview 154

Stakeholder Engagement Outcomes

Executive Summary

Econometric Analysis of Canadian ESG Bonds and Key Ind icators

Overview of Econometric Analysis 75

Regression Analysis 82

Event Study Analysis 87

Key Insights and Limitations 91

Executive Summary

About Sustainable Mortgage Bonds and Securities

Sustainable mortgage bonds and securities (“SMBs”) have the opportunity to gain popularity in the Canadian

market due to growing investor demand for ESG-focused investments.

Sustainable Mortgage Bonds and Securities

are a category of bonds that are backed by sustainable mortgages to

finance or refinance housing projects with green and/or social outcomes

Focus on green and

social capabilities

Backed by

Sustainable

Mortgage Assets

Support investor demand

for environmental, social

and governmental

products

Potential

Financial Benefits

(diversification, less

risky collateral, etc.)

SMBs can enable positive

externalities within the

environment, society, and the

economy

Socially and

environmentally

conscious

Emphasis on

transparent

reporting

procedures

Desire to gain

exposure to the

real estate market

Appealed by stable

cash flows

Potential financial

benefits arising

from sustainable

investment

strategies

Investor Traits

ESG Policy Environment & Potential Eligibility Criteria for CMHC’s Consideration

Our review of leading frameworks and policy directives can support CMHC in developing an SMB framework

structure and setting appropriate ESG eligibility criteria.

UN Sustainable

Development Goals

(“UN SDGs”)

• Canada has adopted the 2030 UN Sustainable Development Goals.

• Six of these goals can be supported by SMBs – key examples include:

Goal 1 No Poverty; Goal 7 Affordable and Clean Energy; and Goal 11

Sustainable Cities and Communities.

International

Capital Markets

Association

(“ICMA”)

• The ICMA’s Guiding Principles for sustainable, green, and social bonds

are recognized by issuers and investors around the world

• CMHC can consider ICMA’s four key guiding principles, which aim to

enable transparency and minimize information asymmetry between

investors and issuers, for its development of a SMB framework. The four

principles are: (1) Use of Proceeds, (2) Process for Project Evaluation and

Selection, (3) Management of Proceeds, and (4) Reporting.

Canada’s National

Housing Strategy

(“NHS”)

• Social sustainability initiatives targeted by the NHS include increased

access to affordable and accessible housing.

• Environmental sustainability initiatives targeted by the NHS include

the reduction of residential energy and water consumption, as well as the

reduction of GHG emissions.

• Financial objectives include the provision of financial support for the

housing of specific target groups (e.g., domestic violence victims, seniors).

Green Buildings

• Green Certification: The borrower’s property must

have a valid green building certification (e.g.,

EnerGuide, ENERGY STAR, LEED) from a list of

recognized institutions.

• Energy Efficiency Thresholds: Property owners must

commit to improvements to their property that reduce

the property’s annual energy usage and/or water usage

by a certain threshold (e.g., 25% reduction in energy

usage over building code requirements).

Social/Affordable Buildings

• Target Low-Income Households: The property

owner (borrower) must rent housing units to low-

income households.

• Rent Thresholds: The property owner (borrower)

must cap rental prices at a maximum net monthly rent,

taking into account the annual incomes of low-income

individuals in Canada.

• Target Vulnerable Populations: The property owner

(borrower) must rent housing units to targeted

vulnerable populations.

Key Observations on Potential

Eligibility Criteria in Canada

Examples of the Potential Role of Government (Based on Secondary Research)

• Communicate policy targets/objectives around green and social/affordable housing and provide

guidance and data-driven insights against green and social/affordable housing targets.

• Craft policy to ensure sustainable mortgage funding programs maximize net benefits for investors,

housing developers/proponents, and the broader Canadian population.

• Incentivize realization of positive externalities by supporting investor demand while monitoring

potential negative outcomes.

Key observations from examples of frameworks studied:

Review of Global Sustainable Mortgage Funding Frameworks

We explored seven global sustainable mortgage funding frameworks to identify best and applicable practices

to consider in the development of Canada’s sustainable mortgage funding program.

• Based on our review of seven global sustainable mortgage funding frameworks, we identified the frameworks of Fannie Mae (United States) and

NWB Bank (Netherlands) as the most relevant frameworks to our review of SMBs in Canada.*

• Fannie Mae and NWB Bank were selected as the top two-ranking frameworks based on several elements: (i) relevance of ESG criteria, (ii) relevance of

environmental measures, (iii) relevance of social measures, and (iv) transparency and data availability.

Snapshot of Fannie Mae Multifamily Green Bond

Framework**

• Fannie Mae is the world’s largest green bond issuer, issuing a total of

US$ 69.1 billion through its green bond program between 2012 and

2019.

• Eligibility for financing relies on borrowers obtaining a recognized green

building certification or committing to improvements to their property

that reduce the property’s annual energy usage by at least 15%, with

combined energy and/or water savings totaling at least30%.

• As of 2018, Fannie Mae projected the following green benefits:

o Annual greenhouse gas emissions savings of over 280 thousand

metric tons of CO

emissions (social cost savings of about $15

million per year);

o Energy savings of 4.3 billion kBTU (amount of energy used by over

34,000 American homes in one year); and

o Water reductions of 22.3 billion litres (amount of water used by

nearly 54,000 American families in one year).

Snapshot of NWB Bank SDG Housing Bond

Framework**

• NWB Bank is one of the world’s largest issuers of social/sustainable

bonds.

• The proceeds from NWB Bank’s SDG Housing Bonds exclusively fund

private, non-profit housing associations in the Netherlands which

provide shelter for roughly 60% of the country’s population.

• NWB Bank’s bond aligns with eight UN Sustainable Development

Goals to achieve social and environmental objectives through its

social/sustainable housing bond issuances.

• Particularly, NWB Bank focuses on Goal 1 No Poverty, and Goal 10

Reduced Inequalities by financing social housing associations that:

o Rent a minimum of 80% of social housing to low-income

households;

o Cap rental rates at a level well below the market average rent; and

o Allocate funds to the social housing of vulnerable populations.

* Note: We also reviewed five other global sustainable mortgage funding frameworks across various jurisdictions. Please refer to Chapter 4 in the main report for more information.

** Note: For more information, please refer to the full case studies in the main report (Chapter 4).

Key Considerations for Canada – Case Studies

Based on our review of the Fannie Mae and NWB Bank frameworks, we find strong indications that SMBs in

Canada could materially enable positive green, social, and economic externalities.

Drawing Insights from Fannie Mae and NWB Bank

Our case studies on the Fannie Mae and NWB Bank frameworks highlight key insights on how SMBs can enable positive action toward climate goals and socio-

economic wellbeing in Canada.

Environmental Targets

• SMBs can support Canada’s

energy-efficiency, water-

efficiency, and greenhouse gas

reduction targets.

Case Study Example

• Fannie Mae shows that SMBs can

support these targets by

financing properties that are at

the forefront of green innovation.

Economic Benefits

• SMBs can give rise to economic

benefits such as employment

and economic output, as well as

property-level financial benefits.

Case Study Example

• Fannie Mae shows that SMBs

contribute to construction jobs

(through build or retrofit) and

drive financial benefits for

owners and tenants (through

utility savings).

Housing Need

• SMBs can enable the provision of

affordable housing to low-income

individuals by financing

affordable housing projects.

Case Study Example

• NWB Bank requires borrowers to

establish rental fee thresholds,

ensure adequate housing quality

standards, and distribute a

portion of eligible housing units

based on household income

levels.

Vulnerable Populations

• SMBs can help Canada achieve

its targets around housing

programs that provide shelter

for target populations (e.g.,

seniors, single mothers,

domestic violence victims).

Case Study Example

• NWB Bank requires borrowers to

allocate a portion of eligible

housing units to priority groups

– with housing needs

determined by municipalities.

Key Considerations for Canada – Econometric Analysis

The outcomes of our econometric analysis suggest that SMBs could potentially enable housing affordability,

green benefits, and related economic activity in Canada.

Summary of Key Takeaways from Econometric Analysis

Below, we summarize the key insights our econometric analyses provide with regard to the potential impacts of SMBs in Canada.

Housing Affordability

• We find that indicators related to housing affordability measures (e.g., rental fee payments, value of real estate to disposable income,

mortgage liabilities to disposable income) are negatively related to growth in the issuances and/or performance of ESG bonds.

• The decrease in the growth of rental fee payments, value of real estate to disposable income, and mortgage liabilities to disposable income are

all associated with increased housing affordability. This potentially indicates that SMBs, by increasing the funding of affordable and social

housing, can enable affordable housing in Canada.

Green Benefits

• We find that household gas and fuel consumption is negatively related to growth in the performance of ESG bonds.

• This potentially indicates that SMBs, by promoting the use of green energy sources, may decrease the reliance of households on non-green

energy sources like gas and fuel – thereby enabling the housing sector’s transition to green energy sources.

Economic Activity

• We find that economic activity (measured by GDP) in the construction sector is positively related to growth in the issuances of ESG bonds.

• This potentially indicates that SMBs, by creating demand in the construction sector through the development or retrofit buildings, can spur

economic activity in the construction sector.

1. For more information on the outcomes of our econometric analysis, including model limitations, please refer to Chapter 5 of the main report.

2. As noted on page 86 of the main report, we believe we believe that this relationship may be spurious. This is because the downward trend in household gas and fuel consumption may be attributable to a third set

of factors that has driven increased fuel efficiency (e.g., fuel efficiency standards, carbon taxes, etc.)

Introduction and Context

Chapter 1

About this Study

In recent years, Canada has seen an upward trend in the demand and issuance

of environmental, social, and corporate governance (“ESG”) financial products.

These instruments can be seen as ‘value-driven’ investments as they can support

sustainability outcomes (environmental or social) across various industries and

sectors. Examples of these instruments include green bonds, social bonds, and

sustainability bonds, of which sustainable mortgage bonds and securities

(“SMBs”) are considered a subset.

SMBs are a category of bonds that are backed by sustainable insured or

uninsured mortgages to finance or refinance projects with green and social

outcomes. SMBs have the potential to become a substantial source of funding for

green and/or social/affordable buildings – with an aim to enable positive and

social externalities in the residential sector. SMBs may include, but are not

limited to, green and/or social government-backed MBS, private label RMBS,and

covered bonds. Generally, sustainable mortgages offer advantageous lending

terms to property owners who commit to enable environmental benefits (e.g.,

reductions in energy and water consumption) and/or social benefits (e.g.,

increased supply of affordable housing). These mortgages could be funded

through the issuance of SMBs to prospective investors that have green, social,

and/or sustainable investment mandates.

Notably, Canada’s green bond market is ranked ninth worldwide in terms of the

value of green bonds issued.

Moreover, several Canadian institutions have

recently begun to structure and issue green and social bonds (e.g., green or

social bonds).

However, Canada has been relatively slower than its peers in

developing a SMB market, especially compared to the US (in which Fannie Mae is

the largest issuer of green bonds worldwide) and the Netherlands (which houses

some of the largest issuers of social housing bonds, e.g., NWB Bank).

Green

and social bonds do not operate in the same way SMBs do as their asset

coverage extends far beyond the real estate market. Proceeds from green and

social bond issuances are used to support a range of sustainability-promoting

initiatives, including sustainable housing development. For example, in 2018,

16% of proceeds generated by Canada’s green bonds were directed to green

building construction.

There could be an opportunity for SMBs to gain popularity in the Canadian

market as many major financial institutions (e.g., banks, investment companies)

in the country currently offer ESG financial products that support a range of

sustainability initiatives, including sustainable real estate development.

Moreover, some Canadian organizations have recently delved into sustainable

mortgage-related programs – such as Desjardin's Green Home Program which

offers the lowest mortgage rate for qualified green homes

and CMHC’s Green

Home Program which offers a partial refund on the cost of mortgage loan

insurance when one buys an eligible energy-efficient home or makes eligible

energy-efficient renovations

. However, despite this momentum the Canadian

market lags behind global peers with respect to the securitization of mortgages

on sustainability-focused residential real estate assets.

1. DBRS, Green with Envy: Canada’s Green Bond Market Is Growing into a Global Player, 2019.

2. Climate Bonds Initiative, Green Finance State of the Market 2018, 2019.

3. Environmental Finance, Sustainable Bonds Insight 2019, 2019.

4. Climate Bonds Initiative, Green Finance State of the Market 2018, 2019.

of green bond proceeds

in Canada were directed to

green building construction

in 2018

16%

5. Desjardins, “Green Homes Program”, Accessed on April 4, 2020: https://www.desjardins.com/ca/personal/loans-

credit/mortgages/green-homes-program/index.jsp.

6. Canada Mortgage and Housing Corporation, “Energy-Efficient Housing Made More Affordable with Mortgage Loan

Insurance”, Accessed on September 15, 2020: https://

www.cmhc-schl.gc.ca/en/finance-and-investing/mortgage-

loan-insurance/the-resource/energy-efficient-housing-made-more-affordable-with-mortgage-loan-insurance.

Structure of the Report

This report outlines the outcomes of our primary and secondary research and analysis, reflecting (i) our review of academic and business literature, (ii) analysis of global

sustainable mortgage funding frameworks and related insights for Canada, and (iii) outcomes of our modelling exercises to assess the relationship between ESG fixed-income

instruments and various environmental, social, and economic indicators, and (iv) outcomes of our consultations with housing developers/proponents and investors. The

analysis and findings in this document are presented in line with six key sections, as outlined below.

Chapter 2: Overview of

Sustainable Mortgage Bonds

This chapter outlines the key definitional features of SMBs and compares them to similar financial products (e.g., MBS, green bonds, social

bonds). We also outline our key observations on the characteristics and motivations of ESG investors, with dedicated narrative on the elements

specific to SMB investors. This content in this chapter is based on our review and analysis of business and academic literature.

Chapter 4: Global Sustainable

Mortgage Funding Frameworks

This chapter includes our review of global sustainable mortgage funding frameworks – with the aim to identify the best practices of frameworks

relevant to the Canadian context and understand how the best practices could be applied in Canada. We begin by reviewing seven frameworks

and rank them based on their

comparability, relevance, and leveragability with respect to the Canadian context. We then provide case studies of the

two top-ranked frameworks (based on our ranking methodology) and delve into the eligibility criteria and reported impacts of each framework.

Chapter 3: ESG

Policy Objectives

for Canada’s Housing Market

This chapter examines the key policies, frameworks, and guiding principles relevant to the prospective development of a sustainable mortgage

funding framework in Canada. We also describe the environmental, social, and economic characteristics that drive ESG eligibility criteria to

outline our observations on potential ESG eligibility criteria in Canada. The section concludes with our high-level remarks, based on our

secondary research, on how governments can promote SMBs and enable investor demand by incentivizing positive externalities and monitoring

negative externalities

Chapter 5: Econometric Analysis

of Canadian ESG Bonds and Key

Indicators

As part of our objective to provide insights into the potential impacts of SMBs in Canada, we employed econometrics to assess the historical

relationships between ESG bonds and various environmental, social, and economic indicators. This chapter describes our econometric analysis,

model outcomes, and key takeaways.

Chapter 6: Stakeholder

Engagement Outcomes

We consulted with stakeholders to substantiate our secondary research, understand the motivations and characteristics of investors and

housing developers/proponents, and obtain viewpoints on market considerations and role(s) of government with respect to green and social

housing in Canada. The outcomes of our stakeholder consultations are thematically presented in this chapter.

Potential Uses of Report by CMHC

The scope and impact of SMBs is an emerging area of interest for the Canada

Mortgage and Housing Corporation (“CMHC") and the broader Canadian financial

system. Deloitte LLP (“Deloitte”) was engaged to review the scope and impact of

SMBs in Canada. At a high level, the content in this study may be used by CMHC to:

• Explore the possibility of developing a sustainable mortgage funding program to

support the supply of green and social/affordable housing in Canada and enable

investor demand;

• Analyze and identify opportunities and risks presented by SMBs in Canada;

• Raise awareness in the investor community of environmental, social, and

economic impacts of SMBs; and

• Explore the potential role that CMHC and/or government partners could have in

the administration of SMBs (e.g., reporting and labelling standards, housing

performance indicators, etc.) and the promotion of investor demand for SMBs.

Moreover, we have consulted with stakeholders to substantiate our secondary

research, understand the motivations and characteristics of investors and housing

developers/proponents, and obtain viewpoints on market considerations and role(s)

of government with respect to the intersection of SMBs and sustainable housing in

Canada. The outcomes of our stakeholder consultations are summarized in Chapter

6 (page 95 onwards).

Overview of Sustainable Mortgage

Bonds and Securities

Chapter 2

Chapter 2 – Section 1

Key Features of Sustainable

Mortgage Bonds and Securities

Key Distinguishing Features of SMBs

Backed by

mortgage assets

Focus on green and

social capabilities

A debt security that is

collateralized by a

collection of mortgages

and traded on a

secondary market

Backed by green or socially

sustainable mortgages –

mortgages that offer

advantageous lending terms to

property owners who commit to

enable environmental, social,

and/or sustainable externalities

Support investor demand

for ESG products

Nature of potential

financial benefits

Acknowledges growing investor

demand for ESG

fixed-income products

Financial benefits of ESG

investments (e.g., SMBs) may

include portfolio

diversification, mitigated risk

due to value-driven factors

(e.g., improved property

value), and short-term

excess return

Comparing SMBs and Similar Financial Products

Key Features of Sustainable Mortgage Bonds and Securities (1/3)

SMBs are a category of bonds backed by sustainable mortgages to finance or refinance housing projects with

green and social outcomes – enabling positive externalities for the environment, society, and economy

1. Please refer to pages 23-25 of this document for more information on the potential financial benefits of ESG investments.

2. For a more detailed comparison of SMBs and similar financial products, please refer to Appendix 1.

Mortgage-Backed

Securities

Definition

Mortgage-backed securities

(“MBS”) are a category of bonds

backed by insured or uninsured

mortgages to finance or refinance

housing projects.

Similarity to SMBs

SMBs, as a subset of MBS, are like

MBS in that they are backed by

mortgages assets – albeit SMBs

are specifically backed by

sustainable mortgages.

Difference from SMBs

SMBs differ from MBS in that they

are backed by sustainable

mortgages – mortgages that fund

housing projects targeting

environmental and social

outcomes. This aspect enables

investors to capitalize on the

increasingly emphasized global

trend of sustainable housing.

Green Bonds and

Financial Products

Definition

A bond is generally considered to

be “green” if the issuance

proceeds are used solely to finance

projects or activities that have a

positive environmental impact

(e.g., reduction in energy usage).

Similarity to SMBs

SMBs are associated with the

generation of positive

environmental impacts, similar to

the environmental sustainability

mandate of green bonds and other

green financial products.

Difference from SMBs

Generally, assets underlying green

bonds are sector-agnostic,

whereas the underlying assets of

green-mandated SMBs are

sustainable mortgages used to

fund green housing projects.

Social Bonds and

Financial Products

Definition

A bond is generally considered

“social” if the issuance proceeds

raise funds for projects with

positive social outcomes (e.g.,

affordable basic infrastructure,

access to essential services).

Similarity to SMBs

SMBs are associated with the

generation of positive social

impacts, similar to the social

sustainability mandate of broader

social bonds and other social

financial products.

Difference from SMBs

Generally, assets underlying social

bonds are sector-agnostic,

whereas the underlying assets of

social-mandated SMBs are

sustainable mortgages used to

fund social/affordable

housing projects.

Key Features of Sustainable Mortgage Bonds and Securities (2/3)

SMBs have a number of key features that can make them attractive to investors – including that they are

backed by mortgage assets and focus on green and social capabilities.

• SMBs are collateralized by a collection of sustainable mortgages. As with many

mortgage-backed securities, SMBs provide investors with timely payments of

interest and principal based on the lending terms of the underlying mortgage

asset (with or without explicit government guarantees).

• SMBs, like mortgage-backed securities, can relate to commercial or residential

properties. Residential properties can take the form of a single dwelling

(buildings with only one dwelling unit, link homes that appear detached above

ground but share a common foundation , or cluster-single developments)

or a

multi-unit dwelling (residences with over five units, including standard rental

housing, student housing, supporting housing, retirement homes, etc.).

• Generally, the lifecycle of a multi-unit property loan is shorter than that of the

standard 25-year single-family residential loan (taking the example of Canada’s

loan lifecycle). Multi-family loans also require a more detailed underwriting

process due to the complexity and diversity of the collateral.

• SMBs consist of mortgages on real estate assets backed by initiatives that

support green or social sustainability initiatives – or a mix of green and social

sustainability initiatives.

• SMBs can raise funds to finance or refinance housing projects (construction or

retrofit) with green outcomes (e.g., reductions in energy and water

consumption). The housing project may be required to obtain a green energy

certification (e.g., EnerGuide) or be projected to reduce energy and/or water

consumption by a certain threshold over the standard building code (e.g., 15-

20% reduction in energy and/or water consumption).

• Moreover, SMBs can also raise funds to finance or refinance housing projects

with social outcomes (e.g., increased supply of affordable and social housing).

The housing project may be required to meet certain social or affordable

housing thresholds (e.g., applicable rent thresholds, allocation of housing to

vulnerable populations).

Backed by Mortgage

Assets

Focus on Green and

Social Capabilities

1. Canada Mortgage and Housing Corporation, Starts & Completions Survey Methodology, Accessed on November 20, 2020:

https://www03.cmhc-schl.gc.ca/hmip-pimh/en/TableMapChart/ScsMasMethodology.

2. Canada Mortgage and Housing Corporation, Reference Guide: CMHC Mortgage Loan Insurance for Multi-Unit Residential Properties, 2017.

3. Fannie Mae, An Overview of Fannie Mae’s Multifamily Mortgage Business, 2012.

Key Features of Sustainable Mortgage Bonds and Securities (3/3)

Other key features of SMBs include support for ESG investor demand and potential financial benefits.

• According to the most recent Global Sustainable Investment Review ESG

integration has grown globally by 69% between 2016 and 2018, growing to

$17.5 trillion assets in 2018.

• The report also cites that 56% of Canadian respondents used ESG

principles as part of their investment approach and decision-making in

2016, up from 38% in 2016.

• Responsible investing in Canada has grown, with responsible investing

making up 51% of Canadian assets under professional managements,

up from 38% in 2016.

• ESG integration refers to the inclusion of ESG factors as components of

fundamental analysis to identify potential sources of alpha or risk reduction

(allowing for the potential to diversify portfolios).

Investor demand for ESG

fixed-income products has increased significantly in recent years.

• SMBs provide another investment mechanism to meet the growing demand of

ESG-focused investment products in the Canadian market.

• Like MBS, SMBs are backed by mortgages (insured or uninsured) and provide

timely payments of interest and principal. The key difference between MBS and

SMBs is that the latter are backed by sustainable mortgages associated with

green and social/affordable housing projects. Housing projects with sustainable

mandates (green and/or social) have the potential to generate unique financial

benefits for investors.

• ESG investment products have been documented as less risky investments in

times of economic and financial uncertainty. For example, MSCI Canada ESG

Leaders Index beat the MSCI Canada Index by 68 basis points in Q1 2020

(during the COVID-19 induced financial crisis).

This evidence suggests that

ESG factors – such as green- or social-mandated housing projects – can

strengthen risk management and potentially lead to financial outperformance

in certain circumstances such as economic downturns.

• For instance, Green Building Finance Summit concluded that green buildings

are more valuable based on their research. Additionally, the Green Building

Value Rating System with Wells Fargo showed that mortgages on green

buildings substantially reduce risk and add value to traditional MBS pools.

Support Investor

Demand for ESG

Products

Nature of Potential

Financial Benefits

1. Global Sustainable Investment Alliance, Global Sustainable Investment Review, 2018.

2. Ibid.

3. RBC Global Asset Management, The Future of ESG Integration, Accessed on April 22, 2020:

http

s://www.rbcgam.com/en/ca/article/the-future-of-esg-integration/detail.

4. Dustyn Lanz, “ESG and Covid-19: Four Market Trends”, Investment Executive, April 2020.

5. The Institute for Market Transformation to Sustainability, Sustainable Mortgage Backed Securities, 2007.

Chapter 2 – Section 2

Investor Characteristics and

Motivations

Comparative Investor Characteristics and Motivations

SMB investors share similar characteristics and motivations to individuals that invest in mortgage-backed

securities and ESG financial products.

ESG Financial

Products

Investments that include

environmental, social and

governance factors (non-

financial factors) as key

components in their value

proposition

Mortgage-Backed

Securities

Low risk, fixed income

investment representing a

pool of residential

mortgages issued by banks

and other lenders.

• Motivated by the view that social

responsibility should be one of

the primary considerations in

making investment decisions,

along with growing shareholder

pressure to adopt sustainable

investment practices

• Motivated to invest in assets that

support environmental and social

stewardship

• How organizations and/or

programs support green and

social sustainability initiatives is

key to ESG investors

• How organizations and/or

programs govern themselves,

disclose impacts, and follow

leading guidance on

sustainability is key to ESG

investors

Sustainable

Mortgage

Bonds and

Securities

Investor

Characteristics and

Motivations

• Relatively low risk

investments (close to nil risk

with explicit government

guarantees)

• High degree of liquidity, as

investment can be sold at

any time prior to maturity

• Regular income, as interest

and a proportion of principal

is fixed and paid timely

• Low minimum investment

required, with investment

requirements as low as

$5,000 in an MBS

Investor

Characteristics

and Motivations

1. TD Canada Trust, Mortgage-Backed Securities (“MBS”), Accessed on April 22, 2020: https://www.tdcanadatrust.com/planning/investing-basics/investment-options/fixed-income-investments/icrcipmb.jsp.

2. RBC Global Asset Management, What is Responsible Investment?, Accessed on April 22, 2020: https://www.rbcgam.com/en/ca/about-us/responsible-investment/what-is-responsible-investment.

Key Characteristics and Motivations of SMB Investors

We identified five key characteristics that outline and define the motivations of SMB investors.

We identified five key characteristics that define the motivations of SMB investors. These characteristics serve to highlight the shared features of the typical investor

(institutional or retail investor) that seeks to incorporate SMBs in their investment strategy.

Investor Characteristics and Motivations

1. RBC Global Asset Management, “What is Responsible Investment?”, Accessed on April 22, 2020: https://www.rbcgam.com/en/ca/about-us/responsible-investment/what-is-responsible-investment.

2. TD Canada Trust, “Mortgage-Backed Securities (‘MBS’)”, Accessed on April 22, 2020: https://www.tdcanadatrust.com/planning/investing-basics/investment-options/fixed-income-investments/icrcipmb.jsp.

3. Xudong An and Gary Pivo, Green Buildings in Commercial Mortgage-Backed Securities: The Effects of LEED and Energy Star Certification on Default Risk and Loan Terms, 2017.

4. Sun Life, Sustainability Bond Framework, 2019.

5. Ingo Fender et al., Green Bonds: The Reserve Management Perspective, BIS Quarterly Review, 2019.

6. Mehmet Balcilar, et al, Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations, Sustainability MDPI Open Access Journal Vol 9(10), 2017.

• Investment decisions are guided

by desired social outcomes the

investor would like to support.

For example, health, safety,

diversity, and impacts on local

communities or Indigenous

communities are key

considerations for the socially

conscious investor.

• Investment decisions are

environmentally motivated. For

example, climate change,

greenhouse gas (“GHG”)

emissions, resource depletion,

pollution, and deforestation are

key considerations for the

environmentally conscious

investor.

• Confirmation that SMBs will

comply with globally-recognized

sustainability frameworks and

principles (e.g., the ICMA

Sustainability Bond Guidelines) –

for example, proceeds from

issuances will be used to provide

clear environmental and/or

social benefits.

• Transparency and reporting on

the amount of proceeds

allocated to each eligible

category and examples of

eligible assets financed.

• The results of an illustrative

portfolio construction exercise

suggest that adding both green

and conventional bonds can help

generate diversification benefits

and, hence, can improve the

risk-adjusted returns of

traditional government bond

portfolios.

Moreover, empirical

evidence suggests that

sustainable investments can

provide significant diversification

gains for conventional stock

portfolios globally.

• Securitized mortgages allow

entry into the real estate market

for smaller investors. Investors

may gain exposure to the real

estate market through smaller

amounts (e.g., investors can

currently invest as little as

$5,000 in an MBS)

relative to

other real estate related

investments.

• SMBs focused on green benefits

are backed by green building

mortgages. Green buildings

have recently generated investor

interest because they provide

more valuable and less risky

collateral compared to standard

structures.

• Empirical evidence shows that

green buildings carry less

default risk, all else equal.

Moreover, at loan origination,

loans on green buildings achieve

better terms than loans on non-

green buildings. This is mainly

attributed to a price premium on

green buildings, which is

interlinked to the building’s level

of green achievement.

Socially and

environmentally conscious

Desire to gain exposure

to the real estate market

Access to enhanced

property value and less

risky collateral

Transparent

reporting procedures

Access to

diversification benefits

Chapter 2 – Section 3

Key Insights on ESG Investment

Performance

We explore the benefits and costs realized by organizations that employ active ESG strategies. This first step

contextualizes our subsequent research on ESG investment performance.

Conceptual Benefits and Costs of Active ESG Strategies

For a company considering an ESG strategy or ESG activities, it is important to understand

the benefits and costs realized by organizations

that employ active ESG strategies before

exploring differences in the financial performance of ESG bonds and securities relative to

their non-ESG counterparts. Conceptually, ESG bonds and securities could outperform their

non-ESG counterparts if the total benefits realized by the issuer outweigh the total costs

incurred, with respect to the issuer’s active ESG strategy.

Referencing Figure 1, the direct costs of capital allocations by companies to ESG activities

are relatively straightforward to measure. The indirect benefits and costs can be more

difficult to measure as they relate to hard-to-value elements (e.g., reputational benefits,

foregone profit opportunities) and will vary based on the perceived value of an ESG activity

at the company level.

Potential Costs

• Direct costs are associated with the implementation, monitoring, and reporting of an

active ESG strategy (e.g., hard costs associated with buying specific materials / eco-

friendly machinery, costs associated with ESG due diligence, etc.).

• Indirect costs are produced by the rejection of potential profitable business opportunities

that may conflict with ESG-related objectives (i.e., opportunity costs).

Potential Benefits

• The financial performance of high ESG-rated issuers tends to emphasize increases in

relational wealth (e.g., intangible assets related to reputation, strong client

relationships, philanthropic practices), which also includes reputational and branding

benefits supported by factors broadly related to trust (e.g., increased transparency and

reduced information asymmetry).

• This can contribute to shareholder value, particularly for issuers in industries that are

operationally dependent on the natural environment (e.g., companies for which land and

natural resource assets are financially material to operations).

Figure 1: Example Costs and Benefits of Active ESG Strategy

Costs

Direct

• Implementation

• Monitoring and

reporting

Indirect

• Foregone profit

opportunities

Benefits

• Employee

relationships

• Customer and

supplier networks

• Brand and reputation

• Investor clientele

• Governance

ESG Activities

• Community relations

• Corporate

governance

• Diversity

• Employee relations

• Sustainable

procurement

• Climate change

strategy

• Social sustainability

initiatives

Financial Performance

• Free Cash Flows

• Cost of capital

• Company value

• Intangible assets

• Financial

diversification

• Green financing

• Asset modernization

Source: Marcelo Cajias et al., Do Responsible Real Estate Companies Outperform Their Peers?, 2012.

1. Herein, we refer to the theoretical costs and benefits of a “benchmark” organization (i.e., agnostic of sector-specific considerations). The costs and benefits may vary based on the sector of the ESG-mandatedorganization.

2. Marcelo Cajias et al., Do Responsible Real Estate Companies Outperform Their Peers?, 2012.

3. Caroline Flammer, “Green Bonds Benefit Companies, Investors, and the Planet”, Harvard Business Review, November 2018.

4. Emphasis on governance can lead to increased investor demand due to an organization’s sustainability-focused mandate, transparent reporting and audit procedures, and distributed management structure.

Recent research indicates that sustainable investment strategies may not entail a return trade-off relative to

conventional investment strategies.

ESG Investments and Financial Returns

Sustainable business practices have become more prominent for organizations’ strategic

and operational activities in step with growing concerns about climate change, social

concerns

, and investment ethics.

This is illustrated by rapid growth of ESG mandates in

investment instruments, as shown in Figure 2. The bulk of growth in ESG mandates has

been in equities, but ESG bond indexes have recently been on a rapid increase.

An often-cited question from investors is whether sustainable investment strategies require

a return tradeoff. Historically, investors had the idea that adhering to sustainability

practices entails sacrificing some financial return. This idea has been cited as “outdated” as

many studies have observed counterintuitive outcomes. In other words, organizations with

high ESG performance ratings can organizations broader companies.

Select examples of empirical evidence:

• Eccles et al. (2014) found that companies that developed organizational processes to

measure, manage, and communicate performance on ESG issues in the early 1990s

outperformed a carefully matched control group over the next 18 years.

• Khan et al. (2016) demonstrated the positive relationship between high performance on

ESG issues and superior financial performance.

• Hale (2016) found that (i) sustainable funds and indexes perform on par with comparable

conventional funds and indexes and (ii) companies with higher ESG scores and ratings

can outperform comparable firms in both accounting terms and stock market terms.

• In 2018, BlackRock studied the correlation between sustainability and traditional factors

such as quality and low volatility, which themselves indicate resilience. Moreover,

BlackRock’s research suggests that sustainable strategies do not require a return

tradeoff, have important resilient properties, can offer investors better risk-adjusted

returns.

