Provisional agreement reached in the EU on European green bonds

The EU is taking a further step to reach its strategy to become climate-neutral by 2050.

On 28 February 2023, the Council of the European Union and the European Parliament reached a provisional agreement on the establishment of the European Green Bond Standard (“EuGB”). The standard is likely to impose strong positive impacts on the green bond market, as it sets out novel, clear requirements for both the green element and the verification of green bonds. If finalised, it will become the first standard in the world to regulate the qualification of green bonds.

Green bonds are bonds issued with the purpose of financing environmentally sustainable activities. The use of proceeds of green bonds is therefore restricted to activities with green characteristics, thereby providing environmental benefits. Green bonds are today one of the most widely used financial instruments to allocate capital to green activities. Green bonds therefore have an important role in financing the shift to a green economy and in reaching international climate goals. However, there has been a need for a uniform standard to improve the efficiency and credibility of the green bond market. The aim of the EuGB standard is to promote the use and strengthen the credibility of the green bond product, thereby also reducing the risk of greenwashing and ensuring continued growth.

The idea of an EU Green Bond Standard has been in development in the EU for several years. In 2019, the Commission’s Technical Expert Group (TEG) published its final report on the development of a European Green Bond Standard. In the report, TEG identified several weaknesses in the current green bond market. These included unclear criteria for the use of proceeds of green bonds and weak mechanisms to ensure reporting and monitoring of the bonds’ environmental benefits. This led to lacking transparency and risks of greenwashing, thereby hindering the potential of the green bond market. The establishment of a voluntary general standard, with precise and strict requirements for issuers, was for this reason recommended by the TEG.[1]

The European Commission initiated the drafting of the standard in 2019 and presented its proposal in July 2021. Negotiations have since then taken place in the European Parliament and the European Council. The provisional agreement reached in February may be the last step to finalize the standard. The standard will be voluntary to apply and its requirements are based on best market practice, such as the principles established by the International Capital Market Association and the Climate Bonds Initiative. A brief summary of the main elements of the EuGB follows below:

Projects eligible for a EuGB must meet the criteria for being “environmentally sustainable” in the EU Taxonomy. The EU Taxonomy criteria are strict and limited to the specific economic sectors currently covered by it (however, the ambition is that the remaining sectors will be included in the future). The scope of eligible projects under the standard will therefore be narrower than the one currently applied by markets; pursuant to which any “green” project can qualify for a green bond. As a temporary measure to ensure the usability of the standard from the start of its existence, the provisional agreement allows in certain instances that up to 15 % of the bond’s use of proceeds are not Taxonomy-aligned, which in the short-term may be crucial for those sectors not yet covered by the EU Taxonomy. This “flexibility pocket” will decrease as the Taxonomy regulation continues to expand across economic activities.
Issuers are obliged to report on the green characteristics of the project. The issuer must report on how the project meets the Taxonomy criteria and confirm that it will continue to do so during the entire period the bonds are outstanding. Additionally, issuers are required to report on how the investments feed into the transition plans to the company as a whole. The reporting must be done in a “Green Bond Framework”, which is to be reviewed by external reviewers both during and after the bond’s life cycle.
Competent national authorities act as supervisory organs for green bond issuers. These authorities have the responsibility in overseeing that EuGB issuances in their respective state comply with the obligations under the standard. In Norway, this will be done by the Norwegian financial authorities (Finanstilsynet).

Bonds issued in accordance with the standard will be designated as a “European Green Bond” or an “EuGB”. The EuGB label provides investors with a greater certainty that investing in the bond will in fact promote environmental benefits, in accordance with the science-based EU Taxonomy, making such bonds more attractive among investors. The European Commission expects the standard to become widely used among issuers, and the goal is that the standard becomes the world’s new “gold standard” for all green bonds issuances.

There are other types of bonds which are also used to finance sustainable activities, such as sustainability linked bonds, climate bonds and sustainable bonds, which are not directly regulated by the proposed standard. The standard has however included specific voluntary reporting requirements, which issuers are free to use when issuing these types of bonds. The requirements aim to prevent greenwashing more generally in all parts of the bond markets.

The EuGB standard is likely to increase transparency and integrity in the market, as well as to minimise the risks of greenwashing. This will altogether promote the use of green bonds as an instrument to finance environmental sustainable growth. The standard is therefore an important contribution to reach the EUs goal of becoming a net-zero economy by 2050. It has for this reason received positive responses by market actors.

The new standard which we are setting will be useful for both issuers and investors of green bonds. Issuers will be able to demonstrate that they are funding legitimate green projects aligned with the EU taxonomy. And investors buying the bonds will be able to more easily assess, compare and trust that their investments are sustainable, thereby reducing the risks posed by greenwashing.

– Elisabeth Svantesson, Minister for Finance Sweden.[2]

In order for the standard to become effective, the provisional agreement needs to be confirmed and adopted by the European Council and the European Parliament. The standard will then apply 12 months after entering into force.

[1] TEG report on EU green bond standard – June 2019 (europa.eu)

[2] Sustainable finance: Provisional agreement reached on European green bonds – Consilium (europa.eu)

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