At a glance:
- On 6 July, the European Commission (EC) published a proposal for a European green bonds Regulation, intended to boost the EU green bond market and address “greenwashing”.
- The proposed Regulation differs from other green bond standards in three main ways: (i) use of proceeds will be linked to the EU Taxonomy; (ii) the issuer will be mandated to disclose various reports, including impact reports, on its website; and (iii) external reviewers of European green bonds will need to be registered and supervised by ESMA.
- Issuers may seek to align to the regulatory-led framework to alleviate “greenwashing” risks. Ultimately though, take-up will depend upon how well established the Regulation becomes amongst investors.
- Non-EU issuers may choose to comply with the framework to attract European investors. The EU might gain a “first mover advantage” over other jurisdictions.
- The proposal must now be agreed by the European Parliament and Council, but it is possible that the framework could be available for use among issuers as early as Q2/Q3 2022.
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On 6 July, the EC published a proposal for a Regulation on European green bonds. Issuers who issue bonds in line with the Regulation will be able to use the “European green bond” designation – or “EuGB” for short. The scope of the proposed Regulation is broad. Public and private sector issuers, whether financial or non-financial undertakings, both inside and outside the EU, will be able to issue EuGBs. The framework will also be available for issuers of covered bonds and securitisations issued by special purpose vehicles.
In publishing the proposal, the EC is seeking to boost the EU green bond market, as well as address concerns about “greenwashing”. The green bond market has grown substantially in recent years and there is already widespread use of proprietary green bond frameworks. Nevertheless, the EC notes how the green bond market in the EU still only represented “about 4% of overall corporate bond issuance” in 2020. Even though some of the green bond frameworks currently in use  are “accepted as setting a standard”, it can still be “costly and difficult” for investors to determine the positive environmental impact of green bonds and to compare them.
As the proposed Regulation will be voluntary, its success will depend upon the extent of take-up among issuers. So how does it compare to other standards? And how popular will it prove to be?
How does the framework compare to other standards?
The framework sets out rules on how the proceeds of EuGBs must be allocated. Crucially, and unlike other standards, the proceeds must relate to economic activities that meet the EU Taxonomy criteria, or meet the criteria within a defined period of time as set out in a taxonomy-alignment plan.
Linking proceed use to the EU Taxonomy potentially makes the framework more difficult to comply with clearly, compared to other, principles-based frameworks, where limitations on use of proceeds may be on a “best endeavours” basis.
For an economic activity to qualify as environmentally sustainable under the EU Taxonomy, it must meet certain criteria, one of which is that the activity does not significantly harm any of the environmental objectives set out in the Regulation. Ensuring that proceeds do not significantly harm any of the EU Taxonomy objectives may be a new concept for issuers to manage.
An additional complexity is that the EU Taxonomy is still being developed. Delegated Acts on four of the objectives are not expected to be adopted until H2 2022 and the EC is considering proposing legislation to extend the EU Taxonomy framework to recognise transition efforts. The proposed Regulation sets out how issuers should manage subsequent amendments to EU Taxonomy screening criteria and delegated acts to prevent any negative impact on the price of the EuGB.
Having a more definitive framework within which to work is likely to be welcomed by many issuers as a way of reducing “greenwashing” risks. Collaboration between finance and debt capital markets teams on proceed use will be essential.
The EuGB framework sets out a number of reports the issuer  must publish on its website (in line with specific templates), until at least the maturity of the bond/s:
- Prior to issuance, the issuer must complete an EuGB factsheet which has been subject to a pre-issuance review by an “external reviewer”;
- Every year and until the full allocation of the EuGB proceeds, the issuer will need to draw up an allocation report;
- Issuers must obtain a post-issuance review by an external reviewer of the allocation report drawn up after the full allocation of the proceeds (although amended allocation reports will need this review and issuers of financial undertakings may need this review for every allocation report in certain circumstances); and
- Issuers must, after full allocation of the proceeds, and at least once during the lifetime of the bond, draw up an EuGB impact report on the environmental impact of the use of the proceeds.
While most frameworks set out expectations around reporting, the quality and extent of impact reporting, in particular, has been inconsistent. Mandating impact reporting is important in demonstrating how the green bond has had a positive impact on the environment. However, sourcing and collating the data needed to report will be challenging. What is potentially less onerous for issuers in the framework than in other standards is that for some issuers the post-issuance review report may only be required once.