• In 2020, BlackRock also found that during notable market downturns in 2015-2016 and

2018, sustainable indexes tended to outperform their non-sustainable counterparts –

demonstrating a smaller drawdown during the market downturn.

Figure 2: Growth in Global ESG-Mandated Funds, 2010 – 2019

Source: BlackRock Investment Institute, with data from IMF, June 2019.

https://www.blackrock.com/us/individual/insights/blackrock-investment-institute/esg-fixed-income.

Notes: The year-to-date (YTD) 2019 data are as of June. The chart shows global ESG-mandated funds only.

1. Examples of social concerns include social and gender inequality, unsustainable consumption and

production, lack of fair employment opportunities, etc.

2. Robert Eccles and Svetlana Klimenko, “The Investor Revolution”, Harvard Business Review, May 2019.

3. BlackRock, Sustainability: The Bond that Endures, 2019.

4. Robert Eccles and Svetlana Klimenko, “The Investor Revolution”, Harvard Business Review, May 2019.

5. Robert Eccles et al., The Impact of Corporate Sustainability on Organizational Processes and Performance, 2014.

6. Mozaffar Khan et al., Corporate Sustainability: First Evidence on Materiality, 2016.

7. Jon Hale, Sustainable Investing Research Suggests No Performance Penalty, 2016.

8. BlackRock Investment Institute, Sustainable Investing: A ‘Why Not’ Moment,2018.

9. BlackRock Investment Institute, Sustainable Investing: Resilience Amid Uncertainty, 2020.

BlackRock’s research on ESG investment performance highlights recent evidence (during the COVID-19

economic downturn) to support broader findings on ESG investment performance.

Snapshot: ESG Investment Performance in 2020

In 2020, BlackRock—a global investment manager with extensive sustainable investing

platforms—conducted a review of ESG investment performance. This review was

predicated on the recent economic downturn due to COVID-19, providing another

opportunity to explore whether sustainable investments outperform conventional

investments during times of economic downturn. Key insights from this analysis include:

• In Q1 2020, 94% of sustainable indexes outperformed their parent benchmarks; and

• This resilience of sustainable indexes held in late March of 2020 when market recovery

began – 88% of sustainable funds outperformed their non-sustainable counterparts

from January 1, 2020 through April 30, 2020.

Although one quarter of performance is a short period and not determinative, this recent

evidence further supports the claim that sustainable strategies do not always equate to a

financial tradeoff. Figure 3 shows that the recent evidence aligns with the outperformance

of sustainable indexes during two other recent periods of economic downturn – (i) the

energy downturn during Jul. 2015 to Feb. 2016 and (ii) the Federal Reserve’s policy

reaction during Sep. 2018 to Dec. 2018.

Moreover, BlackRock analyzed the Q1 2020 performance of 6,759 open-ended funds,

comparing those with high sustainability rankings to those with low sustainability ranks,

relative to their non-sustainable peers. Key insights from this analysis include:

• Funds ranking in the top 10% of their peers on sustainability also rank in the top half of

their peers for Q1 2020 financial returns, on average; and

• Funds ranking in the bottom 10% of their peers on sustainability rank near the bottom

for financial performance.

Figure 4 shows the performance ranking amongst funds with the highest and lowest

sustainable rankings. The effect of sustainability ranking on fund performance is most

pronounced within global equities and emerging market equities. For example, within

global equities, funds that ranked within the top 10% on sustainability ranked in the top

percentile in terms of their Q1 2020 financial returns, while those in the bottom 10%

on sustainability ranked near the bottom 76

percentile on performance.

Source: BlackRock, as of May 11, 2020. https://www.blackrock.com/corporate/literature/investor-

education/sustainable-investing-resilience.pdf. Notes: This analysis reflects a set of 32 globally-representative,

widely analyzed sustainable indexes and their non-sustainable counterparts.

Figure 3: Outperformance of Sustainable Indexes During Downturns

Percentage of sustainable indexes that outperformed their non-sustainablecounterparts.

Figure 4: Average Peer Group Performance Ranking, Q1 2020

Comparison of funds with highest and lowest sustainability rankings within peer groups. Thevertical

axis refers to financial performance (based on Q1 2020 financial returns) in terms of percentiles.

Source: BlackRock and MorningStar, as of May 11, 2020. https://www.blackrock.com/corporate/literature/investor-

education/sustainable-investing-resilience.pdf.

Source: BlackRock Investment Institute, Sustainable Investing: Resilience Amid Uncertainty, 2020.

ESG Policy Environment for

Canada’s Housing Market

Chapter 3

Chapter 3 – Section 1

Leading Guidance on Housing

Sustainability Objectives

UN Sustainable Development Goals 2030

Canada has adopted the 2030 Sustainable Development Goals of the UN General Assembly to be achieved by

2030 – six of which can be supported by sustainable mortgage bonds and securities

The United Nations outlined 17 Sustainable Development Goals (“SDGs”) which together formulate a blueprint to achieve global prosperity and sustainability by 2030. The UN

SDGs have been adopted by the 193 Member States of United Nations, including Canada.

The proceeds from SMBs can serve to support these goals, as evidenced by the adoption of UN SDG goals in global sustainable mortgage funding frameworks (e.g., NWB

Bank’s SDG Housing Bond Framework, Sparebanken Sør Green & Sustainability Bond Framework, NHFIC Sustainability Bond Framework). We reviewed the list of SDGs and

identified six goals that are relevant to SMBs. The six identified below have also been frequently cited in global sustainable mortgage funding frameworks.

Goal 1: No Poverty

This goal focuses on

ending poverty in all

forms and ensuring

equal access for basic

necessities of the poor

and vulnerable groups

This goal is in line with

SMB goals related to

developing affordable

and accessible housing

for low-income and

vulnerable groups

Goal 13: Climate

Action

This goal aims to take

immediate action to

combat climate change

and its impacts

Most SMB frameworks

look to reduce

greenhouse gas

emissions through the

projects they support,

directly supporting

climate change action

Goal 7: Affordable and

Clean Energy

This goal looks to ensure

access to affordable,

reliable and modern

energy services

Increasing the use of

renewable energy and

improving energy

efficiency is a common

feature of most SMB

frameworks

Goal 9: Innovation

and Infrastructure

This goal focuses on

building and promoting

sustainable

infrastructure, as well as

fostering innovation

Upgrading and

retrofitting existing

infrastructure to

promote sustainability

falls directly in line with

SMB requirements for

obtaining funding

through the frameworks

Goal 11: Sustainable

Cities and

Communities

This goal aims to

promote inclusivity,

safety, resiliency and

sustainability in all

communities

Ensuring safe and

affordable living

conditions is a common

objective of SMB

frameworks

Goal 12: Responsible

Consumption

This goal looks to ensure

sustainable consumption

of resources and

sustainable production

patterns

Many SMB frameworks

outline sustainability

requirements that look

to reduce waste and

fossil fuel consumption,

thereby promoting

sustainable communities

Definition

Relevance

Source: United Nations, Sustainable Development Goals, Accessed May 1, 2020: https://sustainabledevelopment.un.org/?menu=1300.

Canada’s National Housing Strategy

Overview of Canada’s National Housing Strategy

The National Housing Strategy (“NHS”) is a 10-year, $55+ billion plan by the Government of Canada to provide affordable and accessible housing to Canadians, with the aim to

strengthen the middle class, cut chronic homelessness in half, and fuel the Canadian economy.

The NHS is grounded in and contributes to the UN SDGs (described in the previous

page). Introduced in November 2017, the housing plan is the first of its kind in Canada and aims to outline ambitious housing targets to ensure funding generates meaningful

investments and program delivery. Such funding will be used to meet the goals of reducing housing need and build new housing that is sustainable, accessible, mixed-income and

mixed-use.

Moreover, in 2019, the NHS was amended to include the “right to housing” – which cemented federal commitment to housing as a fundamental human right.

This initiative can be supported by raising funds for sustainable real estate assets through the implementation of a sustainable mortgage funding program in Canada. Reviewing the NHS

is an important research step so that we can develop a perspective on the ESG criteria most relevant to CMHC as we progress our research and modelling.

The table below summarizes the social, environmental, and financial policy objectives outlined in the NHS. We describe the quantitative metrics of each policy objective in further detail

in subsequent pages.

Social Policy Objectives (Affordability) Social Policy Objectives (Accessibility) Environmental Policy Objectives Financial Policy Objectives

Creation of new units for affordable and

community housing

Creation or repair of shelter spaces for

survivors of family violence

Support energy- and water-efficiency

retrofits to existing community housing

Provide low-interest housing loans

Repairing existing affordable and community

housing units

Creation of new affordable housing units for

seniors

Reduce in energy consumption and

greenhouse gas emissions

Continue the Housing Internship Initiative for

First Nations and Inuit Youth (HIIFNIY)

Reduced rents for affordable and community

housing units

Creation of new affordable housing units for

people with developmental disabilities

Support the construction of affordable rental

housing – Affordable Rental Innovation Fund

Protect and maintain existing community

housing units

Meeting accessibility standards and having

barrier-free common areas

Support construction done by municipalities

and home developers through the Rental

Construction Financing Initiative

Provide income support to those in housing

need

Provide support to women and girls in

Canada

Reduce chronic homelessness by half Support Northern housing

Prepayment flexibilities for co-operative and

non-profit housing

Improve housing in First Nations

Communities

The National Housing Strategy is important to contextualize and explore as it mandates sustainable policy

objectives for Canada’s housing market

1. Canada Mortgage and Housing Corporation, National Housing Strategy, Accessed on April 28, 2020: https://www.cmhc-schl.gc.ca/en/nhs/guidepage-strategy.

2. Government of Canada, National Housing Strategy,2017.

3. Canadian Alliance to End Homelessness, Government Introduces Right to Housing Amendments to National Housing Strategy Act, May 2019.

Canada’s National Housing Strategy – Social Policy Objectives (1/2)

Policy objectives mandated to promote social sustainability within Canada’s housing market

Social Policy

Objectives

We have outlined below the social policy objectives within Canada’s National Housing Strategy. These objectives can largely be categorized into two key

areas: housing affordability and housing accessibility. We have also described the progress to date with respect to each policy objective, where applicable

and available.

Housing Affordability

Affordability relates to the development and improvement of affordable and community housing for Canadians inneed.

1 Creation of new units for affordable and community housing

• The National Housing Co-Investment Fund aims to develop 60,000 new units for affordable and community housing over the next 10 years

• Moreover, 50,000 units will be developed over the next 10 years through an expansion of community housing through the Canada Community

Housing Initiative.

Repairing existing affordable and community housing units

• The National Housing Co-Investment Fund aims to repair up to 240,000 units of existing affordable and community housing over the next 10 years

Reduced rents for affordable and community housing units

• Requirements under the National Housing Co-Investment Fund will ensure 30% of new units have rents at less than 80% of median market rents,

for a minimum of 20 years

• This extends to renewal and repair units, requiring 30% of these units have rents at less than 80% of median market rents, for a minimum of 20

years housing

4 Protect and maintain existing community housing units

• The Canada Community Housing Initiative aims to protect or maintain 385,000 community housing units across Canada over the next 10 years

5 Provide income support to those in housing need

• Starting in 2020, the Canada Housing Benefit will deliver an average of $2,500 per year to each recipienthousehold

• They aim to support at least 300,000 households across the country over the next 10 years

Reduce chronic homelessness by half

• The National Housing Strategy will reduce chronic homelessness by 50% over the next 10 years

7 Prepayment flexibilities for co-operative and non-profit housing

• The 2015 Federal Budget included $150 million for four years starting 2016-17 to support this goal. Since September 2017, the fund supported

the pay-out of 144 long-term, non-renewable mortgages and $74.4 million in waivedpenalties

Source: Government of Canada, National Housing Strategy, 2017

Canada’s National Housing Strategy – Social Policy Objectives (2/2)

Policy objectives mandated to promote social sustainability within Canada’s housing market

We have outlined below the social policy objectives within Canada’s National Housing Strategy. These objectives can largely be categorized into two key

areas: housing affordability and housing accessibility. We have also described the progress to date with respect to each policy objective, where applicable

and available.

Housing Accessibility

Affordability relates to the development and improvement of affordable and community housing for Canadians inneed.

Social Policy

Objectives

(cont’d)

1 Creation or repair of shelter spaces for survivors of family violence

• The National Housing Co-Investment Fund aims to create or repair at least 7,000 shelter spaces for survivors of family violence over the next 10

years.

Creation of new affordable housing units for seniors

• The National Housing Co-Investment Fund aims to create at least 12,000 new affordable units for seniors over the next 10 years.

Creation of new affordable housing units for people with developmental disabilities

• The National Housing Co-Investment Fund aims to create at least 2,400 new affordable units for seniors over the next 10 years.

Meeting accessibility standards and having barrier-free common areas

• Requirements under the National Housing Co-Investment Fund will ensure 20% of new units and 20% of renewal and repair units meet

accessibility standards and projects must be barrier-free or have full universal design.

Provide support to women and girls in Canada

• At least 25% of National Housing Strategy Investments over its 10-year lifetime will support projects that specifically target the unique needs of

women and girls

6 Support Northern housing

• The Federal Government is providing $300 million to help approximately 3,000 Northern families find an adequate, suitable and affordable

housing.

7 Improve housing in First Nations Communities

• Funding from the 2016 Federal Budget will provide renovation and retrofitting support on-reserve to 4,332 units as of September 2017

Source: Government of Canada, National Housing Strategy, 2017

Canada’s National Housing Strategy – Environmental and Financial Policy Objectives

Policy objectives mandated to promote environmental and financial sustainability within Canada’s

housing market

Environmental

Policy

Objectives

We have outlined below the environmental policy objectives within Canada’s National Housing Strategy. We have also described the progress to date with

respect to each policy objective, where applicable and available.

Support energy- and water-efficiency retrofits to existing community housing

• As of September 2017, the Investment in Affordable Housing Fund supported 2,317 projects to retrofit or renovate 95,403 units.

2 Reduce in energy consumption and greenhouse gas emissions

• Requirements under the National Housing Co-Investment Fund will ensure at least a 25% reduction in energy consumption and greenhouse gas

emissions over national building and energy codes in new units.

• This extends to renewal and repair units, requiring at least a 25% reduction in energy use and greenhouse gas emissions relative to past

performance for renewal and repair units

Financial

Policy

Objectives

We have outlined below the financial policy objectives within Canada’s National Housing Strategy. We have also described the progress to date with

respect to each policy objective, where applicable and available.

• Under the 2016 Federal Budget, $5 million given in 2016-17 to support internships for Indigenous youth under HIIFNIY, which provides work

experience and on-the-job training in the housing sector.

Provide low-interest housing loans

• The National Housing Co-Investment Fund aims to provide $11.2 billion in low interest loans over the next 10 years.

2 Continue the Housing Internship Initiative for First Nations and Inuit Youth (HIIFNIY)

3 Support the construction of affordable rental housing

• The Affordable Rental Innovation Fund will provide funding for five years, starting in 2016-17.

• Since September 2017, one project for the creation of 40 units was approved and $1.5 million was expended.

4 Support construction done by municipalities and home developer through the Rental Construction Financing Initiative

• The Rental Construction Financing Initiative began in April 2017 provide low-cost loans to encourage the construction of rental housing over four

years and has since received a number of applications.

Source: Government of Canada, National Housing Strategy, 2017

IMCA Green, Social, and Sustainability Bond Guidelines (1/2)

Overview of ICMA’s Guiding Principles

The International Capital Market Association (“ICMA”) is a global capital markets non-profit organization that outline best-practices for green, social, and sustainable bond

reporting which have become a global standard practice in developing and reporting bond frameworks. ICMA sets out a separate set of criteria for both green and social

bonds, with sustainable bond leveraging both sets of criteria, as per the four key guiding principles outlined below. Alignment with these principles provides a consistent

method for comparing ESG bonds across issuers and jurisdictions. ICMA’s guiding principles are commonly adopted by ESG bond frameworks, including the Fannie Mae and

NWB Bank sustainable mortgage funding frameworks (see our case studies for more information – page 44).*

The ICMA’s guiding principles for green, social, and sustainable bond issuances have become a global

standard in the development of ESG bond frameworks.

Source: (i) ICMA, Green Bond Principles, June 2018 and (ii) ICMA, Social Bond Principles, June 2020.

Use of Proceeds

Process for

project

evaluation and

selection

Management of

Proceeds

Reporting

Projects should provide clear environmental and/or social

benefits, which will be assessed and, where feasible, quantified

by the issuer

The issuer should clearly communicate the sustainability

objectives, the processes for determining eligible projects and

how they fit with the identified objectives, and eligibility and

exclusion criteria

The net proceeds of the bond should be credited to a sub-

account, moved to a sub-portfolio or otherwise tracked by the

issuer in an appropriate manner

The annual report should include a list of the projects to which

the bond proceeds have been allocated, as well as a brief

description of the projects and the amounts allocated, and

their expected impact

*Note: For information on how the Fannie Mae and NWB Bank frameworks align to the ICMA guidelines, please see page 62.

ICMA Guiding Principles

These principles provide guidance on developing green, social, and sustainable

bond frameworks.

ICMA Guidance on External Reviews

• While not included in the four-guiding principles,

the ICMA recommends that issuers undertake

external reviews of their frameworks to ensure

alignment with the with the four guiding

principles.

• External reviews – also known as second-party

opinions (“SPOs”) – provide an assessment of the

issuer’s framework by assessing the green or

social characteristics of eligible assets, which can

include the framework’s adherence to mandated

requirements. Moreover, external reviewers may

also provide ESG rating(s) to an issuer’s

framework which serves as an indication of the

“ESG strength” of the framework and its planned

allocation of proceeds.

• The frameworks in our case study undergo this

external review process and have publicly

released SPOs. Fannie Mae and NWB Bank

engaged CICERO and Sustainalytics, respectively,

for their SPOs.

IMCA Green, Social, and Sustainability Bond Guidelines (2/2)

Examples of Canadian ESG Bonds (Adoption of ICMA Guidelines)

Most ESG bond frameworks in Canada are based on ICMA guidelines and are structured around ICMA’s guiding principles. Generally, the frameworks are independently

reviewed by third-parties (through second-party opinions) such as Sustainalytics and CICERO.

The table below provides examples of ESG bond frameworks in Canada that

mention green and social/affordable housing projects as a key asset category, as well as the name of the organization that conducted the second-party opinion for each

framework.

Most green, social, and sustainable bond frameworks in Canada align with the ICMA guidelines. For example

frameworks, we outline below the “Use of Proceeds” requirement and the second-party opinion provider.

Bond Type Issuer Use of Proceeds – Green and Social/Affordable Buildings

Independent

Reviewer

City of Vancouver

Green Bond

City of Ottawa

City of Toronto

• Green buildings with third party-verified green building certification. Examples of green certifications cited in the frameworks

include (i) LEED (Leadership in Energy and Environmental Design), (ii) BREEAM (Building Research Establishment

Environmental Assessment Methodology), (iii) Passive House, and (iv) BOMA (Building Owners and Managers Association).

Sustainalytics

Bank of Nova Scotia

Manulife

• Green buildings with third party-verified green building certification

• Achieve reduction in GHG emissions in line with the top 15% of housing projects in the property owner’s city

Social Bond City of Toronto • Development of shelters and affordable housing Sustainalytics

National Bank of

Canada

Green Buildings:

• Green buildings with third party-verified green building

certification

• Achieve reduction in GHG emissions in line with the top

15% of housing projects in the property owner’s city

Social/Affordable Buildings:

• Projects aimed at developing and renovating

social/affordable housing programs that contribute to

access to low-income residents

Vigeo Eiris

Sustainable Bond

Green Buildings:

• Green buildings with third party-verified green building

certification

• Achieve reduction in GHG emissions in line with the top

15% of housing projects in the property owner’s city

• Achieve minimum 30% improvement in energy use or

carbon emissions as a result of refurbishment

Social/Affordable Buildings:

• Development, renovation and maintenance of accredited

and registered affordable housing, halfway homes, and

shelters based on municipal classification systems

• Public programs that facilitate affordable housing in regions

that economically underperform or suffer from multiple

deprivations based on Statistics Canada’s definition of the

‘Canadian Index of Multiple Deprivation’ by region

Toronto Dominion

Bank Group

Ernst & Young

LLP

1. IICA, Opportunities in the Canadian Green Bond Market v4.0, February 2020.

2. Canadian ESG framework information was sourced from (i) City of Vancouver, Green Bond Framework, 2018. (ii) City of Ottawa, Green Bonds, Accessed Nov. 14, 2020: https://ottawa.ca/en/business/doing-business-city/investor-relations#green-

bonds

. (iii) City of Toronto, City of Toronto Green Debenture Framework, 2019. (iv) Bank of Nova Scotia, Green Bond Framework, 2019. (v) Manulife, Green Bond Framework, 2017. (vi) City of Toronto, City of Toronto Social DebentureFramework,

2020. (vii) National Bank of Canada, National Bank of Canada Sustainability Bond Framework, 2018. (viii) TD Bank Group, Sustainable Bonds Framework, 2020.

The Climate Bonds Initiative has become the global standard in evaluating green bonds though a certification

program that aligns with ICMA guidelines and the goals of the Paris Climate Agreement.

The Climate Bonds Standard and Certification Scheme

Overview of Climate Bonds Initiative Certifications

1,2

• The Climate Bonds Initiative (“CBI”) is an international non-profit organization that

promotes large-scale investments that promote a low-carbon and climate resilient global

economy.

• CBI operates primarily through the Climate Bond Standard & Certification Scheme, which

supports investors, governments, and stakeholders in identifying investments with

meaningful climate change benefits. By doing so, they help steer investors away from

potential “greenwashing”—the use of marketing products as “green” or environmentally

friendly so that they appear more favourable in the marketplace.

• The Climate Bond Standard is a voluntary certification based on three pillars, namely that a

bond, loan or other debt instrument is:

o Aligned with the ICMA Green Bond Principles and/or other recognized green bond

principles (i.e., EU Green Bond Standard, ASEAN Green Bond Standard);

o Using best practices for internal control, tracking, reporting and verification; and

o Financing assets that are consistent with achieving the goals of the Paris Climate

Agreement.

• The certification program is also aligned with the UN Sustainable Development Goals. CBI

identifies six goals suggested to provide the most benefit through green bonds, including

goals related to affordable clean energy and water, sustainable infrastructure and

communities, climate action and sustainable lifestyles (i.e., goals 6, 7, 9, 11, 13, and 15).

• As of October 2020, 287 debt instruments have been certified by CBI. The US currently has

the most certifications, with 65 certified programs from 17 different issuers. Currently,

Canada does not have any financial instruments certified by the organization.

• Out of the certified offerings, 52 programs include the eligibility and impact of low-carbon

residential buildings. Of these 52 programs, 19 of them are in the US and 11 are in the

Netherlands.

1. Climate Bonds Initiative, Climate Bond Standards Version 3.0, 2019.

2. Climate Bonds Initiative, Certified Bonds Database, Accessed Nov. 5, 2020: https://www.climatebonds.net/certification/certified-bonds

Chapter 3 – Section 2

Observations on Potential Eligibility

Criteria in Canada

Observations on Potential ESG Eligibility Criteria – Green Buildings (1/2)

We summarize below our observations on potential eligibility criteria in Canada for the identification of

eligible green buildings in Canada based on our secondary research.

Building Type Potential Eligibility Criteria in Canada Comments

Green

Buildings

• The borrower’s property must have a valid

green building certification from a list of

recognized institutions.

• Canada recognizes a number of green building certifications that could be relied on to identify eligible green buildings.

We have outlined below some prominent examples of certifications.

o The EnerGuide Label (Natural Resources Canada) is the official mark of the Government of Canada for energy

performance rating and labeling of homes and appliances. Residential buildings can obtain a performance rating

based on the EnerGuide home evaluation which scores homes based on a national benchmark. The rating system

breaks down energy consumption by source and by the proportion of energy going to heating, cooling, ventilation,

and other uses. Moreover, EnerGuide was called out as the most recognized certification program in Canada in our

stakeholder consultations.

o The ENERGY STAR New Home Certificate (Natural Resources Canada) applies to homes that are on average 20%

more efficient than ones built to regional building codes based on space and water heating. This certification only

applies to new residential properties, either during or shortly after construction.

o LEED Certifications (Canada Green Building Council) targets the delivery of green buildings that address energy

efficiency, water conservation, site selection, material selection, day lighting and waste reduction. The program

has a rigorous rating process that can be applied to both new and existing residential buildings.

o Green Globes Certifications (Green Building Initiative) aims to increase accessibility and affordability of building

greener homes by providing an online platform to assess energy-efficient buildings, based on similar standards as

the LEED Certification program. The rating system is tiered based on its internal rating system, with one “green

globe” signifying the lowest acceptable environmental commitment (a score of 35-54%) and four green globes

representing the highest (a score of 85-100%).

• The eligibility criteria can be structured as such that selected green building certifications are preferred to others. This

structure could potentially lead to favourable terms for property owners that obtain the “preferred” certifications.

Key Observations on Potential Eligibility Criteria in Canada

We have outlined below our observations on potential eligibility criteria for the identification of eligible green housing buildings in Canada. These observations were informed

by our secondary research and by our review of Fannie Mae’s eligibility criteria (outlined in our case study of Fannie Mae’s Multifamily Green Bond Framework – page 49).

1. Green certifications have been sources from: (i) NRCAN, EnerGuide in Canada, Accessed Nov.9, 2020: https://www.nrcan.gc.ca/energy-efficiency/energuide/12523. (Ii) NRCAN. Guide to ENERGY STAR Certified Homes, Accessed July 16, 2020:

https://www.nrcan.gc.ca/energy-efficiency/energy-star-canada/energy-star-new-homes/guide-energy-star-certified-homes/12348; (iii) USGBC. LEED Certification for Residential, Accessed July 15, 2020: https://www.usgbc.org/leed/rating-

systems/residentia

l; (iv) Green Globes, What is Green Globes?, Accessed July 15, 2020:http://www.greenglobes.com/v3/interiors/about.asp

Note: Our observations on potential eligibility criteria, as outlined in this section, are intended to provide high-level insights for a prospective sustainable mortgage funding framework in Canada. We have not

evaluated whether the potential eligibility criteria listed above align to specific CMHC objectives or targets.

Observations on Potential ESG Eligibility Criteria – Green Buildings (2/2)

We summarize below our key observations on potential eligibility criteria in Canada for the identification of

eligible green buildings in Canada based on our secondary research.

Building Type Potential Eligibility Criteria in Canada Comments

Green

Buildings

• Property owners must commit to

improvements to their property that

reduce the property’s annual energy

and/or water usage by a certain threshold.

• Canada’s National Housing Strategy outlines energy-efficiency targets that could be potential candidates for an eligibility

criteria threshold:

o For new units, 25% reduction in energy consumption and GHG emissions over national building and energy codes

in new units; or

o For renewed/repaired units, 25% reduction in energy consumption and GHG emissions relative to past

performance.

• The energy-efficiency targets outlined in the NHS are broadly aligned with Canada’s overall increase in energy efficiency

from 1990-2013 – a 24.2% improvement in energy consumption.

This observation aligns with the target of 25%

reduction in energy consumption, providing a reference point as to the potential achievability of the NHS energy-

efficiency targets.

• Moreover, we highlight an example of a recent initiative (Civic Action’s Race to Reduce – 2011 to 2014) in which 196

buildings in the GTA competed to track, report, and collective cut their energy by 10% using ENERGY STAR Portfolio

Manager. Together, the competing firms surpassed the goal and reduced energy consumption by more than 12%.

This

observation alludes to another threshold option that could expand the eligibility relative to the more stringent targets in

the NHS.

• Reduction in water usage is aligned with Canada’s commitment to UN SDG Goal 6: Clean Water and Sanitation,

particularly as it relates to reducing water stress levels by reducing freshwater withdrawals. Environment Canada notes

that household water consumption in Canada declined by 16% between 2013 and 2005.

Key Observations on Potential Eligibility Criteria in Canada

We have outlined below our observations on potential eligibility criteria for the identification of eligible green housing buildings in Canada. These observations were informed

by our secondary research and by our review of Fannie Mae’s eligibility criteria (outlined in our case study of Fannie Mae’s Multifamily Green Bond Framework – page 49).

1. Government of Canada, National Housing Strategy,2017.

2. Natural Resources Canada, Energy Efficiency Trends in Canada: 1990 to 2013, 2016.

3. Natural Resources Canada, Build Smart: Canada’s Buildings Strategy, 2017.

4. Statistics Canada, Human Activityand the Environment 2016, 2017.

evaluated whether the potential eligibility criteria listed above align to specific CMHC objectives or targets.

Observations on Potential ESG Eligibility Criteria – Social/Affordable Buildings (1/2)

5. Government of Canada, National Housing Strategy,2017.

We summarize below our key observations on potential eligibility criteria in Canada for the identification of

eligible social/affordable buildings in Canada based on our secondary research.

Building Type Potential Eligibility Criteria in Canada Comments

Social /

Affordable

Buildings

• The property owner must rent

social/affordable housing to low-income

households.

• The definition of low-income households may be based on Statistics Canada’s annual data on household income levels.

For example, Statistics Canada data shows that the average low-income household in Canada earned $41,886 in annual

income in 2018.

• Additionally, the definition of low-income households my be aligned with criteria applied in other national-level low-

income programs. For example, the Netherlands’ low-income threshold aligns with European state-aid requirements.

the case of Canada, the low-income threshold could be based on other low-income housing programs – such as the Rent

Supplement Programs administered by CMHC and Canadian provinces/territories, which set a limit on the percentage of

households’ income used to pay rent.

• The property owner must cap rental prices

at a maximum net monthly rent, taking

into account the annual incomes of low-

income individuals in Canada.

• Monthly rental fee caps should likely consider regional differences in income levels and housing affordability targets. For

example, the eligibility criteria for Toronto could be set such that the maximum net monthly rent should not exceed

$850 – the average monthly shelter cost in Toronto for households earning between $40,000 and $49,000 per year,

such that shelter costs are below 30% of household income (based on the 2016 Census).

• A rental cap may instead come in the form of a predetermined percentage of an individual’s income, rather than an

absolute dollar-figure. For example, this percentage could align with CMHC’s definition of affordable housing in which

housing is considered “affordable” if it costs less than 30% of a household’s before-tax income.

• Canada’s National Housing Strategy outlines affordable housing targets that specify a targeted rent level. For new units

and renewed/repaired units, 30% of units must have rents at less than 80% of median market rents, for a minimum of

20 years.

Key Observations on Potential Eligibility Criteria in Canada

We have outlined below our observations on potential eligibility criteria for the identification of eligible social/affordable housing buildings in Canada. These observations were

informed by our secondary research and by our review of NWB Bank’s eligibility criteria (outlined in our case study of NWB Bank’s SDG Housing Bond Framework – page 56).

evaluated whether the potential eligibility criteria listed above align to specific CMHC objectives or targets.

1. Statistics Canada, Table 11-10-0232-01: Low Income Measure (LIM) Thresholds by Income Source and HouseholdSize.

2. Aedes, Dutch Social Housing Association in a Nutshell, July 2013.

3. Statistics Canada, Statistics Canada - 2016 Census. Catalogue Number 98-400-X2016228.

4. CMHC, About Affordable Housing in Canada, Accessed Nov. 9, 2020:

https://www.cmhc-schl.gc.ca/en/developing-and-renovating/develop-new-affordable-housing/programs-and-information/about-affordable-housing-in-canada.

Observations on Potential ESG Eligibility Criteria – Social/Affordable Buildings (2/2)

2. Government of Ontario, Ontario Supportive Housing Policy Framework, March 2017.

We summarize below our key observations on potential eligibility criteria in Canada for the identification of

eligible social/affordable buildings in Canada based on our secondary research.

Building Type Potential Eligibility Criteria in Canada Comments

Social /

Affordable

Buildings

• The property owner must rent

social/affordable housing to targeted

vulnerable populations.

• A maximum allocation of loans should be provided to low-income households, leaving the remainder for target

populations (e.g., seniors, people with disabilities, refugees, single mothers, Indigenous people, etc.). For example,

Canada’s National Housing Strategy allocated about 14% of the Federal Budget 2016 to increase affordable housing for

seniors, who may not necessarily meet a low-income threshold.

• The allocation of social/affordable housing to vulnerable populations might be determined by local government agencies

(provincial/territorial or municipal). For example, the Ontario Supportive Housing Policy Framework outlines target

groups for housing support, including seniors, people with mental health-related needs, people with disabilities, illness

and injuries, youth at risk, and survivors of domestic violence.

Key Observations on Potential Eligibility Criteria in Canada

We have outlined below our observations on potential eligibility criteria for the identification of eligible social/affordable housing buildings in Canada. These observations were

informed by our secondary research and by our review of NWB Bank’s eligibility criteria (outlined in our case study of NWB Bank’s SDG Housing Bond Framework – page 56).

1. Government of Canada, National Housing Strategy,2017.

evaluated whether the potential eligibility criteria listed above align to specific CMHC objectives or targets.

