The case of Caja Rural de Navarra: A practical experience for the retail banking sector

by Miguel Garcia de Eulate Martin, Caja Rural de Navarra

Caja Rural de Navarra (CRN) updated in 2017 its Sustainable Bond Framework in order to include Energy efficient buildings within its eligible use of proceeds. This was a relevant step for us, allowing for a sizeable part[1] of our loan book (residential mortgages) to show its contribution to green finance.

This update also marked the beginning of a challenge: that of tagging our mortgage book accordingly, which involves an important change in IT and lending procedures.

With approximately EUR 12bn of total assets, and even though CRN –as a traditional retail bank- is a mainly deposit-financed institution, we regularly issue bonds under our Covered Bond (“Cédulas Hipotecarias”) programme since 2013, when the inaugural Covered Bond was printed. Currently (as of May 2018) CRN has five outstanding Covered Bonds and one Senior Unsecured. Two of these Covered Bonds and also one Senior bond are included in CRN’s Sustainable bond programme.

CRN has a Sustainability framework with a Second Party Opinion (SPO) by Sustainalytics. These are the main milestones in the development or our Sustainable bond programme:

  1. In 2016, after finalising its Sustainability framework for its lending activities, CRN became the first issuer of a Sustainable (including both social and environmental lines) Covered Bond.
  2. In 2017, CRN has updated its Sustainability framework[2] and Sustainalytics has updated CRN’s Second Party Opinion[3] in order to:
    1. Include Energy efficient buildings as a specific environmental line, following CRN’s involvement in the EMF-ECBC EeMAP initiative[4].
    2. Improve the transparency and alignment of our taxonomy by mapping our 9 sustainability lines (5 environmental and 4 social) into the United Nations Sustainable Development Goals (SGD) categories[5].
  3. Since 2016, CRN reports on an annual basis on the social and environmental impact of its lending activity.[6][7]
  4. In 2017, CRN extended the reach of its Sustainable bond framework to Senior unsecured debt, by issuing a Senior private placement.

  5. In 2018, CRN issued its second Sustainable Covered Bond (Cédula Hipotecaria), advancing the United Nations Sustainable Development Goals.
  6. Having in 2018 issued its second benchmark-sized Sustainable Covered bond and one Senior bond private placement, it is currently, according to public information, the third European bank in terms of outstanding sustainable bonds, that is, bonds whose use of proceeds includes both social and environmental activities. Additionally, CRN has been warranted the EMF-ECBC-developed “Sustainable covered bond label” which identifies with a green leaf symbol those issuers with Sustainable (social and/or green) outstanding covered bonds.[8][9]

Energy efficient buildings

Following the inclusion of Energy efficient buildings on the Energy Efficiency use of proceeds, CRN developed a specific framework in order to identify eligible loans under this category.

In our view, one of the greatest environmental impacts that we can offer as a retail and cooperative bank is represented by the physical collateral which underlies our mortgage origination business. Due to the fact that most of this collateral is of residential nature, CRN thinks that the commitment of retail banks in order to identify, tag and promote greener residential mortgages is key in order to reduce CO2 emissions in Europe. In the EU, buildings are responsible for 40% of the energy consumption & 36% of the CO2 emissions. 75-90% of the building stock in the EU is predicted to still be standing in 2050 making Energy Efficiency (EE) refurbishment and energy efficient mortgage financing a top priority for Europe. By improving the EE of buildings, total EU energy consumption could be reduced by 5%-6% and CO2 emissions by 5%. The EU has set very ambitious energy savings targets for 2020 and 2030 with the scale of the investment needed to meet these targets being estimated at around €100 billion per year. In addition, it is considered necessary beyond that to invest €100 billion per year until 2050 in the EU building stock in order to deliver on Europe’s commitments on climate change. While the EU has increased the amount of public funds available for EE, the European Commission suggests there is a need to boost private EE investment to deliver on the 2020 and 2030 energy targets and policy objectives.

