Citicore Energy REIT Corp

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Citicore Energy REIT Corp.

Shades of Green assessment

November 22, 2021

Citicore Energy REIT Corp. (“CREIT”) is a Philippines real estate investment trust investing in land and properties used for renewable energy generation. CREIT is part of the Citicore Group and, prior to its IPO, a wholly owned subsidiary of Citicore Renewable Energy Corporation (“CREC”). CREIT’s portfolio currently consists of one solar plant and four other land assets leased out to solar plant operators (all Citicore companies).

CREIT’s solar plant has installed capacity of 22.3 MW, while the other four land assets host plants with installed capacity totaling 101.4 MW. As a real estate investment trust, CREIT is not involved in solar plant development, construction, operation, or maintenance activities – these roles are fulfilled by other Citicore companies.

According to CREIT, its entire revenues in 2020 derived from income from 1) the lease of its solar plant to CREC, and 2) the leases with the operators of the solar plants on its other land assets. We consider the entirety of CREIT’s revenues Dark Green, given the importance of solar energy in the transition and the exclusive use of the sites for its generation. The Dark Green shading also reflects our view that CREIT and other relevant Citicore companies adequately consider climate resilience and intelligently reduce the risk of local environmental impacts.

CREIT’s planned investments post IPO are the purchase of two land assets from two of CREC’s wholly owned subsidiaries, both of which house active solar plants (with combined installed capacity of 21.2 MW).

For both assets, CREIT has entered into a Memorandum of Agreement to acquire and then lease out the land. As the investments relate to land housing solar plants, we consider them Dark Green in their entirety. These assets were selected in accordance with CREC’s Site Selection Policy – this adequately considers climate resilience, includes a requirement for sites to have minimal trees (i.e. no deforestation), and manages the risk of local opposition. CREIT plans to add further real estate assets with 1.5 GW of renewable energy capacity to its portfolio by 2025.

The gross generation and avoided emissions of the solar plants operating on CREIT’s current land assets are listed in Table 1, which also sets out CREIT’s Scope 1 and Scope 2 emissions. These KPIs and all other figures included in part 2 of this assessment are for CREIT’s solar plant, the four solar plants operated by lessees on its sites, and the two properties it will purchase post IPO. Scope 1 and 2 emissions include the emissions generated from these same plants.

Sector: Renewable Energy

Region: SE Asia

Figure 1: CREIT 2020 revenue and 2021 investments by Shades of Green.

100%

Shades of Green by annual revenue 2020

100%

Shades of Green by planned investments post 2021 IPO

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The Philippines is among the most vulnerable countries to climate-related weather events and temperature increases and has already experienced some increased intensity in heavy rain and wind intensity in cyclones.

CREIT has rightly identified the climate exposure of its land assets and the solar plants they house as a material issue. To mitigate this, CREC’s Site Selection Policy incorporates climate considerations. For example, CREC avoids flood prone areas and coastal locations and has previously rejected sites because of exposure to extreme weather. This is a prudent approach. We note that two of CREIT’s current land assets have minor flood risk (< 5%

below the flood line) and that it has started planning supporting infrastructure to mitigate this risk. In our view, CREIT could ensure more sophisticated climate resilience considerations in respect of the solar plants operated on its land assets. For example, while the solar assets on its land assets are built to withstand historical record wind speeds, wind speeds are generally expected to increase as climate change accelerates.

The development of solar plants can lead to local opposition. In our view, CREIT and CREC comprehensively mitigate this risk through community engagement and effective and intelligent site selection. Importantly, to minimize displacement and disruption, barren land or land which not irrigated or irrigable is prioritized. Any impacted farmers will be offered monetary compensation and to join the innovative agro-solar project operated at several CREIT sites (agro-solar is an initiative of Citicore Power Inc., CREC’s parent company, where high value crops are grown underneath and around the solar installations).

CREIT has sophisticatedly identified key environmental and social risks and focus areas across its business, and which consider both climate mitigation (e.g. reduction of energy consumption by lessees) and adaptation (e.g. climate risk factored into CREC’s site selection). It is a strength that these issues are addressed in formal policies and that CREIT can point to several processes which demonstrate their diligent implementation.

CREIT measures Scope 1 and Scope 2 emissions and plans to

measure Scope 3 emissions in the future. We encourage CREIT to use its calculations of Scope 1 and Scope 2 emissions to set achievable yet ambitious short, medium, and long-term reduction targets. Aspects of CREIT’s value chain policies have, in our opinion, been underdeveloped, for example environmental and social factors have not been explicit and quantified criteria for selection. New initiatives such as factory audits and annual reviews of strategic suppliers are therefore welcome. Social risk can be especially prevalent in the solar panel supply chain given this market is close to a monopoly and involves the use of environmentally sensitive materials.

Investors should note that CICERO Green have relied on CREIT’s documentation and not conducted our own research on CREIT’s operations. Furthermore, our assessment is based on data reported or estimated by CREIT and has not always been verified by a third party.

Table 1: Sector specific metrics.

1No estimates of Scope 3 emissions are available.