Chapter 3 – Section 3

Observations on Potential Role of

Government

Role of Government – Overview

Beyond traditional regulatory oversight of financial products, there is a natural opportunity for governments to be involved with SMBs given that these sustainability-focused

investment instruments are aligned with broader social and environmental objectives and simultaneously simulate sustainable investment practices. Governments around the

world have realized the benefits of sustainable issuances, as evidenced by the fact that government agencies (e.g., NWB Bank, Fannie Mae) and supranational organizations

(e.g., European Investment Bank, The World Bank) are some of the largest issuers of green and social bonds.

Based on our research, we expect this to be true for

sustainable issuances in the residential real estate market (i.e., SMBs). Broadly, governments can support SMBs by:

Defining key performance indicators to guide the tracking of SMB impacts (e.g., availability of affordable housing units or reductions in energy consumption). More

generally, governments should work with issuers and borrowers to create a standard set of key performance indicators, as well as develop capabilities to

understand, scrutinize, and validate the various benefits and impacts of sustainable mortgage funding programs.

Developing policies and signals that (i) enhance and incent positive externalities and (ii) monitor and regulate negative externalities. More generally, governments

should craft policy, signals, and other programs to ensure that sustainable mortgage funding programs maximize net positive externalities for investors, housing

developers/proponents, and the broader Canadian population.

Incentivizing the realization/success of positive externalities by supporting investor demand. This may include ensuring that there is sufficient information access,

uniform reporting/labelling requirements, and high-quality compliance controls to communicate the value of SMBs over alternative investment instruments. More

generally, governments should take into account investor needs (e.g., guaranteed cash flows, frequency of third-party ESG reviews, etc.) to ensure the successful

uptake of SMBs in the market.

Supporting the development/maintenance of eligibility criteria and ensuring that proceeds from SMBs are used and managed in the most effective manner (in

order to maximize net positive externalities). More generally, governments can clearly communicate policy targets/objectives around green and social/affordable

housing and assist sustainable mortgage funding programs by providing guidance and data-driven insights against green and social/affordable housing targets.

The above-mentioned activities serve to showcase, at a high level, how governments can support sustainable mortgage funding programs by incentivizing positive externalities

(benefits) and monitoring negative externalities (costs/risks), with the ultimate goal of ensuring that net positive externalities from SMBs are maximized. The next page

provides an example of the role of governments in supporting the development/maintenance of sustainable mortgage funding platforms.

Governments can promote SMBs and enable investor demand by incentivizing positive externalities and

monitoring negative externalities

Role of Government – Observations from Secondary Research

1. Environmental Finance, Sustainable Bonds Insight,2019.

2. Fannie Mae, Multifamily Green Bond Impact Report: 2012-2018, 2019.

3. NWB Bank, SDG Housing Bond Indicator Report,2019.

Note: The ’role of government’ topic was central in our stakeholder consultations. In the Stakeholder Consultations section (page 95), we provide a complete list of

potential roles of government based on the input and feedback received from stakeholders.

Based on secondary research, we have identified three broad categories of activities that governments can

undertake to support SMBs in Canada

We outline below selected hypotheses on how governments can support the development/maintenance of sustainable mortgage funding programs with respect to eligibility

criteria, reporting requirements, and the use and management of proceeds.

Communication of Policy Targets and Objectives – Governments can clarify and clearly communicate their policy objectives around green and social/affordable

housing. This will enable sustainable mortgage funding programs to better formulate ESG eligibility criteria that target the most relevant housing assets, thereby

enabling the issuer to maximize environmental, social, and economic benefits.

• For example, Fannie Mae – for its Multifamily Green Bond Framework – annually evaluates the eligibility criteria to support the transition of the U.S. rental

housing market to a low-carbon economy. Fannie Mae has partnered with the U.S. Environmental Protection Agency (EPA) and other government agencies to

(i)track and monitor green housing performance and (ii) develop appropriate eligibility criteria given the country’s broader performance measures and policy

objectives.

Guidance and Data-Driven Insights – Governments can assist sustainable mortgage funding programs by providing guidance and data-driven insights on

progress against green and social/affordable housing targets. This will enable SMB issuers to optimize the distribution of funds and better identify applicable green

and social/affordable housing assets.

• For example, NWB Bank – for its SDG Housing Bond Framework – relies on federal and municipal governments to (i) define low-income populations and identify

changes in low-income measures and (ii) prioritize social housing requests based on which population group is most vulnerable in each neighborhood.

Reporting and Due Diligence – Governments can help investors by outlining requirements for performance impact reporting. This will help alleviate potential

information asymmetry between issuers and investors. Moreover, governments can provide guidance on consistent labelling of SMBs (e.g., green, social, and

sustainable) as well as the selection of independent reviewers (second-party opinion providers).

Global Sustainable Mortgage

Funding Frameworks

Chapter 4

Chapter 4 – Section 1

Introduction to Global Sustainable

Mortgage Funding Frameworks

Review of Global Sustainable Mortgage Funding Frameworks

We identified seven examples of global sustainable mortgage funding frameworks across different

jurisdictions – United States, European Union, Norway, Netherlands, Australia and New Zealand

We explored seven global sustainable mortgage funding frameworks to identify the best,

applicable practices to consider in the development of Canada’s sustainable mortgage funding

framework. Specifically, we sought to complete the below key objectives through our review:

• Identify main characteristics of sustainable mortgage funding framework;

• Define ESG factors used by the framework to identify housing projects; and

• Evaluate and recommend measures of social, environmental, and economic impact

reporting.

We sought to identify global sustainable mortgage funding frameworks that were (i) frequently

cited in business and academic literature and (ii) provided different viewpoints from a

geographic perspective. Moreover, our selection of frameworks for review was also informed by

guidance from CMHC.

The seven frameworks selected for review span across five distinct geographies, as outlined

below.

• Fannie Mae Multifamily Green Bond Framework – United States

• NWB Bank’s SDG Housing Bond Framework – Netherlands

• BNG Bank’s Sustainable Municipalities Bond Framework – Netherlands

• European Mortgage Federation’s European Covered Bond Council – European Union

• Sparebanken Sør Green & Sustainability Bond Framework – Norway

• National Housing Finance and Investment Corp.’s Sustainability Bond Framework – Australia

• Housing New Zealand’s Sustainable Financing Framework – New Zealand

On the next page, we assess the applicability and relevance of each framework to the Canadian

context to identify the two frameworks most relevant to the Canadian context. We then provide

perspectives on key features of the two selected frameworks that could provide insights for the

prospective development of a sustainable mortgage funding framework in Canada.

Applicability and Relevance of Global Sustainable Mortgage Funding Frameworks

We provide a perspective on which key features should be leveraged from the global sustainable mortgage

funding frameworks

We identified high-level features that directionally demonstrate the extent to which

each of the seven global sustainable mortgage funding frameworks we studied could

be leveraged to inform the prospective development of a sustainable mortgage

funding framework in Canada. When turning attention to the key features from each

of the seven global sustainable mortgage funding frameworks, several elements

should be considered such as:

• Do the environmental impacts measured by global frameworks relate to Canada’s

green sustainability objectives?

• Do the social impacts measured by global frameworks relate to Canada’s social

sustainability objectives?

• Does Canada have the data capabilities to track and monitor these social and

environmental impacts?

• Does the ESG eligibility criteria to identify relevant housing assets align to Canada’s

housing programs and objectives (e.g., National Housing Strategy)?

Each of these questions is complex and driven by several factors. Deloitte developed

and executed an approach to directionally rank the seven frameworks based on

directional and high-level perspectives on the comparability, relevance, and

leveragability of each framework. For more information on our ranking approach,

please refer to Appendix 2.

This exercise led us to select the frameworks of Fannie Mae and NWB Bank as the

two frameworks most relevant to inform the prospective development of a sustainable

mortgage funding framework in Canada. Fannie Mae embodies the green aspects of

the framework while NWB Bank embodies the social aspects – together, both inform

the green and social aspects of a sustainable mortgage funding framework in Canada

The two frameworks are examined closely in our case studies (presented after this

section).

Note: For information on the other five case studies reviewed, please refer to

Appendix 3.

Fannie Mae

Sparebanken

Sør

ESG Criteria

Social Green

ESG Measures

Social Green

EMF - ECBC

NHFIC

BNG Bank

Housing New

Zealand

NWB Bank

Transparency &

Data Availability

Directional Relevancy Matrix of Global SMB Frameworks

The matrix below illustrates how each framework aligns to social and green eligibility

criteria and reporting measurements relevant to Canada, as well as the transparency

and availability of data in each framework.

Overview of Key Impacts of Sustainable Mortgage Funding Frameworks

Environmental, social, and economic benefits to housing markets and the broader economy are at the heart

of sustainable mortgage funding frameworks.

Environmental Impacts

• Sustainable mortgage funding programs aim to support the

development and/or retrofitting of green buildings to reduce

the residential sector’s environmental footprint.

• In Canada, the residential sector is the largest energy

consumer (23.8% of total energy consumption in Canada) and

one of the top contributors to greenhouse gas emissions

(18.8% of total GHG emissions).

Alignment to National Policies and Objectives:

• Canada’s National Housing Strategy (“NHS”) supports housing

investments that are aligned with Canada’s climate change

agenda, including energy- and water-efficiency investments

and retrofits to community housing.

• These impacts are broadly aligned to the UN Sustainable

Development Goals (“SDGs”) – ‘Affordable Clean Energy’ and

‘Supporting Climate Action’.

Social Impacts

• Social/affordable housing initiatives can provide affordable and

accessible housing solutions to vulnerable populations. This

may include people who are in financial distress or other

target groups (e.g., seniors, refugees, victims of domestic

violence, people with disabilities, etc.).

Alignment to National Policies and Objectives:

• The NHS lays out a path to reduce chronic homelessness by

50% and remove as many as 530,000 Canadians from housing

need by 2027. It also mandates support for vulnerable

populations, such as Indigenous groups, people with

disabilities, victims of domestic violence, amongst others.

• The UN SDGs also mandate the provision of affordable housing

and sustainable communities to all by 2030.

Key Impacts

4. Ibid.

Economic Impacts

• Examples of economic contributions that can be attributed to sustainable mortgage funding programs include (i) job creation, (ii) capital

investments and cost savings, and (iii) sustainable economic growth.

• Each of these dimensions can generate additional economic benefits through multiplying/spillover effects (e.g., additional increases to economic

activity driven by new job creation and spending).

Alignment to National Policies and Objectives:

• Canada’s housing programs align with public investments in job creation, skills training, and early learning. The NHS also gives more flexibility to

provinces, territories, and municipalities to provide the ability to reinvest funds from disposed properties to support capital repair investments.

• These contributions are aligned with Goal 8 of the UN SDP – ‘Good Jobs and Economic Growth’.

1. Statistics Canada, “Canadian System of Environmental-Economic Accounts”, September 2019.

2. Government of Canada, National Housing Strategy,2017.

3. Ibid.

Chapter 4 – Section 2

Case Study: Fannie Mae’s

Multifamily Green Bond Framework

Fannie Mae’s Multifamily Green Bond Framework (1/6)

Fannie Mae’s Multifamily Green Bond Framework

Fannie Mae was established in 1938 in response to a need for reliable financing after the

housing crisis in the US during the Great Depression. It has since become the country’s leading

provider of financing for mortgage lenders, enabling opportunities for Americans to access

affordable and sustainable mortgage financing.

Fannie Mae’s green bond framework began with the organization searching for a way to

improve energy and water efficiency in the United States through mortgage financing. Since

the first issuance of its green mortgage-back security (“Green MBS”) in 2012, Fannie Mae has

grown to become the largest issuer of green bonds in the world. From 2012 to 2019, Fannie

Mae has issued a total of US$69.1 billion in Green MBS through their green bond program.

The key dimensions of this framework have come about through multiple iterations of the green

mortgage financing program. Fannie Mae’s first financing scheme originally required borrowers

to commit a percentage of the loan proceeds to efficiency improvements, however the

incentives led to retrofits with sub-optimal environmental impacts. In other words, property

owners may have opted to allocate funds to green improvements that did not maximize green

benefits. Fannie Mae retired this legacy approach to focus on the Green Rewards Mortgage

Loan and Green Building Certification Mortgage Loan programs – which were introduced in

2016 – that stipulated specific energy and water reduction targets (described in the next slide).

These two programs incentivize property owners to pursue the most effective efficiency

measures and standards to maximize the property’s green benefits (e.g., reductions in energy

and water consumption, reduction in GHG emissions, etc.).

The framework has a specific focus on multifamily properties, enabling Fannie Mae’s green

bonds to also generate social benefits in terms of affordable housing solutions. Their view of

affordable housing considers scenarios where the bulk of renters’ income goes towards paying

for housing. This extends both to government subsidized housing and “workforce housing.”

Fannie Mae is the largest issuer of green bonds in the world. Its green bond issuances support green building

initiatives in the US, which ultimately support the development of utility-efficient and affordable homes.

108

3 554

30 000 27 417

20 793

17 206

2012 2013 2014

5 000

10 000

15 000

20 000

25 000

2015 2016 2017 2018 2019

Figure 5: Value of Fannie Mae’s Green MBS Issuances, 2012 –2019

All values presented in USD millions

Source: Fannie Mae Green MBS Metric Report.

Social

• Affordable, durable

housing

• Reduced utility bills

Financial

• Job creation and

support

• Higher property

value

Environmental

• Lower energy use

• Lower water use

• Generate clean

energy

Triple Bottom Line Impact

While “green” is in the name of the bond, proceeds are used to target more than

just environmental benefits. In addition to environmentalmeasures, Fannie Mae’s

Triple Bottom Line Impact strategy also considers social and financial measures.

Note: All information on Fannie Mae’s framework is sourced from: (i) Fannie Mae, Multifamily Green Bond Impact Report: 2012-2018, 2019.; (ii) Fannie Mae, Data Collections, Accessed June 4, 2020:

https://mfdusdisclose.fanniemae.com/#/resources/datacollections.; (iii) CICERO, Second Opinion on Fannie Mae Multifamily Green Bond Framework, 2018, and (iv) Fannie Mae, Green Building Certifications, Accessed June 4, 2020:

https://multifamily.fanniemae.com/financing-options/specialty-financing/green-financing/green-financing-loans/green-building-certifications.

Fannie Mae’s Multifamily Green Bond Framework (2/6)

Fannie Mae employs a selection process to ensure the maximization of potential benefits arising from green

mortgage financing in the United States.

ESG Eligibility Criteria

Fannie Mae’s framework outlines two green bond programs with distinct eligibility requirements:

• Green Building Certification Mortgage Loan – requires the borrower’s property to obtain a valid

green building certification from a list of recognized institutions.

• Green Rewards Mortgage Loan – requires property owners to commit to improvements that

reduce the property’s annual energy usage by at least 15%, with combined energy and/or

water savings totalling at least 30%.

Below, we describe the applicant process and assessment framework to identify and track eligible

properties.

Green Building Certification Mortgage Loan

Currently, Fannie Mae recognizes 34 green building certifications from 13 institutions that

target environmental improvements. Fannie Mae reviews green building certifications available to

multifamily properties on an annual basis.

• To be selected for the mortgage loan, the green building certification must have been awarded

within the past five years and applied to all residential units and common areas of the

property. Moreover, Fannie Mae has identified the specific certification programs, and the

program’s internal ranking required from each institution in order to be eligible for the loan.

• For example, a property owner may be eligible if it has a 3-Globe or 4-Globe level certification

from Version 1.01 of the “Green Globes Multifamily for Existing Green Buildings” program

issued by the Green Building Initiative.

These certifications are grouped into four buckets based on the scale of their environmental

impact. The top levels includes certifications that reduce water and energy consumption by 50%

or more compared to the national baseline building standards. The second level targets

reductions in water and energy consumption, but not at a particular percentage. The lowest level

targets environmental improvements, but not specifically related to water and energy usage.

While all these certifications will be accepted for the Green MBS, their grouping changes how

Fannie Mae records environmental impacts, and may affect the borrower mortgage quote.

List of Recognized Green Building CertificationProviders

Currently, Fannie Mae recognizes 34 green building certifications from 13

organizations. Building certifications are grouped into stringency levels which are

associated preferential terms on green mortgages.

Green Level Green Building Certification Organization

Towards Zero –

Reduces water and

energy use by 50%

from national

baseline

• International Living Future Institute (2 programs)

• Passive House Institute (PHI) (2 programs)

• Passive House Institute US (PHIUS) (1 program)

• USGBC (1 program)

Level 1 - Reduces

water and energy

use by 20% or

more, and additional

ventilation

requirements

• Build It Green (1 program)

• Enterprise Community Partners (1 Program)

• Green Building Initiative (2 programs)

• U.S. Department of Energy (1 program)

• U.S. Environmental Protection Agency (1 program)

• USGBC (5 programs)

Level 2 –

Reduces water and

energy use by 15%

or more from

national baseline

• Build It Green (1 program)

• Home Innovation Research Labs (1 program)

• International Living Future Institute (1 program)

• Southface (1 program)

• U.S. Environmental Protection Agency (3

programs)

• USGBC (2 programs)

• Viridiant (1 program)

Level 3 –

Reduces water and

energy use by 10%

or more from

national baseline

• Green Building Initiative (2 programs)

• Home Innovation Research Labs (1 program)

• USGBC (4 programs)

Source: Fannie Mae, Multifamily Green Bond Second Opinion,

Note: All information on Fannie Mae’s framework is sourced from: (i) Fannie Mae, Multifamily Green Bond Impact Report: 2012-2018, 2019.; (ii) Fannie Mae, Data Collections, Accessed June 4, 2020:

https://multifamily.fanniemae.com/financing-options/specialty-financing/green-financing/green-financing-loans/green-building-certifications.

Fannie Mae’s Multifamily Green Bond Framework (3/6)

are reported on an annual basis.

Note: All information on Fannie Mae’s framework is sourced from: (i) Fannie Mae, Multifamily Green Bond Impact Report: 2012-2018, 2019.; (ii) Fannie Mae, Data Collections, Accessed June 4, 2020:

https://multifamily.fanniemae.com/financing-options/specialty-financing/green-financing/green-financing-loans/green-building-certifications.

Fannie Mae’s Green Rewards Mortgage Loan program uses a combination of expert evaluation and data

analysis to identify properties with the highest potential to realize energy and water consumption efficiencies.

Green Rewards Mortgage Loan

To be eligible for this program, applicants must go through an external building review process to

determine the energy and water performance of the property. The High Performance Building

(“HPB”) Assessment is Fannie Mae’s main mechanism to determine eligibility for this program.

Fannie Mae engages third-party HPB consultants conduct an energy audit aligned with national

standards (i.e., ASHRAE) to measure a building’s energy and water performance through site-

visits. The audit includes an analysis of energy and water consumption data and historical utility

bill information to determine the property’s potential efficiency increases. Finally, the audit report

is reviewed by the lender to ensure it meets the energy and water reduction requirements set out

by Fannie Mae.

The building’s performance measures and characteristics are collected and analyzed by the HPB

consultant. Fannie Mae collects historical utility bill information and other metrics on behalf of the

property through Bright Power (a third-party service provider). This data is analyzed to determine

whether the property can meet the energy and water reduction requirements. The complete

report must include:

• All applicable and practical energy- and water-efficiency measures a property can undertake;

• Data from site visits and measurement tools with respect to the property (e.g., ENERGY STAR

Score, Source Energy Use Intensity, EPA Water Score, Water Use Intensity) over the last 12

months; and

• Methodology and calculations used by the HPB consultant to derive projected savings in

energy, water, and GHG emissions.

Fannie Mae has partnered with the Environmental Protection Agency (EPA) to generate a

nationally-recognized metric to score multifamily properties’ energy performance. To build this

metric, Fannie Mae surveyed over 1,000 multifamily properties across the US about their energy

and water consumption levels, which was used by the EPA to deliver a 1 – 100 ENERGY STAR

score for multifamily properties.

Approved borrowers must track these efficiency metrics on an ongoing basis for the duration of

the loan to continue to receive the preferential rate. The resulting scores generated by this data

Summary of Eligibility Requirements

Fannie Mae annually evaluates the eligibility requirements to further supportthe

transition of the US rental housing market to a low-carbon economy. The

efficiency of building envelopes need to improve by 30% by 2025 to keep pace

with increased building size and energy demand.

Year of Loan Issuance Eligibility Requirements

2019

Projected annual reduction for the whole property

of 30% in a combination of energy and/or water

consumption, of which a minimum of 15% must

be attributed to savings in energy consumption.

2018

Projected annual reduction for the whole property

in terms of (i) energy consumption by 25% or

more; or (ii) water consumption by 25% or more.

2016 / 2017

Projected annual reduction for the whole property

in terms of (i) energy consumption by 20% or

more; or (ii) water consumption by 20% or more.

Fannie Mae’s Multifamily Green Bond Framework (4/6)

Reporting of Environmental Impacts

Fannie Mae’s green bond program aims to improve energy and water efficiency and does so by tracking and reporting each property’s projected energy savings, water savings

and GHG emission savings relative to the base case (i.e., what properties would have achieved before green upgrades). Data is collected for each property through inspections,

submissions of historic utility bills, and green-building certification requirements. Third-party reviewers use this data to project savings for each of the categories.

The choice to report these annual environmental metrics relates directly to Fannie Mae’s desire to increase housing affordability by combating rising utility rates that reduce

affordability for tenants of multifamily properties. By targeting energy and water savings, Fannie Mae attempts to reduce utility bills – one of the key drivers of tenants’

housing costs.

Environmental benefits realized by the US and attributed to Fannie Mae’s green bond program include

reductions in greenhouse gas emissions, energy consumption and water consumption.

Greenhouse Gas Emission Savings

• In the US, private residential housing is the third-largest of the fuel-consuming economic

sectors contributing to CO

emissions from fossil fuel combustion. The residential sector

accounted for roughly 6% of total CO

emissions in the US in 2018.

1,2

• Within the residential sector, 66% of CO

emissions are attributable to electricity

consumption for lighting, heating, cooling, and operating appliances. The remainder were

attributed to the consumption of natural gas and petroleum for heating and cooking.

• As of 2018, Fannie Mae estimates that its green bond issuances will enable properties to

reduce GHG emissions by 287,000 tonnes (CO

equivalent) per year. The

environmental benefits attributed to this reduction are estimated to be worth nearly $15

million per year (in 2020 dollars).

Figure 6: Fannie Mae – Projected GHG EmissionSavings

Presented in terms of CO

equivalent tonnes

Note: All information related to Fannie Mae’s benefits and impacts have been directly leveraged from Fannie Mae’s publications and

databases. Deloitte did not perform any analysis to estimate or verify the benefits and impacts referenced herein.

1. United States Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks, 2020.

2. The first- and second-largest fuel-consuming sectors in the US are transportation and electricity generation, respectively.

3. United States Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks, 2020.

4. This calculation is based on Environment and Climate Change Canada’s social cost of carbon estimates. The inflation-adjusted

social cost of carbon is $50.8 per tonne of CO

equivalent (in 2020 dollars). Source: Environment and Climate Change Canada,

493

Technical Update to Environment and Climate Change Canada’s Social Cost of Greenhouse Gas Estimates, 2016.

684

804

1 540

29 339

178 969

287 032

2012 2013 2014 2015 2016

Source: Fannie Mae Environmental Impact per CUSIP data release.

50 000

100 000

150 000

200 000

250 000

300 000

2017 2018

Fannie Mae’s Multifamily Green Bond Framework (5/6)

Environmental benefits realized by the US and attributed to Fannie Mae’s green bond program include

reductions in greenhouse gas emissions, energy consumption and water consumption.

Energy Consumption Savings

Figure 7: Fannie Mae – Projected Annual Energy Savings

Presented in terms of kilo British Thermal Units (kBTU)

Water Consumption Savings

• Public water systems, which supply households, are the fourth-largest consumer of water in

the US.

In 2015, the residential sector accounted for 12% of total daily water consumption

in the US. The top uses of energy by the residential sector include water used for indoor

household purposes such as drinking, food preparation, bathing, washing clothes and dishes,

flushing toilets, and outdoor purposes such as watering lawns and gardens.

• As of 2018, Fannie Mae estimates that its green bond issuances will enable properties to

annually save 22.3 billion litres of water. This is equivalent to the amount of water

consumed by nearly 54,000 American families in one year.

• Generally, annual water savings are estimated by comparing historical consumption levels

with projections – the projections are reflective of various water-efficient property upgrades

or installations (e.g., irrigation timers, low-flow toilets and faucets).

Source: Fannie Mae Environmental Impact per CUSIP data release.

Figure 8: Fannie Mae – Projected Annual Water Savings

Presented in terms of millions oflitres

Note: All information related to Fannie Mae’s benefits and impacts have been directly leveraged from Fannie Mae’s publications and

databases. Deloitte did not perform any analysis to estimate or verify the benefits and impacts referenced herein.

1. U.S. Energy Information Administration, US Energy Consumption by Source and Sector, 2019.

2. U.S. Energy Information Administration, Monthly Energy Review, 2020.

2 000

3 500

•

The residential sector is the third-largest consumer of energy in the US.

In 2019, the

residential sector accounted for 21% on an annual basis by of total energy consumption in

the US. The top uses of energy by the residential sector include space heating, water

heating, air conditioning, lighting, refrigeration, cooking, and running a variety of household

appliances.

4 500

4 000

3 000

4 270

2 559

•

As of 2018, Fannie Mae estimates that its green bond issuances will enable properties to

annually save 4.3 billion kBtu of source energy. This is equivalent to the amount of

energy used by over 34,000 American homes in one year.

2 500

1 500

1 000

324

• Generally, annual energy savings are estimated by comparing historical consumption levels

500

6 8

with projections – the projections are reflective of various energy-efficient property

upgrades or installations (e.g., HVAC systems, solar panels, low-energy lights and

2012 2013 2014 2015 2016 2017 2018

appliances).

601

specifically target water consumption.

3. Deiter et al.. Estimated Use of Water in the United States in 2015, 2018.

9 913

22 246

2012 2013 2014 2015 2016 2017 2018

Source: Fannie Mae Environmental Impact per CUSIP data release.

Note: The estimated savings of water consumption were introduced in 2016 as that is when the

Green Rewards Mortgage Loan and Green Building Certification Mortgage Loan were employed to

5 000

10 000

15 000

20 000

25 000

Fannie Mae’s Multifamily Green Bond Framework (6/6)

Reporting of Economic Impacts

The construction and retrofitting of green residential buildings enabled by Fannie Mae’s green bond program leads to economic benefits (e.g., utility expense savings) and

economics benefits (e.g., job creation, economic activity). Notably, green projects lead to reductions in utility expenditures (through energy and/or water consumption

savings) which improve the property’s overall financial metrics and generate cost savings for both property owners and tenants.

The estimated economic impacts outlined below comprise of direct, indirect and induced impacts. Direct impacts are the jobs and GDP supported directly by the construction

and renovation of green buildings. Indirect impacts reflect the impacts to industries within the supply chain that support the construction of green buildings. Induced impacts

reflects all the economic activity that is supported by workers’ spending at local retailers and restaurants during their work on green buildings.

Economic benefits realized by the US and attributed to Fannie Mae’s green bond program include

contributions to employment, economic output, and other property-level financial benefits.

Employment and Labour Income

• Fannie Mae estimates that a cumulative of 170,000 jobs were created or supported to build and/or to retrofit

over 550,000 units from 2012 to 2018. Employment impact is measured in terms of the number of worker-years

of activity supported by spending.

• Moreover, Fannie Mae estimates that newly constructed and retrofitted multifamily buildings contributed $7.2

billion in workers’ income from 2012 to 2018.

Economic Output

• $1.85 in economic output was generated for every dollar spent retrofitting properties through Fannie Mae’s

green bond program from 2012 to 2018.

• Moreover, Fannie Mae estimates that the construction and retrofitting of buildings attributed to its green bond

program contributed $14.6 billion to GDP from 2012 to 2018.

Property Financial Performance

• From 2012 to 2018, Fannie Mae borrowers invested $208 million in energy- and water-saving capital

improvements to retrofit over 2,000 properties.

• Fannie Mae projects these investments will result in $105 million of annual utility bill savings for owners and

tenants.

From 2012 to 2018…

Fannie Mae reports that the building and/or

retrofitting of its funded properties contributed to:

170,000 jobs

with wages paid totaling $7.2 billion

$1.85 in economic output

for every dollar spent retrofitting properties

$14.6 billion in GDP

attributed to the construction and retrofitting of

buildings attributed to its green bond program

$208 million in capital improvements

attributed to energy- and water-saving investments in

over 2,000 properties

$105 million in owner/tenant

annual savings

as a result of energy and water efficiency upgrades

Note: All information related to Fannie Mae’s benefits and impacts have been directly leveraged from Fannie Mae’s publications and databases. Deloitte did not perform

any analysis to estimate or verify the benefits and impacts referenced herein.

Chapter 4 – Section 3

Case Study: NWB Bank’s SDG

Housing Bond Framework

Impact Drivers

The SDG Housing Bond uses a number of social and green performance metrics to

enable social and environmental impacts that align with the UN SDGs (as described

in pages 59-61).

2,6

2,1

2,0

0,0

1,0

2,0

3,0

2017 2018 2019

Source: NWB Bank, SDG Housing Bond Sustainable Indicator Report, 2019.

Note: All information on NWB Bank’s framework is sourced from: (i) NWB Bank, SDG Housing Bond Sustainable Indicator Report, 2019.; (ii) NWB Bank, Our History, Accessed June 24, 2020: https://nwbbank.com/en/about-nwb-bank/our-history.; (iii)

Sustainalytics, De Nederlandse Waterschapsbank N.V. (NWB Bank) Social Bond Second Opinion by Sustainalytics, 2017.; (iv) Climate Bond Initiative. Green Bonds State of the Market 2018, 2019.; and (v) Environmental Finance, Social bond of the

year, SSA: Nederlandse Waterschapsbank, Accessed June 24, 2020: http

s://www.environmental-finance.com/content/awards/green-social-and-sustainability-bond-awards-2019/winners/social-bond-of-the-year-ssa-nederlandsche-

waterschapsbank.html.

1. Mike Van Boom, “How the Dutch do Affordable Housing”, Capital Region Interfaith Housing Initiative, July 2018.

NWB Bank’s SDG Housing Bond Framework (1/5)

NWB Bank’s SDG Housing Bond Framework

De Nederlandse Waterschapsbank N.V. (“NWB Bank”) reads in English as ‘Netherlands Water

Board Bank’, referencing the bank’s mandate upon their creation in 1954 to help finance water

authorities after the North Sea Flood caused catastrophic damage to the country. Today, NWB

Bank is the largest financier of the Netherlands’ public water sector. They have since become

one of the largest backers of housing associations, supporting the affordable housing system in

the Netherlands.

NWB Bank, which first started issuing social bonds in 2017, is one of the largest issuers of

socially-focused sustainable bonds in the world. Its first housing-focused bond – the Affordable

Housing Bond – was renamed to SDG Housing Bond in 2019 to reflect a vision to provide

affordable housing in the Netherlands while being mindful of the environmental impacts of

housing. NWB Bank’s social bond issuances have totaled EUR 6.7 billion from 2017 to 2019.

NWB Bank’s SDG Housing Bond Framework is recognized as a leading example for social bond

frameworks, being awarded ‘Social Bond of the Year’ by Environmental Finance in 2018 and

2019. The framework features a number of indicators that determine social and environmental

impacts of its social bond issuances, which are then mapped to targeted UN SDGs. This

categorization of impacts enables investors to clearly identify ESG bonds that fulfill their

sustainable investment mandates.

The proceeds from NWB’s social bonds exclusively fund private, non-profit housing associations

in the Netherlands. These housing associations focus on making affordable housing accessible

to low-income and vulnerable populations across the country. In the Netherlands, non-profit

housing associations provide shelter for roughly 60% of the country’s population.

NWB Bank is one of the world’s largest issuers of social/sustainable bonds. The proceeds from NWB Bank’s

social housing bonds exclusively fund private, non-profit housing associations in the Netherlands.

Figure 9: Value of NWB Bank’s Housing Bond Issuances, 2017 – 2019

All values presented in EUR Billions

Performance Indicators

UN SGD Goals

Impact Drivers

NWB Bank’s SDG Housing Bond Framework (2/5)

ESG Eligibility Criteria

Due to governmental regulations, the Dutch social housing system enables NWB Bank to select the

social housing associations to support through their bond issuances, but NWB Bank does not have direct

oversight of the specific projects undertaken by the housing associations. Therefore, the eligibility

section of NWB Bank’s framework instead focuses on the criteria to qualify social housing associations

(as opposed to qualify specific development projects):

• Loans guaranteed by the Netherlands’ Guarantee Fund for Social Housing (“WSW”) are eligible for

proceeds from the NWB SDG Housing Bond. To qualify for a WSW guarantee certificate, housing

associations must prove that they are letting a minimum of 80% of their social housing to low-income

populations as defined by the Dutch Social Housing Act (i.e., annual household incomes below EUR

36,798 as of 2018).

o In a review of NWB’s framework, Sustainalytics notes that letting 80% of housing stock to low-

income populations is intended to ensure that proceeds are effectively used to allocate social

housing rentals to the populations most in need.

• Housing associations must let their social housing to households with a maximum income of EUR

36,798 per year (as of 2018), which is the Dutch government’s threshold for low-income households.

• Housing associations must cap rental prices at a maximum net monthly rent of EUR 710.68.

• While not a requirement, a maximum of 10% of the yearly social lettings may be allocated freely up

to EUR 42,436 or to specific priority groups. Examples of priority groups include (i) households with

health problems, (ii) households enduring problems with social factors (e.g., homeless people,

refugees, divorced people, mental health patients, victims of domestic abuse) and (iii) households

impacted by force majeure or calamities.