It is also notable that the proposed Regulation mandates reports to be published on the issuer’s website, whereas in other standards this is often only recommended. External reporting will bring increased transparency to the market.
The proposed Regulation sets out a system of registering and supervising companies that act as external reviewers for EuGBs. External reviewers must register with ESMA and meet the conditions for registration set out in the Regulation e.g. on meeting organisational and governance requirements. External reviewers will also be required to make certain information available free of charge on their websites, including all pre- and post-issuance reviews.
Third country external reviewers which have registered with ESMA (following an EU equivalence decision) will be permitted to perform external reviews of EuGBs. Until an equivalence decision is adopted, third country external reviewers may provide services in the EU following recognition by ESMA. EU registered external reviewers may also endorse services provided by a third country external reviewer (subject to certain conditions).
The registration of external reviewers is likely to be welcomed by many issuers who are keen to bring more standardisation to the review process and is also likely to increase the consistency of reporting on these reviews. This increment in quality will, however, likely increase the costs associated with reporting.
How popular will the framework be?
Within the EU
When it comes to voluntary frameworks, the EU’s success to date in terms of take-up has arguably been mixed. The UCITS brand has undoubtedly enjoyed widespread success, but take-up for other initiatives, such as the Pan-European Personal Pension Product, has been more limited.
As governments and companies alike pursue “net zero” targets and the fight against climate change intensifies, the green bond market is set to grow significantly. At the same time, companies are keen to avoid the risks associated with “greenwashing”. Aligning to a regulatory-led standard will help to alleviate some of this risk. Indeed, some issuers are seeking to align with the EU’s Technical Expert Group (TEG) standard, upon which the EU green bond proposal has built.
Ultimately though, take-up will depend on how well established the Regulation becomes amongst investors. Where stakeholders start to see explicit reference to the EuGB standard in investor mandates, where only the purchase of qualifying EuGBs will be permitted, the Regulation is likely to be widely adopted.
Once the framework is in force, it would also make it easier for the EC to adopt other measures that might increase up-take in the market. In principle, this could include preferential capital treatment, although there is no indication that the EC is considering this actively.
A global brand?
Comparatively, a high volume of green bonds are already issued in the EU, with EUR being the most prominent currency in green bond issuance . Therefore, non-EU issuers may choose to comply with the EuGB to attract European investors.
It is possible that the EU might also gain a “first mover advantage” on green bonds. Comparatively, the UK only recently consulted on green bond measures, such as making changes to the UK prospectus regime, recognising existing standards, setting requirements in relation to contractual agreements, or developing its own UK green bond standard. The UK will issue its first sovereign green bond in September, aligned with the 2021 ICMA Green Bond Principles . The UK also lags behind in developing its Taxonomy, with technical screening criteria only due to be finalised at the end of 2022.
The proposed Regulation will need to be negotiated and agreed by the European Parliament and Council before entering into force. While there will be transitional provisions for external reviewers, as they await registration with ESMA, the framework could be available for use among issuers as early as Q2/Q3 2022.
The EU green bond proposal focuses on use-of-proceeds bonds. While these make up the majority of issuances, the market for sustainability-linked bonds is also growing, fast. As set out in its Strategy for Financing the Transition to a Sustainable Economy, the EC next plans to undertake work on transition or sustainability-linked bond labels. It may also consider adjustments to the Prospectus Regulation to create minimum requirements on the information available for all ESG securities.
Some of the requirements in the proposed Regulation are potentially more onerous and costly than other industry standards, such as around linking to the Taxonomy, reporting, and requiring external reviewers which are registered with ESMA. However, these requirements are also likely to raise consistency and quality of reporting and disclosure related to Green Bonds, comparative to other Frameworks, and the ability to issue under a regulatory-led framework may well prove attractive to issuers and investors alike.
 While not explicitly set out in the EC proposal, commonly used green bond frameworks include the International Capital Market Association’s (ICMA) Green Bond Principles and the Climate Bonds Initiative Climate Bonds Standard.
 There is some limited flexibility in how the Regulation applies to sovereign issuers.
 Climate Bonds Initiative, December 2020.
 UK Government Green Financing Framework, June 2021.
“…our EU Green Bond Standard proposal will set a gold standard in the market… [it] responds to the needs of investors for a trusted, robust tool when investing sustainably.” Mairead McGuinness, Commissioner in charge of Financial Services, Financial Stability, and Capital Markets