February 2022 Copyright V.E 2022 – Reproduction of this content (documents, graphs and images) in whole or in part are prohibited without the express written authorization of V.E and is protected by the provision of the French Intellectual Property Code. 1 Controversial Activities The Issuer appears to be involved in 2 of the 17 controversial activities screened under our methodology: ☐ Alcohol ☒ Fossil fuels industry ☐ High interest rate lending ☐ Pornography ☐ Animal welfare ☐ Coal ☐ Human embryonic stem cells ☐ Reproductive medicine ☐ Cannabis ☐ Chemicals of concern ☐ Gambling ☐ Genetic engineering ☐ Military ☒ Nuclear power ☐ Tobacco ☐ Unconventional oil and gas ☐ Civilian firearms Characteristics of the Framework Project Category 6 Green Categories Project Locations Continental Europe, UK, Australia, Asia- Pacific Existence of Framework Yes Share of Refinancing To be communicated prior to each issuance at transaction level Look-back Period ESG Controversies Number of controversies 7 Frequency Occasional Severity High Responsiveness Reactive SECOND PARTY OPINION on the sustainability of Iberdrola´s Framework for Green Financing V.E considers that Iberdrola´s Framework is aligned with the four core components of the ICMA’s Green Bond Principles 2021 (“GBP”) and LMA’s Green Loan Principles 2021 (“GLP”). SDG Mapping Governance Social Environment ESG Performance as of September 2021 V.E considers that the contemplated Framework is coherent with Iberdrola’s strategic sustainability priorities and sector issues and that it contributes to achieving the Issuer’s sustainability commitments. Issuer Framework Coherence Weak Advanced Robust Limited Coherent Partially coherent Not coherent Advanced Robust Limited Weak Advanced ESG risks management Expected impacts Advanced Advanced Robust Limited Weak Weak Advanced Robust Limited Contribution to Sustainability:
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Controversial Activities
The Issuer appears to be involved in 2 of the 17 controversial activities screened under our methodology: ☐ Alcohol ☒ Fossil fuels industry ☐ High interest rate lending ☐ Pornography ☐ Animal welfare ☐ Coal ☐ Human embryonic stem cells ☐ Reproductive medicine ☐ Cannabis ☐ Chemicals of concern
To be communicated prior to each issuance at transaction level
Look-back Period
ESG Controversies
Number of controversies 7
Frequency Occasional
Severity High
Responsiveness Reactive
SECOND PARTY OPINION on the sustainability of Iberdrola´s Framework for Green Financing
V.E considers that Iberdrola´s Framework is aligned with the four core components of the ICMA’s Green Bond Principles 2021 (“GBP”) and LMA’s Green Loan Principles 2021 (“GLP”).
SDG Mapping
Governance
Social
Environment
ESG Performance as of September 2021
V.E considers that the contemplated Framework is coherent with Iberdrola’s strategic sustainability priorities and sector issues and that it contributes to achieving the Issuer’s sustainability commitments.
Issuer
Framework
Weak Advanced Robust Limited
Coherence
Weak Advanced Robust Limited
Coherent
Partially coherent
Not coherent
Advanced
Robust
Limited
Weak
Advanced
ESG risks management
Expected impacts
Advanced
Advanced
Robust
Limited
Weak
Weak Advanced Robust Limited
Contribution to Sustainability:
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Key findings
V.E considers that Iberdrola’s Framework is aligned with the four core components of the GBP & GLP.
Use of Proceeds - aligned with GBP & GLP
• Eligible Categories are clearly defined and detailed, the Issuer has communicated the nature of the expenditures, the eligibility criteria, and that Eligible Projects will be deployed worldwide.
• The Environmental Objectives are clearly defined, these are relevant for all the Eligible Categories and set in coherence with sustainability objectives defined in international standards.
• The Expected Environmental Benefits are clear and precise, these are considered relevant, measurable, and will be quantified for all the Eligible Categories in the reporting for all the Eligible Categories.
• The Issuer has committed to transparently communicate the estimated share of refinancing prior to each financial instrument’s issuance in a dedicated public SPO or otherwise on Iberdrola’s website.
• The Issuer has not provided information on the look-back period for refinanced Eligible Categories. However, the Issuer has committed to be transparent in each transaction, not only with respect to the share of refinancing (if any), but also with respect to the year in which the Eligible Asset came into operation.
Evaluation and Selection - aligned with GBP & GLP and best practices identified by V.E
• The process for Project Evaluation and Selection has been clearly defined and detailed by the Issuer, it is considered well-structured in all the evaluation and selection steps (including the proposal, selection, validation, monitoring of Eligible Projects). The roles and responsibilities are clear and include relevant internal expertise. The process is disclosed in the Framework and in the herewith SPO.
• The eligibility criteria (selection and exclusion) for project selection have been clearly defined and detailed by the Issuer for all of the Eligible Categories.
• The process applied to identify and manage potentially material ESG risks associated with the projects is publicly disclosed in the herewith SPO. The process is considered robust: it combines monitoring, identification and corrective measures for all projects (see detailed analysis on pages 22-25).
Management of Proceeds - aligned with GBP & GLP and best practices identified by V.E
• The process for the Management and Allocation of Proceeds is clearly defined and detailed and is publicly available in the Framework and in the hereby SPO.
• The allocation period will be 24 months or less. • Net proceeds of the Green Financing Instruments will be placed in the Iberdrola’s general treasury and tracked
by the Issuer in an appropriate manner and attested in a formal internal process. • Information on the intended types of temporary placement for the balance of the unallocated net proceeds is
publicly disclosed in the Framework. • The Issuer has committed that as long as the Green Financing Instrument is outstanding, the balance of the
tracked net proceeds will be periodically adjusted to match allocations to Eligible Projects made during that period.
• The Issuer has provided information on the procedure that will be applied in case of project/asset divestment or postponement and it has committed to reallocate divested proceeds to projects that are compliant with the Green Financing Instruments Framework within 24 months or less.
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Reporting - aligned with GBP & GLP and best practices identified by V.E
• The Issuer has committed to report on the Use of Proceeds annually, until Green Financing Instruments maturity. The report will be publicly available until Green Financing Instruments maturity.
• The reporting will cover relevant information related to the allocation of Green Financing Instruments proceeds and to the expected sustainable benefits of the projects. The Issuer has also committed to report on material developments/issues/controversies related to the projects.
• The reporting methodology and assumptions used to report on environmental benefits of the Eligible Projects will be publicly disclosed.
• An external auditor will verify the tracking and allocation of funds to Eligible Projects until full allocation and in case of material changes. An external auditor will verify the indicators used to report on environmental benefits of the Eligible Projects until the Green Financing Instruments’ maturity.
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SCOPE V.E was commissioned to provide an independent Second Party Opinion (“SPO”) on the sustainability credentials and management of the Green Financing Instruments1 (“Financing Instruments”) to be issued by Iberdrola (the “Issuer”) in compliance with the Framework for Green Financing (the “Framework”) created to govern their Issuance (the “Issuance”).
Our opinion is established according to V.E’s Environmental, Social and Governance (“ESG”) exclusive assessment methodology and to the latest version of the voluntary guidelines of ICMA’s Green Bond Principles (“GBP”) - edited in June 2021 - and LMA’s Green Loan Principles (“GLP”) - edited in February 2021 (referred together as the “GBP & GLP”).
Our opinion is built on the review of the following components:
- Framework: we assessed the Framework, including the coherence between the Framework and the Issuer’s environmental commitments, the Financing Instrument’s potential contribution to sustainability and their alignment with the four core components of the GBP & GLP 2021.
- Issuer: we assessed the Issuer’s ESG performance, its management of potential stakeholder-related ESG controversies and its involvement in controversial activities2.
Our sources of information are multichannel, combining data (i) gathered from public sources, press content providers and stakeholders, (ii) from V.E’s exclusive ESG rating database, and (iii) information provided from the Issuer, through documents.
We carried out our due diligence assessment from November 15th, 2021 to February 3rd, 2022. We consider that we were provided access to all documents and interviewees we solicited. For this purpose, we made reasonable efforts to verify the accuracy of all data used as part of the assessment.
Type of External Reviews supporting this Framework
☒ Pre-issuance Second Party Opinion ☒ Independent verification of impact reporting
☒ Independent verification of funds allocation ☐ Climate Bond Initiative Certification
1 The “Green Financing Instruments” are to be considered as the instruments to be potentially issued, subject to the discretion of the Issuer. The name “Green Financing Instruments” has been decided by the Issuer: it does not imply any opinion from V.E.
2 The 17 controversial activities screened by V.E are: Alcohol, Animal welfare, Cannabis, Chemicals of concern, Civilian firearms, Coal, Fossil Fuels industry, Unconventional oil and gas, Gambling, Genetic engineering, Human embryonic stem cells, High interest rate lending, Military, Nuclear Power, Pornography, Reproductive Medicine and Tobacco.