Solar energy installed capacity (MW)

Actual gross generation (GWh)

Emissions (scope 1- 2) (tCO2eq)¹

Avoided emissions (tCO2eq)²

2021 (Q1-3) 145 146.7 882 173,790

2020 145 204.1 1,221.2 231,720

2019 145 205.2 1,229.6 231,720

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3 Terms and methodology __________________________________________________________________ 16 Shading corporate revenue and investments ... 16 Appendix 1: Referenced documents list __________________________________________________________ 18 Appendix 2: Background _______________________________________________________________________ 19 Appendix 3: About CICERO Shades of Green ______________________________________________________ 20

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1 Citicore Energy REIT Corp. sustainability management

Company description

Citicore Energy REIT Corp. (“CREIT”) is a Philippines real estate investment trust, investing in land and other property used for renewable energy generation. CREIT is part of the Citicore Group and, prior to its IPO, a fully owned subsidiary of Citicore Renewable Energy Corporation (“CREC”).³ As a real estate investment trust, CREIT is not directly involved in solar plant development, construction, operation, or maintenance activities. These roles are fulfilled by other companies in the wider Citicore Group.

CREIT’s portfolio currently consists of one solar plant and four other land assets leased out to solar plant operators (all members of the Citicore Group). CREIT’s solar plant has installed capacity of 22.3 MW while the other four land assets host plants with installed capacity totaling 101.4 MW.

CREIT intends to invest all the proceeds from its initial public offering in new projects: initially, it intends to acquire two identified renewable energy properties each with an operational solar plant (with combined installed capacity of 21.2 MW). It has plans to acquire further properties from 2022 onwards and to increase its capacity by 1.5 GW by 2025. For an overview of CREIT’s properties, see Table 2.

CREIT is currently solely focused on solar energy. Nonetheless, it is open to non-solar renewable energy projects in the future, provided they meet its investment strategy. For example, we understand a 20 MW run-of-river hydropower plant may be brought into CREIT’s portfolio in 2024 and CREIT mentioned the possibility of using hydropower to reduce its reliance on the national grid during off-solar hours. CREIT informed us that, in any event, impoundment hydropower facilities will not be part of its investment strategy.

According to CREIT, Citicore Power Inc., CREC’s parent company, pioneered the ‘agro-solar’ concept in the Philippines. This adapts sustainable farming processes to grow crops beneath elevated solar panels at its properties – when such crops are sold, the profits augment local farmers’ income. Following a successful pilot scheme, three of CREIT’s current properties operate the agro-solar concept, along with one of the properties it will acquire.

CREIT notes that the agro-solar concept also contributes to mitigating local opposition against its operations, with any displaced farmers offered to join the scheme (as well as receiving monetary compensation). The agro-solar concept also helps to reduce energy usage at CREIT’s land assets, given that crops do not require the same maintenance as grass (which requires gasoline use).

3The wider Citicore Group contains a range of businesses operating in, for example, biomass and hyrdo-projects. CREIT also shares a holding company with Megawide, a large engineering and infrastructure conglomerate, though it is Citicore Power

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Table 2: CREIT’s current portfolio of renewable energy real estate properties and identified properties for acquisition.

Governance Assessment

CREIT undertook a materiality assessment involving senior management which identified its environmental and social risks and focus areas. It is a strength that the identified areas are not limited to CREIT’s own operations (which are limited by the fact it is a real estate investment trust) but also consider broader issues such as energy usage at its sites. These issues are addressed in formal policies and CREIT can point to several initiatives and processes which demonstrate the implementation of these policies both internally and across its affiliates (for example CREC and its lessees). CREIT notes that its policies and procedures follow those of the wider Citicore group and CREC. As all CREIT’s lessees

are direct or indirect subsidiaries of CREC, and part of the wider Citicore group, they will in effect adopt the same policies and procedures. In any event, CREIT is entitled to develop further policies not covered at group level and confirms it can ensure compliance from the lessees.

The involvement of senior management and heads of department in day-to-day environmental and climate risk considerations furthermore emphasizes the integration of these issues.

CREIT measures Scope 1 and Scope 2 emissions and plans to measure Scope 3 emissions in the future. We encourage CREIT to use its calculations of Scope 1 and Scope 2 emissions to set achievable yet ambitious short, medium, and long-term reduction targets. This would in particular facilitate measuring the success of the energy- reduction initiatives it is implementing or considering.

Name Output (MW)

) Solar plant

1 Clark Solar Plant 22.3

Properties with solar plants leased to plant operators

2 Armenia Property 8.84

3 Silay Property 25.0

4 Dalayap Property 7.55

5 Toledo Property 60.0

Identified properties to be acquired after the IPO

6 Bulacan Property 15.0

7 South Cotabato Property 6.23

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Aspects of CREIT’s value chain policies have been underdeveloped and we are therefore encouraged by the policies and practices it will implement in this respect. For example, environmental and social factors have not been explicit and quantified criteria for selection. While CREIT points to its preference for Tier 1 suppliers – who it considers should have stronger environmental and social performance – we nonetheless encourage it to move forward with its introduction of annual visits to strategic suppliers factories and annual review of their environmental and social performance.

