The European Commission has opted for a voluntary European standard on ‘green’ bonds (‘European Green Bond’ or EuGB), according to a draft text obtained by EUROPE. The formal legislative proposal is expected to be presented in early July, together with the European Commission’s revised strategy on sustainable finance (see EUROPE 12464/29).
Already mentioned in the 2018 Action Plan on Sustainable Finance (see EUROPE 11977/2), the European Commission has reaffirmed its commitment to put such a tool in place as part of the European Green Deal to improve the ability of investors to identify high quality ‘green’ bonds and to facilitate the issuance of such bonds.
In its report of June 2019, the Technical Expert Group on Sustainable Finance (TEG) recommended that the European Commission create a “voluntary, non-legislative EU Green Bond Standard”. In March 2020, the TEG published a user guide and an updated proposal (see EUROPE 12442/14).
Based on the work of the TEG and the outcome of its public consultations, the European Commission considered that a voluntary standard aligned with best market practice and the EU taxonomy on sustainable finance was the best option.
The draft text therefore establishes uniform requirements for bond issuers who would like to use the ‘European Green Bond’ label for their environmentally sustainable bonds in the EU, but without imposing the use of this standard on current market players. It also establishes a registration system and a supervisory framework to improve confidence in external reviewers of European ‘green’ bonds.
A standard aligned with the taxonomy
The draft text requires issuers of a European ‘green’ bond to ensure that the proceeds of the bond are allocated to assets and expenditure in full compliance with the EU’s taxonomy on sustainable finance (see EUROPE 12699/10) to ensure that the bond itself is fully environmentally sustainable.
According to the European Commission, this link to taxonomy will allow the proceeds of European ‘green’ bonds to be used for a wide range of economic activities that make a substantial contribution to environmental sustainability objectives. For example, a bank could issue a European ‘green’ bond to finance ‘green’ mortgages, or a steel manufacturer could issue a European ‘green’ bond to finance a new low-emission production technology.
The proceeds of bonds that use the ‘European Green Bond’ label should exclusively be used to finance economic activities that are either environmentally sustainable or that contribute to the transformation of activities to become environmentally sustainable.
In this respect, the text specifies that the time required to transform an asset to bring the economic activity to which it relates into line with the criteria of the taxonomy should not reasonably exceed 5 years, except in certain circumstances where it may take up to 7 years.
The text also grants flexibility to sovereign issuers (States), which, unlike financial and non-financial companies, will be able to use the proceeds of European green bonds to indirectly finance economic activities that are aligned with the criteria of the taxonomy through tax expenditure programmes or transfer programmes, including grants.
New transparency requirements
One of the European Commission’s objectives is to ensure that investors have all the information they need to assess the environmental impact of European ‘green’ bonds and to compare them with each other.
Thus, the text proposes specific and standardised disclosure requirements that ensure transparency on how the issuer intends to allocate the proceeds of the bond to eligible expenses and financial assets and how these proceeds have actually been allocated.
It defines model European Green Bond factsheets and annual allocation reports. According to the text, issuers would also be required to disclose the environmental impact of their bonds through the publication of impact reports, published at least once during the life of the bond.
Registration of external examiners
The European Commission also wants to improve confidence in external reviewers who verify the ‘green’ nature of the bonds by introducing a registration scheme, again on a voluntary basis.
The European Securities and Markets Authority (ESMA) would be responsible for authorising external European ‘green’ bond examiners. It would also have the option of refusing to register an external examiner and withdrawing his or her registration under certain conditions and would have the power to impose sanctions.
The text also establishes a regime allowing external examiners from third countries to provide their services in the EU on the basis of an equivalence decision or recognition procedure by ESMA.
In addition, there is a 30-month transition period for the new registration system for external examiners.
See the draft text: https://bit.ly/35GJFbS (Original version in French by Marion Fontana and Damien Genicot)