ACRA CONFIRMED THE COMPLIANCE OF THE PLANNED BOND ISSUE OF THE STATE CORPORATION FOR DEVELOPMENT "VEB.RF" WITH THE ICMA "GREEN" PRINCIPLES BONDS AND NATIONAL GREEN BONDS STANDARDS

acra has confirmed the compliance of the planned bond issue of state development corporation “veb.rf” with the green bond principles of the international capital market ASSOCIATION (icma) and national standards; it has confirmed the compliance of the projects refinanced as part of the issue with INTERNATIONALLY RECOGNIZED PRINCIPLES AND STANDARDS IN THE FIELD of ecology and green financing

compliance of the issue with Regulation of the Bank of Russia dated December 19, 2019 No. 706-P

As part of the planned bond issue of State Development Corporation “VEB.RF” (hereinafter, VEB.RF, the Issuer, or the Initiator) ACRA verified the compliance of the bond issue with the internationally recognized principles, standards, and criteria in the field of ecology and green financing (Green Bond Principles (GBP) of the ICMA), criteria of green financial instruments in accordance with Decree of the Government of the Russian Federation No. 1587 dated September 21, 2021 (hereinafter, the National Standard), as well as compliance of the projects refinanced using the proceeds fr om the bond issue with internationally recognized principles and standards in the field of ecology and green financing.

The projects presented by the Issuer (see below and Appendix 1) fall into the following ICMA project categories:

• Clean transportation;

• Sustainable water and wastewater management.

The projects correspond to the following areas of the Russian green project taxonomy:

5.1. Manufacture of railway transportation vehicles that use clean energy sources (passenger, cargo), purchase of railway transportation vehicles that use clean energy sources, migration of existing rolling stock to clean energy sources (Projects A, B and C).

5.7. Construction and upgrade of infrastructure for clean energy transportation vehicles (including construction of railway and tramway lines) (Project C).

6.2.1. Construction and upgrade of drinking water treatment infrastructure (Project D).

6.2.2. Improving the resource and energy efficiency of drinking water infrastructure (Project D).

6.4.2. Projects aimed at reducing the concentration of pollutants in wastewater (Project D).

Refinancing such projects through the issuance of green debt instruments is possible in both international and Russian practice.

Below is a list of analyzed projects refinanced as part of the issue (see the full description of projects and environmental effects from their implementation in Appendix 1):

A.      Replacement of outdated rolling stock and improvement of the comfort and safety of Moscow Metro passengers (replacement of outdated rolling stock and improvement of the comfort and safety of the Moscow Metro);

B.      Upgrading a fleet of electric suburban passenger trains (upgrading a fleet of electric suburban passenger trains);

C.      Modernization of Taganrog Tramvai (Taganrog’s tram network):

• Track reconstruction;

• Upgrading tram network electric power systems;

• Creation of modern tram stops that ensure passengers can board comfortably, including people with low mobility;

• Updating rolling stock;

• Creation of a modern automated traffic control system to give priority to trams;

• Reconstruction of the tram depot;

• Optimization of the existing route network.

D.      Modernization and operation of the water supply and wastewater discharge system of Yuzhno-Sakhalinsk based on a concession agreement:

• Construction of a new water supply intake (Yuzhny) and modernization of water supply and wastewater discharge networks, which are activities for the construction and modernization of infrastructure for the preparation of drinking water;

• Increasing the resource and energy efficiency of drinking water supply infrastructure by reducing water loss and energy consumption;

• Modernizing water purification infrastructure by implementing effective and advanced water treatment technologies in order to bring water purification quality in line with regulations;

• Reducing the concentration of pollutants in wastewater by modernizing wastewater treatment facilities.

The final monetary volume of the issue at the time of verification had not been determined. However, the Issuer confirmed to the Agency that this amount will not exceed the total amount of financial resources previously provided to its clients for the implementation of all four projects.

The projects will allow positive environmental effects to be achieved, which is expressed in the following:

• Project A: expected reduction of greenhouse gas emissions by 30,613 tons of CO₂ equivalent per year (949,003 tons of CO₂ equivalent over the 31-year operating life). This effect was calculated based on the difference in electricity consumption by a new Moscow Metro train and the rolling stock that was replaced (see Key assumptions for calculating environmental effects).

• Project B: expected reduction of greenhouse gas emissions by 30,358 tons of CO₂ equivalent per year (1,214,320 tons of CO₂ equivalent over the 40-year operating life). This effect was calculated based on the assumed change to the structure of passenger flow in the Moscow Transportation Hub due to the projected replacement of buses and personal vehicles by a less carbon-intensive mode of transportation — electric trains.

• Project C: expected reduction of greenhouse gas emissions by 5,987 tons of CO₂ equivalent per year (167,636 tons of CO₂ equivalent over the 28-year operating life). This effect was calculated based on the assumed change to the structure of passenger flow in Taganrog due to the projected replacement of buses by a less carbon-intensive mode of transportation — electric trams.