The engagement of CRN in the EeMAP initiative by EMF-ECBC can be a relevant case for other retail banks in Europe in order to make a significant contribution from the retail financial sector to a greener and more sustainable economy and also increase the awareness and alignment of the European citizen to the EU sustainable and energy efficiency agenda.

Taking into consideration European and Spanish Energy Efficiency regulation (which considers different climate regions and EPCs categories), Caja Rural de Navarra (CRN) will use Energy Performance Certificates (EPCs) as established in applicable legislation (Directive 2010/31/UE and Spanish Royal Decree 235/2013 which required the requirement for EPCs from 1st June 2013 on), in order to evaluate the degree of energy efficiency. The main objective of the internal framework of CRN will be to focus on its lending activities in either financing new buildings that must be among the best performing in terms of energy efficiency, or financing an appropriate upgrade in the efficiency of the existing stock of buildings.

To this end, CRN’s “Energy efficient buildings” sub-category only includes loans financing:

  1. Residential units (buildings/apartments/houses) whose date of completion and first delivery took place after 1st June 2013, that represent the top performing in terms of energy efficiency. CRN has decided to include only those units within the “A” and “B” categories, which are well below the 15% best performing threshold of the total stock.
  2. Residential units whose date of completion and first delivery took place before 1st June 2013, that either are included in the “A” or “B” categories or after retrofitting have achieved at least a 30% improvement in energy performance, leading to an EPC of “C” or superior. CRN will also include those loans granted to owner’s communities of residential blocks (“Comunidades de Vecinos) to implement new complementary isolation and/or change in centralized heating leading to an EPC “C” or superior for the whole building.

CRN will include units which -after retrofitting- attain the “A”, “B” and “C” categories, as any upgrade from “G”, “F”, “E” or “D” to the “C” category involves an improvement of at least 30% in energy efficiency (this also represents an improvement of 30% compared to the region’s housing stock average, see appendix 2)

Which are the main challenges in including residential buildings’ energy efficiency?

  • Granularity of retail exposures

The granularity of smaller loans in general, and residential mortgages in particular (compared to project finance or commercial mortgages) pose a difficult challenge for which retail banks are best positioned to provide ideas to overcome such hurdles due to their direct and close knowledge of their client base and their loan book detailed composition.

  • Data collection

With EPC data either not publicly available in many countries or not included in banks’ systems, most issuers have used other building certification data or building regulations as a proxy for energy efficiency, whether issuing green or sustainable covered bonds or senior debt. Some European banks, for example, issued green covered bonds in 2018 with residential mortgages as underlying assets, but using the year of construction of the property as a “short-cut” given a lack of available EPC data.

CRN’s process of sourcing EPC data directly involves three work streams:

  • mortgages of individual properties where CRN financed the real estate development, as it may therefore already have the relevant data;
  • existing mortgages not included in the above-mentioned group;
  • and new origination.

EU EPC legislation was implemented in Spain in 2013 and some EUR150m of lending for which CRN has EPCs have already been identified in the first work stream. CRN intends to follow this work by asking regional governments for existing EPCs data and designing new processes in order to capture EPCs in new mortgage origination.

The second work stream (existing mortgages but not having been financed directly by CRN on a real estate development loan since 2013) requires innovative IT tools to be deployed as existing databases on EPCs cannot be easily matched to the mortgage book of the bank as they rely on alphanumeric fields previously included manually into IT platforms and that is why CRN is exploring advanced algorithms able to find reliable solutions.

CRN’s eligibility criteria, checked by second party opinion provider Sustainalytics, mean that the underlying buildings are comfortably within the top 15% most energy efficient – this having become a market standard for energy efficiency – or lending is financing an upgrade of the building that improves energy efficiency by 30%.

Some EUR3bn of CRN’s lending is eligible under its sustainable bond framework as of end-2017, while this eligible portfolio was around EUR2.5bn at end-2016. Overall loan book growth together with the beginning of the tagging process of Energy efficient buildings are responsible for this increase.

