Stimulation expected for the EU green bond market – the EU green bond standard has been drafted

09.06.2019 Stimulation expected for the EU green bond market – the EU green bond standard has been drafted

In March 2018, the European Commission (the “Commission”) announced the Action Plan on Financing Sustainable Growth (the “Action Plan”) which sets out a comprehensive strategy to further connect finance with sustainability. In the Action Plan, the Commission, inter alia, undertook to create standards and labels for green financial products.

In June 2018, the Commission set up the Technical Expert Group on sustainable finance (the “TEG”), the purpose of which, inter alia, is to prepare a report on the EU Green Bond Standard (the “Standard”), building on current best practices. Funds raised through bonds of this type are used to finance projects, solving the problems of climate change, loss of biodiversity, depletion of natural resources, water, air or soil pollution.

On 6 March 2019, an interim TEG report on the Standard was presented for public discussions. Having received feedback from over 100 organisations, which was mostly positive, on 18 June 2019 the TEG published its final report on the Standard (the “Report”).

Though the Report is not a legally binding document and/or a document, expressing the official position of the Commission, it is probable that many of the recommendations indicated in it should be implemented in the EU in a certain form. Besides, both the set-up of the TEG and preparation of its Report just confirms once more that the EU pays more and more attention to the development of green products, including the green bond market. And that is not a surprise as the Commission assesses that in the next decade Europe will need to invest an additional EUR 180 billion annually just to comply with the provisions of the Paris Agreement.

In the Report, in order to develop the green bond market on the EU scale as fast as possible, the TEG gave the Commission the following main recommendations:  

  • To create a voluntary Standard, the draft of which is presented and discussed in detail in the Report. Its creation would enhance the effectiveness, transparency, accountability, comparability, and credibility of the green bond market, encouraging bond issuers to issue namely green bonds and investors – to invest in them.
  • To clearly define an EU Green Bond, as there is no comprehensive definition of it yet. The TEG suggests that an EU Green Bond could be any type of listed or unlisted bond or capital market debt instrument issued by a European or international issuer that is aligned with the Standard.
  • Building on best market practices, the Standard would comprise these critical elements:
  • Alignment with EU-taxonomy: proceeds from EU Green Bonds should go to finance or refinance projects/activities that (a) contribute substantially to at least one of the six taxonomy Environmental Objectives, (b) do not significantly harm any of the other objectives and (c) comply with the minimum social safeguards.
  • Publication of a Green Bond Framework, which confirms the voluntary alignment of green bonds issued with the Standard, explains how the issuer’s strategy aligns with the environmental objectives, and provides details on all key aspects of the proposed use-of-proceeds, processes and reporting of the green bonds.
  • Mandatory reporting on use of bond issue proceeds (allocation report) and on environmental impact (impact report).
  • Mandatory verification of the Green Bond Framework and final allocation report by an external reviewer.
  • Accreditation: The TEG recommends that external verifiers are formally accredited and supervised. The TEG believes that the most suitable European authority to design and operate such an accreditation regime for verifiers would be the European Securities and Markets Authority (ESMA). As this will take time, they recommend setting up an interim registration process for external verifiers of green bonds, for a transitional period of up to three years.
  • Supporting recommendations: The TEG is proposing additional preliminary recommendations suggesting how the Commission, EU Member State governments and market participants can support the green bond market development:
  • To encourage investors, particularly institutional ones (asset management companies, pension fund management companies, insurance companies, banks, etc.), use requirements of the Standard in the creation of their green fixed-income investment strategies and to actively communicate these preferences and expectations to green bond issuers, also underwriters.
  • The TEG recommends that the Commission adopts an ambitious regime for periodic disclosure of green bond holdings by institutional investors.
  • The TEG recommends that the Commission and the EU Member States consider developing a full range of short- and long-term financial incentives to support the development of the EU Green Bond Market aligned with the Standard.
  • The TEG encourages all types of bond issuers (of the public and private sector) to issue their future green bonds in conformity with the requirements of the Standard and communicate openly to which extent they plan to do so.
  • To promote adoption of the Standard through the EU Ecolabel for financial products. The TEG recommends that the Commission explicitly prioritises the Standard in the technical criteria that are currently being developed for the EU Ecolabel for financial products, etc.

The Commission should scrutinise the Report and decide on further actions to be taken regarding TEG’s recommendations set out in it.

Prepared by Mantas Gofmanas, Associate Partner at law firm TGS Baltic