• Project D: expected reduction of greenhouse gas emissions by 8,471 tons of CO₂ equivalent per year (415,079 tons of CO₂ equivalent over the project implementation period (concession agreement is valid for 50 years, with the positive environmental effect beginning from the second year). The effect was assessed based on the reduction of energy consumption by water production and release processes, as well as by treatment and transportation of wastewater. In addition, the following environmental effects will be reached thanks to the implementation of this project: reduction of water loss by 8,920,000 m³ per year (437,080,000 m³ over the project implementation period (concession agreement is valid for 50 years, with the positive environmental effect beginning from the second year). The project will also allow the volume of wastewater treatment to be increased by 2,483,000 m³ per year (121,667,000 m³ over the project implementation period (concession agreement is valid for 50 years, with the positive environmental effect beginning from the second year).

A complete list of the projects that the Issuer plans to refinance using the analyzed green bond issue, as well as a description of the environmental effect of each project, is provided in Appendix 1.

ACRA confirms that the projects refinanced through the issuance of green bonds comply with all the basic internationally recognized principles and standards in the field of ecology and green financing set out by the ICMA in 2021 (2021 GBP).

COMPLIANCE OF THE ISSUE WITH THE ICMA’S GREEN BOND PRINCIPLES

ACRA confirms that the Issuer’s planned bond issue complies with all the basic components of the ICMA’s 2021 GBP. The area in which proceeds will be used (projects that are refinanced through the issue of bonds to achieve objectives that comply with ICMA project categories and have a positive environmental effect), process of evaluating and selecting projects, and management of proceeds and reporting presented in the VEB.RF Green Bond Framework¹ (hereinafter, the Framework) are fully in line with 2021 GBP criteria, and consequently the planned bond issue can be considered as green.

¹ A draft of the document was provided to the Agency; as of the verification date the document had been approved by the Green Financing Committee of VEB.RF and was available on the Issuer’s website at: https://xn--90ab5f.xn--p1ai/investoram/zelenye-obligatsii/.

KEY ISSUE PROPERTIES

Sources: ACRA, Issuer’s data

The Issuer operates on the basis of the Federal Law “On the State Development Corporation ‘VEB.RF’” (Federal Law No. 82-FZ dd. May 17, 2007 “On the State Development Corporation ‘VEB.RF’”). The main objective of VEB.RF is to facilitate Russia’s long-term economic development. In partnership with commercial banks, the Issuer finances major projects aimed at developing infrastructure, industry, and the social sphere, strengthening technological potential, and improving the quality of life of the country’s residents.

The Agency notes that VEB.RF as a development institution plays a key role in the establishment of a sustainable financing system in Russia. The Issuer was designated as a methodological center for financial instruments for sustainable development by Decree of the Government of the Russian Federation No. 3024-r dated November 18, 2020. From March 2020 to May 2021, VEB.RF developed a national green financing methodology, which includes a green project taxonomy, a taxonomy of adaptation projects, and verification system requirements (National Standard).

In order to promote the implementation of the low-carbon development strategy of the Russian Federation, as well as in accordance with the Paris Climate Agreement signed by the Russian Federation, the Issuer indicated in its documents that “it is interested in increasing the investment portfolio, which involves the use of the funds provided for projects that solve the environmental and climate problems of the Russian Federation and the global community”.

The Issuer takes part in many Russian and international sustainability initiatives:

o   As a development institution, VEB.RF carries out systemic work to introduce responsible business standards in Russia. During VEB.RF’s presidency of the BRICS Interbank Cooperation Mechanism in 2020, VEB.RF together with Vnesheconombank Institute and the Russia-OECD Center RANEPA prepared the Responsible Financing Principles.

o   The Issuer has been a participant of the UN Global Compact since 2011.

o   The Issuer has been a member of the international responsible finance initiative — the United Nations Environment Program Finance Initiative (UNEP FI) since 2013 (VEB.RF was the first UNEP FI participant from Russia).

o   In 2019, the Issuer held its first expert session on green approaches to urban sustainability at the COP25 Climate Change Conference. In 2021, the Issuer organized a Green Finance Day and a number of sessions as part of the International Development Finance Club (IDFC) at COP26.

o   The Issuer has been a member of the IDFC since its inception in 2011. The IDFC is membered by 27 national and regional development banks that traditionally have held a progressive position on sustainability and green economy. The IDFC focuses on the contribution of development banks as members of a platform for the fight against climate change, as well as their role in financing green projects and achieving the UN’s 2030 Sustainable Development Goals.

o   The representatives of the Issuer are also actively involved as experts² in the activity of two key work groups of the G20 — the Infrastructure Working Group and the Sustainable Finance Working Group. These groups were created within the framework of cooperation between the ministries of finance and central banks of the G20 countries.

In 2022, the Issuer adopted the VEB.RF Green Bond Framework, which outlines the Issuer’s approaches to the procedure for preparing and placing green bonds: it describes the process of preliminary assessment and selection of projects; provides the requirements for green projects financed (refinanced) by issuing green bonds; indicates permitted areas for the use of funds (in accordance with the national green project taxonomy and ICMA’s eligible project categories); and describes the approaches to managing attracted funds, as well as the principles of verification and reporting.

² The Issuer’s employees represent the Russian Federation in the Sustainable Finance Working Group, which develops methodology for climate transition financial instruments for all countries of the G20.

key assessment factors

The Issuer provided ACRA with documents containing project eligibility criteria that can be included in the green bond issue, project selection process, approaches to managing proceeds, and future reporting. ACRA drew conclusions on the compliance of the bond issue with the four components of the 2021 GBP based on these documents.