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COHERENCE V.E considers that the contemplated Framework is coherent with Iberdrola’s strategic sustainability priorities and sector issues and that it contributes to achieving the Issuer’s sustainability commitments.
The Electric & Gas Utilities sector has a major role to play in the fight against climate change and energy efficiency through the promotion and development of renewable energy sources, energy efficiency and reduction in Greenhouse Gas (GHG) emissions.
Companies are expected to set ambitious climate change strategies, backed by relevant targets and widespread environmental management systems. However, renewable energy facilities such as wind farms call for specific measures to ensure biodiversity protection, health and safety and the promotion of sustainable relations with the communities where they operate.
Companies which are also involved in energy transmission and distribution are expected to increase their efforts to improve the efficiency of their networks as well as mitigate fugitive air emissions. Furthermore, by operating linear infrastructures (pipelines, high-voltage lines, etc.), companies bear additional responsibility for protecting biodiversity through the entire lifecycle of its activities and for preventing accidents along the network and at compressor stations (fires, explosions, ruptures, etc.). Finally, companies are also expected to promote energy efficiency measures for their end customers and ensure energy savings that will contribute to decarbonisation.
Iberdrola produces and supplies electricity to around 100 million people in the countries in which it operates. The company is focused on driving the energy transition to a more sustainable world through its investments in renewable energy, smart grids, large-scale energy storage, digital transformation, new technologies like green hydrogen and energy services for its customers.
Iberdrola has committed to reduce its emissions intensity to 50 gCO2/kWh globally by 2030 and to achieve carbon neutrality at the global level by 20503.
- Iberdrola has incorporated the Sustainable Development Goals defined by the United Nations for the period 2015-2030 into the company's strategy, its Sustainability Policy, and its Bylaws, including the concept of “Social Dividend”. In line with its activity, Iberdrola focuses on an affordable and clean energy supply and action for the climate. In addition, the company reports that it has increased the investment in Research, Development & Innovation activities, it promotes the protection of land ecosystems life and works to create partnerships to achieve these goals. Iberdrola is committed to contributing to the social and economic development of the communities in which it operates and to protecting the environment through its sustainable energy business model.
- The company has also set a target for absolute GHG emissions reductions (Scope 1, 2 and 3) that has been approved by the Science Based Target Initiative and is consistent with the Paris Agreement.
- On the occasion of the Paris 2017 Climate Finance Day, Iberdrola, along with eight of Europe’s largest industrial issuers of green bonds, publicly announced its undertaking to further develop the green bond market with placing green bonds at the heart of its project financing and business lines, and to implement stringent reporting procedures. The company issued its first green bond in 2014, and since then has intensified its financing in the Socially Responsible Investing focused market, having issued over EUR 13.2 billion through capital markets in a total of 18 operations4.
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As part of its business strategy and of the 2020-2022 Sustainable Development Plan “Energy to thrive”, Iberdrola acknowledges the importance of ESG factors for its medium- and long-term targets linked to the fight against climate change5. The associated projects, tasks, and objectives are grouped into several key areas and monitored, measured as well as evaluated in accordance with international sustainability standards. Main targets for 2022 include:
- Environmental targets: increase in green energy consumption, contribute to digitalisation and expansion of networks, reduce emissions and water consumption, invest in R&D, produce green hydrogen, install recharging points, invest in clean energy, reforestation, recycle waste.
- Social targets: increase employee training hours, support different social initiatives and programs, drive employment, grant scholarships, provide access to energy, ensure permanent contracts, promote equal opportunities, create customer-tailored products.
- Governance-related targets: promote cybersecurity, foster responsible supply, events, and financing, improve compliance, implement best practices in the Governance and Sustainability System, introduce new system for centralized purchases.
With the "Energy to thrive" plan, Iberdrola is contributing to the UN SDGs, putting the spotlight principally on SDG 13 (climate action) and SDG 7 (affordable and clean energy). To ensure compliance with the SDGs, the company has established an SDG Advisory Committee that reviews the actions in place. Iberdrola was selected by the OpenODS Index6 as the benchmark organization with the highest score among the 35 Spanish Ibex companies in terms of alignment, localization, implementation, and monitoring of the SDGs.
By creating a Framework to finance and refinance green projects, the Issuer coherently aligns with its sustainability strategy and commitments and addresses important sustainability issues of the sector.
5 https://www.iberdrola.com/wcorp/gc/prod/en_US/corporativos/docs/gsm21_IA_SustainabilityReport20.pdf (p. 99 ff.) 6 OpenODS Index Platform (November 2021): OpenODS Index
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FRAMEWORK Iberdrola has described the main characteristics of the Financing Instruments within a formalised Framework for Green Financing that covers the four core components of the GBP & GLP 2021 (the last updated version was provided to V.E on January 31st, 2022). The Issuer has made this document publicly accessible on Iberdrola’s website7, in line with good market practices.
Alignment with the Green Bond Principles and Green Loan Principles
Use of Proceeds
The net proceeds of the Green Financing Instruments will exclusively finance or refinance, in part or in full, projects falling under six Green Project Categories (“Eligible Categories”), as indicated in Table 1.
• Eligible Categories are clearly defined and detailed, the Issuer has communicated the nature of the expenditures, the eligibility criteria, and that Eligible Projects will be deployed worldwide.
• The Environmental Objectives are clearly defined, these are relevant for all the Eligible Categories and set in coherence with sustainability objectives defined in international standards.
• The Expected Environmental Benefits are clear and precise, these are considered relevant, measurable, and will be quantified for all the Eligible Categories in the reporting for all the Eligible Categories.
• The Issuer has committed to transparently communicate the estimated share of refinancing prior to each financial instrument’s issuance in a dedicated public SPO or otherwise on Iberdrola’s website8.
• The Issuer has not provided information on the look-back period for refinanced Eligible Categories. However, the Issuer has committed to be transparent in each transaction, not only with respect to the share of refinancing (if any), but also with respect to the year in which the Eligible Asset came into operation.
An area for improvement would be to limit the look-back period to a maximum of 36 months to be in line with market practices.
BEST PRACT ICES
The definition and eligibility criteria (selection and exclusion) are clear and in line with international standards for all categories Relevant Environmental Benefits are identified and measurable for all project categories The Issuer has committed to transparently communicate the estimated share of refinancing prior to each financial instruments’
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Table 1. V.E’ analysis of the Eligible Category, Sustainability Objectives and Expected Benefits as presented in the Issuer´s Framework.
- Nature of expenditures: CAPEX - Main locations of Eligible Projects (but not limited to)9: Continental Europe, United Kingdom, Australia, Asia-Pacific
FRAMEWORK INTERNAL DOCUMENTATION AND ANSWERS TO V.E
EL IG IBLE CATEGOR IES
DESCR IPT ION SUSTAINAB IL ITY OBJECT IVES AND BENEF ITS
V.E ’S ANALYS IS
Smart Grids Smart grids projects related to financing of, or investments in development, construction, installation and maintenance of transmission or distribution networks projects with the purpose of connecting renewable sources, improving efficiency, enabling demand side response, decreasing losses, or extending access to electricity. It includes:
- IT systems supporting network control, demand side response and distributed generation dispatching
- Smart meters
- Projects intended to support access to energy, especially in areas of lower penetration or isolated
- Demonstration projects of distributed generation, off-grid management, applied R&D
- Networks projects that facilitate full decarbonisation of the system as defined by the EU Taxonomy10 to foster a widespread renewable generation, ensure system reliability, and connect renewable facilities with the customers.
Climate Change Mitigation Energy Efficiency
-
Avoidance of GHG emissions
Connecting renewable energy production units to the general
network
Improving networks in terms of demand-size management, energy efficiency and access to electricity
Ensuring the stability and back-up of generation systems with significant
renewable energy penetration
The Eligible Category is clearly defined and detailed. The Issuer has communicated the nature of the expenditures, the Eligibility Criteria, and that Eligible Projects will be deployed worldwide.
The Environmental Objectives are clearly defined and set in coherence with sustainability objectives set in the international standards.
The Expected Environmental Benefits are clear. They are considered relevant, measurable, and will be quantified in the reporting. The Eligible Category complies with the Technical Screening Criteria outlined in the First Delegated Act on Sustainable Activities for Climate Change Adaptation and Mitigation Objectives report on the EU Taxonomy published in June 202111.
For the smart meters subcategory, the Issuer complies with the Article 20 of Directive (EU) 2019/94412.
9 Projects will be eligible only if they are financed by Iberdrola, S.A. itself and not by other Iberdrola subsidiaries for which Iberdrola, S.A. does not guarantee. 10 All transmission and distribution infrastructure in systems which are on a trajectory to full decarbonization are eligible, except for infrastructure that connects production plants that are more CO2 intensive than 100 gCO2e/kWh. 11 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=PI_COM:C(2021)2800 12 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32019L0944
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FRAMEWORK INTERNAL DOCUMENTATION AND ANSWERS TO V.E
EL IG IBLE CATEGOR IES
DESCR IPT ION SUSTAINAB IL ITY OBJECT IVES AND BENEF ITS
V.E ’S ANALYS IS
Renewable Energy
Renewable energy projects related to financing of, or investments in development, construction, installation, and maintenance of renewable energy production units as:
- Wind onshore
- Wind offshore - Solar (photovoltaic or CSP) - Hydroelectric facilities (including hydro-pumping stations
and repowering of operating assets), fulfilling strict selection criteria13.
Climate Change Mitigation
- Avoidance of CO2 emissions
The Eligible Category is clearly defined and detailed. The Issuer has communicated the nature of the expenditures, the Eligibility Criteria, and that Eligible Projects will be deployed worldwide.
The Environmental Objective is clearly defined and set in coherence with sustainability objectives set in the international standards.
The Expected Environmental Benefit is clear, it is considered relevant, measurable, and will be quantified in the reporting.
The Eligible Category complies with the Technical Screening Criteria outlined in the First Delegated Act on Sustainable Activities for Climate Change Adaptation and Mitigation Objectives report on the EU Taxonomy published in June 202114.
Sustainable Customer Solutions
Sustainable Customer Solutions that contribute to higher level of efficiency, sustainability and decarbonization:
- Heating electrification as heat pumps - Efficiency projects in buildings (reaching 30% target)15 - Distributed generation as Iberdrola’s “smartsolar”16
- Demand side response IT and physical infrastructure17
Energy Efficiency
-
Avoidance of CO2 emissions
Improving networks in terms of demand-size management, energy efficiency and access to electricity
The Eligible Category is clearly defined and detailed. The Issuer has communicated the nature of the expenditures, the Eligibility Criteria, and that Eligible Projects will be deployed worldwide. The Environmental Objective is clearly defined and set in coherence with sustainability objectives set in the international standards.
The Expected Environmental Benefits are clear. They are considered relevant, measurable, and will be quantified in the reporting. The Eligible Category complies with the Technical Screening Criteria outlined in the First Delegated Act on Sustainable Activities for Climate Change Adaptation and Mitigation Objectives report on the EU Taxonomy published in June 202114.
13 Selection criteria are set out in the Annex "Summary of Assessment Criteria" of the Issuer’s Framework. 14 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=PI_COM:C(2021)2800 15 The Issuer reports that efficiency projects in buildings relate to technical improvements and/or digitalization of buildings, e.g., installations of Smart Home solutions. 16 According to the Issuer, the term “smartsolar” refers to self-consumption with photovoltaic solar energy for all types of customers (residential, SMEs and large companies (PPAs on-site)). The Issuer reports that there is a possibility that
the investment will be made by the customer or by Iberdrola, with Iberdrola managing the entire project (legalization, installation, commissioning, etc.) and monitoring subsequent operation. 17 The Issuer reports that the solution concerns the digitalization of grids to increase their resilience, improve their operability and ensure the integration of renewables and smart recharging.
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FRAMEWORK INTERNAL DOCUMENTATION AND ANSWERS TO V.E
EL IG IBLE CATEGOR IES
DESCR IPT ION SUSTAINAB IL ITY OBJECT IVES AND BENEF ITS
V.E ’S ANALYS IS
Electric Mobility Electric Mobility projects that contribute to higher level of efficiency, sustainability and decarbonization:
- Charging stations
- Associated infrastructure18
Climate Change Mitigation
Energy Efficiency -
Avoidance of CO2 emissions
Improving networks in terms of
demand-size management, energy efficiency and access to electricity
The Eligible Category is clearly defined and detailed. The Issuer has communicated the nature of the expenditures, the Eligibility Criteria, and that Eligible Projects will be deployed worldwide.
The Environmental Objectives are clearly defined and set in coherence with sustainability objectives set in the international standards. The Expected Environmental Benefits are clear. They are considered relevant, measurable, and will be quantified in the reporting. The Eligible Category complies with the Technical Screening Criteria outlined in the First Delegated Act on Sustainable Activities for Climate Change Adaptation and Mitigation Objectives report on the EU Taxonomy published in June 202119.
Green Hydrogen Stations
Green Hydrogen Stations that contribute to higher level of efficiency, sustainability and decarbonization:
- Charging hydrogen stations - Electrolysers
- Associated infrastructure20
Climate Change Mitigation
- Avoidance of CO2 emissions
The Eligible Category is clearly defined and detailed. The Issuer has communicated the nature of the expenditures, the Eligibility Criteria, and that Eligible Projects will be deployed worldwide. The Environmental Objective is clearly defined and set in coherence with sustainability objectives set in the international standards. The Expected Environmental Benefit is clear, it is considered relevant, measurable, and will be quantified in the reporting.
The Eligible Category complies with the Technical Screening Criteria outlined in the First Delegated Act on Sustainable Activities for Climate Change Adaptation and Mitigation Objectives report on the EU Taxonomy published in June 202119.
18 The term “associated infrastructure” is used by the Issuer to refer to those assets that are not part of the main equipment but are required for a correct operation. 19 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=PI_COM:C(2021)2800 20 The term “associated infrastructure” is used by the Issuer to refer to the assets that are not part of the electrolyser but is required for operation, e.g., a connecting line between the electrolyser and the power plant or an electricity or
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FRAMEWORK INTERNAL DOCUMENTATION AND ANSWERS TO V.E
EL IG IBLE CATEGOR IES
DESCR IPT ION SUSTAINAB IL ITY OBJECT IVES AND BENEF ITS
V.E ’S ANALYS IS
Industrial Green Hydrogen Production
Green Hydrogen Production for industrial and chemical processes:
- Electrolysers
- Associated infrastructure21
Climate Change Mitigation
- Avoidance of CO2 emissions
Ensuring the stability and back-up of generation systems with significant
renewable energy penetration
The Eligible Category is clearly defined and detailed. The Issuer has communicated the nature of the expenditures, the Eligibility Criteria, and the location of Eligible Projects.
The Environmental Objective is clearly defined and set in coherence with sustainability objectives set in the international standards. The Expected Environmental Benefits are clear. They are considered relevant, measurable, and will be quantified in the reporting.
The Eligible Category complies with the Technical Screening Criteria outlined in the First Delegated Act on Sustainable Activities for Climate Change Adaptation and Mitigation Objectives report on the EU Taxonomy published in June 2021.
21 As above.
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SDG Contribution
The Eligible Categories are likely to contribute to three of the United Nations’ Sustainable Development Goals (“SDGs”), namely:
EL IG IBLE CATEGOR IES SDG SDG TARGETS
Smart Grids
Electric Mobility Green Hydrogen Stations
7.1. By 2030, ensure universal access to affordable, reliable, and modern energy services.
Renewable Energy
Sustainable Customer Solutions
Electric Mobility Green Hydrogen Stations
7.2. By 2030, increase substantially the share of renewable energy in the global energy.
Smart Grids Sustainable Customer Solutions Electric Mobility
Green Hydrogen Stations
7.3. By 2030, double the global rate of improvement in energy efficiency
Smart Grids
9.1. Develop quality, reliable, sustainable, and resilient infrastructure, including regional and transborder infrastructure, to support economic development and human well-being, with a focus on affordable and equitable access for all.
Industrial Green Hydrogen Production 9.4. By 2030, upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes, with all countries acting in accordance with their respective capabilities.
Smart Grids Renewable Energy
Sustainable Customer Solutions Electric Mobility Green Hydrogen Stations
Industrial Green Hydrogen Production
The projects are likely to contribute to SDG 13 which consists in adopting urgent measures to combat climate change and its impacts.
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Evaluation and Selection of Eligible Projects
• The process for Project Evaluation and Selection has been clearly defined and detailed by the Issuer, it is considered well-structured in all the evaluation and selection steps (including the proposal, selection, validation, monitoring of Eligible Projects). The roles and responsibilities are clear and include relevant internal expertise. The process is disclosed in the Framework and in the herewith SPO.
• The eligibility criteria (selection and exclusion) for project selection have been clearly defined and detailed by the Issuer for all of the Eligible Categories.
• The process applied to identify and manage potentially material ESG risks associated with the projects is publicly disclosed in the herewith SPO. The process is considered robust: it combines monitoring, identification and corrective measures for all projects (see detailed analysis on pages 22-25).
Process for Project Evaluation and Selection
The process is as follows:
- The evaluation and selection of Eligible Projects is performed and coordinated by Iberdrola’s Finance and Treasury Department relying on representatives from several areas of the Iberdrola. The list of Eligible Projects is set up by the Business and Environmental teams, based on internal expertise, and submitted to the Finance Department for validation and selection. The Finance Department checks with the Sustainability Department, Legal and Corporate Social Responsibility (among others) if the projects are available and checks internally that double counting is avoided.
