In parallel with its new strategy on sustainable finance (see other news), the European Commission presented on Tuesday 6 July a proposal for a regulation establishing a voluntary European standard on ‘green’ bonds (European Green Bond or EuGB) (see EUROPE 12745/8).
The issuance of ‘green’ bonds in the EU has exploded in recent years. In 2020, 51% of global emissions came from the EU. However, ‘green’ bond issues currently account for only 2.6% of total bonds issued in the EU, and the European Commission wants to give this market a boost, explained Financial Services Commissioner Mairead McGuinness at a press conference.
The Commission has decided to follow the recommendation of the Technical Expert Group on Sustainable Finance (TEG) (see EUROPE 12442/14) and to propose a “voluntary” standard in order not to disrupt this growing market and to let it evolve.
In practical terms, an issuer may therefore choose to use the European standard or another standard available on the market, for example the ‘Climate Bond Standard’ published by the Climate Bond Initiative.
But if it chooses the European standard, which will be available to all EU and non-EU bond issuers from third countries, and for all types of bonds, including covered bonds, it will have to comply with the requirements set out in the Regulation.
Issuers wishing to use the European label should in particular ensure that 100% of the bond’s proceeds are allocated to assets and expenditures in accordance with the EU taxonomy on sustainable finance (see EUROPE 12699/10) to ensure that the bond itself is fully environmentally sustainable.
However, some flexibility is allowed for sovereign issuers (governments), who, unlike financial or non-financial companies, will not be required to demonstrate the alignment of projects financed by the proceeds of their ‘green’ bonds with certain public spending programmes. In the case of a subsidy programme for the installation of solar panels, for example, it will be sufficient for the sovereign issuer to show that the funding programme itself is aligned with the taxonomy.
The Regulation also establishes a registration system, managed by the European Securities and Markets Authority (ESMA), for external examiners to verify the ‘green’ nature of the bonds.
The European standard is voluntary, but once it has been used, failure to comply with the regulation’s requirements will be penalised, warned a European official. National supervisors may, for example, fine the issuer if the information it has disclosed is not correct. On the other hand, if the external examiner gives a negative opinion, investors could potentially take the issuer to court.
According to the same European official, the European green bond standard will be very attractive, not least because the proposed Corporate Sustainability Reporting Directive (CSRD) (see EUROPE 12703/10) and Article 8 of the Regulation establishing the EU taxonomy require companies to determine the extent to which their activities comply with the EU taxonomy. The use of the European standard, aligned with the taxonomy, will therefore provide the necessary market to players as to their compliance.
A future framework for Next Generation EU ‘green’ bonds
However, the European Commission will not use the European standard for its planned ‘green’ bond issues under the Next Generation EU recovery instrument (see EUROPE 12698/2). The Regulation has to be discussed and adopted by Parliament and the Council of the EU as a first step, and a transition period of 30 months is foreseen for the new registration system for external examiners.
However, the European Commission wants to start issuing green bonds from 2021 to finance the recovery. Nevertheless, it announced that it will prepare a “robust and credible framework” for ‘green’ bond issuance under Next Generation EU, which will be aligned, as far as possible, with the European standard presented today.
“This framework will be based on well known and established market standards, while taking into account the specific structure of the programme [...]. It will provide investors with the necessary guarantees that the proceeds will be used for green investments”, it said.
For MEP Pascal Canfin (Renew Europe, France), it is logical that the Commission does not use this standard, since the regulation will not be in place for “at least 18 months”. “You can not ask them to issue a green bond in the coming months being aligned to something which is not finalised”, he told the press.
MEP Markus Ferber (EPP, Germany) said in a statement that the Commission’s failure to use the EU standard for its own ‘green’ bonds does not look like “a vote of confidence for the EU Green Bond Standard”.
According to him, this new standard will in any case have to prove itself and show that it is a useful tool for companies and States, “otherwise it will only become yet another standard among many”.
See the regulation: https://bit.ly/3woddFY
See its annexes: https://bit.ly/3wmsx6b (Original version in French by Marion Fontana and Mathieu Bion)