Use of proceeds

The objectives of the issuance of green bonds are formulated and comply with the 2021 GBP. The proceeds from the issuance of these bonds will be used to refinance (replenish the funds previously assigned for financing) projects that are aimed at preserving and protecting the environment and having a positive impact on it, as well as preventing climate change or adapting to climate change, and are consistent with internationally recognized goals, principles, standards and criteria in the field of ecology and green finance, as well as the goals and main areas of sustainable (including green) development of the Russian Federation and criteria for sustainable (including green) development projects in the Russian Federation (green project taxonomy) (see Appendix 1).

The Issuer plans to refinance the following projects using funds from the bond issuance:

(1)       Replacement of outdated rolling stock and improvement of the comfort and safety of Moscow Metro passengers (Area 5.1. of the Taxonomy “Production of rail transportation that uses green energy sources (passenger, freight), purchase of rail transportation that uses green energy sources, conversion of existing rail transportation to green energy sources” as per the current version of the National Standard).

(2)       Upgrading a fleet of electric suburban passenger trains (Area 5.1. of the Taxonomy “Production of rail transportation that uses green energy sources (passenger, freight), purchase of rail transportation that uses green energy sources, conversion of existing rail transportation to green energy sources” as per the current version of the National Standard).

(3)       Modernization of Taganrog Tramvai (Taganrog’s tram network) (Area 5.1. “Production of rail transportation that uses green energy sources (passenger, freight), purchase of rail transportation that uses green energy sources, conversion of existing rail transportation to green energy sources” and Area 5.7. of the Taxonomy “Construction and modernization of infrastructure for clean transportation (including the construction of railroads and tram lines)” (as per the current version of the National Standard).

(4)       Modernization and operation of the water supply and wastewater discharge system of Yuzhno-Sakhalinsk based on a concession agreement (Area 6.2.1. “Construction and modernization of infrastructure for the preparation of drinking water”, Area 6.2.2. “Improving the resource and energy efficiency of drinking water infrastructure” and Area 6.4.2. “Projects aimed at reducing the concentration of pollutants in wastewater” of the Taxonomy (as per the current version of the National Standard).

The Issuer confirms that all of the proceeds from the analyzed green bond issue will be used solely to refinance the abovementioned projects, which can be included in the following ICMA project categories as per the 2021 GBP:

• Clean transportation;

• Sustainable water and wastewater management.

The Issuer provided the Agency with:

(1)    Information about project implementation, including goals and short descriptions, as well as environmental impact and the stages of readiness for each project.

(2)    VEB.RF Green Bond Framework;

(3)    Calculation of the climate effect for each project;

(4)    ACRA’s questionnaire filled out by the Issuer;

(5)    Draft resolution on the issue of securities;

(6)    Project documentation, including:

An extract from the business plan and presentation of METROVAGONMASH for the project to replace outdated rolling stock and improve the comfort and safety of Moscow Metro passengers;

• Characteristics of leasing items for the project to upgrade a fleet of electric suburban passenger trains;

• Research on passenger traffic in Taganrog for the project to modernize Taganrog Tramvai (Taganrog’s tram network);

• An extract from the concession agreement and financial model for the project to modernize and operate the water supply and wastewater discharge system of Yuzhno-Sakhalinsk based on a concession agreement.

The projects refinanced as part of the issue will be implemented (were implemented) in the following terms:

·         Project A. As of the date of signing the decision to issue green bonds, the Issuer had already provided the client with financing to implement the project. All railcars, the delivery of which is envisaged within the framework of the project, were purchased and transferred for the possession and use of the State Unitary Enterprise Moscow Metro, which operates these railcars on various metro lines.

·         Project B. As of the date of signing the decision to issue green bonds, the Issuer had already provided the client with financing to implement the project. As part of the project, electric trains were purchased and leased to a lessee who operates rolling stock on the Rizhsky, Belorussky, Savyolovsky, and Kyivsky lines of the Moscow Transportation Hub, providing passenger rail transportation.

·         Project C. As of the date of signing the decision to issue green bonds, the Issuer had already provided the client with financing to implement the project. The project has two stages. In the 1^st stage, 10.63 km of tramway tracks were built, 10 trams were launched on the route, and the traffic control room and three traction substations were upgraded. The 2^nd stage will involve:

• Modernizing 35.22 km of tramway tracks;

• Upgrading five traction substations;

• Upgrading a tram depot;

• Procuring 50 units of rolling stock.

The second stage is currently underway.

·         Project D. As of the date of signing the decision to issue green bonds, the Issuer had already provided the client with financing to implement the project. The concessionaire has begun to perform actions stipulated by the investment program:

Construction of the Yuzhny water supply inlet:

• Selection of a contractor is being completed;

• Engineering surveys have been completed and the main project solutions have been received; design work, including expertise, is expected to be completed in August 2022;

Utilities for the Uyun residential area (water supply and wastewater discharge networks):

• Selection of a contractor is being completed;

• Design work has been completed and comments are being addressed; design work, including expertise, is expected to be completed in August 2022;

• Procurement documentation is being prepared.

Development and implementation of an action plan to replace dilapidated emergency water supply networks based on accident statistics, diagnostics and hydraulic modeling:

•  A contractor is currently being selected.

Design and deployment of a control system at water supply facilities:

• Terms of reference are complete, tender offers are being collected.