  • Harmonisation and common taxonomy

CRN’s has designed its Energy efficient buildings’ financing framework with a view on market practices and data reliability. The Second Party Opinion by Sustainalytics concludes that Caja Rural de Navarra’s “Buildings Energy Efficiency” criterion is aligned with market best practices including loans for buildings among the 15% most energy efficient in the regions Basque Country, Navarre and La Rioja and renovation that improves the Energy efficient buildings by 30%.”

Moreover, Sustainalytics states that Given this local context, Caja Rural de Navarra’s addition of energy efficient housing to the eligible projects is well aligned with EU’s and Spain’s priorities on GHG reduction and initiatives to improve energy efficiency in the housing sector” and that Based on the above points, Sustainalytics considers Caja Rural de Navarra’s sustainability bond to be robust, credible and transparent”.

Sustainalytics has also mapped CRN’s nine project categories against the UN Sustainable Development Goals (SDGs), finding that they are all aligned with SDG 12, responsible consumption and production, 7, affordable and clean energy, or 11, sustainable cities and communities.

This recognised taxonomy is very important for investors and more and more are asking issuers to do this. Investors want to have all the social, sustainable and green bonds they invest in mapped to the SDGs so they can explain this to their final investors and that is why CRN decided to map its own 9 lines into UN SDGs.

Why does it make sense for bond issuers to adapt their framework to include residential buildings’ energy efficiency?

The Investor’s perspective:

In our view, investors benefit from accessing financial instruments with a ‘use of proceeds’ commitment which is aligned with their investment policy. In this sense, transparency, harmonization and allocation & impact reporting are key elements to leverage sustainable finance from the investor’s perspective. The recent EU High Level Expert Group’s final report and the expected European legislative initiative to impulse sustainable finance will also be in CRN’s point of view a clear game-changer in the short run.

Moreover, there is in many investors’ view a clear link between a Sustainable bonds’ framework and the overall ESG strategy of the bank. That is why many investors believe that banks who are first-movers as sustainable bond issuers have a more resilient Governance structure and a long-term strategic perspective which, in turn, can lead to better management, healthier credit metrics and therefore to a lower volatility and better performance of their bonds.

The issuer’s perspective:

We are convinced that its Sustainable issues have benefited from a broader investor base. Taking as example its last Sustainable Covered Bond issued in April 2018, it achieved the highest oversubscription ratio (more than 3x) of any euro benchmark covered bond until that month and got a highly granular and diversified investor base, whith one of the highest allocation to Green and Sustainable investors (65%).

This is a clear proof of the importance that ESG factors are gaining in the success of bond transactions, both from the point of view of investors (with a clear focus on asset managers, pension funds and central banks and sovereign funds) and issuers.

The financial sector / public authorities / society’s perspective:

CRN is attached to its home regions and believes that its ESG strategy is an essential element of its proximity banking model.

From a broader perspective, banks play a key role in the European financial sector. Even in the context of the Capital Markets Union (CMU) project, European banks will retain a great relevance as key players in changing the economy towards a more sustainable environment and a more inclusive society.

Within this background, retail banks are uniquely placed to originate eligible (from a sustainability perspective) assets. These assets could be bonds and/or loans, and different ways to channel financing to them could be envisaged. However, all of these ways will have in common the need for a common taxonomy, a regulatory level-playing field and the right incentives to help this change happen.

That is why CRN believes that the involvement of smaller banks with a local and retail focus is key in order to reach all regions, citizens and SMEs of the EU. If a reasonable, not too burdensome legal framework is put in place and proportionality is taken into account, smaller, and particularly cooperative banks are best placed to channel finance to the real economy with a focus on sustainable social and environmental projects in which Energy efficient buildings will play a key role.

[1] CRN’s updated Sustainability framework:
[2] Sustainalytics updated SPO on CRN:
[3] EMF-ECBC Energy Mortgages Initiative (EeMAP):
[4] United Nations Sustainable Development Goals:
[5] CRN 2016 Impact Report:
[6] CRN 2017 provisional allocation report following UN SDGs:
[7] CRN 2017 provisional allocation report following UN SDGs:
[8] Press release on CRN joining the EMF-ECBC’s Sustainable Covered Bond label:
[9]EMF-ECBC Sustainable Covered Bond list: