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‘Second Opinion’ on Hafslund Eco’s Green Finance Framework 1

Hafslund Eco AS Green Finance Second Opinion March 10th, 2021 Hafslund Eco AS (“Hafslund Eco”) is a renewable energy group that is wholly owned by the City of Oslo, Norway. Hafslund Eco is Norway’s second largest power producer with business areas power generation and electrification solutions, in addition to a 50% ownership of Eidsiva Energi. Hafslund Eco is operating an annual production of more than 21 TWh, and owns hydroelectric power plants which together produce more than 17 TWh. The power plants are located in Oslo and the counties of Viken, Innlandet, Vestland and Agder. The eligible green project categories in Hafslund Eco’s green finance framework are Renewable energy, Climate change adaptation and Clean transportation. Expected shares of proceeds going to the different categories are approximately 70% for renewable energy projects, 30% to climate adaptation projects (mostly dams) and a minor share to clean transportation (charging stations). Net proceeds from green finance instruments can be used for the financing of new assets and projects, as well as for refinancing purposes. Initially, new assets and projects will receive the majority of net proceeds and are defined as green projects taken into operation less than 12 months prior to the issuance of a green finance instrument. Thus, a fair share of net proceeds will go to new hydro power plants. Investments linked to fossil energy generation are excluded. Hafslund Eco acquired Eidsiva Vannkraft as part of an asset swap transaction in late 2019. The establishment of quantitative environmental goals is therefore still at a planning stage. When finalised, the expectation is that they will cover more than ‘in-house’ emissions and be quite ambitious. The selection process and criteria for eligible projects are both well defined, as is the management of proceeds. Screening for controversial projects is always carried out and climate resilience issues are also considered. At this stage, there remain some uncertainties with respect to the methodology (grid factor) chosen for reporting reductions in greenhouse gas emissions. Hafslund Eco’s green finance framework is likely aligned with the technical mitigation criteria and minimum social safeguards in the proposed EU taxonomy. Some of the Do-No-Significant-Harm criteria relevant to this framework may be only partly aligned (such as the quantitative recycling criteria). Based on the overall assessment of the eligible green assets and governance and transparency considerations, Hafslund Eco’s green finance framework receives a CICERO Dark Green shading and a governance score of Good. To improve the framework, Hafslund Eco could conduct life cycle assessments of major projects and instil stricter environmental criteria for their suppliers. Better climate reporting, qualitative climate targets and a clear roadmap towards those targets would strengthen the goverance structure supporting the framework.

SHADES OF GREEN Based on our review, we rate the Hafslund Eco’s green finance framework CICERO Dark Green. Included in the overall shading is an assessment of the governance structure of the green finance framework. CICERO Shades of Green finds the governance procedures in Hafslund Eco’s framework to be Good.

GREEN BOND and GREEN LOAN PRINCIPLES Based on this review, this Framework is found in alignment with the principles.


Contents

1 Terms and methodology ___________________________________________________________________ 3 Expressing concerns with ‘shades of green’ ............................................................................................................. 3

2 Brief description of Hafslund Eco’s green finance framework and related policies ___________________ 4 Environmental Strategies and Policies ...................................................................................................................... 4 Use of proceeds ........................................................................................................................................................ 5 Selection .................................................................................................................................................................... 6 Management of proceeds .......................................................................................................................................... 6 Reporting ................................................................................................................................................................... 7

3 Assessment of Hafslund Eco’s green finance framework and policies _____________________________ 8 Overall shading ......................................................................................................................................................... 8 Eligible projects under the Hafslund Eco’s green finance framework ....................................................................... 8 Background ............................................................................................................................................................... 9 EU Taxonomy assessment ..................................................................................................................................... 10 Governance Assessment ........................................................................................................................................ 11 Strengths ................................................................................................................................................................. 11 Weaknesses ............................................................................................................................................................ 12 Pitfalls ...................................................................................................................................................................... 12

Appendix 1: Referenced Documents List ___________________________________________________________ 14 Appendix 2: EU Taxonomy criteria and alignment __________________________________________________ 15

Electricity generation from hydropower ................................................................................................................... 15 Appendix 3: About CICERO Shades of Green _______________________________________________________ 20


1 Terms and methodology

This note provides CICERO Shades of Green’s (CICERO Green) second opinion of the client’s framework dated March 2021. This second opinion remains relevant to all green bonds and/or loans issued under this framework for the duration of three years from publication of this second opinion, as long as the framework remains unchanged. Any amendments or updates to the framework require a revised second opinion. CICERO Green encourages the client to make this second opinion publicly available. If any part of the second opinion is quoted, the full report must be made available. The second opinion is based on a review of the framework and documentation of the client’s policies and processes, as well as information gathered during meetings, teleconferences and email correspondence.

Expressing concerns with ‘shades of green’ CICERO Green second opinions are graded dark green, medium green or light green, reflecting a broad, qualitative review of the climate and environmental risks and ambitions. The shading methodology aims to provide transparency to investors that seek to understand and act upon potential exposure to climate risks and impacts. Investments in all shades of green projects are necessary in order to successfully implement the ambition of the Paris agreement. The shades are intended to communicate the following:

Sound governance and transparency processes facilitate delivery of the client’s climate and environmental ambitions laid out in the framework. Hence, key governance aspects that can influence the implementation of the green finance are carefully considered and reflected in the overall shading. CICERO Green considers four factors in its review of the client’s governance processes: 1) the policies and goals of relevance to the green finance framework; 2) the selection process used to identify and approve eligible projects under the framework, 3) the management of proceeds and 4) the reporting on the projects to investors. Based on these factors, we assign an overall governance grade: Fair, Good or Excellent. Please note this is not a substitute for a full evaluation of the governance of the issuing institution, and does not cover, e.g., corruption.