According to the information provided by the Issuer, none of the analyzed projects have federal or regional significance and therefore are not subject to mandatory state ecological expertise. In addition, according to the Issuer’s information and in accordance with the procedures adopted by the Issuer, environmental risk assessment is only carried out in cases stipulated by the mandatory requirements of the law of the Russian Federation. These projects do not fall under the relevant category, and therefore the Issuer has not carried out any environmental risk assessment.

The Agency notes that the projects refinanced by the Issuer do not have any significant side effects for the environment (Do No Significant Harm principle): environmental protection law of the Russian Federation is observed when implementing the projects.

A preliminary cost estimate for the implementation of each project is not publicly disclosed by the Issuer, but was provided to the Agency during the evaluation.

The Issuer identified the following as positive environmental effects from the implementation of the analyzed projects:

A.      Project A: expected reduction of greenhouse gas emissions by 30,613 tons of CO₂ equivalent per year (949,003 tons of CO₂ equivalent over the 31-year operating life). This effect was calculated based on the difference in electricity consumption by a new Moscow Metro train (financed under the project) and the rolling stock that was replaced. Emissions for each of the two train types were estimated by multiplying electricity consumption per kilometer traveled (kWh/km); the distance that the trains travel per year on average (km); and the carbon intensity of electricity consumed for Moscow (gCO₂ equivalent/kWh) (calculated based on the indicator of TPPs’ demand for fossil fuels according to the Unified Energy System (UES) of Center³ for 2020). The number of financed trains was taken into account when calculating the final effect.

Data on electricity consumption is included in the technical description of the acquired railcars; information on the average number of kilometers travelled by each train per day is given on the website of the Moscow Metro.

B.      Project В: expected reduction of greenhouse gas emissions by 30,358 tons of CO₂ equivalent per year (1,214,320 tons of CO₂ equivalent over the 40-year operating life). This effect was calculated based on the assumed change to the structure of passenger flow in the Moscow Transportation Hub due to the projected replacement of buses and personal vehicles by a less carbon-intensive mode of transportation — electric trains. The following indicators were used for the calculation: carbon intensity of different types of transportation (personal vehicle, suburban railroad transportation, buses), passenger turnover from the Moscow Region to Moscow, and the structure of passenger traffic. The calculation of the final value of the estimated environmental effect was calculated by subtracting the emissions produced by the provided railcars from the emissions from the transportation that would have been used instead of the provided railcars (see Key assumptions for calculating environmental effects).

C.      Project C: expected reduction of greenhouse gas emissions by 5,987 tons of CO₂ equivalent per year (167,636 tons of CO₂ equivalent over the 28-year operating life). This effect was calculated based on the assumed change to the structure of passenger flow in Taganrog due to the projected replacement of buses by a less carbon-intensive mode of transportation — electric trams. The following indicators were used for the calculation: actual structure of passenger turnover by mode of transportation per day in Taganrog (before the project), predicted structure of passenger turnover by mode of transportation per day in Taganrog (as a result of the project), estimated carbon intensity of various modes of transportation (bus, trolleybus, tram), and the structure of electricity generation in the UES of South⁴. Research on the structure of passenger turnover following the implementation of the project assumes that a quarter of passengers who use buses will start using trams after they are modernized.

The carbon intensity of electricity consumed for the UES of South, which Taganrog is part of, was calculated based on data on the ratio of different fuels used to generate electricity in the system and their estimated carbon intensity (see Key assumptions for calculating environmental effects).

D.      Project D: expected reduction of greenhouse gas emissions by 8,471 tons of CO₂ equivalent per year (415,079 tons of CO₂ equivalent over the project implementation period (concession agreement is valid for 50 years, with the positive environmental effect beginning from the second year). The effect was assessed based on the reduction of energy consumption by water production and release processes, as well as by treatment and transportation of wastewater. Energy consumed by water production and release processes will be reduced to higher energy efficiency and a reduction in the share of water lost (due to upgrading of the system), while the reduction of energy consumed by the treatment and transportation of wastewater depends solely on increasing energy efficiency. Target indicators for the water supply and wastewater discharge systems are documented in the concession agreement.

³ The Unified Energy System of Center is located in the Central and Northwestern Federal Districts and in 19 Russian regions: the Belgorod, Vladimir, Vologda, Voronezh, Ivanovo, Kostroma, Kursk, Oryol, Lipetsk, Ryazan, Bryansk, Kaluga, Smolensk, Tambov, Tver, Tula, Yaroslavl, and Moscow Regions and the city of Moscow.

⁴ The Unified Energy System of South is located in the Southern and North Caucasian Federal Districts and in 15 Russian regions: the Republics of Adygea, Chechnya, Crimea, Dagestan, Ingushetia, Kabardino-Balkaria, Kalmykia, Karachay-Cherkessia, and North Ossetia — Alania, the Astrakhan, Krasnodar, Rostov, Stavropol, and Volgograd Regions, and the city of Sevastopol.

The calculation of the carbon intensity of consumed power, which was used to calculate the effect of both initiatives, has been assessed based on the ratio of different fuels used to generate electricity in Central Energy District of the Sakhalin Region and their estimated carbon intensity.