- The respect of use of proceeds requirement is verified by the Business and Financial teams.
- The project fulfilment with Iberdrola’s Sustainable Development policies and the absence of any ESG matters are verified by the Sustainability and CSR teams (application of the exclusion criteria). Iberdrola’s Finance Department is responsible for coordinating the whole process for identification and selection of Eligible Projects.
The traceability and verification of the selection and evaluation of the projects is ensured throughout the process:
- At the beginning of each transaction, a project evaluation is carried out covering the entire lifecycle of the project (incl. conception, construction, and full operation time). Monitoring and control of the compliance of the selected projects with the Eligibility Criteria is performed at least twice a year for the plants included in any Green Instrument. If a project no longer complies with the Eligibility Criteria, the Finance and Treasury Department commits to reallocate the funds to another Eligible Project.
- Iberdrola will monitor potential ESG controversies related to the selected projects, on a continuous basis throughout the lifetime of the projects. In case a project faces a controversy, the Finance and Treasury Department (in contact with the Sustainability Department), commits to reallocate the funds to another Eligible Project.
- The decision-making process will be traceable through a continuous exchange of emails (or other available means of internal communication) between the decision-makers involved in the selection of projects.
Partially Aligned Not Aligned Aligned Best Practices
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Eligibility Criteria
The process relies on explicit Eligibility Criteria (selection and exclusion), relevant to the environmental objectives defined for the Eligible Categories.
- The selection criteria are based on the description defined in Table 1 in the Use of Proceeds section for each Green Financing Instrument.
- The exclusion criteria applied in case of any material litigation related to ESG matters are based on the integration of ESG factors at project level, according to the principles defined in Iberdrola’s Sustainable Development policies22.
- Avangrid (the US company controlled by Iberdrola, S.A. and listed in the New York Stock Exchange) and Neoenergia (the Brazilian company controlled by Iberdrola, S.A. and listed in the Brazil Stock Exchange) are excluded from the financing and are subject to their own Green Financing Framework as long as they issue their own financial transactions.
Eligibility and exclusion criteria for project selection are clearly defined and detailed for all of the projects. The Issuer reports that it will monitor compliance of selected projects with eligibility and exclusion criteria specified in the
Framework throughout the life of the instrument and has provided details on content, frequency, duration and on procedure adopted in case of non-compliance.
The Issuer reports that it will monitor potential ESG controversies associated with the projects throughout the life of the instrument and has provided details on frequency, content, and procedures in case a controversy is found on a project.
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Management of Proceeds
• The process for the Management and Allocation of Proceeds is clearly defined and detailed and is publicly available in the Framework and in the hereby SPO.
• The allocation period will be 24 months or less. • Net proceeds of the Green Financing Instruments will be placed in the Iberdrola’s general treasury and tracked
by the Issuer in an appropriate manner and attested in a formal internal process. • Information on the intended types of temporary placement for the balance of the unallocated net proceeds is
publicly disclosed in the Framework. • The Issuer has committed that as long as the Green Financing Instrument is outstanding, the balance of the
tracked net proceeds will be periodically adjusted to match allocations to Eligible Projects made during that period.
• The Issuer has provided information on the procedure that will be applied in case of project/asset divestment or postponement and it has committed to reallocate divested proceeds to projects that are compliant with the Green Financing Instruments Framework within 24 months or less.
Management Process
- In case of refinancing operating projects, no dedicated tracking of funds will be conducted. - In case of future project expenditures, the Green Financing Instruments’ proceeds will be managed through a
dedicated tracking process aiming to ensure traceability. - The Issuer has committed to allocating all proceeds to the Eligible Projects at settlement or within 24 months
and has committed to using temporary placements for the balance of unallocated proceeds which do not include GHG intensive or controversial activities, in line with best market practices.
- In case of project divestment, Iberdrola commits to use the net proceeds to finance and/or refinance other Eligible Projects which are compliant with the current Framework as soon as the divestment is effective.
- Iberdrola is committed to performing an external audit of the already invested capital from the accounting records in order to check the correct use of proceeds.
BEST PRACT ICES
The allocation period is 24 months or less. The Issuer has committed not to invest temporarily unallocated net proceeds in GHG intensive activities or controversial
activities.
The Issuer has provided information on the procedure that will be applied in case of project/asset divestment or postponement and it has committed to reallocate divested proceeds to projects that are compliant with the Green Financing Instruments Framework within 24 months or less.
Partially Aligned Not Aligned Aligned Best Practices
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Reporting
• The Issuer has committed to report on the Use of Proceeds annually, until Green Financing Instruments maturity. The report will be publicly available until Green Financing Instruments maturity.
• The reporting will cover relevant information related to the allocation of Green Financing Instruments proceeds and to the expected sustainable benefits of the projects. The Issuer has also committed to report on material developments/issues/controversies related to the projects.
• The reporting methodology and assumptions used to report on environmental benefits of the Eligible Projects will be publicly disclosed.
• An external auditor will verify the tracking and allocation of funds to Eligible Projects until full allocation and in case of material changes. An external auditor will verify the indicators used to report on environmental benefits of the Eligible Projects until the Green Financing Instruments’ maturity.
Indicators
The Issuer has committed to transparently communicate at Bond/Loan and Project level, on:
- Allocation of proceeds: The indicators selected by the Issuer to report on the allocation of proceeds are relevant and exhaustive:
REPORTING IND ICATORS
A list of the projects financed and a breakdown of allocated amounts to Eligible Categories (in total amount and percentage) Invested capital attributable to the Green Financing instrument (in EUR), incl. some individual information Percentage of allocated proceeds vs. unallocated proceeds, if any (in %)
Share of financing vs. refinancing (in %)
Partially Aligned Not Aligned Aligned Best Practices
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The Issuer has committed to report on the Environmental Benefits on a pro rata basis of the Green Financing Instruments proceeds contribution to the total cost of the project and Iberdrola’s ownership.
- Environmental benefits: The indicators selected by the Issuer to report on the environmental benefits are clear, relevant and exhaustive:
EL IG IBLE CATEGORIES
ENVIRONMENTAL BENEF ITS INDICATORS
OUTPUTS AND OUTCOMES IMPACT INDICATORS
Smart Grids T&D lines (in total and attributable km of lines)
Telecommunicated meters (in total and attributable number) Smart meters (in total and attributable number)
Number of new connections Amount of renewable generation capacity connected by the T&D assets (in MWh)
Annual renewable energy produced by the capacity connected by the T&D assets (in MWh)
Annual energy savings (in MWh)
Annual attributable GHG emissions avoided (in tCO2e per year)
Renewable Energy Installed capacity (in MW) or lifetime extension (years) Attributable capacity (in MW) or attributable lifetime extension (years) to the financing instrument
Annual attributable renewable energy produced (in MWh)
Annual attributable GHG emissions avoided (in tCO2e per year)
Sustainable Customer Solutions
Number of heating electrification installations
Buildings’ surface (in m2 or in km2) or energy savings (in MWh) Installed capacity (in MW)
Annual energy savings (in MWh)
Electric Mobility Number of charging stations kW installed at charging stations
Annual energy savings (in MWh) Annual attributable GHG emissions avoided (in tCO2e per year)
Green Hydrogen Stations
Number of charging stations Green hydrogen installed at charging stations (in MW)
Green hydrogen produced annually (in MW)
Renewable Energy Plant allocated (in MW)
Annual attributable GHG emissions avoided (in tCO2e per year)
Industrial Green Hydrogen Production
Installed capacity (in MW)
Green hydrogen produced annually (in MW) Renewable Energy Plant allocated (if any) (in MW)
Annual attributable GHG emissions avoided (in tCO2e per year)
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BEST PRACT ICES
The Issuer will report on the Use of Proceeds until Green Financing Instruments maturity. The Issuer report will be publicly available.
The reporting will cover relevant information related to the allocation of Green Financing Instruments proceeds and to the expected sustainable benefits of the projects. The Issuer has also committed to report on material development related to the projects, including ESG controversies.
The Issuer will report on the allocation of proceeds and on environmental benefits at project level. The indicators selected by the Issuer are exhaustive with regards to allocation reporting. The indicators selected by the Issuer are clear and relevant and cover all expected benefits associated with the Eligible Projects.
The reporting methodology and assumptions used to report on the environmental benefits of the Eligible Projects will be disclosed publicly.
Environmental benefits and impacts will be externally verified until Green Financing Instruments maturity.
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Contribution to sustainability
Expected Impacts
The potential positive Impact of the Eligible Projects on environmental objectives is considered to be advanced.
