On 6 July 2021, the European Commission formally launched a legislative proposal for a regulation on European Green bonds, introducing the EU Green bond Standard (EUGBS) – still to be approved by the European Parliament and the Council. This initiative is part of the EU’s overall strategy on sustainable finance and of the EU’s commitment to the transitions towards a net zero economy by 2050. It comes at a time when the green bonds and other sustainability linked bonds markets are booming as the demand for sustainable investments is increasing. The crisis caused by the impact of Covid-19 pandemic outbreak also represented an opportunity for the EU to increase its green bonds issuance.
The proposed EUGBS is based on recommendations made by the Technical Expert Group on Sustainable Finance and builds on the existent Green Bond Principles established by the International Capital Markets Association (ICMA). However, the EUGBS appears more ambitious and prescriptive than ICMA’s green bonds principles, as it sets a list of disclosure and technical requirements that will need to be followed by issuers wishing to have an EU green bond label once the regulation enters into force. It is important to highlight that this will only happen once the European Parliament (EP) and the Council give their green light following the Ordinary Legislative Procedure. Negotiations usually take time, so it is unlikely that the green bond regulation will be approved before mid-2023. The EP is currently conducting a series of consultations with other actors, including the ECB, which has recently declared its support to the proposed regulation.
One of the most important aspects of the EUGBS framework is perhaps its alignment with the EU Taxonomy Regulation. This means that the proceeds of the bond should be allocated in projects strictly connected with the criteria for environmental and sustainable economic activities enlisted by the Taxonomy. Besides, under the proposed framework, issuers should compromise to follow full disclosure requirements on the use of proceeds. Green bonds will also need to be verified by external reviewers before and after the allocation of proceeds to ensure full compliance with the Green bonds regulation and that projects align with EU Taxonomy. If adopted, it will also give a relevant supervisory role to the European Securities and Markets Authority (ESMA): external reviewers will need to be registered with and approved by the ESMA. The latter will play a relevant role not only in terms of guaranteeing the quality of the verification services of the reviewers, but also, in deciding who will have the faculty to sign off an EUGB. Another important aspect of the proposal is that it also supports issuers in their “sustainability transition” by allowing them to use green bonds to move towards an environmentally sustainable model. The EUGBS label will be available for any type of issuers not only within the EU, but also outside.
Therefore, by providing these criteria, requirements and definition for green investments and economic activities, the EU wants all parties to speak the same language, address the issue of the lack of a universal definition of “green” and avoid the risk of greenwashing. But could an EUGBS evade this risk?
As in any legislative piece the Green bonds regulation – if approved – will bring new opportunities and challenges. It is expected that the EUGBS will serve as a safe financing tool to ensure investments foster environmental impacts in line with the EU’s sustainable finance strategy and climate agenda. The EUGBS is also seen by many as a potential model for creating a global unified green bond framework and a way to continue strengthening the EU’s role in global climate governance.
However, there might be some challenges associated with the EUGBS. Compliance with the criteria and standards in the EU taxonomy (especially for issuers outside Europe) could become difficult since they might face some regulatory and compliance burdens related to the disclosure and reporting requirements and difficulties of going through strict verification schemes. This could cause non-European issuers to find the requirements set by the EUGBS unattractive in comparison with other wide accepted green bonds principles.
Despite the attempts of the EU to introduce a common framework for green bonds issuance and green economic activities, problems associated with the lack of an universal definition of what green actually entails – and the several guidelines and principles available outside Europe – will probably remain, as well as the risk of confusion among investors. Standards and labels of green financial products are supposed to give investors certainty on which projects and companies adhere to environmental canons, but this is not always the case. The risk of misallocation of proceeds or misuse of funds through the issuance of green bonds by some issuers may continue to represent an important challenge for the EU.