In addition, the Issuer intends to achieve the following environmental effects thanks to the implementation of the project: reduction of water loss by 8,920,000 m³ per year (437,080,000 m³ over the project implementation period (concession agreement is valid for 50 years, with the positive environmental effect beginning from the second year), and increase of the volume of wastewater treatment by 2,483,000 m³ per year (121,667,000 m³ over the project implementation period (concession agreement is valid for 50 years, with the positive environmental effect beginning from the second year). Water loss will be reduced by optimizing the water transportation system, which will result in the share of losses declining from 54.65% in 2021 (baseline year) to 10.65% in 2070 (target set out in the concession agreement). The volume of wastewater supplied for treatment will increase by 14% due to the activities planned under the concession agreement (see Key assumptions for calculating environmental effects).

ACRA considers the calculations and key assumptions made by the Issuer to calculate the expected environmental effect produced by the projects to be acceptable. At the same time, the Agency expects that when calculating the actual achieved environmental effect, data on the actual reduction of greenhouse gases for all projects refinanced using the proceeds from the bond issue will be used, taking into account a possible adjustment of the models for calculating environmental effect (see Key assumptions for calculating environmental effects), as well as the reduction of water loss and increase in the volume of processed wastewater for Project D.

A complete list of green projects refinanced using the proceeds from the green bond issue, including short descriptions of them, a list of planned actions, as well as an assessment of environmental effects and an indication of the projects’ compliance with internationally recognized principles and standards in the field of ecology and green financing (2021 GBP), as well as with the National Standard, is provided in Appendix 1.

Process of evaluating and selecting projects

The Issuer has informed ACRA that the assessment of its documents and business procedures for compliance with the requirements for green finance is carried out in accordance with the core international and Russian guidelines in the field of sustainable development and responsible investment.

The Issuer has determined a number of internal procedures, which regulate the process of assessing and selecting financed (refinanced) projects, which are set out in the VEB.RF Green Bond Framework.

The following procedure is applied to recognize whether projects are green and acceptable for financing (refinancing) using proceeds from green bond issues:

1.         A business unit of the Issuer carries out a preliminary assessment of which projects meet the requirements for green projects.

2.         The Issuer’s division, whose functions include confirming the results of the above preliminary assessment of the aforementioned business unit (Risk Unit), confirms or does not confirm the compliance of a project with the requirements for green projects. In some cases, an independent verifier may be involved too.

3.         In the event of a positive decision of the unit responsible for the abovementioned compliance assessment, the VEB.RF green financing committee may approve the inclusion of the project in the list of projects that meet the requirements for green projects and financing (refinancing) of which can be carried out, among other things, using proceeds from the placement of green bonds.

4.         If during any of the above stages a project is recognized as failing to comply with green project requirements, further work on including it in the list of projects that meet the requirements for green projects and financing (refinancing) of which can be carried out, among other things, using proceeds from the placement of green bonds, is not performed.

The Issuer also confirmed that for the selected projects, environmental risks are not accounted for and neutralized due to the fact that holding any environmental impact assessment for these projects is optional in terms of the current law of the Russian Federation. The Issuer also does not have its own environmental policy or a policy for neutralizing environmental risks when financing projects, which limits the assessment in accordance with ACRA’s methodology.

At the same time, an approach to assessing environmental risks is described in the Issuer’s project expert review procedure. The process of expert review of the Issuer’s projects includes environmental expertise. An assessment of the project’s compliance with the requirements and standards in the field of environmental protection is carried out as part of the environmental review. Based on the results of the environmental review, the following are formulated:

• Conclusions on the compliance of the project with the requirements and standards in the field of environmental protection (environmental requirements) established by the law of the country wh ere the project is to be implemented;

• Conclusions on identified environmental risks of the project;

• Recommendations on addressing identified violations and managing the project’s environmental risks.

The socioeconomic effect of project implementation is determined for projects planned for implementation with the involvement of federal budget funds within the framework of target programs, as well as involving the provision of state guarantees of the Russian Federation and individual tax benefits, if the rules of target programs and the conditions for providing state guarantees of the Russian Federation and individual tax incentives provide for the achievement of socioeconomic effects.

The assessment of socioeconomic effects produced by the project may result in a quantitative assessment of one or more of the following indicators:

• Growth of the gross domestic product of the Russian Federation, calculated on the basis of growth of gross value added and tax revenues in connection with the sale and import of goods (works, services);

• The budgetary effect calculated as the balance of the increase in tax and other obligatory payments to the budgetary system of the Russian Federation in connection with the implementation of the project and the amount of state support;

• The project’s impact on gross regional project over five years calculated as follows: the sum of the volume of investments and the increase in the current gross regional product fr om the project, on average per year, multiplied by five;

• Number of new jobs that will be created by the project;

• Share of the population of the city that will benefit from the project.

The Issuer does not plan to identify the risks of possible negative consequences for the social sphere related to the implementation of the projects or manage such risks because it believes that this risk is insignificant.

In addition, according to the Issuer, the implementation of the assessed projects must be in line with its overall development strategy.

As part of the analyzed issue, in accordance with the procedure set out above, the Issuer has identified projects for the refinancing of which the funds received from the placement of green bonds will be used (see the Use of proceeds section and Appendix 1).

The Issuer provided a draft decision on the issue, which lists the projects that will be refinanced using the proceeds from the issue. In addition, for each project the Issuer provided a calculation of the environmental effect expressed for all projects in terms of the reduction of greenhouse gas emissions (in CO₂ equivalent), and for the project to modernize and operate the water supply and wastewater discharge system of Yuzhno-Sakhalinsk on the basis of a concession agreement, this effect was also expressed in terms of reducing water losses and increasing the volume of wastewater treatment (see Appendix 1).

