EBF SUSTAINABLE FINANCE ROUNDUP ARTICLE
Stefano Spinaci, Policy Analyst at EPRS, on the European Green Bond Standard
BRUSSELS, 17 March 2022 – On July 6th, 2021, the European Commission proposed a Regulation on a voluntary European Green Bond Standard (EU GBS) with the intention of setting a ‘gold standard’ for how companies and public authorities can use green bonds to raise funds on capital markets to finance ambitious investments, while meeting tough sustainability requirements and protecting investors from greenwashing. We sat down with Stefano Spinaci, Policy Analyst at the European Parliamentary Research Service (EPRS), to discuss the Commission’s proposal, the elements that distinguish the European Green Bond Standard, and where we are currently in the legislative process.
What are the defining elements of the European Green Bond Standard? How does it set itself apart from other existing standards for green bonds?
The main distinctive element of the proposed European Green Bond Standard is full alignment with the EU taxonomy, as issuers would have to allocate 100 % of the proceeds of the bond to finance taxonomy-aligned economic activities, before maturity of the bond. The new standard would, in addition, allow the funding of long-term projects (up to 10 years) for those economic activities that are not yet aligned with the EU taxonomy, helping issuers finance their green transition. In terms of transparency, the issuers would report firstly on their commitment to align with the standard – to be done annually on the allocation of proceeds – and finally on the aggregate environmental impact. These disclosures would undergo thorough pre-issuance and post-issuance reviews by external reviewers.
The proposal would also establish a registration system and supervisory framework for external reviewers, managed by ESMA. The registered external reviewers would ensure compliance with the EU GBS Regulation, and particularly the alignment of the funded projects with the EU taxonomy. ESMA’s supervisory role would allow it to investigate complaints, impose fines and, if necessary, withdraw registration.
Currently, there are two existing market standards: the Green Bond Principles (GBP) of the International Capital Market Association (ICMA), and the Climate Bond Standard of the Climate Bonds Initiative (CBI).
The ICMA GBP is the dominant market standard, and it is considered the de facto global standard. While the standard defines a clear process for project selection and allocation of funds, it lacks a clear definition of green economic activities. It provides a list of eligible green projects categories, while allowing issuers to look to international/regional and national taxonomies for project eligibility guidance. In terms of external verification, the ICMA GPB simply recommends a third-party external review, while the EU GBS would establish a supervisory framework for external reviewers. Other mandatory requirements in the EU GBS are expressed as recommendations in the ICMA GBP, for example the publication of a framework document (“factsheet” for the EU GBS) before the issuance, the pre-issuance external review on the framework document, and the post-issuance external review of the final allocation report.
Currently, about a quarter of green bonds worldwide are issued under the Climate Bond Standard developed by the CBI. This standard focuses on low-carbon and climate resilience objectives. Its own Climate Bonds Taxonomy covers eight sectors and provides related screening criteria. In comparison, the EU Taxonomy, and therefore the EU GBS, covers a broader range of objectives (eg. biodiversity, circular economy, water use and protection), further than the climate ones. The external review requirements are quite similar to the EU GBS, and external reviewers must be pre-approved by CBI, while impact reporting is only recommended.
What will ensure that the EU GBS will become a ‘gold standard’?
The EU is already a global leader in green bonds. Data on 2021 are not yet fully available yet, but if we look at 2020 data, 48 % of global issuances of green bonds was denominated in euros, and 51 % of the global volume of green bonds was issued in the EU. This is also thanks to the European banking sector, which is excelling in the global market. In addition to this, Europe has been a pioneer in the green bond market thanks to the world’s first green bond issued by the EIB in 2007. The GBS is of course tightly linked to the other elements of the EU’s green finance agenda, and especially the EU Taxonomy, which will provide certainty thanks to its scientific basis. In order to facilitate the uptake of the EU GBS, the European Parliament deemed that a significant share of the EU bonds should be issued in the context of the Recovery plan for Europe and on the basis of the EU GBS. The final aim is to incentivize investments and further issuance of EU GBs. The European Central Bank has suggested that, over time, it will be essential to assess and monitor the attractiveness of the EU GBS compared to market standards and/or other jurisdictions’ statutory green bond labels.
How has the European Commission’s proposal for the EU GBS Regulation been received by stakeholders?
It is clear that green bonds are subject of great interest in the market. Although it lies in the hands of the various stakeholders to outline their views, some of the most debated provisions are the nature of the standard (voluntary vs. mandatory), 100 % taxonomy alignment (or allowing some flexibility), partial grandfathering (vs full or no grandfathering) in the case of evolving technical screening criteria under the EU Taxonomy. Various comments concern the necessity to include activities and sectors currently not covered by the EU taxonomy, and to facilitate access to the instrument for transitional activities and for SMEs. Some suggest a sustainability standard including social and governance factors. On request by the European Parliament, the European Central Bank has also provided an opinion on the proposal. The ECB expresses its favor for full grandfathering because it would help maintain financial stability and certainty for bond issuers and investors, and consequently facilitate the functioning and growth of the European Green Bonds market. To know more about stakeholders’ views, and generally about the EU GBS, I invite you to read our EPRS briefing “European green bonds. A standard for Europe, open to the world”.
Where are we currently in the legislative process?
Following the publication of the Commission’s proposal in July 2021, it is being examined by the co-legislators. In the European Parliament, the Committee on Economic and Monetary Affairs (ECON) is responsible for this file, and has appointed Paul Tang (S&D, The Netherlands) as rapporteur. The Committee on Budgets (BUDG) and the Committee on the Environment, Public Health and Food Safety (ENVI) have been asked to give an opinion on the legislative proposal. At the end of November, the rapporteur published his draft report and proposals for amendments have been introduced in the course of the following months by the shadow rapporteurs and other ECON members. ECON is supposed to adopt its report at the end of March (the indicative date is 31 March), in order to get a mandate to negotiate during the April plenary session (4-7 April) or at the latest during the next plenary session (2-5 May). In the Council, the working party on financial services held various meetings to discuss the dossier under the Slovenian Presidency (second half of 2021) and is continuing its work under the current French Presidency, in order to reach agreement amongst Member States on a negotiating mandate.
For more information:
Alexia Femia, Policy Adviser, Sustainable Finance email@example.com
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