Moreover, in the Netherlands’ social housing system, municipalities decide how to prioritize social

housing requests, based on which party is most vulnerable in that specific neighborhood. The Dutch

system is based on a point system where potential tenants are qualified according to their need. For

example, refugees are typically considered to be among the most vulnerable populations in

neighborhoods where there is a high influx of refugees.

NWB Bank, in alignment and coordination with the Dutch social housing system, employs a robust selection

process to ensure the maximization of potential benefits to affordable housing in the Netherlands.

Note: All information on NWB Bank’s framework is sourced from: (i) NWB Bank, SDG Housing Bond Indicator Report, 2019; (ii) NWB Bank, SDG Housing Framework, 2019; and (iii) Sustainalytics, De Nederlandse Waterschapsbank N.V. (NWB Bank)

Social Bond Second Opinion, 2017.

1. Aedes, Dutch Social Housing Association in a Nutshell, July 2013.

About the Netherlands’ Loan Guarantee System

In the Netherlands, all registered social housing organizations

have access to a three-layer security scheme to finance their

social housing activities. The three layers include:

• Central Fund for Social Housing (CFV) – An independent

public body that ensures financial supervision of housing

associations. The CFV reports to the Ministry of Social

Housing, which expects housing associations to comply with

the conclusions of CFV’s annual reviews. In case of financial

difficulties at an association, the CFV can provide financial

help or provide project-specific support to enable it the

association to get through its activities.

• Guarantee Fund for Social Housing (WSW) – As private

organization set up by social housing associations themselves,

the WSW acts as a second guarantee in the event that CFV

(the first level of guarantee) has insufficient capacity. WSW

has established a ‘security reserve’ from guarantee fees that

it can draw on to support housing associations. The WSW

allows social housing associations to borrow funds on

favorable terms, which enables associations to obtain access

to international public capital markets and obtain the

cheapest possible loans.

• Dutch State and Municipalities – The municipal-level

government bodies act as a guarantor of last resort through

the WSW. They provide interest-free loans in the event that

the social housing sector can no longer overcome its financial

problems and the WSW is nearly exhausted. This is more of a

“back up” role and has not been used to date.

NWB Bank’s SDG Housing Bond Framework (3/5)

Reporting of Social Impacts

A notable feature of NWB Bank’s framework is that it aims to align all social impacts arising

from its issuances with a relevant UN SDG. NWB Bank has selected eight SDGs that relate to

affordable housing, which are described in Figure 10. To target these goals, NWB Bank has

established seven ‘impact drivers’, which are a set of internal social and environmental goals to

be achieved by financing social housing organizations.

NWB Bank has developed 45 performance indicators to help assess the impacts of its bond

issuances. These indicators are split among the seven impact drivers and then are linked to a

specific UN SDG based on the targeted impact. In addition to these quantitative metrics, NWB

Bank accompanies the assessment of each Impact Driver with an example of specific projects

that support the development goals.

Impact Drivers

The seven impact drivers NWB Bank developed to promote UN SDGs are:

1. Deliver adequate homes

2. Manage an affordable housing stock

3. Provide housing to vulnerable groups

4. Maintain an adequate housing quality

5. Contribute to liveable communities and neighbourhood quality

6. Take responsible environment and energy measures

7. Create responsible local partnerships

The following pages will take a closer look at the social impact reporting of the first four Impact

Drivers since they most closely align with the direct social impacts arising from affordable

housing.

To help assess the impacts of its bond issuances, NWB Bank has developed 45 indicators which are split

among seven impact drivers – all of which are mapped to the UN SDGs.

Providing access to

adequate housing

to vulnerable

groups.

Ensure healthy lives

and promote well-

being for all at all

ages.

Provide access for

single mothers and

their children to live

by themselves in

affordable and

adequate dwellings.

Improve the energy

performance of

social housing and

the use of

renewable energy.

Ensure the

provision of

affordable housing

that gives tenants

proximity to the

work and the

community.

Ensure the access

to thriving areas

and cities for all,

including lower

incomes.

Make cities and

human settlements

inclusive, safe,

resilient and

sustainable.

Promote peaceful

and inclusive

societies for

sustainable

development levels.

Figure 10: UN Sustainable Development Goals

The seven impact drivers promoted by NWB Bank align with the eight UN SDG

goals outlined below. To this effect, we provide examples of how NWB Bank

contributes to the achievement of eachgoal.

Note: All information related to NWB Bank’s benefits and impacts have been directly leveraged from NWB Bank’s publications and databases. Deloitte did not perform any analysis to estimate or verify the benefits and impacts referenced herein.

Source: NWB Bank, SDG Housing Bond Framework, 2019.

NWB Bank’s SDG Housing Bond Framework (4/5)

Social benefits realized by the Netherlands’ social housing sector and attributed to the financing of housing

associations include the continued delivery of social housing stock and management of affordable rent levels.

Impact Driver 1: Delivery of Adequate Homes

• Through the proceeds of the SDG Housing Bond, housing associations can invest in the

construction and management of an affordable housing stock for low-income and vulnerable

groups.

• Housing associations in the Netherlands delivered approximately 15,000 new houses in 2019,

representing a total investment of approximately EUR 2.4 billion. As a result of social housing

investments, these housing associations owned and managed approximately 2.4 million residential

units.

• Outcomes arising from social housing investments include people receiving 192,100 new contracts

for social housing in 2017.

o In the same year, housing associations managed 768,000 houses that were accessible to

persons with disabilities and 105,000 houses with care support for elderly people. The total

stock of houses owned by housing associations in 2017 covered 83% of the general target

group and 117% of their priority target group.

Impact Driver 2: Manage an Affordable Housing Stock

• Through debt financing, housing associations can maintain the affordability of their housing stock

to ensure that other basic expenses and the well-being of households are not compromised.

• Housing associations aim to minimize evictions, overdue rent payments, and homelessness risk by

(i)ensuring that affordability standards are regularly reviewed and (ii) actioning on early-warning

signals to help support families with payment problems. In 2017, about 11.9% of social tenants

were at risk of non-payment, down from 12.2% in 2016. Additionally, the number of evictions in

2018 (3,000) was 19% lower than in the previous year and has been on a steady decline.

• NWB’s bond issuances help housing associations keep monthly rents as low as possible. For

instance, the average monthly rent in social housing was EUR 543 in 2017 – well below the

maximum net monthly rental cap of EUR 710 (as described in page 58).

1. The priority target group includes households that are eligible for housing allowances, as well as households in urgent housing needs, including: homeless people, refugees, divorced people, mental health patients, victims of domestic abuse, etc.

2. The net rent-cost ratio is an indicator of affordability based on the total rent costs (excluding energy and local taxes) as a percentage of net disposable income.

Social housing

providers own and

manage about 2.4

million homes

NWB Estimated

Outcomes:

NWB Estimated

Outcomes:

An affordable

housing stock with

an average net rent-

cost ratio of 23.3%

NWB Bank’s SDG Housing Bond Framework (5/5)

Additionally, the social benefits realized by Netherlands’ social housing sector also include the provision of

housing to vulnerable groups and continued maintenance of social housing stock.

Impact Driver 3: Providing Housing to Vulnerable Groups

• Social housing organizations can use bond financing to target priority groups, optimizing social

returns and positive impacts. This can be accomplished by focusing on groups that will benefit

the most from affordable housing, such as low-income groups, people with disabilities, the

elderly, single parents, and other vulnerable groups.

• In 2017, 98% of total annual social housing allocations in the Netherlands went to the general

target group. In the same year, 264,000 tenants were single parents, 1.1 million were single-

person households, and 704,000 households in social housing consisted of retired people.

• NWB Bank also highlights that affordable housing can help reduce societies’ disposable income

gap. In 2016, the average disposable income in the Netherlands’ rental housing sector,

excluding social housing, was EUR 34,200 per year. The average net disposable income of

households in social housing in the Netherlands was EUR 24,800 per year (excluding housing

allowances). The inclusion of housing allowances increases household disposable income and

expanded affordable housing programs decrease rent payments – both which help shrink the

gap in disposable income.

Impact Driver 4: Maintain an Adequate Housing Quality

• A notable share of proceeds are directed towards housing maintenance and improvement

measures; specifically, proceeds can be used to cover a portion of the maintenance and

improvement costs. In 2017, annual investments in maintenance and energy improvements in

the Netherlands were worth EUR 4.3 billion.

• In addition to complying with the Netherlands’ building codes to maintain their housing quality,

housing associations work closely with social assistance and care providers to make sure their

tenants received adaptive housing improvements, such as ramp access for wheelchair use.

• NWB Bank tracks the satisfaction of tenants in social housing by issuing occasional surveys that

ask tenants to rate their level of satisfaction on (i) quality of their houses and (ii) ability to

interface with their social housing provider. For example, in 2017, the average score given by

tenants for the quality of their houses was 6.9 out of 10 and the average score related to their

ability to interface with social housing providers was 7.4 out of 10.

NWB Estimated

Outcomes:

• 264,000 tenants of

social housing were

single parents

• 1.1 million were

single-person

households

• 704,000 households

consisted of retired

people

NWB Estimated

Outcomes:

On average, EUR

2,792 per unit was

invested in

maintenance and

improvement

Chapter 4 – Section 4

Alignment to ICMA’s Sustainability

Bond Guidelines

ICMA Sustainability Bond Guidelines – Fannie Mae and NWB Bank (1/2)

1. Please refer to pages 49-55 for more information on Fannie Mae’s framework.

2. Please refer to pages 56-61 for more information on NWB Bank’s framework.

Adherence to ICMA’s Guiding Principles

Broadly, both the Fannie Mae and NWB Bank frameworks are aligned with the ICMA guiding principles. The table below describes how the Fannie Mae and NWB Bank

frameworks adhere to the ICMA guiding principles.

Broadly, the Fannie Mae and NWB Bank frameworks adhere to the guiding principles established by the

ICMA. We explore the adherence of the two frameworks to each of the four key guiding principles.

Principle Fannie Mae

NWB Bank

1. Use of

proceeds

• Proceeds from Fannie Mae Multifamily Green MBS are used to finance individual

Green Mortgage Loans, which have originated and closed prior to the bond being

issued.

• The loan products include refinancing or acquisition for existing properties which

have been awarded a green building certification and for renovations, retrofits, and

repairs that reduce energy or water consumption by 25% or more from baseline

performance on existing properties.

• Proceeds align with the following ICMA Sustainable Bond Guidelines categories:

o Green Buildings

o Renewable Energy

o Energy Efficiency

o Sustainable Water and Wastewater Management

• Proceeds from the SDG Housing Bonds will exclusively fund NWB’s lending to

social housing associations in the Netherlands.

• This lending will only take place if the housing associations are approved by the

Dutch government through the WSW, provide 80% of social housing lettings to

households with a maximum income of EUR 36,798 per annum, and cap rents

at EUR 710.68 per month.

• Proceeds align with the following ICMA Sustainable Bond Guidelines categories:

o Affordable Housing

o Socioeconomic Advancement and Empowerment

o Access to Essential Services

o Affordable Basic Infrastructure

o Employment Generation

2. Process

for project

evaluation

and selection

• Fannie Mae’s Delegated Underwriting and Servicing (“DUS”) lenders identify, screen

and select properties and originate the Green Mortgage Loans that are eligible for

Green MBS. The loans are then reviewed and approved by Chief Underwriters.

• At the time of closing the loan, the borrower must sign loan documents committing

to report to Fannie Mae the property’s energy and water performance, including the

ENERGY STAR Score and Source Energy Use Intensity (“EUI”), on an annual basis.

• The lender must submit a High Performance Building Assessment (i.e., a summary

of energy and water usage audits) to Fannie Mae at the time of loan delivery, which

occurs after locking the rate and closing the loan with the borrower.

• Green Mortgage loans are closed before the MBS is issued.

• Proceeds are only attributed to social housing associations that can obtain a

loan guarantee from the WSW. (Please see page 58 for more information.)

• The NWB Bank Lending Department selects the assets based on their

adherence to eligibility criteria set out by the framework.

• NWB treasury will qualify lending inside a given calendar year as eligible assets

for a given issuance of an SDG Housing Bond in the same calendar year unless

a potential divergence is clearly defined in connection with the offering.

ICMA Sustainability Bond Guidelines – Fannie Mae and NWB Bank (2/2)

1. Please refer to pages 49-55 for more information on Fannie Mae’s framework.

2. Please refer to pages 56-61 for more information on NWB Bank’s framework.

Principle Fannie Mae

NWB Bank

3. Management

of Proceeds

• Fannie Mae uses an escrow account to track and manage loan proceeds which

are overseen by its lender partners. These partners hold a license to conduct

Fannie Mae business and are risk-sharing partners in the loans originated.

• When a Green Rewards loan closes, the anticipated costs of making the

necessary energy or water improvements to the property are put into an

escrow account and documented in the Completion Repair Agreement.

• Fannie Mae requires confirmation from the lenders that the green

improvements were made to the borrower’s property, no later than 12 months

from loan closing.

• The lender releases the funds from escrow back to the multifamily

owner/borrower only when the owner provides documentation, such as

invoices, confirming that the improvements have been purchased. The lender

conducts a site visit of the property to evaluate its condition on a periodic

basis.

• NWB Bank will maintain and monitor a register of all eligible assets attributable

to the proceeds of SDG Housing Bond issuances.

• NWB Bank will maintain an outstanding balance of green bonds that is smaller

than that of the total balance of eligible loans, less any co-financing volumes.

This will be done on a continuously basis and audited annually.

• NWB Bank will not qualify more than 80% of their lending to the social housing

organization’s social housing stock as eligible assets, since some of the tenants

might improve their living standards but continue living in the social housing

stock.

4. Reporting

• An investor report will be made available on Fannie Mae’s website on an annual

basis. This report will include (i) a list of the different categories (e.g., property

types) of eligible assets financed and the percentage distribution to each

category, (ii) a description of a selection of eligible assets, as examples of the

projects financed in that year, and (iii) a summary of green bond development

and green financing activities in total (i.e., including water and energy) and

separated (i.e., separate for energy vs water investments).

• Additionally, investors can look up any Delegated Underwriting Service (“DUS”)

CUSIP Identifier in Fannie Mae’s public disclosure system, in which at-issuance

and on-going data are available for all of its DUS MBS, including its at-issuance

ENERGY STAR Score and Source EUI.

• NWB Bank will provide an annual investor letter to investors through its public

website. This report will include (i) an assessment of impact through NWB’s

Impact Drivers and associated Key Performance Indicators, (ii) a list of loan

transactions, (iii) a balance of outstanding SDG Housing Bonds, aggregated

lending to eligible assets, and non-disbursed cash, (iv) a selection of lending

examples, and (v) a summary of the NWB SDG Housing Bond developments

• NWB Bank will, to the extent possible, aim to illustrate impacts to the

Netherlands’ social housing sector through specific examples of social housing

outcomes. These examples enable NWB Bank to publicly communicate the key

social benefits of SDG Housing Bond issuances, including the compatibility and

adherence of the social benefits to the UN SDGs.

Adherence to ICMA’s Guiding Principles (cont’d)

Chapter 4 – Section 5

Implications for Canada

By reviewing the Fannie Mae and NWB Bank frameworks, we can derive insights into the elements and

processes of a sustainable mortgage funding framework in the Canadian context.

Drawing Insights from Fannie Mae and NWB Bank

We derive insights into the elements and process of a sustainable mortgage funding

framework – as it relates to the Canadian Constant – through a review of sustainable housing

bond frameworks in the United States (Fannie Mae’s Multifamily Green Bond Framework) and

the Netherlands (NWB Bank’s SDG Housing Bond Framework). In the following sections, we

review the eligibility criteria and evaluation processes of each framework, as well as the

environmental, social, and economic impacts reported by each framework.

Subsequently, we explore two key elements when assessing comparability of these

frameworks to the Canadian context.

• Comparability of ESG Eligibility Criteria - We review the relevance and applicability of ESG

eligibility criteria in each framework to Canada’s housing market and related policy

objectives and targets.

• Observations on Potential Achievability of ESG Impacts – Based on a review of each

framework’s impacts and reporting mechanisms, we provide high-level observations on the

extent to which potential impacts through a sustainable mortgage funding framework can

be realized and tracked in Canada.

We summarize our observations and findings on the comparability of these frameworks with

respect to the Canadian context in the following pages.

Note 1: Link to Fannie Mae’s Green Bond website: https://multifamily.fanniemae.com/financing-options/specialty-financing/green-

financing/green-bonds.

Note 2: Link to NWB Bank’s SDG Housing Bond website: https://nwbbank.com/en/investor-relations/sdg-housing-bonds.

Fannie Mae – Comparability of ESG Eligibility Criteria to Canadian Context

The eligibility criteria of Fannie Mae’s framework broadly aligns with Canada’s policy objective and targets

with respect to the development and promotion of green buildings.

Category

Fannie Mae’s Eligibility

Criteria

Comparisons to Canada

Green

Building

Certification

• Requires the borrower’s

property to have a valid

green building

certification from a list of

recognized institutions.

• In Canada and the US, building codes differ from province to province and from state to state.

Nonetheless, Fannie Mae’s eligibility

criteria provide a mechanism to generalize the selection of properties despite regional differences in building codes.

• Canada and the US share many of the same energy performance standards, such as LEED and ENERGY STAR.

Moreover, 90% of

Canadians recognize ENERGY STAR (the underlying metric used by Fannie Mae) and find it to be the most helpful for tracking energy

efficiency.

This observation further highlights the comparability of Fannie Mae’s ESG eligibility criteria to Canada’s housing market.

• The Canadian Green Building Council offers programs similar to the US Green Building Council, which are both based on LEED

performance standards. Another Fannie Mae approved-organization, Passive House makes available building certifications in the US and

Canada. However, while Passive House's certification programs in the US are specific to US standards, the organization has not yet

made available a certification program specific to Canadian standards.

Green Property

Improvements

• Requires property owners

to commit to

improvements to their

property that reduce the

property’s annual energy

usage by at least 15%,

with combined energy

and/or water savings

totalling at least 30%.

• Canada’s National Housing Strategy outlines energy-efficiency targets that are broadly aligned, but slightly more aggressive than those

of Fannie Mae. The targets are:

o For new units, 25% reduction in energy consumption and GHG emissions over national building and energy codes in new units; or

o For renewed/repaired units, 25% reduction in energy consumption and GHG emissions relative to past performance.

• Moreover, the NHS targets to reduce energy consumption are broadly aligned with Canada’s overall increase in energy efficiency from

1990-2013 – a 24.2% improvement in energy consumption.

• From 2011-2014, 196 buildings in the GTA competed in the Civic Action’s Race to Reduce – a challenge to track, report, and collective

cut their energy by 10% using ENERGY STAR Portfolio Manager. Together, the competing firms surpassed the goal and reduced energy

consumption by more than 12%.

This may imply that Fannie Mae’s criteria of 15% reduction in annual energy consumption is more

appropriate in terms of energy-reduction achievability in Canada.

Evaluation of Fannie Mae’s Eligibility Criteria

The table below compares how Fannie Mae’s green bond eligibility requirements compares to the Canadian context.

1. Please see page 51-52 for more information on the ESG eligibility criteria of Fannie Mae’s framework.

2. Innes Hood, Residential Green Building in North America,2008.

3. Ibid.

4. Natural Resources Canada, Build Smart: Canada’s Buildings Strategy, 2017.

5. Government of Canada, National Housing Strategy,2017.

6. Natural Resources Canada, Energy Efficiency Trends in Canada: 1990 to 2013, 2016.

7. Natural Resources Canada, Build Smart: Canada’s Buildings Strategy, 2017.

Fannie Mae Target Impact Considerations for Canada

Emissions – Fannie Mae estimates that its

green bond issuances will lead to reductions in GHG

emissions of 287,000 tonnes (CO

equivalent) per

year.

• In 2018, Canada’s total levels of GHG emissions were 729 megatons (CO

equivalent)

– significantly lower than the 6,677

megatons in the US.

However, the residential sector of Canada accounts for a much higher share of the country’s GHG emissions

(19%) than the residential sector of the US (6%).

Hence, green housing initiatives in Canada can materially enable GHG

reductions in Canada.

• Fannie Mae’s projected CO

emission savings equaled roughly 0.8%

of the US residential sector’s CO2 emissions in 2018. If this

share was applied to the Canadian residential sector’s CO

emissions, SMBs in Canada could enable the reduction of roughly

109,000 metric tons of CO

emissions per year.

This would translate to roughly $5.5 million of annual savings based on Canada’s

social cost of carbon values.

Energy Consumption – Fannie Mae estimates that

its green bond issuances will lead to energy savings

of 4.3 billion kBTU per year.

• According to Natural Resource Canada’s Energy Efficient Trends, 83% of all residential energy consumption in Canada relates to

space and water heating in 2013.

• Given that energy efficient upgrades (including enhancements to space and water heating/cooling systems) are the main

mechanism through which these savings are realized, a comparable Canadian program could have the potential to realize the

same per capita energy savings as Fannie Mae.

Fannie Mae – SMB Impact Considerations for Canada (1/2)

Comparing Fannie Mae’s with Canadian data and policy objectives, we derive high-level considerations for

SMB impacts in Canada with respect to green housing programs.

High-Level Considerations for SMB Impacts in Canada

Based on our review of the Fannie Mae framework, we outline below high-level observations on the potential achievability of environmental and economic impacts in Canada

(through a hypothetical sustainable mortgage funding framework).

1. ECCC, Greenhouse Gas Emissions Canadian Environmental Sustainability Indicators, 2020.

2. Environmental Protection Agency, Greenhouse Gas Inventory Data Explorer, Accessed November 22, 2020:

https://cfpub.epa.gov/ghgdata/inventoryexplorer/#allsectors/allgas/econsect/all.

3. Statistics Canada. Canadian System of Environmental–Economic Accounts: Energy Use and Greenhouse Gas Emissions, 2017, Accessed July 16, 2020:

https://www150.statcan.gc.ca/n1/daily-quotidien/190910/dq190910b-eng.htm

4. Data on the US residential sector’s total CO2 emissions was sourced from – Environmental Protection Agency, Greenhouse Gas Inventory Data Explorer, Accessed November 22, 2020:

https://cfpub.epa.gov/ghgdata/inventoryexplorer/#allsectors/allgas/econsect/all.

5. Data on the Canadian residential sector’s total CO2 emissions was sourced from – Statistics Canada, Canadian System of Environmental-Economic Accounts, Energy Use and Greenhouse Gas Emissions, 2019.

6. This calculation is based on Environment and Climate Change Canada’s social cost of carbon estimates. The inflation-adjusted social cost of carbon is $50.8 per tonne of CO

equivalent (in 2020 dollars). Source: Environment and Climate Change

Canada, Technical Update to Environment and Climate Change Canada’s Social Cost of Greenhouse Gas Estimates, 2016.

Fannie Mae Target Impact Considerations for Canada

Water Consumption – Fannie Mae estimates that its green

bond issuances will lead to water savings of 22.3 billion litres

per year.

• Canadians use an average of 220 litres of water a day

, lower than the average 340 litres used per day by Americans –

a difference primarily attributed to geographic variations between the two countries (e.g., drier climate conditions in

certain US states).

Through water reduction targets in a green bond framework, Canada is likely to reduce water

consumption as much as Fannie Mae’s program in percentage terms (assuming it targets a similar water reduction

benchmark), given the similarities in water performance requirements between the two countries.

• Canada adopted the UN Clean Water and Sanitation goal of increasing water use efficiency by 2030. From 2013 to

2017, household expenditures on water and sanitation per cubic meter of water use increased by 16.4%, implying

greater dollar value per cubic meter of water used.

Job Creation – Fannie Mae estimates that 170,000 jobs were

supported to build and/or to retrofit homes to retrofit over

550,000 units from 2012-2018.

• According to the Ontario Non-Profit Housing Association (“ONPHA”), which cites a number of sources including CMHC,

developing one residential unit is estimated to directly generate between two and two-and-a-half new jobs.

This

estimate of contribution to employment is likely lower than Fannie Mae’s incremental impact to job creation because of

(i)Fannie Mae’s focus on retrofitted green homes (as opposed to newly built green homes which require more man-

hours) and (ii) industry and market differences between Canada and the US.

• Both Fannie Mae’s reported impacts and ONPHA’s findings indicate that the building and/or retrofitting of green homes

contributes to job creation. However, the extent of this contribution will be influenced by a number of elements,

including economic conditions, industry structures, eligibility thresholds, and whether the program is focused on green

retrofitting of homes or the building of new green homes.

• For example, Fannie Mae’s program promotes energy-efficient upgrades that can incorporated by the property owner –

which would likely require less labour relative to the new construction of green homes. Therefore, while a green bond

program may have positive impacts on job creation, it may be less likely to have a strong direct impact if the focus is

on energy efficient upgrades versus new construction.

Fannie Mae – SMB Impact Considerations for Canada (2/2)

High-Level Considerations for SMB Impacts in Canada (cont’d)

1. Statistics Canada, Canada at a Glance, Environment edition, Water, Accessed July 16, 2020: https://www150.statcan.gc.ca/n1/pub/12-581-x/2017001/sec-1-eng.htm

2. USGS, Water Science School, Water Q&A, Accessed July 16, 2020: https://www.usgs.gov/special-topic/water-science-school/science/water-science-questions-answers?qt-science_center_objects=0#qt-science_center_objects

3. Note: Deloitte calculations based on data from: (i) Statistics Canada. Table 36-10-0124-01: Detailed household final consumption expenditure, Canada, quarterly (x 1,000,000); (ii) Statistics Canada. Table 38-10-0250-01: Physical flow account for

water use (x 1,000).

4. ONPHA, Affordable Housing As Economic Development: How Housing Can Spark Growth In Northern And Southwestern Ontario, 2020.

Category Eligibility Criteria

Observations for the Canadian Context

Housing Need

• Housing associations must let

their social housing to

households with a maximum

income of EUR 36,798 per year

(as of 2018).

• The low-income threshold for any-sized households in the Netherlands was EUR 36,798 in 2018.

This is broadly similar to the

low-income threshold of a Canadian household of three people (i.e., the average household size) which was C$48,064 in 2018 –

equivalent to EUR 31,607 (adjusted for purchasing power parity).

Rent

Requirements

• Housing associations must cap

rental prices at a maximum net

monthly rent of EUR 710.68.

• The average rent in Canada for a three-bedroom unit in a row or apartment building in centers with over 10,000 people was

$997 in 2018. This number increases to $1,192 when solely considering rents in census metropolitan areas (“CMAs”). This

translates to an average rent between EUR 656 to EUR 784 (adjusted for purchasing power parity), implying that NWB Bank’s

monthly rental cap would have been slightly lower than rents in Canada’s CMAs. However, in 2019, monthly average rents

increased to $1,049 and $1,246, respectively, which implies that NWB Bank’s monthly rental cap could be roughly $100 lower

per month than average rents in Canada’s CMAs.

• Canada’s National Housing Strategy outlines affordable housing targets that specify a targeted rent level. For new units and

renewed/repaired units, 30% of units must have rents at less than 80% of median market rents, for a minimum of 20 years.

• In Canada, housing is considered “affordable” if it costs less than 30% of a household’s before-tax income.

Targeting

Vulnerable

Groups

• A maximum of 10% of the yearly

social lettings may be allocated

freely up to EUR 42,436 or to

specific priority groups.

• Canada’s National Housing Strategy mandates affordable housing for vulnerable populations (e.g., domestic violence victims,

Indigenous peoples, people with disabilities).

• Local governments also have frameworks that target social/affordable housing requests to vulnerable populations. For example,

the Ontario Supportive Housing Policy Framework outlines target groups for housing support, including seniors, people with

mental health-related needs, people with disabilities, illness and injuries, youth at risk, and survivors of domestic violence.

5. CMHC, Identifying Core Housing Need, Accessed July 15, 2020:https://www.cmhc-schl.gc.ca/en/data-and-research/core-housing-need/identifying-core-housing-need.

NWB Bank – Comparability of ESG Eligibility Criteria to Canadian Context (1/2)

The eligibility criteria of NWB Bank’s framework supports affordable housing for low-income and target

populations, similar to the mandates of Canada’s social housing programs.

Evaluation of NWB Bank’s Eligibility Criteria

The table below compares how NWB Bank’s sustainable bond eligibility requirements compares to the Canadian context.

1. Please refer to page 58 for more information on the ESG eligibility criteria of NWB Bank’s framework.

2. Frans Schilder and Rene Scherpenisse, Policy and Practice: Affordable Housing in the Netherlands, 2018.

3. Statistics Canada, Table 11-10-0232-01: Low Income Measure (LIM) Thresholds by Income Source and HouseholdSize.

4. CMHC, Average Rent For Row And Apartment Structures Of Three Units And Over, By Bedroom Size, Total CMA’s (SG8036).

Category Eligibility Criteria

Observations for the Canadian Context

Social Housing

Associations

• Financing will only go to social

housing associations in the

Netherlands

• In Canada, a mix of municipal and private non-profit housing organizations manage the delivery of social housing. This is similar

to the Netherlands in which the delivery of social housing is managed by non-profit housing organizations, albeit these

organizations are predominantly private.

• Similar to the Netherlands, Canada has seen a stagnation of new development of social housing since the 1990s. In 2016,

Canada reported over 250,000 publicly-owned social and affordable housing units in 2016.

However, the number of households

in core housing need in the same year was nearly 1.7 million.

NWB Bank – Comparability of ESG Eligibility Criteria to Canadian Context (2/2)

4. Statistics Canada, “Core Housing Need, 2016 Census”, Accessed July 15, 2020: https://www12.statcan.gc.ca/census-recensement/2016/dp-pd/chn-biml/index-eng.cfm.

Evaluation of NWB Bank’s Eligibility Criteria (cont’d)

1. Please refer to page 58 for more information on the ESG eligibility criteria of NWB Bank’s framework.

2. Kyla Tanner, A Comparison of Canada & The Netherlands’ Housing Policies,2020.

3. Ibid.

NWB Target Impact Consideration for Canada

UN Sustainable Development Goals – NWB Bank has

targeted eight UN SDGs through improvements to social

housing.

• Canada adopted the ‘2030 Agenda for Sustainable Development’ which promotes the 17 UN SDGs, which are also

aligned with its green and social/affordable housing targets as outlined in the ‘National Housing Strategy’.

• Therefore, if Canada’s prospective sustainable mortgage funding framework were to track the same SDGs (and related

impact drivers) as that of NWB Bank, it would be aligned with its broader policy objectives and targets.

Delivery of Adequate Homes – NWB Bank states that their

program supported social housing investments allowed people

to receive 192,100 new contracts for social housing in 2017.

• In 2018, more than 283,000 Canadians were on the waitlist for social/affordable housing programs.

This capacity

problem can be alleviated through additional financing from social housing bonds, leading to the development and/or

expansion of social/affordable housing programs.

Manage an Affordable Housing Stock – By supporting the

maintenance of affordable housing stock through bond

financing, NWB states that housing associations don’t have to

shift their costs to tenants, keeping tenant rents low.

• According to the Canadian Household Survey, 10.2% of Canadian renters in social and affordable housing said their

homes were in need of major repairs (e.g., defective plumbing or electrical wiring, structural repairs to walls, floors or

ceilings, etc.) in 2018 – issues which affect over 160 thousand Canadians. Households requiring of the most repairs

were in Nova Scotia (13.7% of households), Northwest Territories (10.1%), and Manitoba (9.9%).

• The majority of Canada’s social housing stock was constructed before the 21

century. This may indicate that a

significant amount of social housing stock is subject to notable repairs and maintenance costs.

• Around one-third of apartment buildings with five or more stories, semi-detached structures, and row houses were

reported as being in poor or very poor condition. Additionally, around one-quarter of apartment buildings with fewer

than five stories and single-detached houses were reported as being in poor or very poor condition.

• These observations imply that Canada’s social housing system is in need of upgrades and/or major overhauls. The

costs associated with this may be alleviated through additional financing from social housing bonds.

4. Ibid.

NWB Bank – SMB Impact Considerations for Canada (1/2)

Comparing NWB Bank’s with Canadian data and policy objectives, we derive high-level considerations for

SMB impacts in Canada with respect to social housing programs.

High-Level Considerations for SMB Impacts in Canada

Based on our review of the NWB framework, we outline below high-level observations on the potential achievability of social impacts in Canada (through a hypothetical

sustainable mortgage funding framework).

1. Statistics Canada. Table: 46-10-0042-01: Waitlist status including length of time, by tenure including social and affordable housing.

2. Statistics Canada. Table: 46-10-0043-01: Housing suitability and dwelling condition, by tenure including social and affordable housing.

3. Statistics Canada. Canada's Core Public Infrastructure Survey: Culture, recreation and sports facilities, and public social and affordable housing, 2016, Accessed July 16, 2020: https://www150.statcan.gc.ca/n1/daily-quotidien/181009/dq181009a-

eng.htm

NWB Bank – SMB Impact Considerations for Canada (2/2)

1. Data has been aggregated on an annual basis from: Statistics Canada. Table 36-10-0107: Household Final Consumption Expenditure.

NWB Target Impact Considerations for Canada

Provide Housing to Vulnerable Groups – In 2017, 264,000

tenants of social housing were single parents, 1.1 million were

single-person households, and 704,000 households consisted of

retired people.