2 Brief description of Hafslund Eco’s green finance framework and related policies

Hafslund Eco AS (“Hafslund Eco”) is a renewable energy group that is wholly owned by the City of Oslo, Norway. Hafslund Eco is Norway’s second largest power producer and has two main business areas – power generation and electrification solutions - in addition to having a significant ownership in grid operations through a 50% share in Eidsiva Energi. Hafslund Eco owns 78.6%1 of the jointly owned power generation company Hafslund Eco Vannkraft. In addition to operating an annual production of more than 21 TWh, Hafslund Eco owns hydroelectric power plants which together produce more than 17 TWh2. The power plants are located in Oslo and the counties of Viken, Innlandet, Vestland and Agder. Hafslund Eco, through “Ladeklar” and the ownership in Eidsiva Energi (Norway’s largest grid company), is facilitating the implementation of electric vehicles in the network area, right from the regional network and out to the end customer.

Environmental Strategies and Policies Hafslund Eco’s core activity is to produce renewable energy and deliver smart electrification solutions. Hafslund Eco is dependent on good relationships with stakeholders and therefore works closely with the corporate sector, municipalities and local communities. The total hydropower production of Hafslund Eco was 13.6 TWh in 20193 increasing to 17.8 TWh in 2020. The greenhouse gas (CO2-equivalent) emissions related to day-to-day operations of Hafslund Eco are largely related to unplanned emissions of sulphur hexafluoride (SF6). The harmful greenhouse gas is necessary and used as an insulation and cut-off medium in switching stations. Hafslund Eco in 2019 purchased climate quotas corresponding to the SF6 emissions of 278 tonnes of CO2 equivalents. In comparison, total scope 1 emissions were 968 tonnes of CO2 equivalents, scope 2 emissions were 1497 and (partial) scope 3 emissions 5071 tonnes of CO2 equivalents in 2019. Of scope 3 emissions, diesel use for large projects were the largest component with 5035 tonnes of CO2 equivalents. The annual emission reporting is in line with the GRI standards. Emissions related to materials used in constructions are not covered. Unfortunately, there is no longer time series of emission data, the reason being that today's Hafslund Eco was established in late 2019 following the asset swap transaction where Hafslund Eco acquired Eidsiva Vannkraft and the numbers from the new company cannot be compared with numbers from one of the old ones. Construction, operation and maintenance of hydropower plants have an impact on the natural environment. The effects are mainly local and related to physical interventions in nature and the impact on biodiversity through changes in water flow and water temperature. Hafslund Eco works continuously to ensure that the activities are carried out in a way that has as little impact on the environment as possible. The impact on the natural environment of Hafslund Eco’s other activities largely derive from buildings, transport and externally sourced services, including transport and contracting activities.

1 57.2% directly, 78.6% directly and indirectly. 2 Including ownership of 90 % in Hafslund Produksjon Holding. Out of 80 hydro power plants, only 5 have an installed capacity below 1MW where the national regulations differ from those of larger plants. 3 Deviation from normal production of 17 TWh is due to lower water inflow than normal and Eidsiva Vannkraft only being consolidated from the fourth quarter of 2019.


Hafslund Eco aim to minimise emissions from day-to-day operations and to limit greenhouse gas emissions from administration and transport through implementing measures such as increased use of zero emission vehicles where possible, increased use of video conferencing to limit business travel, electrification of rigs/work sites and a general reduction of energy use. Hafslund Eco also works towards better routines for purchasing and using resources in a way that reduces waste and benefits the circular economy. Hafslund Eco has established a separate code of conduct for suppliers based on UN and ILO conventions. The group’s purchasing principles stipulate that Hafslund Eco shall, as far as possible, together with suppliers, find good environmental and climate solutions. Hafslund Eco requires suppliers to be registered in Achilles UNCE4 (formerly Sellicha) to qualify for delivery of goods and services to the group’s major projects, and only suppliers with environmental management systems are used. Hafslund Eco follows the so called Oslo model5 when it comes to regulating suppliers’ conduct in the field of workers’ rights. Suppliers are also responsible for their suppliers and subcontractors following the ethical guidelines of Hafslund Eco6. Finally, suppliers must ensure that all equipment used in watercourses is dry before use, and disinfected if necessary, to prevent the spread of organisms between different watercourses. Hafslund Eco has not carried out scenario analysis as recommended by TCFD, but does risk analysis of personnel security, regulatory changes and certain environmental risks. Potential changes in climate/precipitation/water flow are always included in the planning of projects and can lead to rehabilitation/fortification of dams and other flood protection measures. Hafslund Eco is in the process of planning a Zero-emissions roadmap including a range of different strategies that will lead towards an overall GHG reduction target. This includes, but is not limited to actively seeking zero emission solutions to reduce internal emissions, defining clear demands for contractors when it comes to the use of fossil fuel, establishing a zero-emission car park, and minimising land use impacts in projects.