EL IG IBLE
CATEGORY EXPECTED
IMPACT ANALYS IS
Smart Grids ADVANCED
As part of the Sustainable Development Scenario developed by the International Energy Agency (IEA), the importance of electricity networks as well as demand-side measures, end-use electrification and energy efficiency play crucial roles to achieve goals for energy security and climate change mitigation23. Great attention is being paid to the development of transmission and distribution assets together with monitoring tools to support the implementation of intermittent, grid-following renewable energy to the grid in a technically secure way and meshed power system24. The IEA's "Net Zero Emissions by 2050" scenario assumes that investment in smart grids will account for about 40% of total investment to create more resilient and digital grids25. These investments and financing are made to accelerate progress on power system modernisation, and to facilitate grid interconnection to ensure secure, high quality electricity supply, reduce local congestion and improve interconnection between bidding zones, as well as promote the penetration of additional intermittent renewable energy capacity. This category does not entail any lock-in effects.
By following the EU Climate Delegated Act screening criteria26, the category follows one of the most stringent available standards to contribute to the claimed objective in the context of the projects.
Renewable Energy ADVANCED
Incorporating renewable energy is a key issue for energy providers on the way to contribute to a less carbon-intensive and more sustainable energy system. According to the IEA, the demand for renewable energy continuous to grow. Global annual hydropower additions are expected to be stable during the period of 2021-25, ranging from 10 GW to 13 GW27. Global wind additions in 2023-25 could range from 65 GW to 100 GW per year28. Global annual PV additions could reach 149 GW in 2022 and are expected to accelerate even more during 2023-2529. Increasing the share of renewable energy is, therefore, crucial to meet demand and achieve international decarbonization targets. GHG emissions originating from wind power are compliant with the threshold of 100 g CO2/kWh. Solar power is derogated from proving Life Cycle Assessment (LCA) on GHG emissions below 100 g CO2/kWh. However, solar panels are the most land-requiring means of producing electricity and can, therefore, compete with other land usages. Information on the sourcing of panels and if the majority will be installed on roof or on ground could be valuable for minimising negative impacts. With regard to hydropower, the Issuer undertakes to ensure that the generation density is above 5 W/m2.
towards-2050 25 https://www.iea.org/reports/smart-grids 26 4.9. Transmission and Distribution of Electricity: https://ec.europa.eu/finance/docs/level-2-measures/taxonomy-regulation-delegated-act-2021-2800-
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EL IG IBLE CATEGORY
EXPECTED IMPACT
ANALYS IS
By following the EU Climate Delegated Act screening criteria, the category follows one of the most stringent available standards to contribute to the claimed objective in the context of the projects.
Sustainable Customer Solutions
ADVANCED
According to the IEA, energy efficiency progress has been declining and faces further pandemic-related setbacks. The global primary energy intensity improved by less than 1% by 2020, the weakest performance since 2010 and far well below the level needed to tackle the worldwide climate change30. Innovation activities relating to efficiency gains in buildings, electrification of heating, replacements of outdated technologies as well as infrastructures with high global warming potential play an important role in improving energy performance, thus contributing to the achievement of global climate and sustainability goals.
The category includes such efficiency solutions as heat pumps running on R32, which are designed to limit the use of gases which have the highest Global Warming Potential (GWP). Efficiency projects in buildings, electricity distribution as well as infrastructure-related projects have only positive impacts and do not entail any lock-in effects. With the projects in the Sustainable Customer Solutions category, Iberdrola aims to contribute to the claimed objective, adopting internationally recognized standards.
Electric Mobility ADVANCED
Mobility has a minor impact on the utilities sector and this category doesn't tackle Iberdrola's main emission targets. However, with the "Fit for 55" initiative, the European Commission aims to reduce CO2 emissions by 55% by 2030, lifting an earlier target of a 37.5% reduction31. The package includes provisions for ensuring a comprehensive network (e.g., deployment of publicly accessible recharging stations no more than 60 km apart on major roads)32. These measures will rapidly accelerate the uptake of electric vehicles (EV). Furthermore, the "Net Zero Emissions by 2050" scenario developed by the EIA assumes that by 2030, there will be 300 million electric cars on the road, accounting for over 60% of new car sales, compared to only 4.6% in 202033. The installation of publicly accessible chargers is therefore an import issue to serve the growing demand needs for EVs and reduce net GHG emissions to zero by 2050.
Installing infrastructure such as EV charging points will reduce the emissions globally supporting company's decarbonization objectives. The category includes expenditures relating to charging stations with associated infrastructure. The expenditures follow a long-term approach in line with international standards, specifically with the EU’s Directive on Alternative Fuels Infrastructure (DAFI), which has the objective to reduce the reliance on oil for transport, with evident environmental benefits for the contribution to mitigation of climate change34.
Green Hydrogen Stations
Investments related to charging stations infrastructures have a minor impact on the utilities sector and this category does not tackle Iberdrola's main emission targets. However, growing demand for hydrogen should be accompanied by the simultaneous development of a corresponding infrastructure. A research conducted by the IEA shows that at the end of 2020, more than 540 hydrogen refuelling stations were in operation worldwide, an increase of more than 15 % compared to 201935. In the context of the ‘Fit for 55’ package, the European Commission proposed that all member states must install hydrogen charging and refuelling points at every 150 km on major highways by 203036. Nevertheless, the development of a sufficiently dense hydrogen infrastructure is still a concern.
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EL IG IBLE CATEGORY
EXPECTED IMPACT
ANALYS IS
Installing infrastructure such as hydrogen infrastructure will reduce the emissions globally supporting company's decarbonization objectives.
The category includes expenditures relating to charging hydrogen stations, electrolysers, and associated infrastructure. The expenditures follow a long-term approach in line with international standards, specifically with the EU’s Directive on Alternative Fuels Infrastructure (DAFI), which has the objective to reduce the reliance on oil for transport, with evident environmental benefits for the contribution to mitigation of climate change37.
Industrial Green Hydrogen Production
ROBUST
An analysis conducted by the IEA shows that hydrogen is expected to make a significant contribution to the global decarbonization targets, even though it accounts for less than 2% of global electricity generation today. The current production of Green Hydrogen from electrolysis accounts for 30 kt per year, making only ~0.03% of the total hydrogen produced38. In the Net Zero Emissions by 2050 scenario, demand for hydrogen in electricity generation reaches 51 Mt H2-eq by 2030, while the associated electricity generation capacity reaches only 140 GW by 203039, demonstrating a mismatch between the demand and the production output of hydrogen. The production of Green Hydrogen is crucial to accelerate the decarbonization process. Hydrogen dedicated production is relying heavily (>90%) on fossil fuels and especially on natural gas reforming (with LCA emissions estimated at 13kg CO2e/kg H240). Hydrogen is used in a variety of industrial process and has the potential of enabling decarbonising in several sectors if produced following low-carbon criteria. By producing hydrogen with alkaline electrolysis or PEM-Electrolysis with only low-carbon electricity from wind and solar capacities, with electrolysers with a maximum consumption of 55 kWh/kgH2, the category should meet the best available standards41 42, hence reaching the EU Climate Delegated Act eligibility criteria set at 3t CO2e/t H2. The hydrogen production process is highly water demanding especially when produced with PV-powered electrolysis43. To address this issue, Iberdrola explicitly commits to comply with the relevant country-specific water-related guidelines and regulations as well as the Equator Principles. However, some projects that could be located in the Asia-Pacific region include countries that suffer from water stress44 45. To cope with this issue, an area for improvement would be either to exclude water-stressed countries46 from financing under this Framework or to commit not to include seawater desalination plants in the hydrogen production process.
The Eligible Category constitutes the best technological alternative available to abate CO2 emissions in the context of the Green Hydrogen projects.
OVERALL ASSESSMENT ADVANCED
37 Ibid 38 https://www.iea.org/reports/hydrogen 39 Ibid 40 Levelized cost of CO2 mitigation from hydrogen production routes – Parkinson et al. (2018) 41 Study on development of water electrolysis in the EU, E4tech and Element Energy Ltd or the Fuel Cells and Hydrogen Joint Undertaking: Appendix 2 42 TEG final report on the EU taxonomy (2020) 43 IRENA (2020), Green Hydrogen Cost Reduction: Scaling up Electrolysers to Meet the 1.5⁰C Climate Goal, International Renewable Energy Agency 44 https://www.wri.org/insights/17-countries-home-one-quarter-worlds-population-face-extremely-high-water-stress 45 Aqueduct Water Risk Atlas (wri.org) 46 https://www.eea.europa.eu/archived/archived-content-water-topic/wise-help-centre/glossary-definitions/water-stress
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ESG Risks Identification and Management systems in place at project level
The identification and management of the environmental, social and governance risks associated with the Eligible Projects are considered robust47.