• The Canadian National Housing Strategy already outlines plans for investments to target vulnerable populations. A

social housing bond framework in the Canadian context would serve to compliment the work being done by the federal

and provincial governments.

Maintain Adequate Housing Quality – In 2017, annual

investments in maintenance and energy improvements in the

Netherlands were worth EUR 4.3 billion. The SDG Housing Bond

funds can be used to cover some of these costs at the social

housing level.

• In 2019, Canadian households cumulatively spent $3.8 billion on home maintenance and repair costs, $9.2 billion on

home water supply and sanitation services, and $30.8 billion on home energy and gas expenses in 2019.

The burden

of these costs on Canadian households could be offset if social and affordable housing associations were able to cover a

part of the costs through bond financing.

High-Level Considerations for SMB Impacts in Canada (cont’d)

Econometric Analysis of Canadian

ESG Bonds and Key Indicators

Chapter 5

Chapter 5 – Section 1

Overview of Econometric Analysis

Introduction to Econometric Analysis

To provide insights into the potential impacts of SMBs in Canada, we employed econometrics modelling to

assess the historical relationships between ESG bonds and various green, social, and economic indicators.

By funding green and social/affordable housing projects, SMBs have the potential to enable positive externalities for the environment, society, and economy.

The externalities can include green benefits, social benefits, and economic benefits – as described below (with examples).

Green Benefits – SMBs with green mandates fund housing projects that give rise to environmental benefits through energy- and water-efficiency

improvements, reductions in GHG emissions, and/or other climate change strategies.

Social and Housing Affordability Benefits – SMBs with social mandates fund projects with social and affordable housing directives. This can enable

the supply of social and affordable housing, housing for vulnerable populations, quality of housing units, and other factors that promote affordable

housing.

Economic Benefits – SMBs can enable economic and financial benefits through the construction and retrofit of buildings. These may include

contributions to employment and economic activity, as well as financial benefits to owners and tenants through reductions in utility expenditures.

Our case studies suggest that SMBs can materially enable all the above outcomes. For example, Fannie Mae’s Green MBS issuances are associated with many

of the green and economic benefits mentioned above. Moreover, NWB Bank’s SDG Housing Bonds are associated with many of the social outcomes mentioned

above. Now, the question we seek to answer is whether similar impacts would be expected by the introduction and prevalence of SMBs in Canada.

As part of this study, Deloitte was engaged by CMHC to employ modelling techniques to assess whether and how SMBs in Canada could lead to green, social,

and economic benefits . In this capacity, we assessed the current evidence around such impacts in Canada in order to provide insights into SMBs’ future

impacts. However, as there are limited SMB issuances in Canada, we focused our analysis on the relationships between ESG bonds in Canada and various

environmental, green, and social indicators. In the Canadian space, Environmental Social Governance (ESGP bonds tend to have a broader focus than housing

and impact a wider range of industries. However, believe that the impacts of ESG bonds in terms of green, social, and economic benefits would proxy those of

SMBs in Canada.

We hypothesized that ESG bonds in Canada have served to promote social outcomes (particularly housing affordability measures), green outcomes

(particularly the transition from non-green to green energy sources), and economic outcomes (particularly increased economic activity in the construction

sector). Accordingly, we hypothesize that SMBs could enable similar social, green, and economic outcomes in Canada.

The following pages detail our analysis, model outcomes, and related key insights.

1. In economics, an externality is the economic benefit or cost imposed by one or more parties on a third-party who did not agree to incur that benefit or cost. In our context, externalities refer to the economic benefits or costs imposed by SMBs on

the environment, economic, and/or housing market. A positive externality can take the form of an economic benefit or a reduction in economic cost.

Key principles of econometric analysis

Econometrics provides a framework to isolate and measure the

relationship between two variables – such as between growth in the

issuances or performance of ESG bonds and an environmental, social, or

economic indicator.

Key questions to be answered by econometric modelling

What have been the historical relationships between ESG

bonds (superset of SMBs) and measurements around

housing affordability, green energy transition, and

related economic activity?

How has growth in ESG bond issuances corresponded to

changes in environmental performance indicators

(e.g., GHG emissions, energy consumption)?

How have socio-economic performance indicators in

the housing sector (e.g., rental payments, utility

expenses, number of social housing units) reacted to

changes in ESG bond issuances?

How can historical relationships between ESG bonds and

environmental, social, and economic indicators provide

insights into the potential impacts of SMBs in

Canada?

At their core, econometric models are

comprised of three distinct components:

1. Independent variable(s): The

potential explanatory variable(s) in

an experiment.

2. Dependent variable: The variable

whose values we seek to explain

using the independent variable(s).

3. Control variables: Additional

independent variables that must be

held constant to isolate the impact

of the key independent variable.

As key outputs,

econometric modelling

generates coefficients*

and probability scores in

its assessment of the

relationships between

independent variables and

dependent variables –

holding constant the

control variables.

Overview of Analytical Approach (1/2)

Econometric modelling enables us to control for the many factors that simultaneously influence the ESG bond

market while isolating the relationships between ESG bonds and various key outcome indicators.

*Note: Due to limitations around data quality (discussed on page 94), our study only reports the directionality of statistically significant coefficients (i.e., whether the coefficient was positive or negative).

Overview of Analytical Approach (2/2)

We used econometric modelling to assess the historical relationships between ESG bonds and environmental,

social, and economic indicators in Canada.

Build an analytical

data set (ADS)

Determine unique

relationships

Validate the analysis

and findings

Break down the

factors affecting the

housing market

Econometrics Analysis

• Gather bond data from Bloomberg – based on a search criteria that filters for ESG factors relevant to greenand

social/affordable buildings – to develop an ESG bond index for Canada.

• Compile environmental, social, and economic data from third-party data sources to build large master datasets (see

“Summary of Data Inputs” for further details).

• Undertake analysis to identify trends in ESG bond issuances in order to contextualize the Canadian ESG bond market.

• Identify unique relationships between ESG bond issuances and each segment of the analysis – the environmental,

social, and economic factors – through statistical analysis.

• Employ two modelling methodologies to assess the relationships – linear regressions and event studies. We provide

overviews of both sets of analyses in the forthcoming pages.

• Conduct rigorous quality assurance reviews of analysis to ensure that our econometric models are consistent with

statistical theory and stable across variations in model specifications.

• At a high level, this step includes: (i) robustness checks of econometric models by using alternate specifications, (ii)

standard and rigorous tests for technical issues that could bias our models or make them less efficient, and (iii) regular

quality assurance reviews with Deloitte Subject Matter Experts.

Validatio

• Develop a framework to isolate and measure the relationships between ESG bonds and various related indicators in

Canada. This includes the identification of relevant ESG characteristics that may influence environmental, social, and

economic aspects of the Canadian economy and housing market.

• Employ econometric modelling techniques to control for the factors that simultaneously influence the Canadian

housing market and isolate the influences of ESG bonds on environmental, social, and economic factors.

Data Collection

Conceptual approach

Summary of Data Inputs

The datasets compiled from various sources uniquely position our study to analyze the relationships between

ESG bonds and various environmental, social, and economic indicators.

We collected and reviewed over 100 variables from several external data sources to identify variables that could be related to the potential impacts of ESG

bonds in Canada. This data set was narrowed down based on an assessment of the relevance of each variable (which was in part informed by our

conversations with CMHC). Next, we assessed the data quality, frequency, and time-series availability of each variable to determine whether which variables

were suitable for statistical analysis. For more information on the data review and selection process, please refer to Appendix 7.

Below, we summarize the final list of selected variables that were input into our econometric framework to test assess the relationships between ESG bonds

and environmental, social, and economic factors.

1. The entire available time series data for each variable was collected and analyzed.

2. MLIFLEX refers to CMHC’s Affordable Housing Mortgage Loan Flexibilities Program, under which CMHC offers flexibilities to encourage the construction, preservation and improvement of affordable rental properties.

Economic and Financial Factors

• Employment in construction sector

• GDP of construction sector

• GDP of energy sector

• Investment in building construction

• Housing starts

• Multi-unit commercial net income

• Mortgage amount requested by multi-units

Environmental Factors

• Gas and fuel consumption

• Household electricity consumption

• Multi-unit residential utility expenditure

Social and Housing Affordability Factors

• New housing price index

• Rental fee payments

• Consumer credit and mortgage liabilities (% of disposable

income)

• Consumer credit and mortgage liabilities (% of net worth)

• Real estate (% of disposable income)

• Multi-unit net residential income

• Number of beds in multi-unit senior homes

• Number of multi-unit residential units

• Share of qualifying units in MLIFLEX index

• ESG Bond Liquidity

ESG Bond Factors

• ESG Bond Issuance Volume

•

• ESG Bond Return

ESG Bond Total issuance

• ESG Bond Issuance date

• ESG Bond Maturity date

Key Variables Source Key VariablesSource

Fixed-Income

Market Data –

Multiple Source

Trends in Canada’s ESG Bond Market

0,0%

1,0%

2,0%

3,0%

2014 2015 2016 2017 2018 2019

ESG and Non-ESG Bond Issuances in Canada (in C$ millions)

Canadian Market Share of ESG Bonds

The market share of ESG bonds in Canada (relative to total bond issuances) has been on the

rise between 2014 and 2019. The market share reached 2.5% in 2019 – a small portion of

the overall bond market but showing significant potential for growth in future years.

Figure 11: Market Share of ESG Bonds in Canada (2014 – 2019)

Percentage of ESG bond issuances to total bond issuances

We contextualized Canada’s ESG bond market by analyzing its market share relative to all bond issuances in

Canada over the last six years.

Source: Bloomberg LLP.

Year

Non-ESG Bond

Issuance

ESG Bond

Issuance

Total Bond

Issuance

2014 $125,710 $1,009

$126,719

2015 $173,220 $1,413

$174,633

2016 $181,130 $2,550

$183,680

2017 $254,550 $3,859

$258,409

2018 $283,200 $7,413

$290,613

2019 $419,410 $11,241

$430,651

RioCan is included in the list of ESG Bonds sourced from Bloomberg. The

underlying projects reflected in these green bonds include green buildings,

resource efficiency and management, renewable energy and adaptability and

resilience to climate change. This senior unsecured bond has a coupon of 2.361

and a maturity date of March 10, 2027.

Descriptions of Example ESG Bonds from Bloomberg

EllisDon is also included in the list of ESG Bonds sourced from Bloomberg.

EllisDon is a world-leading construction and building services company. The

proceeds it realizes from green bond issuances provide funding for the

construction of green buildings (with a particular focus on hospitals). This

secured bond has a coupon of 3.930 and a maturity date of October 31, 2038.

Overview of Econometric Methodologies

We analyzed the historical relationships between ESG bonds and several environmental, social and economic indicators

associated with the housing market using two econometric modelling approaches, each with their own limitations.

Regression Analysis Event Study Analysis

• Regression analysis is a statistical process used to estimate the relationships

between explanatory variables (e.g., ESG bond issuances) and dependent

variables (e.g., rental payments).

• In this context, regression analysis was used to examine the relationships

between ESG bond issuances in Canada and various environmental, social,

and economic variables.

• An event study analysis considers how variables are affected before and after

a significant event occurs. The outcomes of this analysis showcase how a

variable of interest changes after the occurrence of a material event (e.g., a

permanent shift in ESG bond issuance volume).

• In our analysis, we define the “event” as the time period during which the

growth in ESG bond issuances increased substantially (a step change) or

shifted in terms of growth trajectory. This enables us to assess how trends in

environmental, social, and economic indicators change due to the event.

DescriptionKey AdvantagesKey Limitations

• The event study analysis is less sensitive to the time series length of ESG

bond issuances.

• In other words, the event study analysis can use all available data on

environmental, social, and economic factors before the “event” – whereas the

regression analysis is limited to data after the first ESG bond in Canada was

issued.

• There can be different perspectives as to what constitutes a single “event”

(i.e., the time period during which ESG bond issuances shifted) that is relevant

to the event study analysis.

• This approach enables us to assess the direction and strength of the

relationship between each dependent variable and the explanatory variables

(i.e., key characteristics of ESG bonds).

• In other words, the regression approach tests for potential causal relationships

between key characteristics of ESG bonds (e.g., yield-to-maturity, z-spread,

issuance volume, etc.) and environmental, social, and economic variables

associated with the housing market.

• Canada’s ESG bond market is still nascent, and as such, there is a limited time

series of ESG bond issuances in Canada. This limited data set could potentially

lead to spurious relationships (i.e., in which two or more events or variables

appear to move or change together but in fact are not related in terms of

causality).

• The ESG bonds in our dataset are not exclusively related to the housing

sector, hence, our bond index also includes bonds that fund other sectors.

Hence, we are limited to a relatively high-level analysis until the volume of

housing-focused ESG bonds is sufficient to conduct a more focused analysis.

• Both regression and event study analyses are limited to a national-level view

due to data availability – most variables analyzed are not available at a sub-

national or local level. Hence, we are unable to determine how relationships

could differ at the provincial or local level. A more spatially-focused analysis

could provide a more meaningful and robust set of model outcomes.

Both Analyses

Chapter 5 – Section 2

Regression Analysis

Regression Analysis – Our Approach

Regression analysis can be used to examine the unique relationships between Canadian ESG bond issuances

and environmental, social, and economic variables. This model has been our primary approach.

The model sought to explain the dependent

variables

Dependent

Variable

Key

independent

variable

Control

variables

Key Independent Variables:

ESG Bond Index Characteristics:

1,2

• Last Price Return

• Yield-to-Maturity (YTM) (%)

• Price Bid Ask Spread

• Yield Bid Ask Spread

• Z Spread (%)

• Issuance Volume

Control Variables:

• Canadian Gross Domestic Product (GDP)

• Canadian Consumer Price Index (CPI)

• Canada aggregate bond index value

• Canada aggregate bond index price

return

• BBB Canadian 10-year corporate bond

yield

Dependent Variables:

•

• New housing price index

• Rental fee payments

• GDP of energy sector

• GDP of construction sector

• Housing starts

• Investments in building

construction

• Employment in construction sector

• Consumer credit and mortgage

liabilities (% of disposable income)

• Gas and fuel consumption

• Real estate (% of disposable

income)

Household electricity consumption

•

• Consumer credit and mortgage

liabilities (% of net worth)

• Multi-unit net residential income

• Multi-unit total residential income

• Multi-unit net commercial income

• Multi-unit residential utility

expenditure

• Mortgage amount requested by

multi-units

• Share of qualifying units in

MLIFLEX index

Number of beds in multi-unit senior

homes

Number of multi-unit residential

units

1. For definitions of the ESG bond characteristics listed herein, please refer to Appendix 6.

2. Each independent variable was tested for explanatory power with respect to each dependent variable. The independent variable with the highest explanatory power (i.e., highest statistical significance) was reported in the following key model

outcome slides.

3. We selected Canadian BBB corporate yields as a control median given that it represents the “midpoint” corporate yield curve. BBB-rated corporate bonds generally reflect medium credit quality. Moreover, we specifically control for the growth rate of

aggregate yields in our analysis.

The model isolated the key

independent (explanatory) variables

The model controlled for broad

economic and financial variables

Dependent

variable

Key

independent

variable

Control

variables

Dependent

variable

Key

independent

variable

Control

variables

Regression Analysis – Construction of Canadian ESG Bond Index

We constructed a Canadian ESG bond index – comprised of 49 ESG bonds – with several financial

characteristics that could potentially explain variations in green, social, and economic indicators.

Compile Canadian ESG Bonds

Ranks Bonds Based on

ESG Characteristics

Filter Bonds for ESG

Relevance

Construct Canadian ESG

Bond Index to Measure

Bond Performance

56 Canadian and CAD-labeled

ESG bonds available for review

at the time of analysis. Our

search criteria identified ESG

bonds that adhere to ICMA

green or social bond guidelines.

The ESG bonds were ranked

based on their relevance to the

“use of proceeds” criterion –

specifically bonds were ranked

based on the extent to which

their proceeds were used to

fund sustainable buildings.

The 56 bonds were filtered for

relevance, based on data

availability and importance.

Bonds were excluded if data

availability was deemed too

poor or if the securities had low

ESG relevance. This resulted in

our selection of 49 ESG bonds.

We constructed a Canadian ESG

bond index based on the 49

ESG bonds identified in the

previous activity. This index

was used to assess the

relationships between various

bond characteristics and

environmental, social, and

economic indicators.

Canadian ESG

Bond Index

Characteristics

Last Price

Return

Canadian ESG Bond Index

Given that SMBs, as defined in our study, do not currently exist in the Canadian investment market, we relied on Canadian ESG bond issuances in our regression

analysis. To create a measure of performance for the Canadian ESG bond market, we constructed an index of 49 ESG bonds – the financial characteristics (e.g., yield-

to-maturity, z-spread, etc.) of which were used as explanatory variables (independent variables) in our regression analysis. We provide below a brief summary of

the activities undertaken to construct the ESG bond index.

1. For more information our ranking of the ESG bonds, please refer to Appendix 6.

2. In our analysis, this variable was applied as a dummy variable that equals 1 when cumulative ESG bond issuances are greater or equal to $5 billion and 0 otherwise.

Yield-to-

Maturity

Price Bid-Ask

Spread

Yield Bid-Ask

Spread

Zero Volatility

Spread

Issuance

Volume

Issuance Volume

>$5 billion

alternate specification

Regression Analysis – Key Model Outcomes (1/2)

ESG bonds are negatively related to rental fee payments, mortgage liabilities, and real estate expenses.

These outcomes indicate that ESG bonds may support improvements in housing affordability.

Rental Fee Payments

Consumer Credit & Mortgage Liabilities

(% of Disposable Income)

Real Estate Value

(% of Disposable Income)

ESG Bond

Characteristic

Higher Z-Spread Issuance Volumes >$5 Billion Issuance Volumes >$5 Billion

Directional

Relationship

Negative Relationship

Negative Relationship Negative Relationship

Description of

Relationship

• ESG bonds with higher z-spreads lead to

higher returns and are thus more attractive to

investors.

• We find that growth in performance of ESG

bonds has been negatively related to growth

in rental fee payments.

• After ESG bond issuance volumes crossed $5

billion, growth in issuances has been

negatively related to growth in consumer

credit and mortgage liabilities (as a share of

disposable income).

• After ESG bond issuance volumes crossed $5

billion, growth in issuances has been

negatively related to growth in the value of

real estate to disposable income – an

important indicator of housing affordability

that measures the growth of real estate value

relative to household disposable income.

Considerations for

SMBs

• SMBs that finance affordable and social

housing projects generally require that rental

fee payments be lower than the average

market rents.

• Hence, as SMBs promote the supply and

availability of affordable housing, they may

put downward pressure on rental fee

payments.

• SMBs are backed by sustainable mortgages –

mortgages generally associated with

advantageous lending terms for property

owners with green and/or social mandates.

Hence, SMBs support mortgage affordability.

• Moreover, SMBs can lead to financial benefits

for owners and tenants (e.g., through

downward pressure on rental fee payments),

thereby potentially diverting a portion of real

estate costs to non-discretionary spending.

• Affordable housing projects, which can be

funded by SMBs, generally reflect real estate

values below the market average and

stipulate below-market rental payments.

• Hence, as SMBs promote the supply and

availability of affordable housing, they could

potentially place downward pressure on key

indicators of affordable housing (such as the

value of real estate to disposable income).

Statistical

Causality Tests

Our model did not find statistical evidence of causality between ESG bond characteristics the variables above.

SOCIAL AND HOUSING AFFORDABILITY VARIABLES

Note: The standard summary output tables for the model outcomes on this page have been provided in Appendix 5.

1. We observed the same directional relationship for net and total multi-unit residential income – i.e., growth in the performance of ESG bonds (measured by higher z-spread) has been negatively related to growth in multi-unit total and net residential

income. We understand that multi-unit residential income is driven by rental fee payments, and as such, these findings lead to similar considerations for SMBs – SMBs can potentially place downward pressure on rental fee payments.

Regression Analysis – Key Model Outcomes (2/2)

ESG bonds have been positive related to construction sector GDP and negatively related to gas and fuel

consumption. These outcomes indicate potential economic benefits and environmental benefits.

Note: The standard summary output tables for the model outcomes on this page have been provided in Appendix 5.

GDP of Construction Sector Household Gas and Fuel Consumption

ESG Bond

Characteristic

Issuance Volumes >$5 Billion Yield-to-Maturity

Directional

Relationship

Positive Relationship

Negative Relationship

Description of

Relationship

• After ESG bond issuance volumes crossed $5 billion, growth in issuances

were positively related to economic activity (measured by GDP) in the

construction sector.

• The yields of ESG bonds are a measure of investment performance;

bonds with higher yields lead to higher returns which make the

investments more attractive to investors.

• We find that growth in the yields of ESG bonds has been negatively

related to gas and fuel consumption. This implies that as ESG bonds

have performed better, growth in household gas and fuel consumption

has decreased.

Considerations for

SMBs

• This finding potentially indicates that SMBs may spur economic activity

in the construction sector.

• SMBs in Canada could create demand in the construction sector by

incentivizing new construction and retrofit of green and sustainability-

focused buildings, leading to increased economic activity in the

construction sector. This could include the promotion of activities such

as construction of new buildings to meet green building certification

standards or renovation of social and affordable housing.

• This finding implies that SMBs could enable the housing sector’s

transition from non-green energy sources to green energy sources.

• SMBs in Canada, by promoting energy-efficiency and other green

improvements in buildings, could decrease the reliance of households on

non-green energy sources like gas and fuel.

• However, this relationship may also be spurious, in that it may be

attributable to a third set of factors that has driven increased fuel

efficiency (e.g., fuel efficiency standards, carbon taxes, etc.)

Statistical

Causality Tests

Our model did not find statistical evidence of causality between ESG bond characteristics the variables above.

ECONOMIC VARIABLE ENVIRONMENTAL VARIABLE

Chapter 5 – Section 3

Event Study Analysis

Event Study Analysis – Our Approach

This model examines the dependent variables before and after an event. This model will be applied as a

complementary approach, to validate the results from the regression analysis (primary approach).

About the Event Study Analysis

The event study analysis assesses how relevant variables change before and after a specified event. In our case, the specified event is the time window during which ESG

bond issuances materially shifted. The key explanatory variable considered is the abnormal return of ESG bonds (i.e., the difference between the return after the event and

the expected return before the event).

This approach can help assess whether material shift(s) in ESG bond issuances in Canada have led to material changes in environmental, social, and economic indicators.

Overview of Approach

Below we outline the high-level steps undertaken for the event study analysis.

1. For more information on the activities performed for the event study analysis, please refer to Appendix 5.

Identify Event of Interest

Namely, rising ESG bond

issuances

Step

Identify Event Window

Through breakpoint analysis

Step

Estimate Expected Return

Through regression analysis

Step

Measure Abnormal Return

Based on actual and

benchmark return

Step

Test for Significance

Through hypothesis testing

Step

Dependent Variables

The selection of dependent variables under

the event study analysis was identical to

that under the regression analysis (see

page 83 for the complete list of dependent

variables).

Control Variables

The event study analysis controls for broad

economic factors, including Canadian GDP

and Canadian CPI.

Event Study Analysis – Selection of Event Window

Our selection of the event window – the time period for which we observe a material shift in ESG bond

issuances – considers several factors including statistical tests and descriptive analysis.

Selection of Event Window

The event study analysis relies on the accurate determination of an event

window (i.e., time period) during which the overall trend in the volume of ESG

bond issuances materially shifted (positively or negatively).

To inform our selection of the event window, we rely on structural break analysis

– a statistical test that identifies potential “breakpoints” (event windows) in a

time series. Figure 13 summarizes the outcomes of the structural break analysis.

We observe four potential “breakpoints” (event windows) that could be selected.

However, it is also important to identify the event window in manner that allows

for sufficient data usage for estimation in the post-event time period. Hence, the

event windows for the years 2018 and 2019 are not usable as there is

insufficient post-event data.

We combine the statistical test results along with a descriptive analysis of the

trends in ESG bond issuances to determine an appropriate event window. Figure

14 shows that ESG bonds crossed $5 billion in Q1 2017, after which bond

issuances grew significantly. We believe the event window of Q1 2017 is

appropriate given (i) the $5 billion milestone, (ii) a notable shift in the trend of

ESG bond issuances, and (iii) the statistical test results for the event window.

Alternative Option for Event Window

As an alternative option, we considered the event period between Nov. 2015 and

Jan. 2016. This period represents another potentially suitable event window as

ESG bond issuances in Jan. 2016 were 293% higher than those in Oct. 2016.

Key Outcome: The outcomes of our analysis, as described on the following

pages, do not significantly differ under the alternative event period. The model

outcomes under the alternative event period (Nov. 2015 to Jan. 2016) are

directionally similar to those under the original event period (Q1 2017).

short, our event study analysis is stable under either selection of event period.

Corresponding Breakpoint Times:

Start

(2.50%)

Breakpoint

End

(97.50%)

2015-11 2015-12 2016-1

2017-6 2017-8 2017-9

2018-5 2018-6 2018-7

2019-2 2019-5 2019-6

Figure 12: Illustration of Event Window Figure 13: Statistical Test Results

for Event Window

0 T

Event

Window

Post-Event

Estimation

Window

4-2014

8-2014

12-2014

4-2015

8-2015

12-2015

4-2016

8-2016

12-2016

4-2017

8-2017

12-2017

4-2018

8-2018

12-2018

4-2019

8-2019

12-2019

Selected

Event Period

Alternative

Event Period

Figure 14: Total Outstanding Issuance of Selected ESG Bonds

All values in billions of CAD

Note: Percentages above reflect the confidence interval.

About $5

billion in ESG

bond issuances

Note: We also worked with CMHC to select possible event windows (time periods) for use in the event study analysis.

1. There are some slight changes in the coefficients’ significance levels with the alternative event window, but these are to be expected under different model specifications.

Event Study Analysis – Key Outcomes

The event study analysis corroborates our key model outcomes with regard to social and housing

affordability variables but does not yield statistically significant results for the other variables.

SOCIAL AND HOUSING AFFORDABILITY VARIABLES

Real Estate Value

(% of Disposable Income)

Mortgage Liabilities

(% of Disposable Income)

Negative Relationship

• The dependent variable – real estate value as a share of disposable

income – is an important indicator of housing affordability. For instance,

an increasing ratio indicates that the value of real estate is growing

faster than household disposable income.

• Our analysis shows that growth in this indicator decreased after the

identified event. Like the results of the regression analysis, this outcome

indicates that ESG bonds are linked to housing affordability benefits.

• Our analysis shows that growth in mortgage liabilities (as a share of

disposable income) decreased after the identified event.

• Like the results of the regression analysis, this finding indicates that ESG

bonds may support mortgage affordability.

• Affordable housing projects, which can be funded by SMBs, generally

reflect real estate values below the market average and stipulate below-

market rental payments.

• Hence, as SMBs promote the supply and availability of affordable

housing, they could potentially place downward pressure on key

indicators of affordable housing (such as the value of real estate to

disposable income).

• This outcome is consistent with the negative relationship between ESG

bonds and rental fee payments (as shown by the regression analysis),

which also indicates improved housing affordability.

• SMBs are backed by sustainable mortgages which are generally

associated with advantageous lending terms for property owners with

green and/or social mandates. This can lead to more affordable

mortgages.

• Moreover, SMBs can lead to financial benefits for owners and tenants

(e.g., through downward pressure on rental fee payments), thereby

potentially diverting a portion of real estate costs to non-discretionary

spending.

The model outcomes under the alternative event window (Nov. 2015 to Jan. 2016) are consistent with the model outcomes above.

Directional

Relationship

Description of

Relationship

Alternative Event

Window

Description of

Relationship

Note 1: All other environmental, social, and economic variables (mentioned on page 88) did not yield statistically significant relationships under the event study analysis (with either the selected event window or the alternative event window).

Chapter 5 – Section 4

Key Insights and Limitations

Key Insights from Econometric Analysis (1/2)

Our econometric analyses reveal notable relationships between ESG bonds and various indicators. However,

we cannot be certain that ESG bonds have been the direct source of the impacts.

Summary of Key Model Outcomes

With the regression analysis, we find statistically significant relationships between ESG bonds and

selected economic, social, and environmental indicators in Canada. The key model outcomes

include:

• ESG bonds are negatively related to rental fee payments (general measure and multi-unit

measure), value of real estate to disposable income, and consumer credit and mortgage liabilities

to disposable income. This implies that growth in ESG bond issuances and/or the performance of

ESG bonds has promoted housing affordability in Canada.

• ESG bonds are negatively related to household gas and fuel consumption.

This implies that

growth in the performance of ESG bonds has reduced gas and fuel consumption of Canadian

households, potentially enabling the transition from non-green energy sources to green

energy sources.

• ESG bonds are positively related with economic activity (measured by GDP) in Canada’s

construction sector. This implies that growth in the issuances of ESG bonds has spurred

economic activity in the construction sector.

Moreover, the event study analysis yields most of the same relationships between ESG bonds and

the aforementioned indicators. These findings corroborate our findings from the regression analysis.

It is important to note that the above-mentioned relations are not “strong” enough to successfully

pass our casualty tests (i.e., statistical tests that determine causation in either direction). In other

words, we cannot be certain that the relations observed are a direct result of increased ESG bond

activity. In other words, we cannot be certain that the relationships observed are a direct result of

increased ESG bond activity. This limitation is likely due to (i) limited data on ESG bond issuances,

(ii) data limitations which do not allow for sub-regional analysis (further described on page 94), or

(iii) the presence spurious relationships.

1. As noted on page 86, we believe that this relationship may be spurious. This is because the downward trend in household gas and fuel consumption

may well be attributable to a third set of factors that has driven increased fuel efficiency (e.g., fuel efficiency standards, carbon taxes, etc.)

Key Insights from Econometric Analysis (2/2)

Our findings suggest that SMBs could potentially enable housing affordability, green benefits, and related

economic activity in Canada.

Summary of Key Takeaways

Below, we summarize the key insights our econometric analyses provide with regard to the potential impacts of SMBs in Canada.

Housing Affordability

We find that indicators related to housing affordability measures (e.g., rental fee payments, value of real estate to disposable income, mortgage

liabilities to disposable income) are negatively related to growth in the issuances and/or performance of ESG bonds. The decrease in the growth

of rental fee payments, value of real estate to disposable income, and mortgage liabilities to disposable income are all associated with increased

housing affordability. This potentially indicates that SMBs, by increasing the funding of affordable and social housing, can enable affordable

housing in Canada.

Green Benefits

We find that household gas and fuel consumption is negatively related to growth in the performance of ESG bonds.

This potentially indicates

that SMBs, by promoting the use of green energy sources, may decrease the reliance of households on non-green energy sources like gas and

fuel – thereby enabling the housing sector’s transition to green energy sources.

Economic Activity

We find that economic activity (measured by GDP) in the construction sector is positively related to growth in the issuances of ESG bonds. This

potentially indicates that SMBs, by creating demand in the construction sector through the development or retrofit buildings, can spur economic

activity in the construction sector.

1. As noted on page 86, we believe we believe that this relationship may be spurious. This is because the downward trend in household gas and fuel consumption may be attributable to a third set of factors that has driven increased fuel efficiency

(e.g., fuel efficiency standards, carbon taxes, etc.)

Model Limitations

Our analysis does not find evidence of causal relationship in light of the nascent state of the Canadian ESG

bond market and limitations around data quality and availability.

Summary of Model Limitations

Our model outcomes reveal statistically significant relationships between ESG

bonds and selected environmental, social, and economic indicators. However, we

do not find evidence of causation (i.e., we cannot be certain that ESG bonds are

directly causing the observed changes in indicators) in any of our econometric

models. This is likely due to several factors, including:

• Canada’s ESG bond market is still nascent. Hence, it is possible that ESG

bonds in Canada have not yet time to mature to the extent that material

impacts to environmental, social, and economic variables can be captured.

• The bonds in our ESG bond index are not solely related to the housing sector

(our index includes also bonds related to other sectors). This is because there

are very few issuances of housing-specific ESG Bonds in Canada. Hence, we

are limited to a “broad” analysis until the volume of housing-specific ESG

bonds is sufficient enough to conduct a more “focused” analysis.

• Our analysis is limited to a national-level view due to data limitations.

Specifically, we do not have sufficient data (or an adequate level of data

frequency) at the sub-national level. Hence, we are unable to determine

whether unique relationships between ESG bonds and environmental, social,

and economic indicators exist at the municipal or provincial/territorial levels. A

geographic focus may lead to more meaningful and statistically robust results.

Stakeholder Consultations

Chapter 6

Overview of Stakeholder Consultations

To complement our research and findings, we executed selected stakeholder

consultations to gauge perspectives on sustainable mortgage funding frameworks,

broader ecosystem considerations (e.g., investor motivations, characteristics of housing

developers and proponents), and the potential role(s) of government. At a high level,

three key groups of stakeholders were interviewed:

Housing developers and proponents (e.g., government organizations,

housing associations) involved in the delivery of green, social/affordable, or

sustainable housing programs.

Other ecosystem organizations involved with ESG financial products (e.g., ESG

rating agencies).

The stakeholders were selected collaboratively by Deloitte and CMHC. The interviews

were conducted during October 2020 and November 2020. In this section, we

summarize the key themes that emerged from the consultations.

