Following the fifth trilogue on 28 February 2023, the European Council and European Parliament each confirmed that a provisional agreement on the new standard to fight greenwashing in the bonds market, the “European Green Bonds Standard” (EUGBS), has now been reached.
Despite initially divergent views on several contentious points, with the Parliament pushing for substantive amendments to the Council’s proposal of 13 April 2022 intended further to heighten regulation, supervision, transparency and accountability across the entire green bond market, this provisional agreement marks a significant step towards creating the first ‘best in class’ standard for issuing green bonds.
What we know so far
Whilst the full specifics of the final agreement have not yet been released, the detail thus far confirmed shows that with this provisional agreement, the EU has taken a big step towards “greenifying” a market responsible for half of all global issuances of green bonds (Source: Climate Bonds Initiative – Sustainable Debt Global State of the Market 2021). Moreover, it has gone one step further by tying green bonds to the overall green transition of the company, and by providing a framework for disclosures for other green and sustainability-linked bonds that are keen to show they are serious about their green claims, but not yet able to adhere to the strict standards of the EUGBS’ vaunted “gold standard”.
In its May 2022 report, the Committee on Economic and Monetary Affairs (ECON) of the European Parliament put forward arguably its most talked-about amendment to the Council’s proposition, proposing that information on all “bonds marketed as green or environmentally sustainable, including certified green deal bonds”, such as ICMA aligned Green Bonds and CBI Certified Climate Bonds, should make substantially the same specific, standardised disclosure as the Council had proposed for issuers willing to align with the EUGBS.
According to the 28 February announcements, a middle-ground has been reached such that the agreed-upon EUGBS will:
- Require all companies choosing to use the standard when marketing a green bond to disclose pre-issuance, periodic and post-issuance information, as initially proposed, concerning:
- How the bond’s proceeds will be/are/have been used to contribute to the issuer’s taxonomy-aligned turnover, capital expenditure and operating expenditure
- How those investments feed into the transition plans of the issuer as a whole.
- Provide companies issuing bonds which do not fulfil all the requirements to qualify for the EUGBS with non-binding guidelines for pre-issuance, post-issuance and periodic disclosure requirements, set out in template formats. Any companies opting in to these requirements will also be required to state the minimum proportion of bond proceeds to be used on activities that are environmentally sustainable under Article 3 of Regulation (EU) 2020/852 (“EU Taxonomy“).
The adoption of the EUGBS will therefore require companies choosing to use the standard also to commit to a general green transition. It will also guarantee to investors that any bonds issued with the EUGBS label are taxonomy-aligned, whilst also providing increased trust among investors in bonds issued by companies voluntarily choosing to subject themselves to the ambitious transparency requirements of the EUGBS.
Whilst all parties agreed from the outset on the requirement that the Use-of-Proceeds on EUGBS-aligned bonds should be 100% aligned with the EU Taxonomy, until such time as the taxonomy framework is fully up and running, they also recognised the need to create a flexibility pocket.
By way of derogation, this flexibility pocket would permit up to a specified percentage of the proceeds of any EUGB to be allocated to economic activities that comply with the taxonomy requirements but for which no technical screening criteria have yet been established to determine if that activity contributes to a green objective.
Though the Council initially proposed 20%, legislators ultimately agreed that there will be a 15% flexibility pocket in place under the EUGBS, noting that this is of course a temporary measure meant to limit the effects of the EU Taxonomy’s current, incomplete scope, which will be re-evaluated as Europe’s transition towards climate neutrality progresses. This should though, in the near-term, ensure the usability of the EUGBS from the start of its existence.
The EUGBS will establish a registration and supervisory regime for external reviewers of European green bonds – the independent entities responsible for assessing whether a bond is green – which broadly follows the concept established by the ICMA and CBI principles. This regime will fall within the European Securities and Markets Authority’s (ESMA) responsibility.
Aiming to optimise and regulate the external review process by enhancing accountability and transparency of providers of external reviews, the EUGBS stipulates that any actual or even potential conflicts of interest are properly identified, eliminated or managed, and disclosed in a transparent manner. Technical standards may be developed specifying the criteria to assess the management of conflicts of interest.
Several important issues remain unclear at this stage as the final text has not yet been published. One of these is an often overlooked yet crucial feature of the EUGBS for facilitating transitions. Introduced by the Parliament in May 2022, this feature amends Article 6 of the original, proposed Regulation to allow issuers that prepare and publish CapEx plans to allocate proceeds of their European green bonds not only towards activities aligned with the EU Taxonomy, but also towards activities that are identified in such CapEx plans as meeting the EU Taxonomy requirements within a defined period of time. It remains to be seen at present if this feature has been retained in the agreed final text.
In any event, the agreement is as yet only provisional in nature as it still needs to be confirmed by the Council and the European Parliament and adopted by both institutions before it is final. It will then start applying 12 months after its entry into force.
Thereafter, more uncertainty awaits, since there remains the obstacle of the EU Taxonomy’s usability issues. Discussed at length in the October 2022 Report by the Platform of Sustainable Finance setting out its Recommendations on Data and Usability vis-à-vis the EU Taxonomy, and expanded further by industry stalwarts such as the ICMA and CBI, these various Taxonomy-related challenges will need to be addressed if they are not to impede the take-up of the new standard that Paul Tang, rapporteur for the European Parliament, asserts is “a world apart from current market standards”.
In the short-term, we expect that the green bond market, so deeply wedded to the ICMA Green Bond Principles, will not take to the EUGBS as quickly or as readily as hoped for, but the take-up does nevertheless have an air of inevitability given the new disclosure recommendations laid down in the EUGBS heighten the risk that, as Tang claims, “any green bonds not using this system, will likely be looked at with increasing suspicion”.