The Agency notes that the calculations of environmental effects were carried out directly by the Issuer without the involvement of external experts and professional environmentalists, which limits the assessment. The calculation of the climate effect for the projects was prepared by employees of the Issuer’s Risk Unit, who took part in the development of the National Standard (some of them underwent advanced training at the Skolkovo Moscow School of Management’s Energy Transition course).

The projects selected by the Issuer for the analyzed issue (see Appendix 1) fall under the following 2021 GBP categories:

• Sustainable water and wastewater management;

• Clean transportation.

The projects are aligned with the following UN Sustainable Development Goals (SDGs):

• SDG 6: Ensure availability and sustainable management of water and sanitation for all;

• SDG 11: Make cities and human settlements inclusive, safe, resilient and sustainable;

• SDG 13: Take urgent action to combat climate change and its impacts.

In ACRA’s opinion, the described algorithm is evidence of an efficient process of project evaluation and selection.

Management of proceeds

Proceeds from the issue of green bonds will be managed in line with the VEB.RF Green Bond Framework as follows (see description below).

According to the Issuer, the transparency of the use of proceeds received from the issue of green exchange-traded bonds will also be ensured through the publication of a report and information on the results of an independent external audit of the report and the issue, including an audit opinion (document), in the amount, manner and within the time limits specified in the bond issue decision.

In addition, a dedicated division of the Issuer will oversee the intended use of proceeds from the issue of green bonds. This division will maintain the Register of Issued Green Exchange-traded Bonds (the Register), which will allow the funds spent on the financing and refinancing of green projects to be tracked, including, among other things, proceeds received from the expected issue of green bonds. The Issuer will update the Register on a quarterly basis.

In the reports on the use of proceeds received from the issue of green bonds, the Issuer will disclose information about the use of proceeds from the green bond issue and the environmental effects achieved, which increases the level of transparency for bondholders.

The Issuer will maintain the total amount of financing (refinancing) of green projects financed (refinanced) by the Issuer at a level not lower than the total nominal value of the exchange-traded bonds.

If, before the green bonds’ maturity date, the total nominal value of the issue exceeds the total amount of refinancing of green projects, including in the event of early repayment of a loan provided for the implementation of a green project, the Issuer will make every possible effort to ensure that the released funds are used to finance or refinance other green finance projects. According to the Issuer, these temporarily free excess amounts will be invested in ruble-denominated liquidity management instruments of VEB.RF.

Thus, the Issuer has no plans to open a dedicated account to account for the proceeds from the issue of green bonds, but analytical accounting will be carried out. The draft resolution on the issue and the VEB.RF Green Bond Framework do not provide for external audit of the intended use of proceeds, which limits the assessment in accordance with ACRA’s methodology. The draft decision on the issue of green bonds also does not provide for the right of bondholders to request early redemption of their bonds in the event of misuse of proceeds, which limits the assessment of the effectiveness of control over the intended use of proceeds in accordance with ACRA’s methodology. At the same time, since all of the proceeds will be used exclusively for refinancing (replenishing funds previously allocated for financing) of the projects described above, ACRA assesses the risk of misuse of proceeds for the analyzed issue as low.

In the Agency’s opinion, the procedure for managing proceeds from the issue of green bonds generally complies with the 2021 GBP.

Reporting

The issuer will publish a report on the use of proceeds from the issue of green bonds, including on its website — www.veb.ru. In each report, the Issuer will disclose information about the projects in accordance with the law, and the regulations of the Bank of Russia and the stock exchange wh ere the green bonds are listed. This report will include, among other things:

• Project name;

• Brief description of the project (subject to confidentiality obligations);

• Approved amount of funds allocated for the project out of the bond proceeds;

• Share of funds allocated for the project from other sources;

• Spending (allocation) of funds raised by the bond issue;

• Spending (allocation) of funds raised by the bond issue in the reporting period;

• Information on the management of non-allocated funds;

• Information on attaining the following qualitative and quantitative indicators of the project specified in the green bond issue resolution:

o   Annual reduction of СО₂ emissions, thousand tons of СО₂ equivalent;

o   Annual savings of electricity, mln kWh;

o   Annual amount of treated wastewater, thousand m³;

o   Annual reduction of water losses, thousand m³

• Information confirming the implementation of the project described in the green bond issue decision and actual application of all proceeds received from the issue of the bonds;

• Facts and amounts of any misuse of the proceeds received from the issue of green bonds;

• Facts and essence of any non-compliance with the principles and standards in the field of environment and green financing during project implementation;

• Information on the project progress as of the reporting date.

The Issuer will publish the report annually, within 150 (one hundred fifty) days after the reporting date. The Issuer provided the Agency with a template of this report. In addition, the Issuer presented ACRA with key methods, models and assumptions for calculating the environmental impact for each project.

To verify regular reports on the use of proceeds received from the issue of green bonds, the Issuer will engage independent verifiers at its discretion, however, no external auditor and/or advisor is expected to be involved.

In the Agency’s opinion, the above procedure fully complies with the 2021 GBP.

Additional assessment factors

Organizational structure and strategy

According to the Issuer, the employees of its Risk Unit took part in the development of the National Standard. In addition, some employees have completed the Energy Transition course at the Skolkovo Moscow School of Management. However, the Issuer does not have a separate division that is solely responsible for implementing green projects.