As a new company, CREIT has not reported systematically on its environmental performance, thought it will begin to do so after its listing. Such reporting will be in accordance with the requirements of the Philippines SEC and, CREIT informed us, consider other reporting guidelines such as GRI, IR, SASB and TCFD recommendations.

CREIT has also informed us that its reporting will cover the issues identified in its materiality assessment – this is another welcome commitment to transparency.

CREIT is therefore given an overall governance score of Good.

Sector risk exposure

The below text box highlights some key risks for the real-estate sector. See Appendix 2 for additional background on the real estate sector more generally.

Physical climate risks. More frequent and intense extreme weather events pose the most severe physical risks to CREIT’s portfolio. These weather events not only pose risk to the solar assets on its land assets (e.g. damage to the assets or inability to generate power during extreme weather events) but can also affect underlying land utility and value. The renewable energy sector is also exposed to climate risks through links to the utilities sector e.g.

extreme weather events impacting transmission and distribution assets.

Transition risks. Given its importance in the transition to a zero-carbon economy, renewable energy is comparatively well insulated from transition risks. CREIT should nonetheless consider the exposure of its lessees’

industrial clients to stricter climate policies. As renewable energy in the Philippines becomes more widespread, CREIT should also be aware of the possibility of reduced government support, for example changes in feed-in- tariffs.

Environmental risks. The renewable energy sector is at risk of polluting the local environment during the construction of renewable energy projects e.g. from poor waste handling. This can also entail risks to local biodiversity/habitats. Environmental risks also arise from the generation of renewable energy assets, for example the mining of raw materials found in solar panels.

Social risks. Renewable energy projects can elicit local opposition, for example if their construction or operation disrupts communities. If renewable energy projects are developed on land that is farmed, they can lead to the displacement of farmers. The market for solar panels is close to a monopoly and entails certain social risk such as forced labor.

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Sustainability Management

CREIT is conscious of the need to embed climate and environmental considerations in its business, demonstrated by the variety of formal policies it has in place and which also focus on activities outside of its immediate control (such as site selection, construction, and solar plant operation and maintenance). CREIT’s approach to sustainability and climate issues focuses on the three pillars found in its Environmental Management Framework:

1. Climate action – providing green energy solutions to reduce GHG emissions by continuously investing in renewable energy assets, and working towards achieving a negligible to zero carbon footprint internally.

2. Resource management – judicious use of resources by implementing an innovative business model and circular economy principle.

3. Ecosystem and bio-diversity – ensure the highest standard of environmental management and reduce environmental impact.

The specific details of CREIT’s performance, targets and measures in respect of these pillars are considered in the

‘Key Issues’ section below.

Governance structure

CREIT has emphasized that, as a pure play renewable energy company, sustainability is well integrated and a focus point across the organization. Indeed, according to CREIT, senior management are greatly involved in the management of sustainability issues, for example senior management was involved in the preparation of the company’s materiality assessment which dictates its sustainability approach. Day-to-day, both external and internal sustainability issues are directed through relevant heads of department who can involve senior management as necessary.

The policies and procedures contained in Citicore Power’s Environmental Management Policy also apply to CREIT. The Environmental Management Policy contains information on Citicore Power’s environmental management system (EMS). The scope of the EMS includes the design, development, construction, testing, operation and maintenance of Citicore’s activities. Among others, it involves the use of efficient technologies and innovative measures (e.g. testing the effectiveness of coating materials on solar panels to eliminate surface contamination) and implementation of community based environmental managements programs (e.g. creation of hazardous waste management system).

In respect of planning, Citicore Power screens new projects for probable environmental aspects, identifying environmental impacts and setting out environmental objectives (e.g. in respect of reducing site emissions, optimizing resource usage, and minimizing biodiversity impacts). According to the EMP, potential environmental impacts include erosions and landslides, loss of habitat, generation of solid wastes, run-off from construction, and dust generation from vehicle activity.

The EMP also contains a section on environmental impact, risk assessment and hazard identification. In this, Citicore Power notes it will adopt sustainable land and water management practices aimed at reducing land degradation. CREIT has provided us with several examples of sustainable land practices adopted by different lessees, for example the introduction of drainage networks to avoid heavy flows of water off its sites, and avoiding landfilling at sites. In respect of water management practices, CREIT noted that, for example, its lessees divert water used for panel cleaning to grass areas (and avoids using reagents so it is not harmful to vegetation).

Risk assessment

As part of its IPO process, CREIT has identified and included several risk factors in its REIT plan and its Environmental Management Framework, some of which relate to material environmental and social issues.

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In respect of environmental issues, CREIT notes that seasonal weather changes and natural catastrophes including severe weather conditions (such as typhoons and flooding) could materially disrupt operations at its land assets and result in losses. Extreme weather events will increase in frequency and intensity because of climactic changes, as CREIT also notes in its Environmental Management Framework.

In respect of social issues, CREIT notes that solar plants may be subject to opposition from local communities, because their development, construction, repair, and operation may have significant consequences on agricultural activities and the ecosystems where the power plants are located or otherwise disrupt the activities and livelihoods of local communities. CREIT notes that, as of September 30, 2021, there have been no disruptions in plant operations at its sites as a result of local opposition.

