CASE: OR Green Bond

OR became the second issuer of green bonds intended to be listed on Nasdaq Iceland’s sustainable bond market. The first green bond under its Green Bond Framework was issued on 13 February 2019. OR’s first Green Bond was an ISK denominated 3.528 billion (approx. USD 29 m), had a maturity of 36 years and pays a fixed real interest rate at a yield of 2.60%. The bond attracted bids amounting to ISK 6.258 billion (approx. USD 52 m) at a yield of 2.50-2.70%.

Picture 1:

This is a massive milestone, further establishing the green bond market after the first listed green bond in December 2018 by the City of Reykjavík in December 2018. The issuer and investors now again join forces in contributing to a sustainable future and decrease climate change impact and adapt to a changing climate.

What is OR?

OR or Reykjavík Energy is a public utility company providing: electricity, geothermal water for heating, cold water supply for consumption and firefighting, sewage services, and fibre-optic data connections. The service area extends to 20 municipalities, covering 67% of the Icelandic population. OR manages the production and distribution but provides its services through its subsidiaries, Veitur Utilities, ON Power, and Reykjavík Fibre Network. OR’s principal owner is the City of Reykjavík.

OR’s Green Bond Framework

The Green Bond Framework was based on ICMA’s Green Bond Principles as well as other relevant guidelines and standards, given the specific role of the issuer as an energy company. It also takes into consideration very recent market practice shifts and potential changes to standardizations and taxonomy in the EU.

Over the approximately three month period from the issuance of the second opinion for the City of Reykjavík to OR’s second opinion several changes of emphasis needed to be implemented and managed to ensure the longevity of the Framework. Those changes were stemming both from the second opinion provider, change in focus of interpretation fo the green bond community, as well as adapting focus areas of the issuer.

Picture 2: CICERO rating on OR's Green Bond Framework, Dark Green

The five separate focus areas of the Green Bond Framework were the following:

  1. Description of OR’s good work on sustainability which further strengthens the authenticity of the issuer

  2. Management of proceeds from green bond issuances under the Framework

  3. Eligible Project categories to be funded

  4. Governance surrounding the selection of eligible projects

  5. Transparency and reporting commitments as well as external verifications

Role of CIRCULAR Solutions

The strong sustainability, environmental science, engineering, and financial sector background driving CIRCULAR contributed positively to this issuance, where the link between the climate sciences and financial sector was further established. Extensive work went into qualifying potential project categories and potential underlying projects including renewable energy, energy distribution and management, and sustainable water and wastewater management.

Hard work, smooth and open communication between the issuer, OR, the securities firm Fossar Markets which oversaw the issuance and investor relations, the second-opinion provider CICERO, and CIRCULAR ensured that no gaps were left in the Framework. This resulted in the highest possible grade from CICERO, for the overall framework, each project category, and the governance of the Framework itself and governance around climate-related work within the issuer.

The UN Sustainable Development Goals

In order to provide investors with a clearer understanding of the relationship between sustainability and the projects which are to be funded, the project categories were connected to specific UN Sustainable Development Goals (UN SDGs). For example:

  • Renewable energy - no. 7 and 13

  • Energy distribution and management - 7, 9, and 13

  • Sustainable water and wastewater management - 6 and 14

Picture 3: UN SDGs applied to OR's Green Bond Framework

CICERO’s Shades of Green

The Framework underwent a second-opinion by CICERO Shades of Green, a Norwegian NGO, to verify that it aligns with ICMA’s Green Bond Principles. CICERO is a leading reviewer of Frameworks in the Nordics. It grades frameworks based on several in-depth criteria. The grading is intended to provide investors with better information about how progressive the Framework is with regards to tackling climate issues. The Green Shading grade from CICERO was as follows:

“Based on the project category shadings detailed below, and consideration of environmental ambitions and governance structure reflected in OR’s green bond framework, we rate the framework CICERO Dark Green.”

“No weaknesses perceived.”

Green Bond Governance

Another criteria evaluated by CICERO is ‘governance’, both related to the issuer’s environmental and sustainability governance and its governance around the Green Bond Framework itself, e.g. the selection of eligible projects. CICERO’s governance grading was as follows:

“The overall assessment of OR’s governance structure and processes gives it a rating of Excellent. CICERO considers OR’s proven and applied governance processes a clear strength of this green bond framework.”

Picture 4: CICERO governance rating on OR's Green Bond Framework, Excellent

Shared benefits

This issuance does not only provide shared benefits for investors and the issuer, by increasing the options of transparent and responsible investment and possibly provide better funding options for the issuer. This means something much more. It means that Icelandic industries and public can operate using low-carbon energy. It allows further infrastructure projects within Reykjavik to make use of renewable energy, ensuring a low carbon society. This issuance has the potential to have a transformational effect on Icelandic society.

We at CIRCULAR are excited to see the green bond market in Iceland thrive and look forward to more green, social, and/or sustainable bonds being issued, hopefully in the near future. This is perfect timing for the financial markets and investors in Iceland to contribute in a meaningful way to a sustainable future.

Bjarni Herrera Thorisson

Dr. Hafþór Aegir Sigurjónsson

Dr. Reynir Smári Atlason

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