Use of proceeds Hafslund Eco’s green finance framework has been developed in alignment with the 2018 Green Bond Principles (“GBP”)7 and the Green Loan Principles (“GLP”)8. An amount equal to the net proceeds from green finance instruments issued under Hafslund Eco’s Green finance framework will be used to finance a portfolio of assets and projects in Norway, in whole or in part, that promote the transition towards low-carbon and climate-resilient development. Only such assets and projects that comply with the list of green projects in table 1 are deemed eligible to be financed by green finance instruments. This also includes acquisitions of such projects as well as investments in share capital of companies with such assets and where the use of proceeds should be directly linked to the book value of the eligible assets owned by the acquired company, adjusted for the share of equity acquired. The eligible green project categories are: Renewable energy, Climate change adaptation and Clean transportation. Expected shares of proceeds going to the different categories are approximately 70% for renewable energy projects, 30% to climate

4 https://www.achilles.com/no/community/utilities-nce/ and https://www.achilles.com/community/utilities-nce/ 5 See https://www.oslo.kommune.no/for-vare-leverandorer/krav-til-leverandorer/oslomodellen/#toc-3 for a description (in Norwegian). 6 https://hafslundeco.no/leverandorer/etiske-retningslinjer 7 Green Bond Principles published in June 2018 are voluntary process guidelines for issuing Green bonds established by International Capital Markets Association (ICMA), https://www.icmagroup.org/green-social-and-sustainability-bonds/green-bond-principles-gbp/ 8 Green Loan Principles published in March 2018 are voluntary process guidelines for issuing Green loans established by Loan Markets Association (“LMA”), https://www.icmagroup.org/assets/documents/Regulatory/Green- Bonds/LMA_Green_Loan_Principles_Booklet-220318.pdf


adaptation projects (mostly dams) and a minor share to clean transportation (charging stations). Net proceeds from green finance instruments can be used for the financing of new assets and projects, as well as for refinancing purposes. Initially, new assets and projects will receive approximately 70% of net proceeds and are defined as ongoing green projects and those taken into operation less than 12 months prior to the issuance of a green finance Instrument. Green finance instruments will not be used to finance investments linked to fossil energy generation and infrastructure, nuclear energy generation, research and/or development within weapons and defence, potentially environmentally negative resource extraction, gambling or tobacco.

Selection The selection process is a key governance factor to consider in CICERO Green’s assessment. CICERO Green typically looks at how climate and environmental considerations are considered when evaluating whether projects can qualify for green finance funding. The broader the project categories, the more importance CICERO Green places on the governance process. To ensure the transparency and accountability around the selection of green projects, Hafslund Eco has established an internal Green Finance Committee, being responsible for the evaluation and selection process. The Green Finance Committee consists of members from the Management, Operations and Finance teams in Hafslund Eco, including member(s) with sustainability expertise. Other internal or external representatives with specific expertise may be invited from time to time when deemed necessary. All decisions will be made in consensus. There is always a screening of the projects which take into account environmental concerns, social impacts, landowner and potential local resistance. Very controversial project will usually be set aside, for instance wind power on land has to a large part been actively avoided. Only such assets and projects that comply with the green project criteria defined in table 1 below are eligible to be financed with green finance instruments. The Green Finance Committee will keep a register of all green projects, and to ensure traceability. All decisions made by the committee will be documented and filed. The Green Finance Committee holds the right to exclude any green project already funded by green finance instruments, which is further described below under Management of Proceeds. The Green Finance Committee is also in charge of potential future oversight and updates of the green finance framework.

Management of proceeds CICERO Green finds the management of proceeds of Hafslund Eco to be in accordance with the Green Bond and Green Finance Principles. An amount equal to the net proceeds from issued green finance instruments will be earmarked for financing and refinancing of green projects as defined in the green finance framework. The Treasury department of Hafslund Eco will endeavour to ensure that the value of green projects at all times exceeds the total amount of green finance instruments outstanding. If a green project already funded by green finance instruments is sold, or for other reasons loses its eligibility in line with the criteria in the green finance framework, it will be replaced by another qualifying green project as soon as practically possible. Net proceeds from green finance instruments awaiting allocation to green projects will be held as cash.


Reporting Transparency, reporting, and verification of impacts are key to enable investors to follow the implementation of green finance programs. Procedures for reporting and disclosure of green finance investments are also vital to build confidence that green finance is contributing towards a sustainable and climate-friendly future, both among investors and in society. To enable investors and other stakeholders to follow the development of the green projects funded by green finance instruments, a green finance report will be made available on the website of Hafslund Eco 9 . The treasury department will be responsible for the reporting and coordinate necessary data input from relevant departments (i.e., accounting, sustainability, technical). The green finance report will include an allocation report and an impact report and be published annually as long as there are green finance instruments outstanding or until full allocation. Reporting to be done on a portfolio basis with examples of funded projects. The allocation reporting will be reviewed by an independent auditor. The allocation report will include the following information:

• Amounts invested in each of the green project categories defined in table 1 and the share of new financing versus refinancing.

• Examples of green projects that have been funded by green finance instruments. • The nominal amount of green finance instruments outstanding, divided into green bonds and

green loans. • The amount of net proceeds awaiting allocation to green projects (if any).

The impact report aims to disclose the environmental impact of the green projects financed under the green finance framework. Impact reporting will, to some extent, be aggregated and depending on data availability, calculations will be made on a best intention basis. The impact assessment may, where applicable, be based on the metrics listed below.

• Renewable energy: Energy generation capacity from hydropower (MW); actual annual energy generation from hydropower (MWh); and annual reduction and/or avoidance of GHG emissions (tonnes of CO2e)10.

• Climate change adaptation: Number of rehabilitated dams. • Clean transportation: Number of electric vehicles charging stations installed.

9 https://hafslundeco.no 10 For 2019, a grid factor based on electricity from gas was used. This might be revied and changed for 2020.