CREIT has provided us with various policies and practices it employs in respect of the above risks (which are set out and considered in the Key Issues section below). It also informed us of its three-step risk management process, involving 1) risk assessment, 2) risk mitigation, and 3) risk monitoring. Going forward, CREIT intends to document its risk policy, including criteria, more comprehensively.

CREIT has also informed us about the materiality assessment it undertook in 2020-21, to identify which issues influence stakeholders and are significant to the company’s economic, social, and environmental impact. The issues identified in the materiality assessment inform CREIT’s sustainability approach and will be the focus of its sustainability reporting (see Reporting, below).

In its materiality assessment, CREIT employed a methodology that involved identifying relevant sustainability disclosures and reviewing various secondary sources of information. CREIT also sought stakeholder feedback before the prioritized topics were reviewed by senior management. Included in the outcome of the materiality assessment are numerous issues relevant for this assessment. In respect of environmental impact, they include emissions, resource management (water, wastewater, and waste) and ecological impacts. Social issues include:

workforce conditions, labor standards and human rights; supply chain management; and relationships with host communities.

Reporting

CREIT’s first sustainability report will be published alongside its first post-IPO annual report. It will report in accordance with SEC guidelines for publicly listed companies in the Philippines. According to CREIT, these guidelines build on GRI, IR, SASB and TCFD recommendations and that in any event it intends to exceed the guidelines’ requirements. The issues identified in its materiality assessment will form the basis of its sustainability reporting, and CREIT also confirmed it will disclose the methodologies and assumptions used in calculating impacts (if required).

According to its Sustainability Policy, CREIT shares Citicore Power Inc.’s sustainability goals. One of Citicore Power Inc.’s priorities and guiding sustainability principles is to ‘monitor, calculate and publish’ sustainability performance metrics annually, including energy and water use, waste generation, recordable injury rate and carbon emissions. At a minimum, it is therefore expected that CREIT will report in line with this guiding principle.

Key issues

Note: Figures included in this section are for CREIT’s solar plant, the four solar plants operated by lessees on its sites, and the two solar plants operating on the land assets it will purchase post IPO (see Table 2).

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GHG Emissions

CREIT has estimated that its solar plant, the solar plants operated on its other sites (including on the two sites it will purchase post IPO) could avoid approximately 231,720 tons of CO2 per annum. Over the lifetime of the plants, this will total around 7,000,000 tons of CO2.⁴

CREIT’s own Scope 1 and Scope 2 emissions for 2020 are set out in Table 3. In calculating these emissions, CREIT includes the emissions associated with its own solar plant and the solar plants operated on its other land assets (including on the two sites it will purchase post IPO). Though it has set no emission targets, CREIT states in its Environmental Management Framework that it endeavors to constantly explore ways to further reduce its carbon footprint through energy use optimization, diversification of its energy portfolio, and investments in new technologies. Examples of such measures are set out in the Energy section below.

CREIT does not currently measure Scope 3 emissions, though it informed us it intends to do so in the future. It noted that before it commits to Scope 3 reporting, it wants to undertake an assessment on data availability.

Emissions Total (tons CO2eq⁵) Scope 1⁶ Scope 2⁷

2020 1221.2 97.9 1123.3

Main sources Gasoline use to maintain

vegetation at solar plants and operating areas.

Electricity purchased at solar site for off-solar hours lighting, protection and maintenance.

Table 3: CREIT’s GHG-emissions (2020).

Energy

According to CREIT, its solar plant and the solar plants operated on its other sites had actual gross generation of 204.1 GWh in 2020.

As for the energy used to operate the solar plants at its sites, according to its Environmental Management Framework, in 2020 the operators of the solar plants consumed 841 GJ of gasoline to maintain vegetation at solar panel and operating areas, 539 GJ of diesel for site vehicles and diesel driven water pumps used for cleaning, and 1,643,261 kWh of electricity - from the grid during off-solar hours - for lighting, protection and maintenance at its plants.

CREIT has informed us that gasoline use in 2020 was 60 GJ lower than in 2019, as a result of its agro-solar projects which replace grass with crops which do not require similar maintenance. Diesel use fell by 20 GJ from the 2020

4To calculate this figure, CREIT has assumed the electricity from the plants will replace electricity from coal, which it notes emits around 1 ton of CO2 per MWh of electricity generation. This has been multiplied by the average gross generation of its plants in 2017 – 21. Lifetime emissions have been calculated by taking a plant lifespan of 30 years. Note that lifecycle emissions from the solar plants are not considered in this calculation. This should be viewed as maximum potential avoided emissions, as the Philippines grid mix includes other power sources with lower emission intensities than coal.

5CO2e, carbon dioxide equivalent is a measurement term for greenhouse gas accounting.

6According to CREIT’s Environmental Management Framework, this covers stationary, fugitive and mobile combustion emissions.

7According to CREIT’s Environmental Management Framework, this covers emissions from purchased electricity (off-solar hours) at solar site and its corporate office.