The issuer has approved the VEB.RF Green Bond Framework, adopted a general Development Strategy for the period up to 2024 and for the period up to 2030, and an ESG Strategy is expected to be adopted.

ACRA assesses the degree of integration of the Sustainable Development Principles into the policies and procedures of the Issuer as high. The Issuer has joined a number of global ESG initiatives (see pages 4–5).

The Agency assesses the overall quality of the Issuer’s corporate governance and strategic planning as high.

Financial feasibility of the projects

All the projects included by the Issuer in this bond issue will be refinanced.

Purchases have already been made for Projects A and B.

Project C: as part of the first stage, 10.63 km of tramway tracks have been built, ten trams have been put into operation, and a traffic control room and three traction substations have been upgraded.

Project D: a financial model has been presented on the basis of which the financial feasibility of the project was assessed.

Information presented by the Issuer allows the Agency to assess the financial feasibility of the projects as high. At the same time, the Agency will assess the implementation of the projects as part of its standard monitoring procedures.

key assumptions

• Proceeds from the issue of green bonds will be used as intended.

key assumptions for calculating environmental effects

1.      Project A. In ACRA’s opinion, there are no significant assumptions.

2.      Project B. The final value of the estimated environmental effect was calculated by subtracting the emissions produced by the purchased railcars from the amount of emissions from vehicles that would have been used (share proportional to the number of provided trains) instead of purchased railcars. Thus, in the model presented by the Issuer, the redistribution of passengers from other vehicles to updated models of railway transportation is proportional to the current structure of the transportation used. This assumption of the Issuer is not supported by field observations or passenger flow models. The Agency believes that for a more accurate calculation of the effect, the Issuer should have taken a more detailed approach to assessing the change in the structure of passenger traffic in connection with the commissioning of new trains and provided a forecast for a decrease in the share of road transportation (buses and private vehicles) and an increase in the share of rail transportation.

3.      Project C. The expected environmental effect was calculated based on the forecast of the redistribution of passenger traffic in Taganrog. Field observations for the preparation of the forecast were carried out in November 2020, when passenger traffic and its structure may have been distorted compared to long-term averages due to passenger traffic restrictions caused by the coronavirus pandemic.

4.      Project D. Specifications of the water supply and wastewater discharge systems are indicated in the concession agreement, and calculations thereof are not explained by the Issuer. Therefore, the key assumption for this project is meeting these specifications on time and in accordance with the concession agreement.

rating components

Compliance of the issue with the 2021 GBP: yes.

Assessment score: GR1.

additional information

The assessment of the bonds of State Development Corporation VEB.RF and the projects refinanced as part of the bond issue for compliance with internationally recognized goals, principles, standards and criteria in the field of environment and green financing (2021 GBP), as well as the requirements to the system of verification of sustainable (including) green development projects in the Russian Federation have been performed based on the Methodology for Green Debt Obligation Assessment with respect to green bond assessment.

ACRA’s opinion on the compliance of the bonds of State Development Corporation VEB.RF and the projects refinanced as part of the bond issue for compliance with internationally recognized goals, principles, standards and criteria in the field of environment and green financing (2021 GBP), as well as the requirements to the system of verification of sustainable (including) green development projects in the Russian Federation has been published by the Agency for the first time. The compliance assessment may be revised within one year following the publication date of this press release.

ACRA’s opinion on the compliance of the bonds of State Development Corporation VEB.RF and the projects refinanced as part of the bond issue for compliance with internationally recognized goals, principles, standards and criteria in the field of environment and green financing (2021 GBP) is based on data provided by State Development Corporation VEB.RF, information from publicly available sources, and ACRA’s own databases. The assessment of compliance of the bonds of State Development Corporation VEB.RF and the projects refinanced as part of the bond issue for compliance with internationally recognized goals, principles, standards and criteria in the field of environment and green financing (2021 GBP) is solicited, and State Development Corporation VEB.RF participated in the assessment process.

In assigning the assessment, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.

No conflicts of interest were discovered in the course of the assessment process.

The assigned assessment is not a credit rating.

Appendix 1. Projects to be refinanced by the proceeds received from the issue of green bonds

Appendix 2. Compliance of the bond issue with the criteria in Decree of the Government of the Russian Federation dated September 21, 2021 No. 1587 “On approval of the criteria for sustainable (including green) development projects in the Russian Federation and the verification system requirements for sustainable (including green) development projects in the Russian Federation”

ACRA has also verified the bond issue and the projects to be refinanced with the proceeds from the issue for compliance with the criteria set by Decree of the Government of the Russian Federation dated September 21, 2021 No. 1587 and the criteria for green projects (the Green Project Taxonomy).

Compliance opinion

The assessed financial instrument (bonds) complies with the criteria.

Assessment methodology

The verification of the bond issue for compliance with the internationally recognized principles and standards in the field of environment and/or green financing, as well the projects to be refinanced with the proceeds from the bond issue has been performed based on the Methodology for Green Debt Obligation Assessment with respect to green bond assessment.