2 Investors and issuers directly involved in the ESG investment space.

Key Considerations for Housing Developers

Many housing developers work with municipal governments to develop housing that services needs identified by city programs/policy

initiatives. Notably, municipalities across Canada are increasingly identifying old/aging stock of buildings as a driver of new projects or

refurbishment initiatives. In some instances, municipalities identify land plots available for housing projects and issue Requests for

Proposal (RFP) initiatives for developers to respond to

• Discussions and engagement with public sector authorities often focus on the funding model that would apply to housing developments

as governments can shape the sliding scale of rental prices

• Stakeholders noted that housing developers are often confronted with several individual funding envelopes from various levels of

governments and programs that are ‘patched together’ (known as program stacking) to enable projects to come on stream

• Increasingly, provincial governments have articulated green building policies in social/affordable housing and have identified particular

standards they would like new projects to abide by (e.g., emissions reductions, verifications) which also shape the specifications of

sustainable housing projects

• A housing industry association noted that it works with municipalities to modify land use policies that could better enable the stock of

land available for social/affordable housing projects

Responding to

Housing

Needs in

Canadian

Municipalities

Priority

Populations

are Identified

through

Research and

Alignment to

Broader Policy

Objectives

Stakeholders did not identify specific formulae or methodologies to identify priority populations as there are several drivers of housing

vulnerability which may vary by locality. Priority populations noted in consultations varied but included seniors, young women, refugees,

new Canadians, the artistic community (i.e., developing spaces conducive to studios to enable artists to achieve success), those

experiencing mental illness and/or battling substance abuse issues

• It was noted that in some cases, municipalities or developers prioritize a population if it aligns to available funding envelopes

• In some cases, the law can also shape prioritization. For example, those fleeing domestic violence

• One Toronto-based developer noted that a priority population they worked within was the Jane & Finch neighbourhood in North

Toronto which has historically had significant socioeconomic challenges. In this instance, an entire neighbourhood rather than a

specific demographic group was deemed to be priority

Key Considerations for Investors (1/2)

Investors acknowledge the growing demand for ESG financial products in Canada. The majority of our consultations expressed a desire for

the increased supply of ESG financial products (which include SMBs) and provided insights on how the market could adopt and enable ESG

investment practices. The key themes with respect to market and investor demand considerations are outlined below

• In the case of ESG fixed-income products, investors have initially focused on the green bond market (with a particular emphasis on

bonds linked to climate change). This has led to greater market demand and supply for green bonds over other ESG-linked bonds (e.g.,

social bonds, sustainable bonds). This trend is not unique to Canada as other countries have also generally led with green bonds in the

adoption of ESG fixed-income investments. However, the trend perhaps continues to be pronounced in Canada as the country’s green

bond market has yet to fully mature. Our stakeholder consultations noted that there continues to be a supply-demand imbalance for

green bonds in the Canadian investment market (i.e., market demand for green bonds currently outstrips supply)

• Nonetheless, our stakeholder consultations echoed that investors have recently begun to broaden their investment horizons to social

and sustainable bonds. This is partly attributed to the increasing global emphasis on sustainability initiatives (demand for

social/sustainable bonds has grown in other countries too) and the increased availability of social/sustainable bonds. Our stakeholder

consultations included two leading public-sector issuers of sustainable/social bonds in Canada. Both stakeholders stated that a key

motivation to develop a social/sustainable bond framework was to take advantage of increasing market demand

• Generally, investors do not have a strong preference between green and social/sustainable bonds (all else equal). This lack of

preference between green and social is expected to hold for SMBs as well. Our stakeholder consultations noted that the motivations

underlying ESG investment strategies do not materially differ between different types of ESG bonds. Of course, this would only be true

if both types of bonds are equivalent in terms of transparency, financial characteristics, market liquidity, and relevant factors

Market

Considerations

and Investor

Demand

Key Considerations for Investors (2/2)

ESG

Investments

and Financial

Returns

Empirical evidence, albeit based on a limited time series, shows that ESG investments can outperform non-ESG investments under certain

market and economic conditions. For example, BlackRock’s research shows that sustainable indexes have outperformed non-sustainable

indexes over the last four economic downturns (see page 24-25 for more information). To substantiate this research, we asked investors

for their viewpoints on whether and why ESG bonds (including SMBs) could outperform non-ESG bonds. The key outcomes of this topic are

outlined below.

• Investors acknowledge the empirical evidence mentioned above, but they believe it is still too early to conclusively state that ESG

bonds can outperform non-ESG bonds. The general consensus is that, as the market evolves and matures, only time will tell whether

there exist prospects for ESG bonds to achieve medium- to long-term financial outperformance.

• Many investors believe that any observed financial outperformance would be attributed to imbalances in supply and demand. Hence,

the financial outperformance of ESG bonds relative to non-ESG bonds would be short-lived. The excess returns would normalize once

the ESG bond market matures to a point that issuance volumes and trading activity reflect those of the overall bond market.

• Investors do not believe that the aforementioned considerations around financial outperformance would differ in the case of SMBs.

However, it was noted that there may be liquidity constraints in the initial roll-out of SMBs as markets adopt to this new type of

security.

Investors emphasized the importance of adequate and standardized processes around reporting, labelling, and overall transparency of

ESG bond frameworks. Our stakeholder consultations echoed that there does not exist a uniform set of guidelines in Canada for such

processes. Hence, many issuers and investors rely on third-party or international guidelines. This often leads to a lack of uniformity

around ESG bond frameworks, a nuance that acts as a barrier to information symmetry and widespread adoption.

ESG

Reporting,

Labelling, and

Transparency

• Investors recommended that the government step in to establish reporting and tracking standards and define key performance

indicators. This would help investors better understand the mandate of the underlying asset and how proceeds would be used

• Some investors noted that it would be helpful if the government could provide guidance on what constitutes “green”, “social”, and

“sustainable” labels. Currently, ESG labels are largely based on third-party guidance and the second-party opinions engaged by issuers.

However, both third-party guidance and second-party opinions can have differing viewpoints. This presents an opportunity for the

government to play a role in standardizing the labelling process.

• Our stakeholder consultations also echoed that the government could support issuers by establishing standardized data collection

guidance so that the impacts reported by green bonds of different issuers are consistent. This would help to ensure that investors

considering two or more green bonds with similar mandates and underlying assets do not observe significant differences in reporting

quality or quantity.

Key Barriers Identified (1/2)

Housing developers were asked to identify the key obstacles they face when delivering or managing green/sustainable housing programs. Responses were

categorized in the following themes:

Securing financing was found to be particularly challenging by most developers– with some noting not being able to have access to

adequate financing that reflects the requirements and cadence of building development.

• Securing an upfront cash flow was cited as a challenge. The CMHC Seed Funding program was identified as helpful, but not fully

adequate to address the challenge. Stakeholders encouraged a review of the program to adjust parameters/requirements to more

current financial/economic contexts.

• Not-for-profit housing developers were noted to be ‘cash poor’ but asset rich. A not-for-profit stakeholder noted that this can

make it difficult for not-for-profit housing developers to compete for CMHC funding against private sector developers with different

financial profiles.

• Stakeholders operating in the Toronto market noted that rising construction costs and development charges have put added pressure

on financing for developers.

• Stakeholders noted that capitalizing on one-off funding opportunities can often spur activity. For example, a Toronto-based housing

developer noted that a recent building was enabled through a substantial private sector donation. Had it not been for the donation, the

project may not have occurred.

(i)

Funding/

financial

considerations

Developers noted that there continues to be a large demand for affordable housing across the country. While unable to provide specific

estimations, many noted that the COVID-19 crisis is or can be expected to place further pressure on the requirement for housing

• Anecdotally it was noted that vacancies in affordable housing dwellings are down from pre-COVID-19 levels and anticipated this to

grow in coming months/years. When asked if tenants stay despite increases in income that would enable them to access market

housing options, stakeholders generally had mixed views. In some instances, this scenario was noted as a challenge that is difficult to

get around. Others however, stated this was not a critical challenge that could explain a lack of vacancies.

(ii)

Demand

Key Barriers Identified (2/2)

• A municipal housing stakeholder noted that within their city, stakeholders had a common understanding of what ‘affordable’ means.

However, across Canada, understanding varies. As a result, there are differences in policy frameworks and criteria which can limit the

ability of the housing sector to speak with authority and unity when liaising with government.

• Municipal zoning approaches which can make identifying land available for housing projects difficult to quickly identify and

execute upon.

• Differences in frameworks and criteria for green or social outcomes can also ‘confuse’ investors and can create a lack of ability to

communicate the benefit associated with ESG related bonds/products. For example, when comparing two ESG related financial

products, understanding the differences in outcomes, or intensity of environmental or social outcomes can be difficult without a

common nomenclature/understanding.

• As many municipalities are adopting building codes that are driving green outcomes, communicating what ‘net new’ green outcomes

that are above and beyond building code could be a challenge.

(iii)

Policy

environment

Housing developers were asked to identify the key obstacles they face when delivering or managing green/sustainable housing programs. Responses were

categorized in the following themes:

Tracking and Monitoring of Environmental, Social, and Economic Benefits (1/2)

• Broadly, environmental outcomes were viewed as easier to communicate than social: As environmental outcomes can be quantified (e.g., GHG

emissions reductions) some stakeholders viewed environmental outcomes to be easier to record, track and communicate than social outcomes in an

attributable manner.

• Stakeholders also noted that the public may be able to quickly understand environmental impacts driven from housing projects whereas the pathway

through which a housing project drives social changes can be harder to grasp quickly.

• Some housing developers/industry associations monitor outcomes: The extent to which housing developers tracked broader benefits associated

with housing projects varied across stakeholders.

• Broadly, all housing developers reported that significant effort goes into financial reporting associated with housing projects

• In instances where a ‘patchwork’ of public sources of funding have been put together to enable a project, reporting requirements were viewed as

robust.

• Increasingly, housing projects are being asked to deliver a high quality of life for residents. One stakeholder noted that the mantra for standards is

“would I want to live there”.

• As a result, newer developers are putting time and energy into reporting how buildings drive good outcomes.

• A provincial housing association noted that it has a team actively working to benchmark energy performance, through automated uploads of energy

utilization energy to a portfolio manager responsible for reporting on the performance of several buildings.

• This form of monitoring requires partnership with local hydro providers to enable data transfer.

• A housing developer based in Toronto noted that environmental outcomes were not tracked formally. However, the organization stated that it would point

to the integration of low water use toilets, and the potential to monitor electricity savings as potential options to communicate ‘green’ outcomes if asked.

• A European investor stakeholder noted that municipalities contract with relevant energy providers to provide dynamic tracking of results as a means of

tracking outcomes.

• Third party verification was identified as an important measurement tool. A municipal bond issuing stakeholder for example noted that second-opinions

and external ESG credit ratings verification was critical to the success of ESG financial tools.

• Public reporting of outcomes for bond issuers is also increasingly important to maintain transparency and public trust in ESG related activity.

Tracking and Monitoring of Environmental, Social, and Economic Benefits (2/2)

• Frameworks reviewed in Deloitte research were identified by stakeholders: ICMA and the UN SDG Goals were both identified by a key Canadian

municipal bond issuer as sources of guidance for the development of its eligibility criteria.

• When asked to what extent labelling of bonds as ‘green’ influences demands, stakeholders generally stated labelling standards were helpful signals to

investors

• Many stakeholders noted a lack of globally accepted, easily understood standards as to what constitutes a ‘green’ outcome as a potential challenge for

the ESG space broadly

• A stakeholder noted that while transparency in reporting is critical, it did not advocate for government to develop its own standard and associated

compliance mechanisms as a means to create uniformity

Trends Expected to Shape Social/Affordable Housing in Canada (1/2)

• Affordable housing as a mechanism for economic recovery: A housing industry association noted that as Canada navigates economic recovery from

COVID-19, housing could be reconceptualized as a driver of economic growth and prosperity.

• New housing projects could stimulate economic activity associated with construction

• Ensuring individuals and families have access to affordable hosing could protect against further vulnerability in society

• Integrating social housing as part of the government’s view of ‘infrastructure’ could help position the sector to receive further funding

• In the short term, it was noted that the COVID-19 crisis led to an increase in demand for affordable housing – responding to this need will likely add

pressure on housing wait times. Some stakeholders noted that the COVID-19 crisis could help to highlight the need for investing in housing.

• New approaches to construction: Stakeholders identified modular housing and micro housing could create new opportunities and business models for

housing in the future.

• Emphasis on building resiliency: New builders and governments are looking to ensure buildings are using materials and technologies that can enhance

their resiliency and lessen the need for wholescale refurbishments in the future. New technologies that can support better financial performance were

viewed to be as in demand in the coming years.

• Single person dwellings: Some stakeholders noted that there is an often overlooked need for units suitable for one person. Increasingly, elderly

tenants, or individuals without families require social/affordable housing options. Multi-room units designed for families are often not accessible to these

groups.

• REIT activity: A potential threat or challenge that could confront the social/affordable housing ecosystem was noted to be increasing examples of REITs

buying rental or social/affordable housing for the purposes of transforming them into units that command market rent. This could erode the existing

limited pool of housing stock in Canada and create vulnerability for tenants.

• Consolidation amongst developers: A housing association stakeholder noted that developers in Canada tend to be medium-to-large firms or, niche,

highly specialized firms. Over time they expected some level of consolidation in which larger firms merge or acquire specialized capabilities or, specialised

firms come together to grow in scale.

• Ensuring that the specific area of expertise (e.g., developing housing suitable for those with dementia) is retained within the ecosystem through these

consolidations was viewed as imperative.

• Proximity to services/food deserts: A Toronto-based housing developer noted that ensuring housing projects are located in proximity to essential

services, grocery stores (specifically with produce) as of critical importance. Increasingly, there is public policy interest in addressing ‘food deserts’

(instances in which communities lack access to full suite grocery stores/fresh foods).

Trends Expected to Shape Social/Affordable Housing in Canada (2/2)

• Enhanced interest in climate change: As consumers and governments pivot towards tackling climate change and aligning to Canada’s commitments

for the Paris Climate Change Agreement will likely help spur support for and potential adoption of SMBs along side other ESG related financial products.

• Specifically, for investments that can clearly show returns on par, or better than non-ESG related products – interest in supporting social or

environmental challenges were viewed as opportunities that investors would want to capitalize on.

• Financial institutions similarly, indicated a broader interest in facilitating/developing ESG related products both to meet customer demand but to also

enhance their own firm’s environmental footprint/support for green outcomes.

• For example, a representative from a major Canadian municipality noted that municipal green bond issuance has been driven in part by the City’s

green goals, and Canada’s commitments to the Paris Climate Change Agreement. Political support has also furthered momentum and investor interest.

− A municipal stakeholder also noted that as a large landlord of social/affordable housing buildings, ensuring that they are able to generate financing

that can support retrofits and/or new builds further drives interest in bond issuances.

• One investor stakeholder noted that housing developers may continue to be encouraged to invest in green buildings or to integrate green

technologies/renewable energies into housing projects to access incentives/subsidies from government.

− This interest has led to momentum in the adoption of solar panels for example.

Role of Government: Considerations for the Success of SMBs in Canada (1/3)

Example Expectations of the role of government identified in consultations:

• An explicit loan/bond guarantee from government could further support investor confidence in SMBs.

• Governments could stand behind the underlying projects

• Ensuring SMBs are easily explained to the market and understood to stakeholders that do not have a deep financial background (e.g., some housing

developers)

• Ensuring transparency in reporting and mandating/encouraging regular, clear, quality reporting to investors and the public on the outcomes associated

with public bond issuances

• Support by providing data to help address gaps that can limit transparent reporting

Broader Comments

• Policy support for environmental and social outcomes – a private sector interviewee noted that Canada’s climate change related policies could

influence adoption of ESG related financial products including SMBs. Specifically, energy policy and the choices the government makes in transforming

Canada’s oil and gas industry were identified as areas where the government could send important policy signalling.

• A European investor stakeholder noted that in some instances there can be differences in understanding of what sustainability is, or the case for

climate change across rural and urban communities. As a result, government may continue to have a role to educate citizenry on sustainability.

• The stakeholder also suggested that the government could provide financial incentives for ESG products (e.g., tax breaks, or guarantees) that could

further support market momentum and adoption.

Broader considerations

• Financial literacy/awareness of SMBs was viewed as relatively nascent: When asked what the prospects of SMBs could be as a tool to achieve

social/environmental outcomes in housing, housing developers noted that the ecosystem may not be aware of how SMBs could influence the financing,

execution or success of social/affordable housing projects. Ensuring that the communications explaining SMBs are accessible to organizations and

individuals of all financial literacy levels will be critical.

• Roadshows, conferences and communications initiatives that familiarize investors with what an SMB is (and what it is not) were identified as a

potential mechanism to enhance awareness of a CMHC supported SMB(s).

Role of Government: Considerations for the Success of SMBs in Canada (2/3)

• Transparent and robust reporting: Both public and private stakeholders interviewed noted that SMBs will be held to a high standard of reporting that

can adequately communicate ‘why’ someone would purchase an SMB and how it drives attributable economic or social benefits. While ESG rating firms

such as Sustainalytics can assist in reporting on outcomes, ensuring that those less familiar with ESG investment tools can understand how SMBs help

drive change was viewed as critical.

• It was noted that there is a significant level of momentum in measuring environmental outcomes. Social changes/outcomes were viewed as more

challenging to measure.

• Canada’s position as a safe place to invest: An affordable housing organization stated leveraging Canada’s reputation as a safe place to invest for

foreign investors could be a means to further enhance global investment into Canadian issued SMBs.

Role of Government: Considerations for the Success of SMBs in Canada (3/3)

Potential Risks

• When asked what risks CMHC could encounter in scaling a SMB, stakeholders convened on the following risks:

• Investor let down: A scenario in which funds are being channeled towards projects/ projects that do not drive the outcomes it states it would (e.g.,

environmental outcomes) or Outcome ‘drift’ – a scenario where the outcome is only tangentially related to the stated green or social outcome an

investor is expected.

• Lack of awareness:

− Variances in, or low levels of underwriting quality including the performance of collateral underpinning SMBs could make it challenging for investors

to understand the mechanisms through which ESG outcomes will be achieved, limiting adoption/investor interest

− Specifically, in scenarios in which ESG related financial products may be more expensive for issuers or investors than non-ESG products, a lack of

understanding or confidence in how an investment could support ESG outcomes could limit adoption

Comparison of SMBs and Similar

Financial Products

Appendix 1

Comparing SMBs to Similar Financial Products

SMBs share characteristics with mortgage-backed securities, green bonds, and social bonds – but they differ

in notable ways from these financial products.

• MBS are fixed-rate investments that represent an

ownership interest in a pool of mortgages on real

estate assets. The investors receive proportional

shares of the interest and principal payments

associated with those mortgages.

• MBS can also relate to commercial or residential

properties. Residential properties can take the

form of a single dwelling or multi-family dwelling.

• Green bonds are bonds where the proceeds are

allocated to assets that support green

sustainability. The issuer of green bonds

communicates to investors the environmental

objectives and the process to determine how the

project fits within eligible green project’s

categories and related eligibility criteria.

• Examples of relevant asset categories include:

renewable energy projects, clean transportation,

energy efficiency, pollution prevention and control,

and green buildings and infrastructure.

• Social bonds are bonds where the proceeds are

allocated to assets that support social

sustainability. The issue of social bonds

communicates to investors the social and

sustainable objectives and the process to

determine how the project fits within related

eligibility criteria.

• Examples of relevant asset categories include:

affordable basic infrastructure, access to essential

services, food security, employment generation,

and affordable housing.

Mortgage-Backed Securities Social Bonds and Financial ProductsGreen Bonds and Financial Products

SMBs vs Mortgage-Backed Securities

• SMBs are a type of mortgage-backed security.

However, SMBs are unique because they

comprise of a pool of mortgages on

sustainability-focused real estate assets (green

and/or social sustainability).

• Like mortgage-backed securities, investors

receive a proportional share of the interest and

principal payments associated with these

mortgages.

SMBs vs Green and Social Bonds / Financial Products

• Sustainability bonds are investment instruments in which the proceeds are attributed to assets or projects

with green or social sustainability objectives.

• SMBs are similar in that they consist of a pool of mortgages on real estate assets that are backed by green

and/or socially sustainability initiatives or real estate assets that output green or social initiatives. As such,

SMBs are understood to meet the baseline requirements of ESG investment products.

1. Fannie Mae, Single-Family, Accessed on April 27, 2020: https://www.fanniemae.com/portal/funding-the-market/mbs/single-family/index.html.

2. BMO Financial Group, BMO Sustainable Financing Framework, 2019.

3. Sustainalytics, Second-Party Opinions for your Social Impact Initiatives, Accessed on April 27, 2020: https://

www.sustainalytics.com/sustainable-finance/social-bonds/.

Our Approach to Rank Global

Sustainable Mortgage Funding

Frameworks

Appendix 2

* NWB Bank and BNG Bank only track the environmental performance with respect to their social/affordable housing stock. The proceeds related to these two frameworks are only attributed to social/affordable housing associations.

112

Approach to Directionally Rank Global Sustainable Mortgage Funding Frameworks

We developed and executed an approach to rank global sustainable mortgage funding frameworks with

respect to their relevance to our study – considering impact measures, ESG criteria, and data availability.

Transparency and Data Availability

We measure the framework’s transparency and data availability with respect to ESG criteria and performance measures through three levels: (i) strong indicates that highly

detailed information is available (e.g., 3+ years of historical data), (ii) medium indicates that quantitative mechanisms are outlined but historical data is less available, and

(iii) low indicates that sufficient details are not provided, likely due to the newness of the framework.

Relevancy of ESG Criteria and Impact Measures

We measure the relevance of the framework’s ESG criteria and performance measures to Canada’s housing market and related initiatives through three levels: (i) score of 3

indicates a high degree of relevance, (ii) score of 2 indicates a medium degree of relevance, and (iii) score of 1 indicates a limited degree of relevance. This directional and

high-level scoring system was based on our review of Canada’s green and social/affordable building initiatives and objectives (e.g., National Housing Strategy, Canada’s

Buildings Strategy, 2030 Agenda for Sustainable Development, Affordable Housing Initiative, etc.).

The table below summarizes the directional scores attributed to each of the seven frameworks reviewed. These scores informed our selection of the Fannie Mae and NWB

Bank frameworks. For more information, please refer to page 47.

Global Sustainable Mortgage Funding Framework

Transparency and Data

Availability

Relevance of

ESG Criteria

Relevance of

Environmental Measures

Relevance of

Social Measures

Fannie Mae Multifamily Green Bond Framework Strong Green – 3 | Social - 1 3 1

NWB Bank’s SDG Housing Bond Framework Strong Green – NA | Social – 3 2* 3

European Mortgage Federation’s European Covered Bond Council Low Green – 3 | Social - NA 2 2

Sparebanken Sør Green & Sustainability Bond Framework Medium Green – 3 | Social - NA 2 1

BNG Bank’s Sustainable Municipalities Bond Framework Strong Green – 1 | Social - 1 2* 3

NHFIC Sustainability Bond Framework Low Green – NA | Social - 3 NA 1

Housing New Zealand’s Sustainable Financing Framework Medium Green – 1 | Social - 3 1 2

Review of Additional Sustainable

Mortgage Funding Frameworks

Appendix 3

EMF European Covered Bond Council (1/3)

Timeline of Framework Implementation

• September 2016 – Launch of the European Energy Efficiency Mortgage initiative

• June 2017 – Announcement of the Energy Efficient Mortgage Action Plan (EeMAP)

• October 2017 – Announcement of Energy Efficiency Data Portal & Protocol (EeDaPP) Initiative

• March 2018 – European Commission’s Sustainable Finance Action Plan is formally released

• June 2018 – The Energy Efficient Mortgages Pilot scheme was released

• 2020/2021 – EMF’s plans include the purchase of green bonds or residential mortgage-backed

securities after the green mortgage portfolio has been built

Housing Segments Covered by Framework

• The framework covers all new and existing residential homes, both single-family and multi-family

homes, and commercial properties. While commercial properties are covered by the framework,

the focus is on residential real estate assets.

Program Performance

• No bonds have been issued through this framework to-date but plans to issue green bonds have

been slated for 2020/2021.

ESG Eligibility Criteria

Efficient Mortgages (EEMs) are intended to finance the purchase, construction and/or renovation of

both residential (single family & multi-family) and commercial buildings. The properties’ energy

performance needs to meet one of the following criteria:

• Compliance with the relevant national definition of nearly zero energy buildings (NZEBs);

• Improvement of 20% over current applicable national building regulations (for example, where

NZEB definitions have not been finalized); or

• Improvement of 30% or more in the case of renovations.

Source 1: Energy Efficient Mortgage Initiative, Energy Efficient Mortgage Initiative Presentation, 2019.

Source 2: Energy Efficient Mortgage Initiative, Energy Efficient Mortgages Pilot Scheme, 2019.

Source 3: ECBC, Energy Efficient Mortgages, Accessed on April 29, 2020: https://hypo.org/ecbc/market-initiative/emf-ecbc-energy-mortgages-initiative/.

EMF European Covered Bond Council (2/3)

Source 1: Energy Efficient Mortgage Initiative, EeMAP Energy Efficiency (EE) Financing: Emerging Analysis, 2017.

Source 2: Energy Efficient Mortgage Initiative, Market Needs And Gaps In Energy Efficient Mortgages’ Reporting Protocol And Data Portal Implementation, 2018.

115

Social Performance Measure Measurement Mechanism

Lower energy bills through the construction are refurbishment of green buildings

• Operational energy consumption could be tracked through the property's utility provider

• Electricity prices in the EU are available through Eurostat

Retained wealth through preferential interest rates during the period of improving the

property

• The framework may look at the debt-to-service-coverage ratio or the debt-to-come ratio

Increased property value (protection against browndiscount)

• This metric may be reported in Euros through MortgageLending Values or Affordable

Market Values (AMV), or an index of thesemetrics

• An associated metric would be the property value relative to the area median value, which

could be calculated by use of land register, cadastre, AVMs, or regional statistics

• A final related metric could be price-to-square meter, to be reported in €/m2

Increasing the ease of selling the property through the energy-efficient improvements • No information

Reduce costs of healthcare through improved living conditions • No information

Distance to central business district • No information

Distance to closest public-transportation hub • No information

Social Performance Measures

Below, we outline the social performance metrics employed by EMF to report the performance of its program. Where available and applicable, we also describe the

measurement mechanism related to each performance metric.

EMF European Covered Bond Council (3/3)

Source 1: Energy Efficient Mortgage Initiative, EeMAP Energy Efficiency (EE) Financing: Emerging Analysis, 2017.

Source 2: Energy Efficient Mortgage Initiative, Market Needs And Gaps In Energy Efficient Mortgages’ Reporting Protocol And Data Portal Implementation, 2018.

116

Environmental Performance Measure Measurement Mechanism

Reduction in energy consumption through construction and refurbishment of greenbuildings

• Operational energy consumption could be tracked through the property's utility provider in

kWh/m² per year

Reduction in greenhouse gas emissions and improved air quality though construction and

refurbishment of green buildings

• Main metric used for tracking this is the Energy Performance Certificate which tracks and

rates the primary energy use per square meter of floor area (kWh/m2)

Reduction in carbon footprint per kilogram of CO2 equivalent emitted (or saved) per unit

observed

• No information

Reduction in building envelope and heat transfer coefficient (U-value or H-value) measured in

(W/m2)

• A building envelope is the physical separator between the conditioned and unconditioned

environment of a building including the resistance to air, water, heat, light, and noise

transfer, and comprises four components: walls, windows, roofand floor

Environmental Performance Measures

Below, we outline the environmental performance metrics employed by EMF to report the performance of its program. Where available and applicable, we also describe the

measurement mechanism related to each performance metric.

Economic Performance Measure Measurement Mechanism

Increased private investment in energy efficient improvements, largely through retrofitting

properties

• No information

Boost in small and medium-sized enterprises (SME) activity in the retrofitting sector due to

increases in private investment

• No information

Economic Performance Measures

Below, we outline the financial and economic performance metrics employed by EMF to report the performance of its program. Where available and applicable, we also

describe the measurement mechanism related to each performance metric.

Sparebanken Sør Green & Sustainability Bond Framework (1/3)

Timeline of Framework Implementation

• 2019 - Sparebanken Sør established the framework and issued their first green and

sustainable bonds

Housing Segments Covered by Framework

• The framework is split into two bond series – green bonds and sustainable bonds. Only green

bonds wholly fund residential housing projects whereas sustainable bonds support commercial

buildings.

• All types of residential buildings are eligible for financing through the green bond framework, with

different ESG requirements allocated for different building codes, (for more information, refer to

the ESG Eligibility Criteria section in the next slide).

Program Performance

• The maximum green funding available through the program was 23.3 billion NOK (approximately

US$2.2 billion).

• This amount was used to finance residential green buildings. The entire amount was allocated

towards new residential buildings in Norway.

• The allocation of funding to green bonds was 10 billion NOK (approximately US$955 million), and

the unallocated amount of the eligible Sustainability Project Portfolio was 13.3 million NOK

(approximately US$1.3 billion).

Source 1: Sparebanken Sør, Green & Sustainability Bond Framework, 2019.

Source 2: Sparebanken Sør, SpareBank 1 Boligkreditt Green Covered Bond Allocation Reporting, 2019.

117

Sparebanken Sør Green & Sustainability Bond Framework (2/3)

ESG Eligibility Criteria

Green residential buildings refer to new residential buildings belonging to the top 15% most energy-

efficient buildings of the local building stock and refurbished residential buildings that achieved

energy savings of at least 30% in comparison to the baseline performance of the building before the

renovation.

The framework segments its eligibility criteria based on buildings codes, which translate to the

below high-level segmentations.

1. New residential buildings in Norway

− New or existing Norwegian apartments that were built from 2012 onwards. These apartment

buildings correspond to the top 15% most energy efficient apartment buildings in Norway.

− New or existing Norwegian other residential dwellings that were from 2009 onwards. These

residential dwellings also correspond to the top 15% most energy efficient residential

dwellings in Norway.

2. Older residential buildings in Norway

− Norwegian residential buildings built prior to 2009 with EPC-labels A, B, and C (based on

labels between A to G, with A-label denoting the highest efficiency). These buildings can be

identified in data from the Energy Performance Certificate (EPC) database – which provides

ready-to-use information on building stock in Norway.

3. Refurbished residential buildings in Norway that have achieved a 30% improvement in

energy efficiency

− Refurbished Norwegian residential buildings that have achieved at least a two-step

improvement in energy label compared to the calculated label based on the building code in

the year of construction

− Refurbished Norwegian residential buildings that have achieved at least a 30% improvement

in energy efficiency measured in specific energy, kWh/m2, compared to the calculated label

based on the building code in the year of construction

− Where EPC labels are available to select eligible assets under this criterion, only labels of ‘D’

or better will be considered.

Source 1: Sparebanken Sør, Green & Sustainability Bond Framework, 2019.

Source 2: Sparebanken Sør, SpareBank 1 Boligkreditt Green Covered Bond Allocation Reporting, 2019.

118

Sparebanken Sør Green & Sustainability Bond Framework (3/3)

Source 3: Sparebanken Sør, Green Covered Bond Investor Presentation, 2019.

119

Source 1: Sparebanken Sør, Green & Sustainability Bond Framework, 2019.

Source 2: Sparebanken Sør, Post-issuance Green & Sustainability Bond Allocation Report, 2019.

Environmental Performance Measure Measurement Mechanism

Reduction of energy consumption (GWh-equivalents) due to the construction and

refurbishment of green residentialbuildings

• No information

Ex-ante annual energy savings in MWh due to the construction and refurbishment of green

residential buildings

• Site energy savings calculated using the difference between the top 10 percent of buildings

and the national building stock benchmarks

Annual GHG emissions reduced in tons of CO2 due to the construction and refurbishmentof

green residential buildings

• No information

Annual GHG emissions avoided in tons of CO2 due to the construction and refurbishment of

green residential buildings

• No information

Breakdown of loans by Energy Performance Certificates(EPC)

• Each project is categorized into a different energy performance category based on

European Union standards.

• This metric would capture loans made for projects that are projecting towards specific EPC

labels (especially in the case of new-builds), or given to projects that have an existing EPC

(especially in the case of refurbishments).

Environmental Performance Measures

Below, we outline the environmental performance metrics employed by Sparebanken Sør to report the performance of its program. Where available and applicable, we also

describe the measurement mechanism related to each performance metric.

Social and Economic Performance Measures

Sparebanken Sør’s framework does not include social or economic performance measures related to residential real estate units.

BNG Bank Sustainable Municipalities Framework (1/9)

Timeline of Framework Implementation

• 2016 - First sustainability bond linked to Dutch Social Housing Associations

• 2017 - Second sustainability bond linked to Dutch Social Housing Associations

• 2018 - Third sustainability bond linked to Dutch Social Housing Associations

• 2019 - Framework released for a potential fourth bond issuance

Housing Segments Covered by Framework

• Housing units and properties funded by social housing associations in the Netherlands

Program Performance

• In 2019, BNG’s total bond issuance was €14.9 billion, with a weighted average maturity of 7.2

years, and 94 transactions in six currencies. These figures include all of their bond offerings

• BNG’s new long-term lending in 2018 was €11.6 billion with €5.5 billion going towards housing

associations

• The sustainable housing bond issuance was €500 million in 2018, €750 million in 2017, and €1

billion in 2016

Source 1: BNG Bank, Sustainability Bond for Dutch Housing Associations Framework 2019, 2019.