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figure, as a result of the use of dry type cleaning during summer months. Finally, the use of solar powered streetlights reduced electricity consumption between 2019 and 2020 by 4,000 kWh.

CREIT states that its lessees intend to implement the following measures to further reduce energy consumption:

replacement of 10% of grass areas at panel operation floor with agri-plants (such as turmeric) to reduce gasoline use (it aims to start this at three plants at the end of this year); use of solar lights for perimeter lighting by the end of 2022; and use of solar powered electric motor-driven pumps to reduce diesel usage (in exploratory phase but part of a five year improvement plan). CREIT also informed us is the lessees are considering the use of storage technology to meet night-time off solar demand, as well as the use of night-time capable renewable energy sources (such as hydro).

Local Environmental Issues

CREIT acknowledges the potential of renewable energy projects to impact ecosystems and biodiversity and, in its Environmental Management Framework, it states biodiversity conservation is an integral parameter of its investment decisions. According to the Environmental Management Framework, none of its properties are located in or adjacent to national parks or other protected areas, no IUCN 17 Red List species have been identified near the project sites or along transmission lines, and habitats are protected or restored. In line with national regulations, CREC, which is responsible for site development, also plants 100 trees for each tree it fells during constructing at CREIT’s land assets.

CREC has a Site Selection Policy for potential renewable energy projects, which is applied to any site which will be infused into CREIT’s portfolio. This involves consideration of local populations and the potential for opposition.

Specifically, CREC prioritizes sites that will have the least impact on food production and local communities. Per the Site Selection Policy, land used for solar projects should not be irrigated or irrigable, and barren land should be prioritized to minimize displacement. Any impacted farmers will be offered monetary compensation and to join the agro-solar projects (on CREIT’s properties where this is implemented). CREIT informed us that, should a farmer not wish to leave their land, CREC would not include that land in the solar site (though this is very unlikely given the land should be non-irrigated). CREIT furthermore noted that its sites require clearance from the Department of Agriculture, which certifies that the land is no longer productive for agriculture, and the Department of Agrarian Reform, which determines if a specific site is more beneficial as a solar plant than agricultural land.

CREIT has provided us with information on the agro solar projects operating at three of its sites (and one of the sites it will acquire post IPO), whereby high value crops are grown beneath the solar modules CREIT plans for all its current properties to employ the concept by the end of 2023. Around 25 – 35 farmers have been hired as part of the scheme, which has led to the harvest of around 5,000 kg of turmeric crop. Of the income earned, around half goes directly to the farmers, while the other half is used to support community projects in the area around the solar plant. CREIT also emphasizes the environmental benefits of the project, for example water used to clean solar panels is used on the crops, which also require less gasoline-intensive maintenance as grass.

Climate Resilience

CREC’s Site Selection Policy contains parameters that relate to the resilience of the sites. In respect of solar power, for example, CREC undertakes a hydrology and flooding study. This determines if a site is in a flood-prone area or exposed to risks of rising sea levels and/or storm surges. Climatic conditions and changes are monitored on an on-going basis and infrastructure is modified/augmented as necessary to ensure it is safeguarded. CREIT has provided several other examples of resilience measures, for example all solar assets at its sites are designed to withstand the strongest historic wind speeds, and the development of networks of drainage systems at its sites.

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CREIT has informed us that none of its sites are exposed to flood risk, heavy winds, or rising sea levels/storm surges, except for Silay and Toledo which have minor flood risk (< 5% below the flood line). CREIT noted that it has started planning supporting infrastructure at these sites to mitigate this risk.

Resource Management

In respect of water and wastewater management, CREIT’s Environmental Management Framework states that, in 2020, 2265.27 m³of water were used for plant operation and maintenance (including panel cleaning) and usage in administrative offices. Of this, 2219.97 m³ was recycled or reused for grass/vegetation watering. CREIT states that in the coming years its lessees intend to adopt the latest water conservation techniques (e.g. water-less and dry- cleaning techniques). For the purposes of this calculation, CREIT includes its own solar plant and those operated by the lessees.

In respect of waste management, CREIT’s Environmental Management Framework states that 100% solid waste in 2020 was either composted, recycled or reused. Measures adopted by the operators of the solar plants at CREIT’s sites include the establishment of a material recovery facility for the segregation of solid waste, and no use of landfills or incineration.

Value Chain

CREIT informs us that around one-third of the electricity generated by the solar plants located on its land assets is sold directly to industrial clients. These clients span a range of industries, including food production and the manufacture of semi-conductors, automotive and consumer products. According to CREIT, none of its lessees’

current industrial clients operate in fossil fuel intensive industries.

CREIT has a Supply Chain Policy in place. CREIT informed us that all procurement and supplier relations will be undertaken by CREC (for development and construction) and by its lessees (for operation and maintenance).

Nonetheless, CREIT informed us that both CREC and the lessees follow the same policy as CREIT and have the same procedures in place.