3 Assessment of Hafslund Eco’s green finance framework and policies

The framework and procedures for Hafslund Eco’s green finance investments are assessed and their strengths and weaknesses are discussed in this section. The strengths of an investment framework with respect to environmental impact are areas where it clearly supports low-carbon projects; weaknesses are typically areas that are unclear or too general. Pitfalls are also raised in this section to note areas where Hafslund Eco should be aware of potential macro-level impacts of investment projects.

Overall shading Based on the project category shadings detailed below, and consideration of environmental ambitions and governance structure reflected in Hafslund Eco’s green finance framework, we rate the framework CICERO Dark Green.

Eligible projects under the Hafslund Eco’s green finance framework At the basic level, the selection of eligible project categories is the primary mechanism to ensure that projects deliver environmental benefits. Through selection of project categories with clear environmental benefits, green finances aim to provide investors with certainty that their investments deliver environmental returns as well as financial returns. The Green Bonds Principles (GBP) state that the “overall environmental profile” of a project should be assessed and that the selection process should be “well defined”. Green finance instruments issued under the green finance framework will finance and refinance investments and related expenditures within the green project categories shown in table 1. This also includes acquisitions of such projects as well as investments in share capital of companies with such assets and where the use of proceeds should be directly linked to the book value of the eligible assets owned by the acquired company, adjusted for the share of equity acquired.

Category Eligible project types Green Shading and some concerns

Renewable energy

Investments, and related expenditures, directed towards the development, construction, installation, improvement, operation, repair and maintenance of hydro power projects and related infrastructure.

Dark Green ü Initially, about 60% of renewable energy

investments will be for new hydro power plants. Hydropower is a renewable energy source, which contributes to Norway’s low grid emissions factor.

ü Large hydropower facilities and associated construction/renovation projects will have impacts on the surrounding environment and biodiversity. New access roads and mass depositions are examples that will need special scrutiny.

ü Hafslund Eco has facilities that affect


nature conservation areas, but all of the activities/facilities have been conducted in accordance with concessions given by The Norwegian Water Resources and Energy Directorate (NVE) and follow requirements for mitigating measures to safeguard the environmental values given by the administrative authority.

ü Hafslund Eco has specified that they emphasize maintaining good dialogue with stakeholders, and use local suppliers to reduce transport and maximize local value creation.

Climate change adaptation

Investments, and related expenditures, aimed at reducing risks associated with climate change, such as fortification of hydropower facilities and dams to ensure they can withstand higher levels of precipitation.

Dark Green ü Climate change adaptation is a necessary

and important part of mitigating risks from climate change.

ü Operational expenses related to relevant projects are included.

Clean transportation

Investments, and related expenditures, in infrastructure for electric vehicles, such as charging stations.

Dark Green ü Operational expenses related to relevant

projects are included. ü Infrastructure can be used by plug-in

hybrid vehicles, which involves fossil fuel activities. Be careful to select infrastructure investments that do not encourage fossil fuel transport modes.

Table 1. Eligible project categories

Background In 2019, global renewable electricity generation rose 6%, with wind and solar PV technologies together accounting for 64% of this increase. Although the share of renewables in global electricity generation reached almost 27% in 2019, renewable power still needs to expand significantly to meet the IEA’s Sustainable Development Scenario (SDS) share of 50% of the generation by 203011. The EU has committed itself to a clean energy transition, which will contribute to fulfilling the goals of the Paris Agreement on climate change and provide clean energy to all. To deliver on this commitment, the EU has set binding targets, e.g., to increase the share of renewable energy to at least 32% of EU by 203012.

In February 2020, Norway released updated targets for 2030 to cut emissions by 50-55% from 1990 levels13, and a White paper was published in January 202114. Norway is projected to miss its 2020 emissions reductions target

11 https://www.iea.org/fuels-and-technologies/renewables 12 https://ec.europa.eu/energy/sites/ener/files/documents/necp_factsheet_pl_final.pdf 13 https://www.regjeringen.no/no/aktuelt/norge-forsterker-klimamalet-for-2030-til-minst-50-prosent-og-opp-mot-55-prosent/id2689679/ 14 https://www.regjeringen.no/no/dokumenter/meld.-st.-13-20202021/id2827405/ (in Norwegian).


by around 4.5 million tCO2e and needs fast action to reach the new 2030 goal. The government has outlined necessary steps to achieve this through the ‘Klimakur 2030’ analysis 15 . The analysis covers 60 emissions reductions measures in multiple sectors including energy, transport and industrials that will lead to a 50% emissions reduction by 2030. The implementation of electrification measures will make up 34% of total emissions reductions between 2021-2030 in Norway. The Norwegian hydropower system has a normal annual production of around 136 TWh and an aggregate power capacity of 32,700 MW. Norway currently has more than 800 reservoirs, with a storage capacity equivalent to around 87 TWh. The 30 largest reservoirs, three of which are wholly or partly owned by Hafslund Eco, account for almost half of the total capacity. Norway has around half of Europe’s total reservoir capacity. Large storage capacity and high installed capacity provide the Norwegian hydropower system with significant flexibility. Most of Norway’s reservoirs were built before 1990, but upgrades and expansions of power plants have increased reservoir utilisation capacity in recent years. Relatively little growth is expected in hydropower production in Norway in the next few years, as capacity investments in renewable energy are largely being channelled towards solar and wind power. Norwegian power demand is estimated to increase by 5.8 TWh to account for the electrification of many sectors towards 2030. In 2019, Norway produced 135 TWh of electricity and total consumption amongst all sectors was 126 TWh, while in 2030, it is expected consumption will increase to 159 TWh. Considering expansions in generation capacity from wind and hydropower, this will be well within Norway’s expected generation capacity of 174 TWh. Electricity generation is expected to increase until 2022 due to investments in offshore wind power. One of the benefits of hydropower is that only negligible levels of greenhouse gases are emitted after a power plant has been built. Life cycle assessments (LCAs) show the total emissions in a product’s life cycle from the extraction of raw materials, to production, distribution, use, reuse, maintenance and recycling – to final disposal, including all transportation involved. Life cycle assessments of various power production techniques show that hydropower has very low emissions. Thus, the Norwegian Institute for Sustainability Research (NORSUS, previously Østfoldforskning) have calculated emissions from several Norwegian hydropower plants through life cycle assessments and the calculations show that the emissions from a typical Norwegian hydropower plant are approximately 3.3g CO2-equivalents per kWh16. The net environmental gain from electrifying the energy supply is thus substantial.