Source 2: BNG Bank, Investor presentation Sustainability Bond for Dutch Social Housing Associations 2019, 2019.

120

BNG Bank Sustainable Municipalities Framework (2/9)

ESG Eligibility Criteria

• The framework chooses the "best-in-class" social housing associations by assigning a

sustainability score to each association based on 79 performance indicators (described in

subsequent pages), weighted for the size and the social-issues associated with each association

• In 2019, the framework was eligible to 320 social housing associations which were large enough

to provide adequate data on a yearly basis. This group was then limited to the 200 groups with

the highest sustainability score and were most focused on investing in their neighborhood.

• Each eligible group is split into 10 classes of associations based on size, age of property, and

type of property (e.g., one-family dwellings, high-rise, etc.)

• From the group of 200, the 15 highest-scoring associations in each class is selected. After

correcting for double counting, this brings the eligible groups down to 100 associations

• These 100 best-scoring associations can be used as the elected associations for a 2019 BNG

Bank Sustainability Bond for Dutch Social Housing Associations

Structure of Performance Measures

All performance reporting measures are broken into two categories: external and internal.

• External sustainability refers to the local environment in which the rental units are located

• Internal sustainability is related to the performance of the social housing association and its

housing units

Performance in measures are used to create an overall sustainability score which determines the

associations inclusion in the bond issuance.

Note: We continue to investigate the quantitative mechanisms that drive the sustainability scoring

system.

Source 1: BNG Bank, Sustainability Bond for Dutch Housing Associations Framework 2019, 2019.

Source 2: BNG Bank, Investor presentation Sustainability Bond for Dutch Social Housing Associations 2019, 2019.

121

BNG Bank Sustainable Municipalities Framework (3/9)

Source: BNG Bank, Sustainability Bond for Dutch Housing Associations Framework 2019, 2019.

122

Environmental Performance Measure Measurement Mechanism

External Factors

• Score given based off the quality of the air in the area, measured by:

− Total CO2 emissions in kg per inhabitants

Air Quality

− Total nitrogen emissions in kg per inhabitants

− Total particulate matter emissions in kg per inhabitants

− Average yearly concentration of nitrogen in the air in μg/m3

− Average yearly concentration of particulate matter in the air in μg/m3

Annoyances and Emergences

• Score given based off the risk for people being affected by disasters, measured by:

− Three-year moving average of the number of registered earthquakes in the area

− Number of probable victims in case of a 100-year flood per squared kilometer

• Score given based off annoyance of odors, noise, or absence of light in the area, measured in:

− Yearly emission of artificial light in nanoWatts/cm2/sr

− Average background noise intensity on a scale of 1-8

• Score given based off nuisance due to urban heat islands, measured by the yearly average temperature difference that occurs due to

urban heat island effects

Nature and Landscape

• Score given based off nature preservation in the area

• Score given based off access to nature in the area, measured by:

− Average distance of inhabitants to all forms of public greenspace in kilometers

− Average distance of inhabitants to any form of recreational water in kilometers

• Score given based off the biodiversity that needs to be maintained and reinforced, measured by the total number of observed species in

the area in a given 10-year time period

Energy • Score given based off the consumption of renewable energy

Environmental Performance Measures

Below, we outline the external and internal environmental performance metrics employed by BNG Bank to report the performance of its program. Where available and

applicable, we also describe the measurement mechanism related to each performance metric.

BNG Bank Sustainable Municipalities Framework (4/9)

Environmental Performance Measure Measurement Mechanism

Internal Factors

• Score given based off citizen’s consumption of energy and emission of greenhouse gasses, measured by:

− Average electricity consumption of rental houses in kWh/dwelling

− Average gas consumption of rental houses measured in m3

Energy − Average installed capacity of solar (PV) panels per address (kW peak) measured in installed capacity/dwelling

− Energy label index, which represents the percent of housing units of an association with a certain energy label

− Average CO2 emission of the energy used for heating the dwellings in kg/m2 (gas-consumption and external heat supply)

− Total costs of residential improvements per rental unit (energy measures and accessibility for elderly people)

• Score given based off how well the social housing association promotes circular economy through separated waste collection,

measured in:

− Total amount of household waste produced in kg per inhabitant

Resources and Waste

− Total amount of residual waste produced in kg per inhabitant

− Total amount of organic waste produced in kg per inhabitant

− Total amount of packaging glass collected in kg per inhabitant

− Total amount paper and cardboard waste in kg per inhabitant

− Total amount of plastic waste in kg per inhabitant

Source: BNG Bank, Sustainability Bond for Dutch Housing Associations Framework 2019, 2019.

123

Environmental Performance Measures (cont’d)

BNG Bank Sustainable Municipalities Framework (5/9)

Source: BNG Bank, Sustainability Bond for Dutch Housing Associations Framework 2019, 2019.

124

Social Performance Measure Measurement Mechanism

External Factors

Social Participation

• Score given based off how concerned citizens are in society, measured by the share of people that was enrolled in any form of

volunteering in the past 12 months

• Score given based off perceived social cohesion, measured by the share of people that was enrolled in any form of informal care giving in

the past 12 months

• Score given based off voting power and voting participation in the area, measured by the turnout in the last municipal election

Economic Participation

• Score given based off how well citizens can make ends meet financially, measured by:

− Share of households in possession of financial assets of 5,000 Euro or more (excluding real estate dept.)

− Share of the potential labor force that receives social assistance in the form of social welfare benefits

• Score given based off amount of poverty and social exclusion, measured by the share of households with a household income below 105%

of the social minimum

Arts and Culture

• Score given based off the sufficiency and diversity of the cultural offer, measured by:

− Average distance per inhabitant to for instance a theater or cinema

− Average distance per inhabitant to a museum

Health

• Score given based off people’s perception of their mental and physical health, measured by:

− Share of the inhabitants that does not meet the requirements of sufficient physical activity

− Share of the inhabitants that show risky behavior (heavy smokers or drinkers)

− Regional life expectancy at birth

− Share of inhabitants that assesses their own health as ‘good’ or ‘very good’

• Score given based off quality and accessibility of healthcare, measured by the average distance per inhabitant to a general practitioner

Residential Environment

• Score given based off availability and accessibility of public daily facilities, measured by:

− Average distance per inhabitant to catering facilities like restaurants or bars

− Average distance per inhabitant to shops who provide daily goods and services

• Score given based off satisfaction with their dwelling and living environment, measured by the share of inhabitants that is satisfied with

the living environment

Social Performance Measures

Below, we outline the external and internal social performance metrics employed by BNG Bank to report the performance of its program. Where available and applicable, we

also describe the measurement mechanism related to each performance metric.

BNG Bank Sustainable Municipalities Framework (6/9)

Source: BNG Bank, Sustainability Bond for Dutch Housing Associations Framework 2019, 2019.

125

Social Performance Measure Measurement Mechanism

External Factors (cont’d)

Education

• Score given based off quality of education offered in the area, measured by:

− Share of people that leaves the education circuit without a diploma

− Share of low educated people in the 18+ population (excluding students)

• Score given based off the accessibility to education appropriate for the citizen’s capabilities, measured by:

− Average distance per inhabitant to the closest elementary school

− Average distance per inhabitant to the closest school for secondary education

Internal Factors

Physical and Economic Accessibility

• Score given based off the extent to which associations are focused on providing affordable housing for people in need, measured by:

− Share of affordable and low-cost dwellings suitable to provide housing to low income households within the regional market

− Two-yearly average of the percentage of allocations within the income limits

• Score given based off the allocations of dwellings to a target group, measured by the match between the housing stock of a corporation

with regard to the target group in the area of the possession of the housing association

• Score given based off the accessibility of the dwellings for people with physical or mental disabilities, measured by the percentage of the

housing stock that is accessible with wheelchairs or for people with physical disabilities

Living Quality

• Score given based off the price-quality ratio of dwellings, measured by:

− Expenses on quality of the living environment (social and physical activities) per rental unit

− Rent price as a percentage of the maximum permitted rent

− Rental price in percentage of the assessed value

• Score given based off the health environment of the dwellings

Social Performance Measures (cont’d)

BNG Bank Sustainable Municipalities Framework (7/9)

Source: BNG Bank, Sustainability Bond for Dutch Housing Associations Framework 2019, 2019.

126

Social Performance Measure Measurement Mechanism

Internal Factors (cont’d)

Safety and Security

• Score given based off the chance of citizens becoming a victim of violence, crime, and traffic accidents, measured by:

− The number of arrested suspects for property related crimes per 10,000 inhabitants

− The number of deaths or heavily wounded victims of traffic incidents per 1,000 inhabitants

− The number of arrested suspects for vandalism per 10,000 inhabitants

− The number of arrested suspects for violent crimes or sexual assaults per 10,000 inhabitants

• Score given based off the perceived safety of the citizens

Residential Satisfaction

• Score given based off the quality of service the association provides to their tenants, measured by:

− Index between the assessed dwelling quality and the reference value of the Dutch national average

− Tenants’ rating of sustainability bond on a scale of 1-10

− Tenants’ rating of sustainability bond on scale of 1-10, after a repair request

Social Performance Measures (cont’d)

BNG Bank Sustainable Municipalities Framework (8/9)

Source: BNG Bank, Sustainability Bond for Dutch Housing Associations Framework 2019, 2019.

127

Economic Performance Measure Measurement Mechanism

External Factors

Labour

• Score given based off the use of the potential labour of the population in the area, measured by the share of the potential work force that

is currently active in the labor market

• Score given based off how healthy the labour offered is

• Score given based off the supply and demand of labour balance, in quantity and quality, measured by the percentage of unemployed

people in the potential labor force

Competitiveness

• Score given based off how competitive businesses are in the area, measured by:

− Amount of vacant retail space (as share of non-vacant retail space)

− Total regional production divided by the number of inhabitants resulting in a regional version of GDP

− Total share of highly educated people

Infrastructure and Accessibility

• Score given based off accessibility of businesses, facilities, institutions and economic centers by transport means, measured by:

− Average distance per inhabitant to the closest train station with a connection to the domestic railway network

− Average distance per inhabitant to the closest main road access point

Internal Factors

Corporation Valuation

• Score given based off the economic status of the association, measured by:

− Average amount of points in housing valuation system based on the NEN 2767 system

− Ratio of the long-term debts and the standardized association exploitation value

• Score given based off the value of the association’s property, measured by the standardized association exploitation value in euros per unit

Economic Performance Measures

Below, we outline the external and internal economic performance metrics employed by BNG Bank to report the performance of its program. Where available and applicable,

we also describe the measurement mechanism related to each performance metric.

BNG Bank Sustainable Municipalities Framework (9/9)

Economic Performance Measure Measurement Mechanism

Internal Factors (cont’d)

Future Constancy

• Score given based off the risk profile of the association based on their debt profile, measured by:

− Expected revenues from new housing units realized over 2017-2021 as a percentage of the current revenues from rent

− Number of newly constructed housing units to be rented as percentage of the total stock exploited in the reporting year. Newly

constructed units destined for direct sale or for rental by third parties are excluded from this figure

− Remaining lifespan of property

− Interest coverage ratio is based on net cash flow, national government contributions, corporate income tax, levies special project

support and sanitation, divided by payed interest minus interest collected

− Solvency ratio measuring the resistivity of the housing association in relation to the total capital

• Score given based off the extent to which the association demonstrates valuing legality, financial continuity and integrity

• Score given based off the extent to which the association displays creative, adaptive and innovative characteristics of the housing facilities,

measured by the Total amount of (semi) public charging stations for electronic vehicles

Loss of Revenue

• Score given based off the optimization of available space use

• Score given based off the extent to which revenue is lost due to vacancy or market developments, measured by:

− Loss of rental income due to vacancies exceeding three months as a result of market circumstances

− Loss of rental income due to vacancy as a result of the execution of projects

− Percentage of the annual rent that is missed by outstanding rental arrears

Source: BNG Bank, Sustainability Bond for Dutch Housing Associations Framework 2019, 2019.

128

Economic Performance Measures

NHFIC Sustainability Bond Framework (1/3)

Timeline of Framework Implementation

• February 2019 - First social bond issued

• November 2019 - Second social bond issued

Housing Segments Covered by Framework

• New or existing housing that is funded by Community Housing Providers (CHPs). CHPs are

regulated by national and state/territorial governments.

Program Performance

• NHFIC's first bond issuance was a social bond of $315 million AUD in March 2019

• Their second bond issuance was another social bond of $315 million AUD in November 2019

• The bonds were used to support the financing of over 2,000 properties and support the supply of

over 360 new social and affordable dwellings

• NHFIC estimates the loans created through the bonds will save around $50 million AUD in

interest payments over the next 10 years

• As of November 2019, the total value of loans the NHFIC Board approved was over $830 million

AUD since the framework's establishment

• These loans supported the delivery of more than 1,000 new and 3,600 existing, social and

affordable homes

ESG Eligibility Criteria

To be eligible for loans under this framework, loans must be used to: (i) acquire new housing stock,

(ii) construct new housing stock, (iii) maintain existing housing stock, or (iv) assist CHPs with

working capital requirements and/or for an application towards their general corporate purposes.

In each case, the use of the loan finance must demonstrate improved housing outcomes

for Australians.

Source 1: NHFIC, Sustainability Bond Framework, 2019.

Source 2: NHFIC, Social Bond Report 2018-19, 2019.

Source 3: NHFIC, Annual Report 2018-19, 2019.

Source 4: NHFIC, NHFIC Bonds Exceed $600m With Second Bond Issuance, Accessed on April 29, 2020: https://www.nhfic.gov.au/media-resources/media-releases/nhfic-bonds-exceed-600m-with-second-bond-issuance/.

NHFIC Sustainability Bond Framework (2/3)

Source: NHFIC, Sustainability Bond Framework, 2019.

130

Social Performance Measure

Impacts are to be reported in accordance with the International Capital Market Association's Social Bond Principles. These principles include the following social project categories, but not

limited to:

• Affordable basic infrastructure (e.g. clean drinking water, sewers, sanitation, transport, energy)

• Access to essential services (e.g. health, education and vocational training, healthcare, financing and financial services)

• Affordable housing

• Food security

• Socioeconomic advancement and empowerment

Impacts are to be reported per target populations of the loan proceeds based of the ICMA Social Bond Principles, including but not limited to:

• Living below the poverty line

• Excluded and/or marginalized populations and/or communities

• Vulnerable groups, including as a result of natural disasters

• People with disabilities

• Migrants and /or displaced persons

• Undereducated (such as supporting child education costs, or specific programs like drug education)

• Underserved, owing to a lack of quality access to essential goods and services

• The unemployed

Number of dwellings and/or units supported

Social Performance Measures

Below, we outline the social performance metrics employed by NHFIC to report the impacts of its program. NHFIC’s framework does not provide information on

measurement mechanisms.

Environmental Performance Measures

NHFIC’s framework does not include environmental performance measures related to residential real estate units.

NHFIC Sustainability Bond Framework (3/3)

Source: NHFIC, Sustainability Bond Framework, 2019.

131

Economic Performance Measure

Employment generation including through the potential effect of SME financing and microfinance

Anticipated interest savings from preferential loan rates

Economic Performance Measures

Below, we outline the economic performance metrics employed by NHFIC to report the impacts of its program. NHFIC’s framework does not provide information on

measurement mechanisms.

NHZ Sustainability Financing Framework (1/3)

Timeline of Framework Implementation

• April 2019 - First sustainable bond issued

Housing Segments Covered by Framework

New or existing social housing, defined as (i)state housing managed by Housing New Zealand

(“HNZ”), (ii) transitional (emergency) short-term housing, (iii) affordable housing for sole buyers

that make less than $120,000 NZD or two or more buyers that make less than $180,000 NZD, and

(iv) sections of land sold HNZ for housing development without the application of price restrictions.

Program Performance

• NNZ's first bond issuance was a sustainable bond of $500 million NZD in April 2019

• The bonds were used to house nearly 5,300 people with new and/or retrofitted social housing.

• The loans also supported 192 new/upgraded facilities for tenants requiring intensive support to

live in their homes, and 49 new/upgraded facilities for tenants with mobilityconsiderations.

• As of November 2019, the total value of loans the NHFIC Board approved was over $250 million

NZD since the framework's establishment

ESG Eligibility Criteria

Under this framework, borrowers may be eligible for a loan through a social, green or sustainable

bond. To be eligible for loans under the green framework, loans must be used to: (i) acquire green

building certification of new or renovated social housing, and/or (ii) reduce construction waste,

carbon emissions, and soil runoff during construction. To be eligible for loans under the social

framework, loans must be used to: (i) support vulnerable target populations aligned with ICMA

social bond guidelines, and (ii) support UN Sustainable development goals as they relate to social

housing.

In each case, the use of the loan finance must demonstrate improved housing outcomes for New

Zealanders.

Source 1: HNZ, Housing New Zealand Sustainable Financing Framework, 2019.

Source 2: HNZ, Sustainability Financing Impact Report,2019.

Source 3: HNZ, Housing New Zealand issues the first sustainability bond for the New Zealand Market, Accessed on Nov. 4, 2020:

https://kaingaora.govt.nz/assets/Investors-Centre/Media-statements/Housing-New-Zealand-issues-the-first-sustainability-bond-for-the-New-

Zealand-market-2-April-2019.pdf

132

NHZ Sustainability Financing Framework (2/3)

Source: HNZ, Sustainability Financing Impact Report, 2019.

133

Environmental Performance Measures

Below, we outline the external environmental performance metrics employed by HNZ to report the performance of its program. Where available and applicable, we also

describe the measurement mechanism related to each performance metric.

Environmental Performance Measure Measurement Mechanism

External Factors

Energy

• Green building certifications obtained

• Energy savings from renovations and upgrades in kg/m2, including:

− standard designs for standard material sizes and reduced material types that reduce construction waste

− deconstruction services and waste management to recycle and reuse deconstruction waste

− use of materials that reduce waste and/or have recycled content

Air pollution

• Reduce rate of embodied emissions through use of low embodied carbon designs and materials

• Reduction in air pollution through:

− use of surface area materials designed to reflect heat

− increased tree and vegetation coverage of HNZ land

Nature and Landscape

• Reduction of soil runoff rates by reduction of site runoff during/after construction

• Amount of soil and land remediated

Material Waste

• Share of materials sourced sustainably (including certified products, recycled content)

• Amount of waste that is separated and/or collected and treated in tonnes

• Amount of waste reduced, reused, recycled and/or diverted from landfill in tonnes

NHZ Sustainability Financing Framework (3/3)

Source: HNZ, Sustainability Financing Impact Report, 2019.

134

Social Performance Measures

Below, we outline the external and internal social performance metrics employed by HNZ to report the performance of its program. Where available and applicable, we also

describe the measurement mechanism related to each performance metric.

Social Performance Measure Measurement Mechanism

External Factors

New and Retrofitted Social Housing • Number of people housed with new and/or retrofitted social housing accommodation

Internal Factors

Mobility Considerations • Number of new and/or upgraded facilities financed that include mobility considerations.

Populations Requiring Intensive Support • Number of new and/or upgraded facilities financed for supported housing for tenants requiring intensive support to live in their homes

Socioeconomic Advancement and

Empowerment

• Type of support for individuals identified as most at risk of poor wellbeing outcome

• Case studies on how funds from the bond proceeds wereused.

Additional Model Outcomes from

Regression Analysis

Appendix 4

Regression Analysis – Additional Model Outcomes (1/2)

We tested various other economic and environmental variables; however, the causal mechanism is not clear for these outcomes. Hence, we

believe these might be spurious relationships and do not make inferences as to the potential relationships to SMBs.

New Housing Price

Index

GDP of Energy

Sector

Multi-Unit Net

Commercial Income

Mortgage Amount

Requested by

Multi-Units

Household

Electricity

consumption

Multi-Unit

Residential Utility

Expenditure

Issuance Volumes

>$5 Billion

Lower Bid-Ask Spread Higher Z-spread Higher Z-Spread

Issuance Volumes

>$5 Billion

Lower Bid-Ask Spread

Negative

Relationship

Positive

Relationship

Negative

Relationship

Negative

Relationship

Positive

Relationship

Positive

Relationship

• After ESG bond

issuance volumes

crossed $5 billion,

growth in issuances

has been negatively

related to growth in

new home prices.

• ESG bonds with

lower bid-ask

spreads imply

higher liquidity. This

result shows that as

the liquidity of ESG

bonds has

increased, growth in

the economic

activity of the

energy sector has

increased.

• ESG bonds with

higher z-spreads

lead to higher

returns and are

thus more attractive

to investors.

• We find that growth

in the performance

of ESG bonds has

been negatively

related to growth in

the net commercial

income of multi-

units.

• ESG bonds with

higher z-spreads

lead to higher

returns and are

thus more attractive

to investors.

• We find that growth

in the performance

of ESG bonds has

been negatively

related to growth in

the total amount of

mortgages

requested by multi-

unit buildings.

• After ESG bond

issuance volumes

crossed $5 billion,

growth in issuances

has been positively

related to growth in

household

electricity

consumption.

• After ESG bond

issuance volumes

crossed $5 billion,

growth in issuances

has been positively

related to growth in

residential utility

expenditure by

multi-units.

Our model did not find statistical evidence of causality between ESG bond characteristics and variables above.

ESG Bond

Characteristic

Directional

Relationship

Description of

Directionality

Statistical

Causality Tests

Environmental Variables

Economic Variables

Regression Analysis – Additional Model Outcomes (2/2)

Housing Starts

Investments in

Building

Construction

Employment in

Construction

Sector

Consumer Credit

and Mortgage

Liabilities

(% of net worth)

Number of Beds

in Multi-Unit

senior Homes

Number of Multi-

Unit Residential

Units

Share of

Qualifying Units

in MLIFLEX Index

All Characteristics All Characteristics All Characteristics All Characteristics All Characteristics All Characteristics All Characteristics

Not Statistically

Significant

Not Statistically

Significant

Not Statistically

Significant

Not Statistically

Significant

Not Statistically

Significant

Not Statistically

Significant

Not Statistically

Significant

• We find no

evidence of a

relationship

between ESG

bonds and

housing starts.

• We find no

evidence of a

relationship

between ESG

bonds and

investments in

building

construction.

• We find no

evidence of a

relationship

between ESG

bonds and

investments in

employment

levels in the

construction

sector.

• We find no

evidence of a

relationship

between ESG

bonds and

consumer credit

and mortgage

liabilities as a

share of net

worth.

• We find no

evidence of a

relationship

between ESG

bonds and

number of beds

in multi-unit

senior homes.

• We find no

evidence of a

relationship

between ESG

bonds and

number of multi-

unit residential

units.

• We find no

evidence of a

relationship

between ESG

bonds and the

share of

qualifying units

in MLIFLEX

index.

ESG Bond

Characteristic

Directional

Relationship

Description of

Directionality

Other variables economic, environmental, and social variables tested did not lead to statistically significant outcomes. However, due to limitations

around data quality and availability, we cannot be certain whether the relationships do not exist or whether the data is not sufficient to allow our

models to meaningfully capture the relationships.

Social and Housing

Affordability Variables

Economic Variables

Note: We tested for statistical significance at the p-scores of 0.05 and 0.10. The outcomes listed above were not statistically significant at their p-score level.

Additional Information on

Econometric Analysis

Appendix 5

Sensitivity Analysis and Robustness Checks

We performed a series of tests on our variables and model outcomes, as well as undertook alternative

specifications of the regression model, to validate the accuracy and robustness of our analysis.

Regression Analysis Event Study Analysis

Variable Tests

• All the independent and dependent variables used in our analysis

were tested for stationarity – a pre-requisite characteristic for

performing time-series econometric analysis.

• Any variables found to be non-stationary were transformed into log-

differences to remove any time-trends that may be influencing the

variable.

• The same stationarity tests and log-difference transformations used

for the regression analysis were applied to the event study analysis.

• This model requires the determination of an event window (time-

period of the event under analysis). We used a Chow breakpoint test

and descriptive analyses of trends in ESG bond issuances to define an

appropriate event window for the analysis.

Alternate

Specifications

• Two specifications of the linear regressions were performed, based on

modifications to the bond index.

• The main specification was performed on three of the five ESG bond

index variables listed on pages 83-84. The alternate specification is

identical to the main specification but incorporates a dummy variable

to capture the time periods during which bond issuances were equal

to or greater than $5 million. This dummy variable intends to capture

the effects of high bond issuance levels on environmental, social, and

economic indicators.

• For the pre-event period of the analysis, we regress the dependent

variables on the control variables (i.e., Canadian GDP and CPI) to

determine a post-event expected value. In the case the results are

insignificant, we regress the dependent variables on the single

control variable with the most explanatory power to use as the post-

event expected value.

• An alternate specification of this analysis includes changing the event

window based on the results of the breakpoint testing – i.e., re-

running the econometric models with a different event specification.

Robustness of

Results

• We performed two-way Granger causality tests on all significant

coefficients to determine whether the statistically significant model

outcomes had more explanatory power in addition to correlations.

The Granger causality test can be used to determine whether the

independent variable directly results in variations in the dependent

variable.

• For social variables and other variables which had lower data

frequencies, we used a sign test to verify the directional correlation

of the abnormal changes (difference between the actual and

expected return after the event).

Summary of Sensitivity Analysis and Robustness Checks

The table below describes the statistical processes and tests done to ensure the robustness of our econometric model and results. This includes our incorporation of

alternative specifications used for sensitivity analysis.

Additional Information on Event Study Approach

After identifying an event window, there are three key steps to determine the relationship between the event

and the dependent variables.

Additional Information

• The key measure for the event study analysis is the computation of the abnormal return, the difference between returns with intervention and the expected

returns without intervention.

• Abnormal returns can be used in significance testing to determine if there exists a potential relationship between the event and the distribution of returns.

• After identifying the event window, there are three computational steps to calculate significance – as detailed below.

Estimate Expected Return

• First, we need to determine what each of our

dependent variables would look like in absence of

the specified event.

• To do this, we regress each of the dependent

variable on the control variables (i.e. Canadian GDP

and CPI) for the pre-event period (i.e., the time

period between the first data point and the event

start date).

• We use the regression coefficients to calculate

predicted values of the dependent variable to

estimate what would have happened in the

absence of the event.

• The abnormal return computes the difference

between what would have happened without the

event and what happened in reality (with the

event).

• To measure the abnormal return for a given

dependent variable, we subtract the expected

return, calculated by the predicted values from the

previous step, from the actual data in the post-

event period:

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,

= 

,

−  

,

�

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For return on dependent variable, i, in the post-

event window, t, and for the expected return for the

same dependent variable and time period given the

control variables, X

• To test for significance, we perform statistical

hypothesis testing on the abnormal returns of each

dependent variable.

• Specifically, we run a t-test, where the t-statistic

uses the abnormal return data for the post-event

period, calculated in the previous step.

• We use this t-statistics to generate a p-value, to

determine its significance at the 5% and 10%

significance levels.

• In the case where data is too limited to perform the

t-test, we corroborate the results with a sign test

to determine directionality of the correlations.

Calculate Abnormal Return

1 2

Test Significance

Regression Analysis – Summary Output Tables for Key Outcomes (1/2)

We provide below the standard summary output tables associated with the key outcomes of the regression

analysis (as shown on pages 85-86).

Variable Estimate Std. Error T Statistic Pr (>|t|)

Intercept 0.0146*** 0.0017 8.5870 0.00

Z-Spread -0.0097* 0.0049 -1.9730 0.07

Canadian Aggregated Bond Index Value 0.1802* 0.1009 -1.7870 0.09

Canadian GDP 0.0725 0.1958 0.3700 0.72

Canadian CPI -0.1340 0.1130 -1.1860 0.25

Canadian Aggregated Bond Index Volume -0.0004 0.0017 -0.2100 0.84

BBB Corporate Bond Yield 0.0159** 0.0073 2.1780 0.05

Adjusted R

37.48%

Variable Estimate Std. Error T Statistic Pr (>|t|)

Intercept 0.0086** 0.0035 2.4200 0.03

Issuance Volumes >$5 Billion -0.0081** 0.0030 -2.6880 0.02

Canadian Aggregated Bond Index Value 0.0727 0.2068 0.3520 0.73

Canadian GDP 0.0186 0.4206 0.0440 0.97

Canadian CPI -0.1328 0.2398 -0.5540 0.59

Canadian Aggregated Bond Index Volume -0.0078** 0.0035 -2.2580 0.04

BBB Corporate Bond Yield 0.0051 0.0150 0.3370 0.74

Adjusted R

26.75%

Variable Estimate Std. Error T Statistic Pr (>|t|)

Intercept 0.0042 0.0059 0.7190 0.4838

Issuance Volumes >$5 Billion -0.0184** 0.0054 -3.4130 0.0042

Canadian Aggregated Bond Index Value -0.2008 0.3437 -0.5840 0.5684

Canadian GDP 1.3582 0.7274 1.8670 0.0830

Canadian CPI 0.9735* 0.3876 2.5110 0.0249

Canadian Aggregated Bond Index Volume 0.0022 0.0056 0.3960 0.6982

BBB Corporate Bond Yield -0.0102 0.0255 -0.4000 0.6951

Adjusted R

43.55%

Dependent

Variable: Rental

Fee Payments

Dependent

Variable:

Consumer

Credit &

Mortgage

Liabilities (%

Disposable

Income)

Dependent

Variable: Real

Estate

Expenses

(% of

Disposable

Income)

Note 1: ***, **, and * represent statistical significance at 1%, 5%, and 10%, respectively.

Note 2: The variables listed in the tables above (except the intercept) are presented in growth rate differences.

141

Regression Analysis – Summary Output Tables for Key Outcomes (2/2)

We provide below the standard summary output tables associated with the key outcomes of the regression

analysis (as shown on pages 85-86).

Variable Estimate Std. Error T Statistic Pr (>|t|)

Intercept -0.0010 0.0014 -0.7030 0.48

Issuance Volumes >$5 Billion 0.0038** 0.0017 2.1640 0.03

Canadian Aggregated Bond Index Value -0.2056 0.1807 -1.1380 0.26

Canadian GDP 0.1207 0.3354 0.3600 0.72

Canadian CPI -0.4673* 0.2739 -1.7060 0.09

Canadian Aggregated Bond Index Volume -0.0008 0.0025 -0.3240 0.75

BBB Corporate Bond Yield -0.0169 0.0120 -1.4060 0.16

Adjusted R

3.64%

Variable Estimate Std. Error T Statistic Pr (>|t|)

Intercept 0.0144 0.0084 1.7210 0.11

Yield-to-Maturity -0.0501* 0.0235 -2.1320 0.05

Canadian Aggregated Bond Index Value -0.2767 0.4970 -0.5570 0.59

Canadian GDP 0.2136 1.0188 0.2100 0.84

Canadian CPI -0.1343 0.5508 -0.2440 0.81

Canadian Aggregated Bond Index Volume -0.0012 0.0084 -0.1470 0.89

BBB Corporate Bond Yield 0.0221 0.0380 0.5810 0.57

Adjusted R

-2.68%

Dependent

Variable: GDP of

Construction

Sector

Dependent

Variable: Gas

and Fuel

Consumption

Note 1: ***, **, and * represent statistical significance at 1%, 5%, and 10%, respectively.

Note 2: The variables listed in the tables above (except the intercept) are presented in growth rate differences.

142

Event Study Analysis – Summary Output Tables for Key Outcomes

We provide below the standard summary output tables associated with the key outcomes of the event study

analysis (as shown on page 90).

Variable Estimate T Statistic Pr (>|t|)

Pre-Event Average 0.0076

Post-Event Average Abnormal Return -0.01016** -2.8655 0.015

Sign Test Sample Observations Pr (>|t|)

Positive Sign Test 12 1 0.9968

Negative Sign Test 12 11 0.0002***

Variable Estimate T Statistic Pr (>|t|)

Pre-Event Average 0.0078

Post-Event Average Abnormal Return -0.0078*** -4.70818 0.001

Sign Test Sample Observations Pr (>|t|)

Positive Sign Test 12 2 0.9807

Negative Sign Test 12 10 0.0032***

Dependent

Variable: Real

Estate Expenses

(% of

Disposable

Income)

Dependent

Variable:

Mortgage

Liabilities (% of

Disposable

Income)

Note 1: ***, **, and * represent statistical significance at 1%, 5%, and 10%, respectively.

143

ESG Bond Index Construction and

Definitions

Appendix 6

Definitions of ESG Bond Characteristics

Variable Description

Last Price Return

• The month-to-month financial return of the index price, which is

measured by the average of the prices that make up the index.

Yield-to-Maturity (YTM)

• The total return that will be paid out from the time of a bond's

purchase to its expiration date measured at the last day of the

month.

Price Bid Ask Spread

• The difference between bid and ask price of the bond index at end

of the month.

Yield Bid Ask Spread

• The difference between the yield to maturity using the bid and

ask price at the end of the month.

Zero-Volatility

Spread (Z-Spread)

• The constant spread that makes the price of a security equal to

the present value of its cash flows when added to the yield at

each point on the risk-free rate.

Issuance Volume • The dollar value of the bonds issued.

The table below provides the definitions of the characteristics within our Canadian ESG bond index

(as described on page 84).