EL IG IBLE CATEGORIES
SMART GR IDS
RENEWABLE ENERGY
SUSTAINABLE CUSTOMER SOLUT IONS
ELECTR IC MOBIL ITY
INDUSTR IAL GREEN
HYDROGEN PRODUCTION
GREEN HYDROGEN STAT IONS
Environmental Management
Systems X X X X X X
Environmental Impact
Assessment X X N/A N/A X X
Eco Design/ End of life
decommissioning N/A X N/A N/A X X
Biodiversity X X N/A N/A X X
Pollution prevention and
control X X N/A N/A X X
Adaptation to climate change and its major consequences
X X N/A N/A X X
Management of environmental
risks in the supply chain
X X X X X X
Health and Safety X X X X X X
Respect of human and
labour rights X X X X X X
Social factors in the supply chain X X X X X X
Business Ethics X X X X X X
OVERALL ASSESSMENT
Advanced Advanced Robust Robust Robust Robust
47 The “X” indicates the ESG risks that have been activated for each Eligible Category.
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Environmental Management Systems
Iberdrola ensures that all projects are managed under an Environmental Management System based on international procedures and standards that are audited by recognised independent agencies. The Issuer currently holds the ISO 14001 certification. This standard applies to the areas of generation, transport, distribution and marketing of products, management of offices, and general services. In particular, in 2020, 77.29% of energy was generated in certified facilities.
Environmental Impact Assessment
EIA studies, which generally include a social impact assessment, are performed at Iberdrola’s locations of operation prior to the construction of the facilities and in accordance with the current law in each of the countries and must be approved by the competent public authorities.48 The scope of an EIA study also depends on the characteristics of the assets to be installed, e.g., for Smart Grid projects, the length and voltage of the grids are the variables that influence the scope of such a study.
An EIA covering both construction and operation phases has been or will be conducted for each Eligible Project. Specific environmental risks have been identified and dedicated environmental management plans are implemented at the project level. In addition, according to the Issuer, environmental incidents and anomalies are monitored and mitigation and compensation measures are implemented.
According to the International Energy Agency (IEA), Iberdrola is one of the few European utilities actively involved in the deployment of Smart Grids. The company has set up the Global Smart Grids Innovation Hub or knowledge centre to foster innovation through collaboration with suppliers, universities, technology centres and start-ups.49
Eco Design/End of life decommissioning
When conducting the EIA, the decommissioning of windfarm and solar PV components is considered. The regulated licences and permits for each project included requirements for ensuring the asset is suitably decommissioned. Through Wind-Europe and Sustainability Working Group of Solar Power Europe, Iberdrola sits on working groups dedicated to new sustainable systems for recycling wind turbine blades50 and solar panels.
In terms of solar PV asset management, Iberdrola reports performing detailed EIA assessments (including ESG aspects) covering all product phases. As part of the EIA, the decommissioning of components of a PV power plant is considered. Iberdrola reports having management systems and controls in place to guarantee that all applicable regulatory requirements are adequately addressed to ensure compliance. Additionally, Iberdrola provides information about its membership in the Solar Power Europe Sustainability Working Group, which works to maximize the sustainability values (eco-design, life cycle assessment (LCA), sustainable supply chain, circular economy) of the photovoltaic sector. In addition, the Issuer reports that it participates in forums to learn from industry best practices to improve its environmental performance and product quality.
With regard to the Green Hydrogen projects, the Issuer reports that the LCA is subject to a Delegated Act which is still pending approval. In addition, the generic conditions for all industrial installations are applied to meet the decommissioning requirements.
Biodiversity
Ecological monitoring is conducted at project level according to Iberdrola’s Flora & Fauna monitoring program and quantitative indicators are documented. Iberdrola has a dedicated Integration and Restoration Plan for the Landscape (PIRP) starting at the end of the construction phase and has defined a Compensation Programme for each Eligible Projects. In addition, employees and contractors receive trainings on biodiversity issues.
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With regards to specific measures linked to the Grid projects, as part of its Biodiversity Action Plan focusing on impact, prevention, reduction, and compensation activities51, Iberdrola publicly discloses measures undertaken to protect biodiversity. In particular for Spain, the following measures are reported52:
- Fire prevention: Launching of the Flash Project aiming at optimizing the vegetation management and the maintenance of power-line corridors to reduce fire hazards.
- Risk reduction: Continued management of the Overhead Grid Project to adapt supports for avifauna protection, and ongoing adaptation of 234,000 poles in the distribution lines to avoid electrocution of birds by 202553.
- Vegetation management: Implementation of the FLORA application to increase efficiency in the management of the vegetation on the streets with power lines.
As of January 2022, Iberdrola is updating its Biodiversity Strategy.
Pollution prevention and control
Dedicated procedures are in place. During construction phases, noise, dust, and vibrations are monitored and mitigation measures are reported to be implemented in case of irregularities and/or incidents. Iberdrola regularly performs audits on the construction site and technicians (employees and contractors) receive trainings on this topic.
To ensure control of SF6 fugitive emissions leakages due to maintenance operations at the power distribution facilities, the Issuer reports to schedule maintenance works one year in advance. SAP records of leaks and gas recharged will be maintained at the individual equipment level.
The company has a target to reduce SF6 emissions, which corresponded to 0.4% of Scope 1 in 2020. Iberdrola reports that specific plans for efficiency improvement and reduction of SF6 emissions are in place, including for instance the installation of the first eco-efficient high voltage switches as part of the reform of a substation in the Murcia region of Spain. These switches use an alternative insulating gas mixture instead of SF6, eliminating the carbon dioxide equivalent (CO2) caused by insulating gas during the product's lifetime.
Adaptation to climate change and its major consequences
The Issuer reports to pay close attention to the solidity of its design criteria, operation and maintenance procedures, and measures required for their effectiveness and efficiency. Since certain plants/components are sensitive to climatic variables such as temperature, humidity, or extreme weather events, Iberdrola reports to analyse and define design-specific production optimisation. The site studies and equipment specifications are complemented by these two tools: one internal prediction system which includes extreme weather events forecasting (Meteoflow) and another tool to monitor and ensure the maximum lifespan of the facilities and optimise asset management (Domina). According to the Issuer, these tools make it possible to anticipate failures, improve availability and carry out less expensive repairs. In addition, Iberdrola states that it has internal policies and procedures that contribute to the resilience of its assets.
Management of environmental risks in the supply chain
Dedicated guides including environmental guidelines are reported to be available for contractors and suppliers. They are contractually obliged to comply with Iberdrola’s dedicated plans including an environmental management plan, ecological systems compensation plan and emergency plan. Additionally, Iberdrola regularly performs on site suppliers’ audits.
Health and Safety
Iberdrola performs, at the project level, periodic inspections to guarantee compliance with the HSE plan, and detect incidents and non-conformities. Penalties are reportedly applied in case of repeated incidents. In addition, employees and contractors receive safety training. Iberdrola monitors and documents several H&S indicators including working
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hours and the number of accidents (frequency and gravity). Medical posts with doctors and nurses are installed in each site. To ensure a high level of safety, Iberdrola affirms to follow the principle that its employees may not, under any circumstances, perform risky work unless they have the necessary means and knowledge to mitigate or eliminate the effects of the risk. The Issuer reports that this principle of conduct is part of its Safety Policy and is supported by the Global Safety Department.
Respect of human and labour rights
Iberdrola has adopted a Code of Ethics applying to employees, suppliers, contractors, or business partners. Due diligence and monitoring systems linked to human rights violations risks as well as dedicated action plans are implemented. Additionally, internal and external whistleblowing systems are in place to report human and labour rights violations as well as grievance mechanisms to address local stakeholders’ complaints. Audits are reported to be performed (including contractors and subcontractors) to guarantee Iberdrola’s compliance with the Code of Ethics as well as the local legislation.
In 2020, following the human rights analysis carried out with independent experts, a gap analysis was performed to identify opportunities for improvement. Thanks to this analysis, Iberdrola has reviewed its operating procedures linked to the management and mitigation of potential impacts on local communities, developed guidelines linked to public consultations with communities, reviewed complaints, and grievance mechanisms to facilitate access to remedies for victims; strengthened the human rights due diligence in its supply chain.
Social factors in the supply chain
The selection of suppliers relies on the Corporate Purchasing procedures and tools, which are developed at corporate level. Suppliers are required to comply with the provisions of the Code of Ethics and are audited annually on ESG and safety issues. A dedicated whistleblowing system has been implemented for supplier in order to receive and address Iberdrola’s Code of ethics violations within the supply chain.
The Issuer reports that one of its main objectives is to ensure that, by 2022, at least 70% of its main suppliers are subject to sustainable development policies and standards (including diversity and inclusion criteria). To this end, a supplier sustainability assessment model has been implemented using an external platform (GoSupply) and has been externally validated by Forética. The assessment of a supplier is reported to cover the supplier's performance in various areas, including the identification of targets related to the Sustainable Development Goals (SDGs), the management of climate change risks, the circular economy strategy, human rights due diligence, etc. The supplier must provide evidence and documentation for its statements and performance. Suppliers that fall below the defined threshold receive an individual ESG improvement plan. Suppliers that do not meet the minimum ESG requirements may be excluded from working with the Issuer, which is indicated in the ESG improvement plan.