When evaluating suppliers, CREC or the lessees consider, among others, price, quality and reputation of the supplier. Environmental and social considerations have not therefore been an explicit factor. Instead, CREIT informs us that proxy measures to measure these risks have been used, undertaking a qualitative assessment based on, for example, negative news articles, reviews, or available independent ratings. From 2021, however, new critical and strategic suppliers and contracts will be assessed on their non-financial parameters as part of the selection process. In any event, CREIT notes that CREC and the lessees try to maintain good relations with Tier 1 suppliers, who they believe should have more comprehensive environmental and social policies in place.

CREIT’s sustainable supply chain strategy (also described as its sustainable supply chain framework) sets out the ways in which CREIT seeks to integrate non-financial, sustainability parameters into its procurement practices.

Again, this will also be applied by CREC and the lessees. As part of the sustainable supply chain strategy, CREIT has developed an approval process which, among other things, involves suppliers responding to an assessment questionnaire developed. However, as the non-financial aspects of the questionnaire are based on subjective criteria (and complemented by ‘proxy measures’ such as negative news reports), no express weighting is currently given to environmental or social issues. CREIT has informed us that it is working towards developing a quantitative assessment mechanism to evaluate non-financial measures and that, in any event, it would disqualify potential suppliers or sub-contractors if it became aware of certain social issues such as the use of child or forced labor.

If a supplier is identified as a strategic supplier, it will also undergo a factory audit. In respect of ESG issues, this includes an evaluation of 1) implementation of environmental management system, 2) promotion of eco-friendly

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or recycled material products, 3) community relations programs, 4) compliance with labor law. Strategic suppliers undergo a yearly evaluation to ensure they continue to meet CREIT’s requirements in these respects.

CREIT also has a Supplier Code of Conduct in place. CREC and the lessees have the same Code of Conduct in place. Per the Code of Conduct, all suppliers are expected to minimize the impact on the environment. CREIT informs us that there is currently no follow up with suppliers on this expectation, though such a mechanism is being developed. Suppliers are also required to comply with CREIT’s corporate and site-specific environmental standards.

Noting that solar panels have a 30-year life span, CREIT and the wider Citicore Group does not currently have an end-of-life policy in place. It also notes there are no institutions or contractors accredited by the Department of Environment and Natural Resources in the Philippines for safe disposal or recycling of solar panels, but that it expects government guidelines soon to help developers prepare for end-of-life management. CREIT further notes that it is Citicore policy to repair and reuses damaged solar panels where possible and that recycling will be the preferred option in the future.

Table 4: CICERO Green assessment of Citicore Energy REIT Corp’s management of key environmental issues.

Key issue CICERO Green comments

GHG Emissions ✓ Renewable energy – including solar power – is key to a low carbon transition. In the Philippines, nearly 90% of energy comes from fossil fuel sources (and around one-third from coal) – solar power therefore has increased mitigation impact in this context.

✓ We are encouraged that CREIT calculates and reports its Scope 1 and Scope 2 emissions.

The utility of these calculations could be improved by the introduction of company level reduction targets. Scope 3 emissions will likely account for a majority of CREIT’s emissions. We are therefore encouraged by its intention to measure such emissions in the future, which should also be used to set targets and inform interactions with its value chain.

Energy ✓ The energy produced by CREIT’s solar plant and the plants operated on its land contributes to the transition. CREIT’s renewable energy capacity is expected to increase by 1.5 GW by 2025.

✓ We welcome the range of practices and initiatives introduced, or planned to introduce, to reduce energy use at CREIT’s sites. Given it is the cause of its largest measured emissions, we encourage CREIT to prioritize reducing the use of grid electricity in operating its solar plant and the other plants on its sites during off-solar hours. To this end, we are again encouraged by CREIT’s lessees consideration of potential mitigation measures, for example the use of storage devices. We note, however that such solutions come with their own environmental considerations (embedded emissions, material sourcing etc.).

Local

Environmental Issues

✓ CREIT has confirmed that all current sites were previously industrial land or non-irrigated land, and that no deforestation was necessary before construction. This is a strength. As safeguards regarding prior land-use and deforestation are reflected in its Environmental Management Framework and CREC’s Site Selection Policy, similar risks for future sites are reduced.

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✓ CREC’s policy to focus on non-irrigated and unproductive farmland should reduce displacement. We are encouraged by the prioritization of community engagement and that sites in the past have been rejected on account of their proximity to and potential interference with local communities. The approach to community engagement is well- reflected in the agro-solar concept. All displaced farmers are, for example, invited to join the agro-solar project (if it is in operation on the site in question), and any profits from the concept not going to the farmers is reinvested in community projects.

Climate Resilience ✓ Climate resilience is suitably integrated into CREC’s site selection and asset design, for example the avoidance of flood prone sites (we note that two current sites have small flood risk exposure) or coastal locations. We are also encouraged that sites have in the past been rejected because of their climate vulnerability.

✓ CREIT could ensure more sophisticated climate resilience considerations in respect of the solar plants operated on its land assets. For example, while the solar assets are built to withstand historical record wind speeds, wind speeds are generally expected to increase as climate change accelerates.

Resource Management

✓ We are encouraged by policies and initiatives to reduce water usage in place at CREIT’s sites, in particular the high re-use rate of water used for solar panel cleaning.

✓ It is a strength that CREIT sends zero waste to landfill or incineration.

