At the end of October, the European Union adopted the European Green Bond Regulation (the “Regulation“), setting the first of its kind uniform standards for bonds referred to as “European Green Bonds” or “EuGBs”.
Meaning of the Regulation and Nomenclature
The Regulation aims to unify and streamline the currently fragmented and opaque green bond market, which is currently governed by varying standards or even the individual criteria of each issuer for assessing sustainability. This inconsistency increases the risk of misleading greenwashing and can limit investment opportunities for both investors and issuers.
The EU framework for green bonds will be voluntary, meaning that it will be up to individual issuers to decide whether they choose to comply with the requirements of the Regulation to designate a bond as green. Only bonds for which a prospectus has been published in accordance with the Prospectus Regulation or which are issued or guaranteed by selected public bodies (e.g., states, counties, or municipalities) will be eligible for designation as a “European Green Bond.”
Key Feature of the Green Bond
A key consideration for using the green bond label is the allocation of bond proceeds. Almost all of the proceeds (at least 85%) must be allocated, directly or indirectly, to environmentally sustainable economic activities—i.e., activities that comply with the environmental objectives set out in the Taxonomy Regulation.
Non-environmental (e.g., social) objectives are not covered by the Regulation, though it does allow for a certain degree of flexibility. Until the taxonomy framework is fully operational, issuers may allocate the remaining up to 15% of the proceeds to:
- Activities for which there are not yet technical screening criteria under the Taxonomy Regulation
- Other specific activities that must contribute to the environmental objectives set out in this Regulation.
Transparency and Disclosure of Information
Issuers of “European Green Bonds” will need to comply with extensive transparency and disclosure requirements regarding how they allocate the proceeds of the bonds. Before issuing a bond, issuers must publish a summary of the bond’s details, including annual allocation reports and environmental impact reports throughout the investment’s life and after maturity.
Issuers that cannot yet meet the Regulation’s standards but still want to demonstrate their green ambitions have the option of offering bonds as “environmentally sustainable” or “sustainability-linked”. For this purpose, they can use a common template for regular disclosure of sustainability information on their bonds. This rule aims to prevent greenwashing.
Classification of Green Bonds and Effectiveness of the Regulation
In practice, there will be two categories of green bonds:
- “European Green Bonds” (meeting all the requirements of the Regulation)
- Other green bonds.
Given that reports from green bond issuers published under the Regulation must be independently verified, a registration system is introduced. This system includes a supervisory framework for external assessors, who will need to comply with the Regulation’s requirements, with a strong emphasis on the proper management of conflicts of interest. External assessors will have 18 months to adapt to these new conditions.
The Regulation is expected to be applicable from January 2025 and is anticipated to be published in the Official Journal of the EU by the end of next year.