Business Ethics
Iberdrola has adopted a Code of Ethics applying to employees, suppliers, contractors, or business partners. Iberdrola’s internal audit divisions are responsible for supervising the implementation of the company’s internal control system covering, among others, policies related to crime prevention, anti-corruption as well as anti-fraud and conduct constituting bribery. Crime prevention programmes are also subject to external independent reviews. Additionally, the Issuer states that it is certified for the standards UNE-ISO 37001 anti-bribery management systems54 and UNE 19601 management system for criminal compliance55. Iberdrola reports that the application of the Code of Ethics is ensured by the Compliance Unit. In addition, there is a Compliance Department in each Country company and/or in the Head Office. Its responsibilities include the application of the “zero tolerance” principle towards unlawful acts and situations of corruption and fraud. Employees, suppliers, and shareholders have the possibility to report unlawful behaviours through internal channels anonymously. With respect to third party relationships, the Issuer reports that it has implemented a fraud and corruption risk assessment process.
54 ISO - ISO 37001 — Anti-bribery management systems 55 UNE 19601:2017 Management system for criminal compliance. Requirements with guidance for use. - European Standards (en-standard.eu)
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ISSUER
Iberdrola, S.A. is engaged in the generation, transmission, distribution, sale, and retail of electricity. The company generates electricity through several resources including hydroelectric, nuclear, coal and cogeneration. Iberdrola also stores, trades in and retails natural gas. In 2020, the company acquired Aalto Power, a French renewables company, for EUR 100 million and Avangrid’s Board of Directors approved the acquisition of PNM Resources.
Level of ESG performance
The Issuer’s ESG performance was assessed through a complete process of rating and benchmark.
As of September 2021, Iberdrola displays an overall advanced ESG performance, ranking 5th in our “Electric & Gas Utilities” sector which covers 66 companies. Iberdrola’s performance is considered advanced in the Environmental, Social and Governance pillars.
DOMAIN COMMENTS OPINION
Environment
Iberdrola’s performance on the Environment pillar is considered advanced.
The company commits to all of the issues under review in the Environment domain. Iberdrola has set the goal of reaching global carbon neutrality by 2050 and reducing its emissions intensity to 50 gCO2/kWh globally by 2030. In addition, it has also set a goal of GHG emissions of absolute scope 1, 2 and 3, which has been approved by the Science-Based Target initiative. Iberdrola commits to reduce absolute Scope 1, 2 and 3 GHG emissions by 20% by 2030 from a 2017 base-year. In 2019, 83% of the production sites were covered by a certified environmental management system. Moreover, Iberdrola reports that its sites are ISO 14001 and EMAS certified. The company is a signatory of the Global Compact and communicates on this principle. In addition, almost 73% of its total installed capacity is from renewables. Comprehensive measures appear to be in place to protect biodiversity including biotope management plans.
In the 2018-2022 strategic outlook, the company has planned an investment of EUR 11.5 million in renewable energies, to increase installed capacity in the United States, the United Kingdom, Spain, Portugal, Brazil, and Mexico. The resources allocated cover the following technologies: Hydro, Wind and Solar. Iberdrola has reported offering “Green Energy”, a product that comes exclusively from renewable sources.
The company promotes the use of efficient air conditioning and lighting, micro-generation, variable speed engine mechanisms, smart thermostats, and global energy management systems in third-party buildings.
Advanced
Robust
Limited
Weak
Advanced
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Social
Iberdrola’s performance on the Social pillar is considered advanced.
Iberdrola's commitment to health and safety is backed by extensive measures including risk assessments and OHSAS 18001 certifications and an Occupational Safety and Health Policy.
To prevent discrimination and promote diversity, Iberdrola reports to have allocated extensive measures in all of its sites including affirmative action programs, training and monitoring of salary disparities. The company's commitment to human rights is backed by permanent systems including internal and external audits, and external investigation of allegations.
Iberdrola reports extensive measures to reduce fuel poverty and improve access to energy including social tariffs, rural electrification programs and customer assistance. Capacity building programs and social impact assessments are among the measures allocated to promote local social and economic development. Lastly, Iberdrola reports transparently on taxes paid in all the countries where it operates.
Iberdrola maintains to have a formalised commitment on responsible contractual agreements in its Corporate Governance System, its Stakeholder Relations Policy, and its Customer Relationship Management Report.
Advanced
Robust
Limited
Weak
Governance
Iberdrola’s performance on the Governance pillar is considered advanced.
The Audit Committee plays a comprehensive role in overseeing internal and external controls, and now all CSR risks inherent to the company's business operations seem to be covered by its internal controls system. In addition, the company's CSR strategy is presented to investors covering relevant CSR issues namely climate change and H&S. Moreover, 62% of the Board is considered independent and 38% of directors are women. Finally, climate change objectives are considered in the executives' variable remuneration.
The company has issued a formalised commitment to preventing corruption in its Anti-Corruption and Anti-Fraud Policy and its Code of Ethics, there is a dedicated structure responsible of corruption issues. The company's compliance system is reported to work according to ISO 19600 Compliance management system. In addition, internal and external audits are conducted to ensure internal verification of the compliance with the company’s Code of Conduct and to prevent corruption and anti-competitive practices, respectively.
Advanced
Robust
Limited
Weak
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Management of ESG Controversies As of January 2022, Iberdrola faces seven stakeholder-related ESG controversies, linked to four of the six domains we analyse:
- Business Behaviour, in the criteria of “Customer relations”, “Social standards in the supply chain”, “Corruption” and “Anti-competitive practices”.
- Environment, in the criteria of “Biodiversity” and “Protection of water resources”. - Community Involvement, in the criterion of “Social and Economic Development”. - Human Rights, in the criterion of “Fundamental Human Rights”.
Frequency: On average, the controversies faced are considered “occasional”56; above the sector average.
Severity: On average, the level of severity of the case, based on the analysis of the impact on both the Issuer and its stakeholders, is considered “high”57; in line with the sector.
Responsiveness: Iberdrola is considered overall “reactive”58; in line with the sector.
Involvement in Controversial Activities
The Issuer appears to be involved in two of the 17 controversial activities screened under our methodology, namely:
- Fossil Fuel Industry (major involvement): Iberdrola has an estimated turnover from fossil fuels which is between 33% and 50% of total turnover. This turnover is derived from fossil fuel-powered electricity generation and the storage of natural gas.
- Nuclear Power (major involvement): Iberdrola has an estimated turnover from involvement in nuclear power which between 10% and 33% of total turnover. This turnover is derived from the generation of electricity from nuclear power and the provision of services to the nuclear power industry.
The Issuer appears to be not involved in any of the other 15 controversial activities screened under our methodology, namely: Alcohol, Animal welfare, Cannabis, Chemicals of concern, Civilian firearms, Coal, Unconventional oil and gas, Gambling, Genetic engineering, Human embryonic stem cells, High interest rate lending, Military, Pornography, Reproductive Medicine and Tobacco.
The controversial activities research provides screening of companies to identify involvement in business activities that are subject to philosophical or moral beliefs. The information does not suggest any approval or disapproval on their content from V.E.
56 V.E scale of assessment: Isolated / Occasional / Frequent / Persistent. 57 VE scale of assessment: Minor / Significant / High / Critical. 58 VE scale of assessment: Non-communicative / Reactive / Remediative / Proactive.
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METHODOLOGY In V.E’s view, Environmental, Social and Governance (ESG) factors are intertwined and complementary. As such they cannot be separated in the assessment of ESG management in any organisation, activity or transaction. In this sense, V.E provides an opinion on the Issuer’s ESG performance as an organisation, and on the processes and commitments applicable to the intended issuance.
Our Second Party Opinions (SPOs) are subject to internal quality control at three levels (Analyst, Project Manager and Quality Reviewer). If necessary, this process is complemented by a final review and validation by the Expertise Committee and Supervisor. A right of complaint and recourse is guaranteed to all companies under our review.
COHERENCE
Scale of assessment: not coherent, par t ia l ly coheren t, coheren t
This section analyses whether the activity to be financed through the selected instrument is coherent with the Issuer's sustainability priorities and strategy, and whether it responds to the main sustainability issues of the sector where the Issuer operates.
ISSUANCE Alignment with the Green and/or Social Bond Principles
Scale of assessment: Not a l igned, Par t ia l ly a l igned, Al igned, Bes t Prac t ices
The Framework has been evaluated by V.E according to the ICMA’s Green Bond Principles - June 2021(“GBP”) and the LMA’s Green Loan Principles – February 2021 (“GLP”) and on our methodology based on international standards and sector guidelines applicable in terms of ESG management and assessment.
