On 28 February 2023, the Council of the European Union and the European Parliament announced (the Announcement)1 that they had reached a provisional agreement on the creation of European green bonds (EuGB).
Background
On 6 July 2021, the European Commission published a legislative proposal on European green bonds (the EuGB Regulation). The EuGB Regulation will lay the foundation for a common framework of rules regarding the use of the EuGB designation for bonds that pursue environmentally sustainable objectives as defined by the EU Taxonomy Regulation. It also sets up a system for registering and supervising companies that act as external reviewers for green bonds aligned with the EuGB framework.
The broader aim of the EuGB Regulation is to facilitate the further development of the European market for green bonds while minimising disruption to existing green bond markets. The EU Commission hopes that the development of this market will help meet the EU’s climate and environmental objectives under the Paris Agreement on climate change. The EuGB Regulation also aims to reduce the risk of “greenwashing” by setting high standards for the issuance of green bonds.
The EuGB Regulation forms part of the European Green Deal which sets an objective of making it easier for investors and companies to identify environmentally sustainable investments while ensuring that such investments are credible.
Details of the provisional agreement
In the absence of actual text of the provisional agreement, the publication of which is expected shortly, only a few details are known about the provisional agreement:
Voluntary nature:
The proposed EuGB standard remains a voluntary standard. Whilst the European Central Bank was of the view that there should be a clear commitment to making the EuGB standard mandatory for newly issued green bonds within a reasonable time frame2, the Announcement indicates that the EuGB Regulation will remain of voluntary nature with its uniform requirements applying to issuers of bonds that wish to use the designation “EuGB”. To prevent greenwashing in the green bonds market in general, the EuGB Regulation will also provide for some voluntary disclosure requirements (set out in template format) for other environmentally sustainable bonds and sustainability-linked bonds issued in the EU but not using the “EuGB” designation. According to the European Parliament, issuers using these voluntary disclosure requirements would subject themselves to ambitious transparency requirements and, as a result, benefit from better trust among investors. Market participants and industry associations (such as ICMA3) have reiterated their support for the voluntary nature of the proposed EuGB standard and the wider sustainability disclosure templates for sustainable and sustainability-linked bonds.
Flexibility pocket/EU Taxonomy:
All proceeds of EuGBs will need to be invested in economic activities that are aligned with the EU Taxonomy. However, according to the Announcement, the provisional agreement allows for 15% of the proceeds from a EuGB to be invested in sectors not yet covered by the EU Taxonomy (such as aviation) and/or in economic activities that comply with the EU Taxonomy requirements but for which no technical (green) screening criteria have so far been developed (such as the case for agriculture). In other words, initially, issuers of EuGBs would need to ensure that at least 85% of the funds raised by the bonds are allocated to economic activities that align with the EU Taxonomy Regulation4. This additional 15% “flexibility pocket”, introduced by the provisional agreement, is to ensure the usability of the EuGB standard from the start of its existence. The use and the need for this flexibility pocket will be re-evaluated as Europe’s transition towards climate neutrality progresses and with the ever increasing number of attractive and green investment opportunities that are expected to become available in the coming years. Whilst the additional flexibility is useful, concerns have been raised about the future take up of the voluntary EuGB standard given the usability issues identified in connection with the EU Taxonomy5.
Transparency:
All issuers choosing to use the EuGB standard when marketing a green bond will not only be required to disclose much information about how the bond’s proceeds will be used, but also show how those investments feed into the transition plans of the company as a whole. The EuGB standard therefore requires companies to be engaging in a general green transition, which appears to be a new requirement introduced by the provisional agreement.
External reviewers:
The Announcement reiterates that the EuGB Regulation establishes a registration system and supervisory framework for external reviewers of European green bonds – the independent entities responsible for assessing whether a bond is green. The Announcement does not indicate any proposed changes to the external reviewers’ position in the original proposal for the EuGB Regulation but re-emphasizes that such external reviewers will need to properly identify, eliminate or manage any actual or potential conflicts of interest and disclose such conflicts of interest in a transparent manner. The proposed EuGB Regulation will also set out requirements regarding pre-issuance and post-issuance reviews. Neither a pre-issuance review nor a post-issuance review will be permitted to refer to ESMA or any competent authority in such a way that could indicate or suggest their endorsement or approval of the relevant document or any assessment activities of the external reviewer. External reviewers will be required to make available certain information free of charge on their websites, including all pre- and post-issuance reviews.
Supervision:
As per the original proposal for the EuGB Regulation, the national competent authorities of the home member state designated (in line with the EU Prospectus Regulation) shall supervise that issuers comply with their obligations under the new standard.
Other than the above, not many details of the provisional agreement are known at this stage. For instance, it is unclear at this stage whether securitisations would be part of the EuGB standard as per the European Banking Authority’s report on developing a framework for sustainable securitisation6.
There have been suggestions that the provisional agreement may incorporate securitisation within the new EuGB standard and do so on the basis of proceeds rather than assets but this, and any other changes to the original proposal for the EuGB Regulation can only be assessed once the final text for the EuGB Regulation is publicly available
Next steps
The agreement reached between the European Council and the European Parliament is provisional and still needs to be confirmed by the Council and the European Parliament, and adopted by both institutions before it is final. The EuGB Regulation will start applying 12 months after its entry into force.