ESG Bond Index Construction – Selection and Treatment Process

Sector Issuer

Total Amount

(C$ millions)

Banking Bank of Montreal 654.45

Banking Bank of Nova Scotia 651.35

Banking Canadian Imperial Bank of Commerce 1,000.00

Banking National Bank of Canada 1,999.95

Banking Royal Bank of Canada 752.64

Banking Toronto-Dominion Bank/The 1,723.07

Financial Export Development Canada 1,583.31

Industrial Algonquin Power Co 300.01

Industrial Brookfield Renewable Partners 1,250.03

Industrial City of Ottawa Ontario 302.01

Industrial City of Toronto Canada 500.01

Industrial City of Vancouver 85.00

Industrial CPPIB Capital Inc 3,662.86

Industrial Ellisdon Infrastructure RIH GP 152.71

Industrial Ivanohe Cambridge 300.01

Industrial Mobilinx Hurontario GP 263.26

Industrial Ontario Power Generation Inc 2,150.05

Industrial Province of Ontario Canada 2,554.48

Industrial Province of Quebec Canada 2,800.06

Industrial South Coast British Columbia Transportation Authority 600.01

Insurance Manulife Financial Corp 1,075.62

Insurance Sun Life Financial Inc 750.02

Real Estate Investment Trusts RioCan Real Estate Investment Trust 350.01

Supranational European Investment Bank 3,450.00

Supranational International Finance Corp 750.00

Total 29,660.92

To build a Canadian ESG Bond Index, we analyzed all Canadian and CAD-labeled ESG bonds currently traded on the market. The table below outlines the aggregate amount of

the ESG bonds across sectors, including the banking, financial, industrial, real estate, and supranational sectors. The notional value of ESG bonds issued by organizations in

these sectors totals to about $29.7 billion – most of which is accounted by issuances by organizations in the industrial sector ($14.9 billion).

Selection and Treatment Process

In our selection of relevant ESG bonds, we ranked the 56 ESG

bonds obtained from Bloomberg from ‘high’ to ‘low’ based on their

relevance to the “use of proceeds” criterion for SMBs. The ranking

categories are defined below.

• High – Use of Proceeds directly supported green or affordable

buildings.

• Medium – Use of Proceeds supported sustainable energy projects

but did not have a specific focus on building.

• Low – Use of Proceeds did not support the projects in the high

and low categories or information was unavailable.

All securities that ranked low or did not have sufficient data were

excluded from the analysis. This resulted in 49 ESG bonds for

inclusion in our ESG bonds index.

Addition treatment of these 49 ESG bonds included the conversion

of securities issued in foreign currencies to CAD, based on the

foreign exchange rate as at the issue date of the bond.

ESG Bond Index Construction – List of ESG Bonds (1/5)

# Issuer CUSIP Use of Proceeds Relevance Currency

Maturity

Type

Issuanc

Date

Maturit

Date

oupon

Rate

1 Bank of Nova Scotia 064159QD1

An amount equivalent to the net proceeds of Scotiabank‘s Green Bond will be allocated

exclusively to finance or refinance, in whole or in part, new or existing Eligible Green Assets,

which refer to loans made by Scotiabank for assets, businesses or projects that meet

Scotiabank’s Green Bond Framework Eligibility Criteria. A business will be considered eligible

for financing using a Scotiabank Green Bond only if it derives 90% or more of its revenues

from activities in the below list of eligible categories. Eligible Areas are : 1. Renewable

Energy; 2. Energy Efficiency; 3. Pollution Prevention and Control; 4. Environmentally

sustainable management of living natural resources and land use; 5. Terrestrial and aquatic

biodiversity conservation; 6. Clean Transportation; 7. Sustainable Water and Wastewater

Management; 8. Green Buildings

High USD

MATURITY

2019-07-

2023-01-

2.38%

2 City of Ottawa Ontario 689551FE4

The City of Ottawa Framework identifies eight eligible categories to which bond proceeds may

be directed: (1) renewable energy; (2) energy efficiency; (3) pollution prevention and

control; (4) clean transportation; (5) sustainable water management; (6) sustainable

management of natural resources; (7) climate change adaptation and resilience; and (8)

green buildings.

High CAD

MATURITY

2017-11-

2047-11-

3.25%

3 City of Vancouver 921577RM6

The eligible use of proceeds are : 1. Renewable Energy; 2. Energy Efficiency; 3. Green

Buildings; 4. Clean Transportation; 5. Pollution Prevention and Control; 6. Sustainable Water

and Wastewater Management; 7. Environmentally Sustainable Management of Living Natural

Resources.

High CAD

MATURITY

2018-09-

2028-09-

3.10%

4-6 CPPIB Capital Inc

12593CAF8

CPPIB defines three eligible investment categories. These are: (1) Renewable Energy (wind

and solar), (2) Sustainable Water and Wastewater Management and (3) Green Buildings

(LEED Platinum certified). CPPIB determines to use Green Bond proceeds to finance or re-

finance projects/joint ventures as well as companies that are supplying and delivering projects

that belong to any of the three eligible investments categories.

High CAD

MATURITY

2018-06-

2028-06-

3.00%

22411VAL2

2019-12-

2020-12-

0.38%

AW8745126

2019-02-

2029-02-

0.88%

7-8

Manulife Financial

Corp

56501RAG1

An amount equal to the net proceeds from a Green Bond issuance will be used to finance or

re-finance, in part or in full, new and/or existing green assets that meet the Eligibility Criteria.

By category the list by gategory is : 1. Renewable Energy; 2. Green buildings; 3.

Environmentally sustainable management of natural resources and land use; 4. Energy

Efficiency; 5. Clean Transportation; 6. Sustainable Water Management; 7. Pollution

Prevention and Control.

High CAD CALLABLE

2018-05-

2028-05-

3.32%

AQ0237612

2017-11-

2029-11-

3.00%

The table below describes the key financial characteristics of the 49 Canadian ESG bonds in our index. It also includes our ranking of the bonds (based on the criteria outlined

in the previous page). At the end of the table, we have also described the seven Canadian ESG bonds that were not included in our bond index (highlighted in green).

ESG Bond Index Construction – List of ESG Bonds (2/5)

# Issuer CUSIP Use of Proceeds Relevance Currency

Maturity

Type

Issuanc

Date

Maturit

Date

oupon

Rate

9-10

National Bank of

Canada

63307CAG6

The net proceeds of the Bonds will be used to finance and refinance, in whole or in part, five

“Eligible Businesses and Projects” Categories which are: 1.) Renewable Energy (green

category); 2.) Sustainable Buildings (green category); 3.) Clean Transportation (green

category); 4.) Affordable housing (social category); 5.) Access to Essential Services (social

category).

High USD

MATURITY

2019-10-

2022-10-

2.15%

63307DAG4

2019-10-

2022-10-

2.15%

RioCan Real Estate

Investment Tru

766910BF9

RioCan intends to use the net proceeds from the issuances of Green Bonds to finance eligible

green projects (the “Eligible Green Projects” or the “Projects”) that are in the following areas:

1. Green Buildings; 2. Resource efficiency and management; 3. Renewable energy; 4.

Adaptability and resilience to climate change (project related to energy storage, storm water

management or other climate resilience projects)

High CAD CALLABLE

2020-03-

2027-03-

2.36%

12 Royal Bank of Canada ZS3024180

The proceeds of RBC Green Bonds will be allocated exclusively to finance or refinance, in part

or in full, eligible businesses and projects that promote the transition to a low carbon, climate

resilient and sustainable economy and provide clear environmental sustainability benefits

(“Eligible Assets”). Eligible Assets may include, but are not limited to, loans to businesses and

projects that meet RBC’s Green Bond eligibility criteria. Where a business derives 90% or

more of its revenues from activities in the eligible categories, it will be considered as eligible

for financing from an RBC Green Bond. In these instances, the Use of Proceeds can be used

by the business for general purposes, so long as this financing does not fund expansion into

activities falling outside the eligible categories. Eligible Categories are : 1. Renewable energy;

2. Energy Efficiency; 3. Pollution, prevention and control (Proceeds may be allocated to the

construction, development, operation, acquisition and maintenance of facilities, systems or

equipment used for: a) Collection, treatment, recycling or reuse of emissions, waste,

hazardous waste or contaminated soil. b) Facilities, systems and equipment that are used to

divert waste from landfills or reduce emissions; 4. Environmentally sustainable management

of living natural resources and land use; 5. Clean transportation; 6. Sustainable water and

wastewater management; 7. Green buildings

High EUR

MATURITY

2019-05-

2024-05-

0.25%

13-14

South Coast British

Columbia Tran

83740TAG2

The net proceeds of TransLink’s Green Bond issuances will be used to finance or refinance, in

whole or in part, existing and future capital projects that provide environmental benefits to

TransLink and the region, and support the achievement of environmental and climate goals.

Eligible categories are : 1. Clean transportation; 2. Renewable energy; 3. Energy efficiency;

4. Pollution, Prevention and control; 5. Green Buildings; 6. Climate Change adaptation

High CAD

MATURITY

2018-11-

2028-11-

3.25%

83740TAH0

2019-10-

2050-10-

2.65%

15 Sun Life Financial Inc 86682ZAL0

An amount equal to the proceeds of each Sustainability Bond will be used to finance or re-

finance, in part or in full, new and/or existing green or social assets within Sun Life’s General

Account that meet the Eligibility Criteria. Eligible categories are : 1. Renewable energy; 2.

Energy efficiency; 3. Green buildings; 4. Clean transportation; 5. Sustainable water

Management; 6. Access to essential services

High CAD CALLABLE

2019-08-

2029-08-

2.38%

ESG Bond Index Construction – List of ESG Bonds (3/5)

# Issuer CUSIP Use of Proceeds Relevance Currency

Maturity

Type

Issuanc

Date

Maturit

Date

oupon

Rate

16-17

Toronto-Dominion

Bank/The

891145N34

Eligible categories are : 1. Renewable energy generation; 2. Energy efficiency management;

3. Green infrastructure and sustainable land use

High

CAD

MATURITY

2014-04-

2017-04-

1.82%

89114QBT4 USD

2017-09-

2020-09-

1.85%

18 Bank of Montreal 06367WRC9

The eligible use of proceeds are : 1. Renewable energy; 2. Green buildings and infrastructure;

3. Energy efficiency; 4. Clean transportation; 5. Pollution prevention and control; 6.

Sustainable water and wastewater management; 7. Sustainable management of living natural

resources and sustainable land use; 8. Indigenous peoples’ business and community; 9.

Women-owned business lending; 10. Access to free or subsidized essential services; 11.

Affordable housing.

High USD

MATURITY

2019-10-

2022-11-

2.05%

19 Ivanohe Cambridge 46578WAB0

The proceeds obtained from Brookfield Renewable’s green bond program will be used to

finance or refinance the following “Eligible Investments” : 1- Green Buildings; 2- Renewable

Energy; 3- Energy Effeciency; 4- Sustainable Water and Wastewater Managment; 5- Clean

transportation; 6- Climate Change Adaptation

High CAD CALLABLE

2019-12-

2024-12-

2.30%

20-22

Brookfield Renewable

Partners UL

11282ZAM0

The proceeds obtained from Brookfield Renewable’s green bond program will be used to

finance or refinance the following “Eligible Investments” : 1- Renewable Energy Generation

(Solar Energy, Wind Energy, Hydroelectricity, Biomass Energy); 2- Energy Efficiency and

Management (Industrial efficiency, Climate change and eco-efficient products, production

technologies and processes, Energy storage technologies or assets)

Medium CAD CALLABLE

2018-09-

2029-01-

4.25%

23-24 City of Toronto Canada

891288DR0

The proceeds of each green debenture will be applied exclusively to finance or re-finance, in

whole or in part, new and/or existing capital projects under the City of Toronto Green

Debenture Framework. “Eligible Projects” means identified capital projects that meet the

City’s environmental objectives. The selection of these projects is generally guided by the

prevailing plans, policies and strategies as approved by Toronto City Council. Eligible

categories are : 1. Renewable energy; 2. Energy efficiency; 3. Pollution prevention and

control and utilizing waste as a resource; 4. Sustainable clean transportation; 5. Sustainable

water and wastewater management

Medium

CAD

MATURITY

2018-08-

2048-08-

3.20%

891288DT6 Medium

2019-09-

2039-09-

2.60%

25-27

Export Development

Canada

30216BFY3

Will support EDC’s existing and future lending operations for Eligible Transactions. Eligible

Transactions will include : 1. Waste Management; 2. Remediation & Soil Treatment; 3.

Recycling & Recovery; 4. Water Management; 5. Sustainable Forests Management; 6.

Sustainable Agriculture Management; 7. Renewable Energy; 8. Biofuels & Bioenergy; 9.

Smart Grid Energy Infrastructure; 10. Alternative Energy Transportation and Public Ground

Transport; 11. Industrial Process Improvements

Medium

USD

MATURITY

2015-12-

2018-12-

1.25%

30216BGU0 Medium

2017-06-

2020-06-

1.63%

30216BGV8 Medium

2017-09-

2022-09-

1.80%

ESG Bond Index Construction – List of ESG Bonds (4/5)

# Issuer CUSIP Use of Proceeds Relevance Currency

Maturity

Type

Issuanc

Date

Maturit

Date

oupon

Rate

28-29 Mobilinx Hurontario GP

60742LAA8

The proceeds will finance part of the Hurontario LRT concession project, which involves 18km

of a new double-track light rail transit system

Medium CAD

SINKABLE

2019-10-

2039-05-

3.28%

60742LAB6 Medium CAD

2019-10-

2054-05-

3.64%

30-33

Ontario Power

Generation Inc

68321ZAB7

Proceeds obtained from OPG’s green bond issuance shall be used to finance and/or refinance

“Eligible Projects”, a group of selected projects that offer tangible environmental benefits.

Eligible Projects will include the following: 1. Renewable Energy Generation; 2. Energy

Efficiency and Management.

Medium

CAD CALLABLE

2018-06-

2048-06-

3.84%

68321ZAC5 Medium

2019-01-

2049-01-

4.25%

68321ZAF8 Medium

2020-04-

2025-04-

2.89%

34-36

Province of Ontario

Canada

68323ACW2

“Eligible Projects” means projects (mainly infrastructure) funded by the Province that have

environmental benefits, exclusive of fossil fuel and nuclear energy projects. Eligible Projects

are located throughout Ontario communities and align with the Province’s environmental and

climate change policies. Without limitation, projects in the following sectors will generally be

considered eligible: 1. Clean Transportation; 2. Energy Efficiency and Conservation; 3. Clean

Energy and Technology; 4. Forestry, Agriculture and Land Management (Like sustainable

forest management); 5. Climate Adaptation and Resilience (Like flood protection and

stormwater management).

Medium CAD

MATURITY

2014-10-

2018-10-

1.75%

68323ADL5 Medium CAD

MATURITY

2016-01-

2023-01-

1.95%

68333ZAJ6 Medium CAD

MATURITY

2020-02-

2027-02-

1.85%

37-41

Province of Quebec

Canada

748148BY8

Eligible green projects (excluding electricity generation projects involving fossil fuels and

nuclear energy) correspond to one of the following categories: 1. Public Transit; 2. Energy

Efficiency; 3. Renewable Energy; 4. Sustainable Waste Management; 5. Sustainable Land

Development; 6. Water Management or Water Treatment; 7. Forest, Agricultural Land, and

Land Management; 8. Climate Adaptation and Resilience .

Medium CAD

MATURITY

2018-03-

2023-03-

2.45%

748148RW5 Medium CAD

MATURITY

2017-03-

2022-03-

1.65%

748148RX3 Medium CAD

MATURITY

2018-07-

2025-07-

2.60%

748148RY1 Medium CAD

MATURITY

2019-02-

2024-02-

2.25%

748148SA2 Medium CAD

MATURITY

2020-02-

2027-02-

1.85%

42 Algonquin Power Co 01585PAJ4 The eligible use of proceeds are: 1. Renewable energy generation; 2. Energy management. Medium CAD CALLABLE

2019-01-

2029-01-

4.60%

ESG Bond Index Construction – List of ESG Bonds (5/5)

# Issuer CUSIP Use of Proceeds Relevance Currency

Maturity

Type

Issuanc

Date

Maturit

Date

oupon

Rate

International Finance

Corp

45950KCQ1

The eligible use of proceeds are: 1. Renewable energy generation; 2. Energy management;

Sustainable Forestry

Medium CAD

MATURITY

09/13/20

1.38%

44-49

European Investment

Bank

AQ6993853

The eligible use of proceeds are: 1. Renewable energy generation; 2. Energy management

Medium CAD

MATURITY

01/18/20

2.38%

QJ4281714 Medium CAD

MATURITY

11/05/20

1.25%

QZ5198804 Medium CAD

MATURITY

09/16/20

1.13%

29878TCU6 Medium CAD

MATURITY

09/16/20

1.13%

29878TCS1 Medium CAD

MATURITY

11/05/20

1.25%

29878TCX0 Medium CAD

MATURITY

01/18/20

2.38%

Canadian Imperial

Bank of Comme

136069V32

An amount equal to the net proceeds will be allocated to the finance or re-finance, in part or

in full, new and / or existing Eligible Assets that imply implication of Women in Leadership.

Low CAD

MATURITY

2018-09-

2021-09-

2.90%

51-52

Ellisdon Infrastructure

RIH Genera

28903QAA9 Unknown Unknown CAD SINKABLE

2018-11-

2038-10-

3.93%

28903QAB7 Unknown Unknown CAD SINKABLE

2018-11-

2051-11-

4.15%

53 INTL Finance Corpo

45950KCQ1 No Available Data NA CAD

MATURITY

09/14/20

09/13/20

1.375%

54-56

National Bank of

Canada

AX2401526

No Available Data

NA EUR

MATURITY

02/13/20

02/20/20

Float

ZS1533380 NA EUR

MATURITY

03/11/20

04/01/20

Float

ZS9968372 NA EUR

MATURITY

05/14/20

02/24/20

Float

ESG Bond Index Construction – Monthly Average Values

The charts summarize the aggregated financial variables within the Canadian ESG bond index based on

monthly average values.

Last Price and Yield to Maturity Zero Volatility Spread (%) Price and Yield Bid Ask Spread

Last Price Return Average of number of securities during the month Average Volume (within the period)

3,5

2,5

1,5

0,5

115

110

105

100

May-2014

Nov-2014

May-2015

Nov-2015

May-2016

Nov-2016

May-2017

Nov-2017

May-2018

Nov-2018

May-2019

Nov-2019

May-2020

Last Price ($, left) YTM (%, right)

0,16

0,14

0,12

0,1

0,08

0,06

0,04

0,02

0,7

0,6

0,5

0,4

0,3

0,2

0,1

mai-2014

oct-

2014

mars-2015

août-2015

janv-2016

juin-2016

nov-2016

avr-2017

sept-2017

févr-2018

juil-2018

déc-2018

mai-2019

oct-2019

mars-2020

Price Bid Ask Spread (left) Yield Bid Ask Spread (right)

0,3%

0,2%

0,1%

0,0%

-0,1%

-0,2%

-0,3%

-0,4%

-0,5%

mai-2014

nov-2014

mai-2015

nov-2015

mai-2016

nov-2016

mai-2017

nov-2017

mai-2018

nov-2018

mai-2019

nov-2019

mai-2020

avr-2014

oct-2014

avr-2015

oct-2015

avr-2016

oct-2016

avr-2017

oct-2017

avr-2018

oct-2018

avr-2019

oct-2019

avr-2020

1,2

0,8

0,6

0,4

0,2

-0,2

avr-2014

oct-2014

avr-2015

oct-2015

avr-2016

oct-2016

avr-2017

oct-2017

avr-2018

oct-2018

avr-2019

oct-2019

avr-2020

12 $

10 $

8 $

6 $

4 $

2 $

0 $

avr-2014

oct-2014

avr-2015

oct-2015

avr-2016

oct-2016

avr-2017

oct-2017

avr-2018

oct-2018

avr-2019

oct-2019

avr-2020

MILLIONS

ESG Bond Index Construction – Last Value of Month

The charts summarize the aggregated financial variables within the Canadian ESG bond index based on

based on the last value of each month.

3,5

3,0

2,5

2,0

1,5

1,0

0,5

115

110

105

100

avr-2014

oct-

2014

avr-

2015

oct-2015

avr-

2016

oct-2016

avr-

2017

oct-2017

avr-

2018

oct-2018

avr-

2019

oct-2019

avr-

2020

RATE

PRIC

Last Price YTM (%)

-2%

-4%

-6%

avr-2014

oct-2014

avr-2015

oct-2015

avr-2016

oct-2016

avr-2017

oct-2017

avr-2018

oct-2018

avr-2019

oct-2019

avr-2020

Last Price Return Number of Securities Price Bid Ask Spread

Price and Yield Bird Ask Spread Z Spread (%) Price and Yield Bid Ask Spread

avr-2014

oct-2014

avr-2015

oct-2015

avr-2016

oct-2016

avr-2017

oct-2017

avr-2018

oct-2018

avr-2019

oct-2019

avr-2020

1,4

1,2

0,8

0,6

0,4

0,2

-0,2

avr-2014

oct-2014

avr-2015

oct-2015

avr-2016

oct-2016

avr-2017

oct-2017

avr-2018

oct-2018

avr-2019

oct-2019

avr-2020

0,30

0,25

0,20

0,15

0,10

0,05

0,00

0,7

0,6

0,5

0,4

0,3

0,2

0,1

avr-2014

oct-

2014

avr-

2015

oct-2015

avr-

2016

oct-2016

avr-

2017

oct-2017

avr-

2018

oct-2018

avr-

2019

oct-2019

avr-

YIELD BID ASK SPREAD

PRICE BID ASK SPREAD

Price Bid Ask Spread Yield Bid Ask Spread

45 $

40 $

35 $

30 $

25 $

20 $

15 $

10 $

5 $

0 $

avr-2014

oct-2014

avr-2015

oct-2015

avr-2016

oct-2016

avr-2017

oct-2017

avr-2018

oct-2018

avr-2019

oct-2019

avr-2020

MILLIONS

Information on Third-Party Data

Review

Appendix 7

Variable Source Data Characteristics Relevance Included in Analysis

Employment in construction sector Statistics Canada

• Frequency: Yearly

• Date Range: 2001 – 2017

• Geography: Provincial Level

High Yes

Employment in environmental sector Statistics Canada

• Frequency: Yearly

• Date Range: 2001 – 2017

• Geography: Provincial Level

High

(poor data availability)

GDP of the construction sector Statistics Canada

• Frequency: Monthly

• Date Range: 1997 - 2020

• Geography: Canada

High Yes

GDP of the energy sector Statistics Canada

• Frequency: Monthly

• Date Range: 1997 - 2020

• Geography: Canada

High Yes

Investment in building construction by building

type and type of work

Statistics Canada

• Frequency: Monthly

• Date Range: 1981 - 2020

• Geography: Canada

High Yes

Housing starts Statistics Canada

• Frequency: Quarterly

• Date Range: 1948 - 2020

• Geography: Canada

High Yes

Multi-Unit Commercial net income CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

Low Yes

Multi-Unit Commercial utilities expenditure CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

Low

(low relevancy to the study)

Multi-unit Requested mortgage loan amount CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

High Yes

Economic and Financial Variables – Data Summary

Variable Description

Employment in construction sector

This variable is expressed as a net/creation growth employment flow rate in the construction sector. Net growth is computed as a sum of

gross employment creation and gross employment reduction. Gross creation signifies the jobs gained in the construction sector.

Employment in environmental sector

This variable is expressed as a net/creation growth employment flow rate in the professional, scientific and technical services sector. Net

growth is computed as a sum of gross employment creation and gross employment reduction. Gross creation signifies the jobs gained in

the construction sector.

GDP of the construction sector Gross domestic product in the construction sector.

GDP of the energy sector Gross domestic product in the energy sector.

Investment in building construction by building

type and type of work

Building type includes residential, industrial and commercial properties. Type of work includes renovations, new construction,

or conversions.

Housing starts Number of new houses begun during a particular quarter by type of unit such as apartment, single-detached, etc.

Multi-Unit Commercial net income The net income generated by commercial business functions in multi-unit buildings.

Multi-Unit Commercial utilities expenditure The amount of money commercial businesses in multi-unit buildings pay toward utility bills, including electricity and gas bills.

Multi-unit Requested mortgage loan amount The total amount of mortgages requested by multi-units.

Economic and Financial Variables – Data Description

Variable Source Data Characteristics Relevance Included in Analysis

New housing price index Statistics Canada

• Frequency: Monthly

• Date Range: 1981 - 2020

• Geography: Canada

High Yes

Paid Rental Fees for Housing Statistics Canada

• Frequency: Quarterly

• Date Range: 1981 – 2019

• Geography: Canada

High Yes

Happiness index World Happiness Report

• Frequency: Yearly

• Date Range: 2005 -2019

• Geography: Canada

Medium

(poor data availability)

Healthy life expectancy at birth World Happiness Report

• Frequency: Yearly

• Date Range: 2005 -2019

• Geography: Canada

Medium

(poor data availability)

Core housing need CMHC

• Frequency: Yearly

• Date Range: 1991,1996,2001,2006,2011 (all

regions), 2012-2017 (urban regions)

• Geography: Provincial, National and CMAs level

High

(poor data availability)

Housing affordability index Bank of Canada

• Frequency: Quarterly

• Date Range: 1990 - 2019

• Geography: Canada

High Yes

Rental vacancy CMHC

• Frequency: Annually

• Date Range: 1992 - 2019

• Geography: Provincial and CMAs level

High

(poor data availability)

Variables from Canadian Income Survey (CIS) Statistics Canada

• Frequency: Annually

• Date Range: 2012-2017

• Geography: National

High

(poor data availability)

Custom extraction of affordable

housing variables

Statistics Canada

(custom extract)

• Frequency: Annually

• Date Range: 2012-2017

• Geography: Provincial, National and CMAs level

High

(poor data availability)

Social and Housing Affordability Variables – Data Summary (1/3)

Variable Source Data Characteristics Relevance Included in Analysis

Multi-unit rental net income including expenses CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

High Yes

Multi-unit total rental income CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

High Yes

Multi-Unit Commercial utilities expenses CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

Low

(low relevancy for the analysis)

Total unit count for residential Multi-Unit CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

High Yes

Number of beds in multi-unit senior homes CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

High Yes

Sum of total units and senior houses CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

Low

(low relevancy for the analysis)

RCFI indicator CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

Medium

(low relevancy for the analysis)

MLI FLEX indicator (social housing category

indicator with +1000 observations)

CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

High Yes

Multi-Unit Arrears amount CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

Medium

(poor data availability)

Social and Housing Affordability Variables – Data Summary (2/3)

Variable Source Data Characteristics Relevance Included in Analysis

Multi-Unit Arrears report date CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

Low

(low relevancy for the analysis)

Multi-Unit Claim received date CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

Low

(low relevancy for the analysis)

Mortgage Delinquency Equifax

• Frequency: Quarterly

• Date Range: 2012-2020

• Geography: Provincial

Medium Yes

Consumer credit and mortgage liabilities

(% of

disposable income)

Statistics Canada

• Frequency: Quarterly

• Date Range: 1990-2020

• Geography: Canada

High Yes

Real estate (% of disposable income) Statistics Canada

• Frequency: Quarterly

• Date Range: 2010-2020

• Geography: Canada

High Yes

Consumer credit and mortgage liabilities

(% of net worth)

Statistics Canada

• Frequency: Quarterly

• Date Range: 1990-2020

• Geography: Canada

High Yes

Social and Housing Affordability Variables – Data Summary (3/3)

Variable Description

New housing price index • Index that measures new housing prices for a composite of building types

Happiness index • National average of a happiness score on a scale of 1 to 10.

Healthy life expectancy at birth

• Healthy life expectancies at birth are based on the data extracted from the World Health Organization’s (WHO) Global Health

Observatory data repository.

Core housing need

• Percentage of households in core housing need. Core housing need happens when:

• 1. major repairs are required, and residents don’t have the means to move to a good unit in their community

• 2. there are not enough bedrooms for the residents, and they don’t have the means to move

• 3. the current home costs more than the residents can afford, and they do not have the means to make a move or find an available

affordable home in their community

Housing affordability index

• The housing affordability index is meant to measure the share of disposable income that a representative household would put toward

housing-related expenses. The measure is a ratio of housing-related costs (mortgage payments and utility fees) to average household

disposable income. The higher the ratio, the more difficult it is to afford a home.

Rental Vacancy • The number of rental units that are available to rent to tenants.

Variables from Canadian Income Survey (CIS)

CIS included a number of variables relevant to core housing need including:

• Persons living in households whose after-tax income is less than the low-income measure after tax (LIM-AT)

• Persons living in economic families whose before-tax income is less than the low-income cut-off before tax (LICO-BT)

• Persons Living in economic families whose disposable income is less than the Market Basket Measure (MBM)

• After tax income persons aged 16 and over (ATINC)

• Condition of dwelling (REPA)

• Dwelling suitable (SUIT)

• Monthly rent paid for the household (RENTM)

• Monthly mortgage payment (MORTGM)

Custom extraction of affordable

housing variables

Custom data extraction included:

• Incidence of Urban Households in Core Housing Need (%)

• Dwellings in need of major repairs (%)

• Dwellings not suitable (%)

• Market Basket Measure

• Low Income Measures Thresholds by household size

Social and Housing Affordability Variables – Data Description (1/2)

Variable Description

Multi-unit Rental net income including expenses • The gross income generated from renting units in multi-unit buildings, less the expenses associated with the building.

Multi-unit total rental income • The gross income generated from renting units in multi-unit buildings.

Multi-Unit Commercial utilities expenses • The amount of money Commercial units in multi-unit buildings pay toward utility bills, including electricity and gas bills.

Total unit count for residential multi-unit • The amount of residential units that comprise a residential multi-unit building

Number of beds in multi-unit senior homes • The amount of beds avail to seniors in senior housing facilities.

Sum of total units and senior houses • The combined amount residential units in multi-unit buildings and senior units in senior housing facilities.

RCFI indicator

• This indicator related to how many projects accessed CMHC’s rental construction financing which provides low-cost funding to eligible

borrowers during the riskiest phases of product development of rental apartments.

MLI FLEX indicator (social housing category

indicator with +1000 observations)

• This indicator relates to how many units qualify for CMHC’s affordable housing mortgage loan insurance. The benefits of this

inssuance program includes higher loan-to-value ratios loan advances of 85-95% of costs during construction, debt coverage ratios

as low as 1.10 for standard rentals, amortization periods up to 40 years and reduced premiums.

Multi-Unit Arrears amount • The amount of money owed on mortgage loans that is overdue for payment.

Multi-Unit Arrears report date • The date when a mortgage loan goes into arrears

Multi-Unit Claim received date • The date when a mortgage claim amount was received.

Mortgage Delinquency

• A home loan for which the borrower has failed to make payments as required in the loan documents. A mortgage is considered

delinquent or late when a scheduled payment is not made on or before the due date.

Consumer credit and mortgage liabilities

(% of disposable income)

• Canadian households, ratio of credit and mortgage liabilities to disposable income

Real estate (% of disposable income) • Canadian households, ratio of real estate value to disposable income

Consumer credit and mortgage liabilities

(% of net worth)

• Canadian households, ratio of credit and mortgage liabilities to net worth

Social and Housing Affordability Variables – Data Description (2/2)

Variable Source Data Characteristics Relevance Included in Analysis

Household electricity consumption

Statistics Canada

• Frequency: Quarterly

• Date Range: 1981 – 2019

• Geography: Canada

High Yes

Multi-Unit Residential utilities expenses CMHC

• Frequency: Monthly

• Date Range: 2000 -2020

• Geography: Canada

High Yes

Household Gas and Fuel Consumption Statistics Canada

• Frequency: Quarterly

• Date Range: 1981 – 2019

• Geography: Canada

High Yes

Greenhouse gas emissions by sector Statistics Canada

• Frequency: Yearly

• Date Range: 1990 - 2017

• Geography: Available on the provincial and

national level

High

(poor data availability)

Temperature departure

Statistics Canada

• Frequency: Yearly

• Date Range: 1948-2018

• Geography: Canada

High

(poor data availability)

Wastewater volume processed by municipal

sewage system

Statistics Canada

• Frequency: Monthly

• Date Range: 2013-2016

• Geography: Canada

Medium

(poor data availability)

Electric power annual generation by

energy type

Statistics Canada

• Frequency: Yearly

• Date Range: 2005 - 2018

• Geography: Canada

Medium

(poor data availability)

Total value of environmental and clean

technology products supply and demand

Statistics Canada

• Frequency: Yearly

• Date Range: 2007 - 2018

• Geography: Canada

Medium

(poor data availability)

Environmental Variables – Data Summary

162

Variable Description

Household electricity consumption • Household expenditure on utilities such as electricity, gas, other fuel, water supply.

Multi-Unit Residential utilities expenses • The amount of money residential households in multi-unit buildings pay toward utility bills, including electricity and gas bills.

Household Gas and Fuel Consumption • Household expenditure on utilities such as electricity, gas, other fuel, water supply.

Greenhouse gas emissions by sector • The amount of GHG emissions released by each industry through their industrial activities.

Temperature departure

• National average temperature departure from reference rate average.

Wastewater volume processed by municipal

sewage system

• The amount of wastewater that is processed by municipal sewage systems

Electric power annual generation by

energy type

• Measures total electricity generation by energy type such as hydro, tidal and thermal.

Total value of environmental and clean

technology products supply and demand

• The amount of environmental and clean technology projects supplied in Canada and the amount used in Canada in dollar-value terms,

based off the Canadian supply-use tables.

Environmental Variables – Data Description

163

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