Actions taken

For verification purposes, the verifier (ACRA) requested and reviewed the following documents presented by the Originator (Issuer):

1)      VEB.RF Green Bond Framework;

2)      The Issuer’s internal sustainable development and risk management policies and procedures;

3)      ACRA’s questionnaire filled out by the Originator;

4)      Project descriptions;

5)      Models and assumptions for environmental effects presented by the Originator.

Discussions were held with the Originator.

Confirmation of independence of the opinion and the absence of conflicts of interest or other circumstances hampering proper, objective and impartial analysis and judgement

See pages 14–15 of this press release.

Confirmation of the type of sustainable development financial instrument declared by the Originator

Green financial instrument (green bond).

Is the Originator liable for non-compliance of the sustainable development financial instrument with the requirements?

No.

Compliance of the sustainable development projects with one or more areas set by the sustainable development project criteria

5.1. Manufacture of railway transportation vehicles that use clean energy sources (passenger, cargo), purchase of railway transportation vehicles that use clean energy sources, migration of existing rolling stock to clean energy sources (Projects A, B and C).

5.7. Construction and upgrade of infrastructure for clean energy transportation vehicles (including construction of railway and tramway lines) (Project C).

6.2.1. Construction and upgrade of drinking water treatment infrastructure (Project D).

6.2.2. Improving the resource and energy efficiency of drinking water infrastructure (Project D).

6.4.2. Projects aimed at reducing the concentration of pollutants in wastewater (Project D).

See Appendix 1.

Information about the Originator and the sustainable development projects

The Originator is a development institution that, in accordance with a mandate defined by law, performs a unique function of financing strategically important investment projects, which, in view of the increased risks and the regulatory factor, cannot be performed by commercial banks.

The Originator is not a commercial bank, and it is regulated by a special law, Federal Law No. 82-FZ “On the State Development Corporation ‘VEB.RF’” dated May 17, 2007. According to the Financial Policy Memorandum of VEB.RF approved by Decree of the Government of the Russian Federation No. 2208-r dated August 10, 2021, VEB.RF participates in the implementation of initiatives of the Government of the Russian Federation in the field of the country's socio-economic development.

Areas and goals of refinancing the portfolio of green projects

Project A. Area: transportation and industrial engineering. Goal: reduction of greenhouse gas emissions.

Project B. Area: transportation and industrial engineering. Goal: reduction of greenhouse gas emissions.

Project C. Area: transportation and industrial engineering. Goal: reduction of greenhouse gas emissions.

Project D. Area: water supply and wastewater discharge. Goal: saving energy and increasing the efficiency of resource management.

Compliance of the bond issue with the requirements set by the Bank of Russia in line with the law of the Russian Federation on securities issues for bonds whose issue or prospectus contains additional identification using the words “green bonds”

Yes (an extended confirmation is presented on pages 1–2 of this press release).

Assessment of compliance of the relevant sustainable development projects with the sustainable development project criteria

Complies (see pages 2–4 of this press release and Appendix 1).

Results of the analysis of the goals for which proceeds will be applied and the procedures for ensuring recommendations on the use and management of proceeds

Complies (see pages 5–9 of this press release).

Results of the analysis of the procedures for selection and approval of sustainable development projects

Complies (see pages 9–11 of this press release).

Results of the analysis of the control over the implementation of sustainable development projects

Complies (see pages 11–12 of this press release).

Values of indicators and an independent confirmation of the expected environmental effect from the sustainable development projects

The Issuer presented the calculations for the following environmental effects:

• Project A: expected reduction of greenhouse gas emissions by 30,613 tons of CO₂ equivalent per year (949,003 tons of CO₂ equivalent over the 31-year operating life). This effect was calculated based on the difference in electricity consumption by a new Moscow Metro train and the rolling stock that was replaced (see Key assumptions for calculating environmental effects).
• Project B: expected reduction of greenhouse gas emissions by 30,358 tons of CO₂ equivalent per year (1,214,320 tons of CO₂ equivalent over the 40-year operating life). This effect was calculated based on the assumed change to the structure of passenger flow in the Moscow Transportation Hub due to the projected replacement of buses and personal vehicles by a less carbon-intensive mode of transportation — electric trains.

• Project C: expected reduction of greenhouse gas emissions by 5,987 tons of CO₂ equivalent per year (167,636 tons of CO₂ equivalent over the 28-year operating life). This effect was calculated based on the assumed change to the structure of passenger flow in Taganrog due to the projected replacement of buses by a less carbon-intensive mode of transportation — electric trams.
• Project D: expected reduction of greenhouse gas emissions by 8,471 tons of CO₂ equivalent per year (415,079 tons of CO₂ equivalent over the project implementation period (concession agreement is valid for 50 years, with the positive environmental effect beginning from the second year). The effect was assessed based on the reduction of energy consumption by water production and release processes, as well as by treatment and transportation of wastewater. In addition, the following environmental effects will be reached thanks to the implementation of this project: reduction of water loss by 8,920,000 m³ per year (437,080,000 m³ over the project implementation period (concession agreement is valid for 50 years, with the positive environmental effect beginning from the second year). The project will also allow the volume of wastewater treatment to be increased by 2,483,000 m³ per year (121,667,000 m³ over the project implementation period (concession agreement is valid for 50 years, with the positive environmental effect beginning from the second year).

Size of expected environmental effects of the green projects

Presented in Appendix 1.

Information on conflicts of interest and the independence of judgement

No conflicts of interest were discovered in the course of the assessment process (see page 15 of this press release).