EU Taxonomy assessment In March 2020, a technical expert group (TEG) proposed an EU taxonomy for sustainable finance that specified mitigation thresholds and “do no significant harm” (DNSH) criteria for eligible activities. The DNSH-criteria are to make sure that progress against some objectives is not made at the expense of others and recognizes the relationships between different environmental objectives17. In November 2020, EU published its draft delegated act to outline its proposed technical screening criteria for climate adaptation and mitigation objectives, respectively, which it was tasked to develop after it entered into law in July18. The EU regulation also specifies that certain minimum safeguards (social safeguards) must be followed for an activity to defined as sustainable.

15 https://www.miljodirektoratet.no/globalassets/publikasjoner/m1625/m1625.pdf 16 NORSUS report on” The inventory and life cycle data for Norwegian hydroelectricity”, available here: https://norsus.no/wp-content/uploads/AR-01.19-The-inventory-and-life-cycle-data-for-Norwegian-hydroelectricity.pdf 17 Taxonomy: Final report of the Technical Expert Group on Sustainable Finance, March 2020. https://ec.europa.eu/knowledge4policy/publication/sustainable-finance-teg-final-report-eu-taxonomy_en 18 https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12302-Climate-change-mitigation-and-adaptation-taxonomy#ISC_WORKFLOW


We have assessed eligible projects in Hafslund Eco’s green finance framework against the mitigation thresholds and the DNSH criteria in the draft delegated acts published in November 202019. We have also completed a light touch assessment of the social safeguards, with an emphasis on assessing alignment with the UN Guiding Principles on Business and Human Rights. Further comments on alignment is given under the sections on Governance, Strengths and Pitfalls, and detailed thresholds, NACE-codes and likely alignment with technical and DNSH criteria are given in Appendix 2.

Governance Assessment Four aspects are studied when assessing the Hafslund Eco’s governance procedures: 1) the policies and goals of relevance to the green finance framework; 2) the selection process used to identify eligible projects under the framework; 3) the management of proceeds; and 4) the reporting on the projects to investors. Based on these aspects, an overall grading is given on governance strength falling into one of three classes: Fair, Good or Excellent. Please note this is not a substitute for a full evaluation of the governance of the issuing institution, and does not cover, e.g., corruption. Hafslund Eco as it is today was only established in late 2019 following the asset swap transaction and acquisition of Eidsiva Vannkraft. The establishment of quantitative environmental goals is therefore still at a planning stage. When finalised, the expectation is that they will cover more than ‘in-house’ emissions and be quite ambitious. This is important since much of the environmental impact of hydro power production is associated with the construction phase. The selection criteria and process are both well defined, as is the management of proceeds., and there is ample environmental expertise in-house to assess the environmental impacts of eligible projects and activities. All physical interventions of a facility are included in the environmental report that must be approved by NVE20 before any project can start. Hafslund Eco follows the so called Oslo model when it comes to regulating suppliers’ and subcontractors’ activities in the social field. As this model, like the taxonomy, prescribes a due diligence approach when assessing risks and allocating preventive measures, this is a clear strength. By informing about their HME work and that they apply the Oslo model when it comes to regulating subcontractors and requiring suppliers to be registered in Achilles UNCE to qualify for delivery of goods and services to the group’s major projects, CICERO Green assess that Hafslund Eco seems to fulfil the minimum social safeguards of the EU taxonomy.Screening for controversial projects is always carried out and climate resilience issues are also considered. Through the licencing process all affected parties/interest are able to participate through public hearing. On the reporting side, we note that this will be on a portfolio basis, and that there remain some uncertainties with respect to the methodology chosen for reporting reductions in greenhouse gas emissions. The overall assessment of Hafslund Eco’s governance structure and processes gives it a rating of Good.

Strengths It is a clear strength that Hafslund Eco’s framework focuses exclusively on low-carbon solutions and climate adaptation. Under the renewable energy category, proceeds will partially be used to upgrade existing hydropower assets. This contributes to extending the lifetime of hydropower assets and has the potential to deliver increased

19 EU Taxonomy: Annex to the Commission Delegated Regulation, supplementing Regulation (EU) 2020/852, November 2020. https://ec.europa.eu/finance/docs/level-2-measures/taxonomy-regulation-da-2020-annex-1_en.pdf 20 The Norwegian Water Resources and Energy Directorate.


