The European Parliament and European Council adopt the European Green Bonds Regulation, the new voluntary standard to fight greenwashing

Background

On 6 July 2021, the European Commission published a legislative proposal⁴ for a regulation on European green bonds establishing an EU voluntary high-quality standard for green bonds (the EuGB standard) to help scale up and raise the environmental ambitions of the green bond market. On 28 February 2023, a political agreement was reached5 on the EuGB standard and, earlier this month, the European Parliament and the European Council adopted the EuGB Regulation. The EuGB Regulation lays 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 Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (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.

Key elements of the EuGB Regulation

Voluntary nature:

The 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 frame⁶, the EuGB Regulation remains of voluntary nature with its uniform requirements applying to issuers that wish to use the designation “European Green Bond” or “EuGB” for bonds that are made available to investors in the European Union (EU), regardless of where the issuer is domiciled within or outside of the EU. This label will only be available for issuers that publish an EU Prospectus Regulation compliant prospectus, or where the issuer or guarantor is an EU sovereign or quasi sovereign that is exempt from the requirement to publish a prospectus under the EU Prospectus Regulation.

To prevent greenwashing in the green bonds market in general, the EuGB Regulation also provides for some voluntary disclosure templates 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 templates would subject themselves to ambitious transparency requirements and, as a result, benefit from better trust among investors. Market participants and industry associations (such as ICMA⁷) 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 alignment:

Proceeds of bonds that use the designation “European Green Bond” or “EuGB” (EuGBs) will need to be invested in economic activities that are aligned with the EU Taxonomy Regulation. For an economic activity to qualify as "environmentally sustainable" under the EU Taxonomy Regulation, the activity must (i) contribute substantially to at least one of the environmental objectives, or be an enabling activity, (ii) not significantly harm any of those environmental objectives, (iii) be carried out in compliance with minimum social and governance safeguards, and (iv) comply with detailed technical screening criteria to be adopted under the EU Taxonomy Regulation.

However, the EuGB Regulation allows for 15% of the proceeds from a EuGB to be invested in economic activities (1) that comply with the EU Taxonomy requirements but for which no technical (green) screening criteria have so far been developed (as per (iv) above), or (2) activities in the context of international support.  In other words, initially, issuers of EuGBs would need to ensure that at least 85% of the net proceeds raised by the bonds are allocated to economic activities that align with the EU Taxonomy Regulation. This additional 15% “flexibility pocket” is to ensure the usability of the EuGB standard from the start of its existence. In the case of activities in (1) above, the issuer will still need to demonstrate that the activities contribute substantially to one or more of the environmental objectives and do no significant harm to any of the environmental objectives and, in the case of activities under (2) above, the issuer will need to comply with the technical screening criteria on a “best efforts” basis.

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 Taxonomy⁸.

Sovereign issuers:

The use of proceeds requirement is more flexible with respect to EuGBs issued by EU and third-country sovereigns.  The EU Regulation allows proceeds of sovereign EuGBs to be allocated to tax relief, subsidies, intermediate consumption, current transfers within a general government, current international cooperation or other types of public expenditure, provided such proceeds are allocated in accordance with the EU Taxonomy requirements.

Transparency:

All issuers choosing to use the EuGB label will need to comply with certain pre- and post-issuance transparency requirements. These include the completion of a pre-issuance green bond factsheet, post-issuance allocation report(s) and post-allocation impact report, each following templates set out in the Annexes to the EuGB Regulation. 

The green bond factsheets, for instance, will only require limited information on use of proceeds, but must demonstrate how such proceeds 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. 

The green bond factsheet and post-issuance reports will need to be published on the issuer's website and remain available until at least 12 months after maturity of the bonds. The EuGB Regulation does not require the green bond factsheet or other pre-issuance documentation to be included in an issuer’s prospectus, but information in the factsheet will be considered “regulated information” for the purposes of the EU Prospectus Regulation and may be incorporated by reference in the prospectus.

External reviewers:

The EuGB Regulation establishes a registration system and supervisory framework for external reviewers of EuGBs – the independent entities responsible for assessing whether a bond is green. 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. External reviewers will be registered with ESMA.

The EuGB Regulation also sets out requirements regarding pre-issuance and post-issuance review of the green bond factsheet and post-issuance allocation report, respectively.  Issuers may also seek a review by an external reviewer of the EuGB impact report. Neither a pre-issuance review nor a post-issuance review is 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 are required to make available certain information free of charge on their websites, including all pre- and post-issuance reviews.

Sustainable securitisations:

The EuGB Regulation contains disclosure and exclusion requirements for securitisations wishing to use the EuGB label. With respect to sustainable securitisations, the use of proceeds requirements will apply to the securitisation originator, rather than the issuer. 

Supervision:

The EuGB Regulation provides that 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.

Sanctions:

The competent authority of the EU member state responsible for approving the relevant prospectus will have wide-ranging powers to ensure issuers of EuGBs comply with the requirements set out in the EuGB Regulation, including the ability to require publication of factsheets, reports, reviews and assessments, the ability to suspend or prohibit an offer or admission to trading, suspend or prohibit advertisements, make public the fact that the issuer is not complying with its obligations, prohibit the issuer from issuing EuGBs for up to a year and impose economic fines. 

Opt-in to additional voluntary disclosures:

In addition to the EuGB label, issuers of green bonds that are not able to fully align issuance proceeds with the taxonomy requirements, or issuers of sustainability-linked bonds with environmentally sustainable objectives, can also opt-in to provide additional pre-issuance disclosure information thereby subjecting themselves to ambitious transparency requirements. These additional disclosures will follow standard public templates which will be developed in the future by the European Commission.

Next steps

The EuGB Regulation is expected to be signed and published in the Official Journal of the EU imminently. It will enter into force on the 20th day following its publication and will start applying 12 months from that date.