Value Chain ✓ Noting the difficulty in measuring and influencing a value chain’s environmental and social performance, we are encouraged by CREIT’s intention to take meaningful steps in this area. As other Citicore companies are responsible for procurement, we welcome that such steps will also be taken by CREC and the lessees.

✓ The intentions in respect of CREIT’s value chain are particularly welcome given some shortcomings in current approaches. For example, while CREC and the lessees utilize a supplier questionnaire during the selection process, environmental and social considerations are complemented by ‘proxy measures’ and do not have an explicit weighting. Similarly, while suppliers are expected to adhere to a Supplier Code of Conduct, there is little follow up and, we understand, suppliers would not be excluded if they breached this code. CREIT notes that Citicore companies will be able to exert more influence over suppliers as its generation capacity and number of sites increase.

✓ The sourcing of solar panels entails risk as the market is close to a monopoly and their production entails certain social risks such as forced labor.

✓ None of CREIT’s lessees’ current industrial clients operate in fossil fuel intensive industries. Nonetheless, we encourage the plans to include sustainability considerations in selecting industrial customers.

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2 Assessment of Citicore Energy REIT Corp’s revenues and investments

Shading of Citicore Energy REIT Corp’s revenue and investments

Given CREIT’s governance score of Good and management of key concerns, we have assigned a shade to revenues and investments as follows:

Figure 2: CREIT 2020 revenue and 2021 investments by Shades of Green.

Dark Green is allocated to projects and solutions that correspond to the long-term vision of a low carbon and climate resilient future. These projects should be Paris aligned or have zero emissions around mid-century.

According to CREIT, all of its revenues in 2020 derived from income from 1) the lease of its solar plant to CREC, and 2) the leases with the operators of the solar plants on its other land assets.⁸ These revenues are considered Dark Green in their entirety, given the importance of solar energy in the transition and the exclusive use of the sites for its generation. The Dark Green shading also reflects that CREC and the lessees adequately consider the climate resilience of CREIT’s land assets and the solar plants they house, and the comprehensive approach to local environmental issues (for example, the policy to select sites with minimal trees and measures to minimize local opposition).

CREIT’s investments post IPO are the purchase of the Bulacan Property and South Cotabato Property, both of which host active solar plants.⁹ For both properties, CREIT has entered into a Memorandum of Agreement to acquire and then lease out the land. As the investments relate to properties with solar plants, these are considered

100%

Shades of Green by annual revenue 2020

100%

Shades of Green by planned investments post 2021 IPO

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Dark Green in their entirety. Furthermore, these assets were selected in accordance with CREC’s Site Selection Policy, which adequately considers climate resilience local environmental issues.

CREIT plans to add further real estate assets with 1.5 GW of renewable energy capacity to its portfolio by 2025.

This includes the infusion of nine renewable energy projects with 634.5 MW of capacity from CREC’s asset pipeline (consisting of seven solar farms, one solar rooftop system, and one 20 MW run-of-river hydropower plant).

While CREIT is sure of the completion of these acquisitions, given their variable timeframes and stages of development, we have not included these as part of our assessment of investments.

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3 Terms and methodology

The aim of this analysis is to be a practical tool for investors, lenders and public authorities for understanding climate risk. CICERO Green encourages the client to make this assessment publicly available. If any part of the assessment is quoted, the full report must be made available. Our assessment, including on governance, is relevant for the reporting year covered by the analysis. This assessment is based on a review of documentation of the client’s policies and processes, as well as information provided to us by the client during meetings, teleconferences and email correspondence. In our review we have relied on the correctness and completeness of the information made available to us by the company.

Shading corporate revenue and investments

Our view is that the green transformation must be financially sustainable to be lasting at the corporate level. We have therefore shaded the company’s current revenue generating activities, as well as investments and operating expenses.

The approach is an adaptation of the CICERO Shades of Green methodology for the green bond market. The Shade of Green allocated to a green bond framework reflects how aligned the likely implementation of the framework is to a low carbon and climate resilient future, and we have rated investments and revenue streams in this assessment similarly. We allocate a shade of green to the revenue stream and investments according to how these streams reflect alignment of the underlying activities to a low carbon and climate resilient future and taking into account governance issues.

In addition to shading from dark green to red, CICERO Shades of Green also includes a governance score to show the robustness of the environmental governance structure. When assessing the governance of the company, CICERO Green looks at five elements: 1) strategy, policies and governance structure; 2) lifecycle considerations including supply chain policies and environmental considerations towards customers; 3) the integration of climate

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falling into one of three classes: Fair, Good or Excellent. Please note this is not a substitute for a full evaluation of the governance of the issuing institution, and does not cover, e.g., corruption and tax.

CICERO Green has completed a light touch assessment of social safeguards with a focus on human rights and labor rights risks. This assessment is meant to provide information to readers on the context in which CREIT operates and its approaches to the social risks it faces. It should not be taken as a full screening of alignment with relevant national or international laws, guidelines or principles.