capacity by improving the efficiency of systems. Restorations and capacity additions to existing sites can be considered positive for the environment and climate as this avoids local impacts and GHG emissions connected with new constructions. Based on information presented by the issuer, projects to be financed under the framework are well within the EU taxonomy mitigation thresholds listed for hydropower. Norwegian hydropower is assumed (based on the NORSUS study – cf footnote 9) to generate electricity with life cycle emissions including emissions from inundation of land (3.3g CO2e/kWh), far lower than the given thresholds in the EU taxonomy (100g CO2e/kWh). Although calculation method used in the study differs from the taxonomy, it is not likely that actual emissions are close to the given threshold. The main negative environmental impacts associated with generation of hydropower include impacts on biodiversity, interference with migration pathways and changes in habitat from construction and operation, unsustainable management of water and waste, noise, visual and chemical pollution of the local environment. The impacts will vary widely depending on the solutions chosen and on the location of the activities. There might also be considerable local resistance to construction of new hydropower. It is the Norwegian Water and Energy Resources Directorate (NVE) who is managing the water and energy resources in Norway. In accordance with the Energy and/or Water Course Act, the construction of energy production facilities larger than 1 MW need a license from the NVE. Old hydropower plants (established before 1917 when the “Water resource Act” was introduced) will normally not possess a license but will be subject to the same laws as plants with licenses. Relevant authorities conduct audits to monitor compliance of the licenses they issue. The company has informed us that they are following national laws and regulations and obtain licenses for their operations where required, and that they are regularly audited by relevant competent authority. This comprises completion of EIAs and alignment with the EU water framework directive (WFD), as well as adherence to requirements related to impacts on biodiversity and habitats. To receive a license for hydropower production, the project needs to undergo an Environmental Impact Assessment (EIA) in line with the EU EIA-directive (2014/52/EU). In practical terms there are EIA requirements for all new hydro projects above 10 MW, and many of the smaller ones. By adhering to the legal regime relevant to their operations, Hafslund Eco is likely to be aligned with the main DNSH-criteria related to circular economy, pollution, and ecosystems. DNSH-criteria where the issuer is likely to be only partly aligned are presented under pitfalls.

Weaknesses We find no material weaknesses in Hafslund Eco’s green finance framework.

Pitfalls While renewable energy projects generally are considered to have positive climate mitigation impacts, there are nevertheless emissions associated with the construction process. CICERO Green encourages Hafslund Eco to conduct life cycle assessments of major projects. Life cycle assessments will provide valuable information on the environmental and climate impacts of the projects and point to suppliers that can lead to a reduction in emissions. Hafslund ECO has not implemented the full recommendations of TCFD, e.g., the scenario analysis. Still, climate risks and vulnerability assessments are part of the hydro power and climate adaptation projects. Increased


precipitation represents both an opportunity, but also a potential huge risk related to dam collapse. It is therefore very good that Hafslund Eco include climate adaptation as a separate category in their framework. Despite regulat stakeholder consultations, there are often conflicts associated with watercourse regulations. The development and operation of hydropower plants are of major interest for municipalities, local communities and interested parties. Potential conflicts are mainly related to:

• Effects on fish and fishing in regulated rivers with fluctuating flow of water. Optimal fisheries management.

• Construction activities and impact on neighbors and nature close to construction sites. • Access and availability to hydropower facilities like dams and connected roads. 3rd party safety. • Impacts on biodiversity and nature qualities from operation and maintenance of our facilities. • Effects of damaging floods in regulated watercourses, especially in downstream municipalities.

Challenges and conflicts are handled by mitigation measures and regular contact with local municipalities and communities and operation in accordance with national regulations and guidelines (internal control). Hafslund Eco informs us that a final decision on which grid factor to use for the 2020 sustainability report has not yet been made. When the desicion is final they guarantee transparency. If the company obtains and complies with the licenses issued by the relevant authorities, it is our interpretation that they are likely to be aligned with several of the requirements in the EU taxonomy DNSH-criteria related to sustainable water management and biodiversity considerations. It is however unclear to what extent the Norwegian hydropower regulation fully takes into account the EU taxonomy DNSH criteria in particular related to sustainable water management. New hydropower developments need to complete a cumulative impact assessment to ensure that the construction of the plant does not deteriorate the status of the relevant water body. Norwegian regulation includes a requirement for installation of fish passes for existing hydropower. However, there is no requirement to fence out fishes in old hydropower plants, as well as no requirements for turbines that prevent fish kill or for cumulative impact assessments for new hydropower developments. On the other hand, large amounts of juvenile fish is introduced in rivers and lakes each year by the company and new solutions to the fish kill problem are constantly researched.


Appendix 1: Referenced Documents List

Document Number

Document Name Description

1 20210310 - Hafslund Eco_Green Finance Framework Draft

Hafslund Eco’s Green financing framework dated March 2021.

2 Bærekraftsrapport-HE_2019 Sustainability report 2019 (in Norwegian)

3 hafslund_e-co_annual_report_2019_eng Annual report 2019

4 Standard terms and conditions Hafslund Eco Procurement standard, https://hafslundeco.no/en/procurements/standard-terms-and-conditions

5 Requirements for Suppliers Hafslund Eco Requirements for suppliers, https://hafslundeco.no/en/procurements/requirements-for-suppliers

6 Code of Conduct Hafslund Eco Code of conduct, https://hafslundeco.no/en/procurements/code-of-conduct

7 Oslo model Description of the Oslo model (in Norwegian) https://www.oslo.kommune.no/for-vare-leverandorer/krav-til-leverandorer/oslomodellen/#toc-3


Appendix 2: EU Taxonomy criteria and alignment Complete details of the EU taxonomy criteria are given in https://ec.europa.eu/finance/docs/level-2-measures/taxonomy-regulation-da-2020-annex-1_en.pdf.

Electricity generation from hydropower Framework

activity

Renewable energy projects

Taxonomy

activity

Electricity generation from hydropower (NACE Code D.35.1.1 and F42.22)

Taxonomy

version

EU Technical mitigation criteria Comments on alignment Alignment

Mitigation threshold

The activity complies with either of the following criteria: a) The life cycle GHG emissions from the generation of

electricity from hydropower are lower than 100gCO2e/kWh21.

b) The power density of the electricity generation facility is above 5 W/m2.

• The issuer is referring to a study by the Norwegian Institute for Sustainability Research on Norwegian hydropower, where average emissions are calculated to

around 3.3g CO2e/kWh22. • The life cycle assessment (LCA)-study is performed using

the ISO 40040/44/48. • Power density is not calculated due to lack of clear

definitions on how to do this.

Likely aligned with thresholds, but company specific LCA-studies are not calculated. Method used in study differ from the

taxonomy. However, it is not likely that actual emissions are close to the given threshold.

EU Taxonomy DNSH-criteria Comments on alignment Alignment


• Physical climate risks material to the activity have been identified (chronic and acute, related to temperature, wind, water, and soil) by performing a robust climate risk and vulnerability assessment.

• The assessment is proportionate to the scale of the activity and its expected lifespan.

o for investments into activities with an expected lifespan of less than 10 years, the assessment is performed, at least by using downscaling of climate projections

o for all other activities (older than 10 years), the assessment is performed using

• Risk assessments are carried out regularly.

• Climate risk is integrated in the evaluation of the stability of dams and the quality of floodplains and plays a large role in the decision on whether to implement measures or not. This is closely related to third party safety.

• The largest installations and installations with the biggest potential for damage if breached are prioritised (facilities classified in category 3 or 4 according to dam safety regulations, 'damsikkerhetsforskriften').

• None of the issuer's activities have an expected lifespan of less than 10 years.

Likely aligned.

21 The life cycle GHG emissions are calculated using Commission Recommendation 2013/179/EU or, alternatively, using ISO 14067, ISO 14064-1, the G-res tool. Quantified life cycle GHG emissions are verified

by an independent third party. 22 https://norsus.no/wp-content/uploads/AR-01.19-The-inventory-and-life-cycle-data-for-Norwegian-hydroelectricity.pdf


high resolution, state-of-the-art climate projections across a range of future scenarios consistent with the expected lifetime of the activity, including, at least, 10 to 30 years climate projections scenarios for major investments.

• The economic operator has developed a plan to implement adaptation solutions to reduce material physical climate risks to the activity. The adaptation solutions identified need to be implemented within five years from the start of the activity. These adaptation solutions do not adversely affect the adaptation efforts or the level of resilience to physical climate risks of other people, of nature, of assets and of other economic activities and are consistent with local, sectoral, regional or national adaptation efforts.

• Both historic data and projected future scenarios are used in the assessment of projects

• The issuer has developed an investment plan for the next 10 years. Implementation of this plan is ongoing.

Sustainable use and protection of water and marine resources (water management)

1: Operation of existing hydropower plants, including refurbishment activities to enhance renewable energy or energy storage potential.

Measures have been implemented to reduce adverse impacts on water and protected habitats. The effectiveness is monitored in an authorisation or permit. The operation of the hydropower plant complies with authorisation or permit issued by the competent authority, and sets out relevant mitigation measures necessary to:

• ensure conditions as close as possible to undisturbed continuity in the water body the plant relates to, functional fish passes and turbines preventing fish kill, measures to ensure minimum ecological flow and sediment flow;

• reduce the impact of hydropeaking;

• protect or enhance habitats;

• reduce adverse impacts of eutrophication.

2: Construction of new hydropower plants

• The plants are conceived so that no deterioration of the status of the water body is experienced, demonstrated by a cumulative impact assessment.

• Where the cumulative impact assessment demonstrates that the envisaged project could

• The construction of energy production facilities larger than 1 MW needs a license from the Norwegian Water Resources and Energy Directorate (NVE) according to the “Energy Law” and the “Water Resources Law”.

• Companies need to complete an EIA and to demonstrate alignment with the WFD. This includes requirements for minimum water level.

• NVE is carrying out audits to monitor performance.

• River basin management (RBM) is conducted on a regional level, and hydropower plants need to be incorporated in the existing river basin management plans. This is regulated in “Vanndirektivet”.

• The issuer confirms that measures have been implemented to reduce the negative effect on water and protected habitats and that the operation of all hydropower plants complies with the authorisation or permit issued by the competent authority.

• Functional fish passes are a focus area for the issuer. Implemented measures include rebuilding old fish ladders to be better suited for the species in the local area and installing automatic fish counters as a replacement for manual counters, as well as other habitat-improving measures. Preventing all species and sizes of fish to enter

Likely aligned, although fish kill prevention in all turbines cannot be guaranteed.


deteriorate or compromise the achievement of good status/potential of the specific water body it relates to, a further in-depth cost-benefit assessment must be performed.

hydropower tunnels and turbines is a very challenging task because of technological restrictions. The issuer is actively involved in R&D projects on this issue; in a pilot project in Vangen hydropower plant (Aurland) a new physical, fine-mesh grille has been installed to reduce the risk of fish swimming past the intake grids.

• Sediment flow in large quantities is generally not an issue in reservoirs that are located in mountainous areas where the potential for sediment flow is naturally low.

• The issuer is working on the planning of physical measures to reduce effects of hydropeaking. In Hol 1 hydropower plant, rules for down ramping have been implemented to reduce these effects.

• Cumulative impact assessments are a topic in the licencing process if the regulatory authority (NVE) finds it relevant.