Use of proceeds
The definition of the Eligible Projects and their sustainable objectives and benefits are a core element of Green/Social/Sustainable Bonds and Loans standards. V.E evaluates the clarity of the definition of the Eligible Categories, as well as the definition and the relevance of the primary sustainability objectives. We evaluate the descriptions of the expected benefits in terms of relevance, measurability and quantification. In addition, we map the potential contribution of Eligible Projects to the United Nations Sustainable Development Goals’ targets.
Process for evaluation and selection
The evaluation and selection process is assessed by V.E on its transparency, governance and relevance. The eligibility criteria are assessed on their clarity, relevance and coverage vs. the intended objectives of the Eligible Projects.
Management of proceeds
The process and rules for the management and the allocation of proceeds are assessed by V.E on their transparency, traceability and verification.
Reporting
The monitoring and reporting process and commitments defined by the Issuer are assessed by V.E on their transparency, exhaustiveness and relevance, covering the reporting of both proceeds’ allocation and sustainable benefits (output, impact indicators).
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Contribution to sustainability
Scale of assessment: Weak, L imi ted, Robus t, Advanced
V.E’s assessment of activities’ contribution to sustainability encompasses both the evaluation of their expected positive impacts on environmental objectives, as well the management of the associated potential negative impacts and externalities.
Expected positive impact of the activities on environmental objectives
The expected positive impact of activities on environmental objectives to be financed by the Issuer or Borrower is assessed on the basis of:
i) the relevance of the activity to respond to an important environmental objective for the sector of the activity;59
ii) the scope of the impact: the extent to which the expected impacts are reaching relevant stakeholders (i.e. the issuer, its value chain, local and global stakeholders);
iii) the magnitude and durability of the potential impact of the proposed activity on the environmental objectives (capacity to not just reduce, but to prevent/avoid negative impact; or to provide a structural/long-term improvement);
iv) the extent to which the activity is adopting the best available option.
ESG risk management for eligible activities
The identification and management of the potential ESG risks associated with the eligible projects/activities are analysed on the basis of V.E’s ESG assessment methodology, international standards and sector guidelines applicable in terms of ESG management and assessment.
ISSUER Issuer’s ESG Performance
Scale of assessment o f ESG Performance: Weak, L imi ted, Robus t, Advanced
NB: The Issuer’s level of ESG performance (i.e. commitments, processes, results of the Issuer related to ESG issues), has been assessed through a complete process of rating and benchmarking developed by V.E. The Issuers ESG performance has been assessed by V.E on the basis of its:
• Leadership: relevance of the commitments (content, visibility and ownership). • Implementation: coherence of the implementation (process, means, control/reporting). • Results: indicators, stakeholders’ feedbacks and controversies.
59 The importance of a specific social need at country level is assessed on the basis of the country performance on the priority SDG that the project is
targeting using data from Sachs, J., Schmidt-Traub, G., Kroll, C., Lafortune, G., Fuller, G., Woelm, F. 2020. The Sustainable Development Goals and COVID-19. Sustainable Development Report 2020. Cambridge: Cambridge University Press.
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Management of Stakeholder Related ESG Controversies
V.E defines a controversy as public information or contradictory opinions from reliable sources that incriminate or make allegations against an issuer regarding how it handles ESG issues as defined in V.E ESG framework. Each controversy may relate to several facts or events, to their conflicting interpretations, legal procedures or non-proven claims.
V.E reviewed information provided by the Issuer, press content providers and stakeholders (partnership with Factiva Dow Jones: access to the content of 28,500 publications worldwide from reference financial newspapers to sector-focused magazines, local publications or Non Government Organizations). Information gathered from these sources is considered as long as it is public, documented and traceable.
V.E provides an opinion on companies’ controversies risks mitigation based on the analysis of 3 factors:
• Frequency: reflects for each ESG challenge the number of controversies that the Issuer has faced. At corporate level, this factor reflects on the overall number of controversies that the Issuer has faced and the scope of ESG issues impacted (scale: Isolated, Occasional, Frequent, Persistent).
• Severity: the more a controversy is related to stakeholders’ fundamental interests, proves actual corporate responsibility in its occurrence, and have caused adverse impacts for stakeholders and the company, the higher its severity is. Severity assigned at the corporate level will reflect the highest severity of all cases faced by the company (scale: Minor, Significant, High, Critical).
• Responsiveness: ability demonstrated by an Issuer to dialogue with its stakeholders in a risk management perspective and based on explanatory, preventative, remediating or corrective measures. At corporate level, this factor will reflect the overall responsiveness of the company for all cases faced (scale: Proactive, Remediate, Reactive, Non- Communicative).
The impact of a controversy on a company's reputation reduces with time, depending on the severity of the event and the company's responsiveness to this event. Conventionally, V.E's controversy database covers any controversy with Minor or Significant severity during 24 months after the last event registered and during 48 months for High and Critical controversies.
Involvement in Controversial Activities
17 controversial activities have been analysed following 30 parameters to screen the company's involvement in any of them. The company's level of involvement (Major, Minor, No) in a controversial activity is based on:
• An estimation of the revenues derived from controversial products or services. • The specific nature of the controversial products or services provided by the company.
V.E’S ASSESSMENT SCALES
Scale of assessment of Issuer's ESG performance or strategy and financial instrument's Contribution to sustainability
Scale of assessment of financial instrument's alignment with Green and/or Social Bond and Loan Principles
Advanced Advanced commitment; strong evidence of command over the issues dedicated to achieving the sustainability objective. An advanced expected impact combined with an advanced to robust level of E&S risk management & using innovative methods to anticipate new risks.
Best Practices The Instrument's practices go beyond the core practices of the ICMA's Green and/or Social Bond Principles and/or of the Loan Market Association’s Green Loan Principles by adopting recommended and best practices.
Robust Convincing commitment; significant and consistent evidence of command over the issues. A robust expected impact combined with an advance to robust level of assurance of E&S risk management or an advanced expected impact combined with a limited level of assurance of E&S risk management.
Aligned The Instrument has adopted all the core practices of the ICMA's Green and/or Social Bond Principles and/or of the Loan Market Association’s Green Loan Principles.
Limited Commitment to the objective of sustainability has been initiated or partially achieved; fragmentary evidence of command over the issues. A limited expected impact combined with an advanced to limited level of assurance of E&S risk management; or a robust expected impact combined with a limited to weak level of assurance of E&S risk management; or an advance expected impact
Partially Aligned
The Instrument has adopted a majority of the core practices of the ICMA's Green and/or Social Bond Principles and/or of the Loan Market Association’s Green Loan Principles, but not all of them.
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combined with a weak level of assurance of E&S risk management.
Weak Commitment to social/environmental responsibility is non-tangible; no evidence of command over the issues. A weak expected impact combined with an advanced to weak level of assurance of E&S risk management or a limited expected impact with a weak level of assurance of E&S risk management.
Not Aligned The Instrument has adopted only a minority of the core practices of the ICMA's Green and/or Social Bond Principles and/or of the Loan Market Association’s Green Loan Principles.
STATEMENT ON V.E' S INDEPENDENCE AND CONFLICT -OF-INTEREST POLICY Transparency on the relation between V.E and the Issuer: V.E has not carried out any audit mission or consultancy activity for Iberdrola. No established relation (financial or commercial) exists between V.E and Iberdrola. Independence, transparency, quality and integrity requirements are all formalised within our Moody’s Code of Conduct. This opinion aims at providing an independent opinion on the sustainability credentials and management of the Financial Instruments, based on the information which has been made available to V.E. V.E has neither interviewed stakeholders out of the Issuer’s employees, nor performed an on-site audit nor other test to check the accuracy of the information provided by the Issuer. The accuracy, comprehensiveness and trustworthiness of the information collected are a responsibility of the Issuer. The Issuer is fully responsible for attesting the compliance with its commitments defined in its policies, for their implementation and their monitoring. The opinion delivered by V.E neither focuses on the financial performance of the Financial Instruments, nor on the effective allocation of its proceeds. V.E is not liable for the induced consequences when third parties use this opinion either to make investments decisions or to make any kind of business transaction. Restriction on distribution and use of this opinion: The deliverables remain the property of V.E. The draft version of the Second Party Opinion by V.E is for information purpose only and shall not be disclosed by the client. V.E grants the Issuer all rights to use the final version of the Second Party Opinion delivered for external use via any media that the Issuer shall determine in a worldwide perimeter. The Issuer has the right to communicate to the outside only the Second Party Opinion complete and without any modification, that is to say without making selection, withdrawal or addition, without altering it in any way, either in substance or in the form and shall only be used in the frame of the contemplated concerned bond (s) issuance. The Issuer acknowledges and agrees that V.E reserves the right to publish the final version of the Second Party Opinion on V.E’ website and on V.E’ internal and external communication supporting documents.
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