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Appendix 1: Referenced documents list

Document Number

Document Name Description

1 REIT Plan (4 November 2021) Working draft of REIT plan

2 Investor Relations Presentations (September 2021 and November 2021)

3 Citicore AgroSolar Project Description of the agro-solar pilot

4 Sustainability Policy

5 Materiality Assessment

6 Solar Panel End-of-life-cycle Management

7 Environmental Management Policy (CREIT)

8 Environmental Management Policy (Citicore Power)

9 Supply Chain Policy

10 Supplier Code of Conduct

11 CREC Site Selection Policy

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Appendix 2: Background

The substantial need for more renewable energy generation, including solar installations, is undeniable. The IEA estimates that, in 2020, renewable energy generation grew by nearly 5%, reaching almost 30% of global electricity supply.¹⁰ The IEA estimated that solar energy was the fastest growing of the renewable sources, with solar capacity growing by around 33% in 2020. Despite these positive trends, further increases in renewable generation are necessary to meet the IEA’s Sustainable Development Scenario (SDS) targets: the SDS requires the share of renewables in global electricity supply to reach 50% by 2030 to meet climate and sustainable energy goals.¹¹ In respect of solar, the SDS requires solar output to increase to 3268 TWh in 2030, up from 720 TWh in 2019.¹² On a global level, the IEA Sustainable Development Scenario estimates a required energy efficiency improvement rate of 3.2% per year through 2040, which is double the rate in the period 2000-2016, in order to be in line with the SDS scenario.¹³ Energy efficiency investments, such as smart technology aimed at reducing energy consumption, are key to reducing emissions. Smart grids and grid upgrades are necessary to manage and increase the share of intermittent and decentralized renewable energy. Energy storage is a key enabling technology for rolling out renewable energy further. In 2019, 2.9 GW of storage capacity were added to electricity systems globally – however this was almost 30% less than in 2018. The roll-out of storage systems is fragile and dependent on policy support.

The Philippines gets around 88% of its energy from fossil fuels and around 10% from low carbon energy sources, including renewables. Approximately 36% of fossil fuels are coal.¹⁴ The Philippines is, however, the first country in the Southeast Asian region to set a moratorium on new coal and implementing several measures to support renewables.¹⁵ As for renewable energy, solar remains a comparatively small energy source in the Philippines:

according to the Philippines Department of Energy, electricity generation from solar totaled 1,246 GWh in 2016.

By comparison, geothermal and hydropower projects generated 10,250 and 10,252 in 2019 respectively.¹⁶ The annual average growth rate of installed solar capacity between 2014 – 2019 was 109%, the highest of all energy sources (wind and biomass were the next fastest growing energy sources in this period, at 28% and 29%

respectively).

The Philippines is among the most vulnerable countries to climate-related weather events and temperature increases and has already experienced some increased intensity in heavy rain and wind intensity in cyclones. The Philippines is exposed to tropical cyclones, with an annual average of 20 tropical cyclones.¹⁷

10 https://www.iea.org/reports/global-energy-review-2020/renewables

11 https://www.iea.org/fuels-and-technologies/renewables

12 https://www.iea.org/data-and-statistics/charts/solar-pv-power-in-the-sustainable-scenario-2000-2030

13https://www.iea.org/reports/energy-efficiency-2019

14 https://ourworldindata.org/energy/country/philippines?country=~PHL#what-sources-does-the-country-get-its- energy-from

15 https://climateactiontracker.org/countries/philippines/

16 https://www.doe.gov.ph/sites/default/files/pdf/energy_statistics/2019-key-energy-statistics.pdf

17 https://bagong.pagasa.dost.gov.ph/information/climate-change-in-the-philippines

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Appendix 3: About CICERO Shades of Green

CICERO Green is a subsidiary of the climate research institute CICERO. CICERO is Norway’s foremost institute for interdisciplinary climate research. We deliver new insight that helps solve the climate challenge and strengthen international cooperation. CICERO has garnered attention for its work on the effects of manmade emissions on the climate and has played an active role in the UN’s IPCC since 1995. CICERO staff provide quality control and methodological development for CICERO Green.

CICERO Green provides second opinions on institutions’ frameworks and guidance for assessing and selecting eligible projects for green, sustainability and sustainability-linked bond investments. CICERO Green also provides Company Assessments, providing an assessment and shading of a company’s revenues and investments as well as assessing the governance structure to indicate the greenness of a company. CICERO Green is internationally recognized as a leading provider of independent reviews of green bonds, since the market’s inception in 2008.

CICERO Green is independent of the entity issuing the bond, its directors, senior management and advisers, and is remunerated in a way that prevents any conflicts of interests arising as a result of the fee structure. CICERO Green operates independently from the financial sector and other stakeholders to preserve the unbiased nature and high quality of second opinions.

We work with both international and domestic issuers, drawing on the global expertise of the Expert Network on Second Opinions (ENSO). Led by CICERO Green, ENSO contributes expertise to the second opinions, and is comprised of a network of trusted, independent research institutions and reputable experts on climate change and other environmental issues, including the Basque Center for Climate Change (BC3), the Stockholm Environment Institute, the Institute of Energy, Environment and Economy at Tsinghua University and the International Institute for Sustainable Development (IISD).

Citicore Energy REIT Corp