Protection and restoration of biodiversity and ecosystems (ecosystems)

• An Environmental Impact Assessment (EIA) or screening has been completed in accordance with national provisions.

• Where an EIA has been carried out, the required mitigation and compensation measures for protecting the environment are implemented.

• For sites/operations located in or near biodiversity-sensitive areas (including the Natura 2000 network of protected areas, UNESCO World Heritage sites and Key Biodiversity Areas, as well as other protected areas), an appropriate assessment, where applicable, has been conducted and based on its conclusions the necessary mitigation measures are implemented.23

• The construction of energy production facilities larger than 1 MW needs a license from the NVE according to the “Energy Law” and the “Water Resources Law”.

• To receive a license the company needs to complete an EIA, including implementation of mitigative measures. This is also required by the “Energy Law”.

• The issuer has facilities that affect nature conservation areas, but all of the activities/facilities have been conducted in accordance with concessions given by NVE and follow requirements for mitigating measures to safeguard the environmental values given by the administrative authority.

• According to the issuer they are following national laws and regulations and have completed EIAs for all new projects, and required compensation measures have been implemented.

Likely aligned.

It is however unclear whether national requirements for mitigating measures in nature conservation areas are aligned with EU Nature legislation.

23 Practical guidance is contained in Commission notice C/2018/2619 ‘Guidance document on the requirements for hydropower in relation to EU nature legislation’ (OJ C 213, 18.6.2018, p. 1).


Infrastructure enabling low-carbon road transport

Framework

activity

Clean transportation

Taxonomy

activity

Infrastructure enabling low-carbon road transport (NACE Codes F42.11, F42.13, F71.20)

Taxonomy

version

EU Technical mitigation criteria Comments on alignment Alignment

Mitigation criteria Substantial contribution to climate change mitigation Infrastructure enabling low-carbon road transport:

• The infrastructure must be dedicated to vehicles with zero tailpipe CO2 emissions;

• E.g., electric charging points, electricity grid connection upgrades, hydrogen fueling stations.

• The infrastructure cannot be dedicated to the transport of fossil fuels.

Loans to finance or refinance electric charging points and electricity grid connection upgrades can be used by plug-in hybrid vehicles. These are not low carbon according to the definitions:

• Low carbon vehicles: Fully Electric, Hydrogen or otherwise zero-emission passenger & freight vehicles

• Low carbon public and mass transportation: Fully Electric, Hydrogen or otherwise zero-emission public and mass transportation systems, such as busses, trains, trams and ferries.

Likely aligned but be aware of potential support of plug-in hybrids.

EU Taxonomy DNSH-criteria Comments on alignment Alignment


• Physical climate risks material to the activity should be identified (chronic and acute, related to temperature, wind, water, and soil) by performing a robust climate risk and vulnerability assessment. The assessment should be proportionate to the scale of the activity and its expected lifespan.

• Not applicable Not applicable.

Sustainable use and protection of water and marine resources

• Environmental degradation risks related to preserving water quality and avoiding water stress are identified and addressed.

• In the EU, fulfill the requirements in the EU WFD or complete an EIA in line with national regulations.

• Not applicable Not applicable.

Transition to a circular economy (circular economy)

• At least 70 % (by weight) of the non-hazardous construction and demolition waste (excluding naturally occurring material24) generated on the construction site is prepared for re-use, recycling and other material recovery, including backfilling operations using waste to substitute other materials.

• Waste management is handled in accordance with national laws and regulations, and local policies, stipulated in contracts with subcontractors.

Likely not aligned, due to lack of quantitative requirements of recycled materials.

24 Refer to the European List of Waste established by Commission Decision 2000/532/EC


Pollution prevention and control

• Measures are taken to reduce noise, dust and pollutant emissions during construction or maintenance works.

• Measurements on pollution preventions are applied in accordance with national rules and regulations.

Likely aligned.

Protection and restoration of biodiversity and ecosystems

• An Environmental Impact Assessment (EIA) or screening should be completed in accordance with national provisions.

• Where an EIA has been carried out, the required mitigation and compensation measures for protecting the environment are implemented.

For sites/operations located in or near biodiversity-sensitive areas additional requirements apply.

• Not applicable/the projects are very small and therefore do not require an EIA

Not applicable.


Appendix 3: About CICERO Shades of Green

CICERO Green is a subsidiary of the climate research institute CICERO. CICERO is Norway’s foremost institute for interdisciplinary climate research. We deliver new insight that helps solve the climate challenge and strengthen international cooperation. CICERO has garnered attention for its work on the effects of manmade emissions on the climate and has played an active role in the UN’s IPCC since 1995. CICERO staff provide quality control and methodological development for CICERO Green. CICERO Green provides second opinions on institutions’ frameworks and guidance for assessing and selecting eligible projects for green bond investments. CICERO Green is internationally recognized as a leading provider of independent reviews of green bonds, since the market’s inception in 2008. CICERO Green is independent of the entity issuing the bond, its directors, senior management and advisers, and is remunerated in a way that prevents any conflicts of interests arising as a result of the fee structure. CICERO Green operates independently from the financial sector and other stakeholders to preserve the unbiased nature and high quality of second opinions. We work with both international and domestic issuers, drawing on the global expertise of the Expert Network on Second Opinions (ENSO). Led by CICERO Green, ENSO contributes expertise to the second opinions, and is comprised of a network of trusted, independent research institutions and reputable experts on climate change and other environmental issues, including the Basque Center for Climate Change (BC3), the Stockholm Environment Institute, the Institute of Energy, Environment and Economy at Tsinghua University and the International Institute for Sustainable Development (IISD).