Parliament and Council reach provisional agreement on Commission’s proposal for a Regulation on European green bonds (“EUGBs”)

Summary

• In order to further the objectives of the European Green Deal, the Commission put forward proposals on 6 July 2021 for a Regulation of the European Parliament and of the Council on European green bonds (the proposed Regulation).
• The European Parliament and the Council have now reached a provisional agreement on the proposed Regulation.
• The proposed Regulation sets out uniform requirements for issuers of bonds that wish to use the designation ‘European green bond’ or ‘EUGB’ for their environmentally sustainable bonds that are aligned with the EU Taxonomy and made available to investors globally.
• The proposed Regulation will allow issuers to demonstrate that they are funding legitimate green projects aligned with the EU Taxonomy and investors buying the bonds to more easily assess, compare and trust that their investments are sustainable, thereby reducing the risk of greenwashing in relation to green bonds.

Pressing need for green investments

In order to the deliver on a number of climate, environmental and social sustainability goals, the EU has acknowledged that major private and public investments are needed, and there is a pressing need to mobilise private financial and capital flows to green investments[1].

This was underlined by the adoption of the "European Green Deal" on 11 December 2019, the aim of which was to make the EU climate neutral by 2050, while transforming the EU's economy into a modern, resource-efficient, competitive one.

One of the main instruments for financing investments related to green investments (i.e. green technologies, energy and resource efficiency, sustainable transport infrastructure and research infrastructure) is environmentally sustainable bonds or green bonds.

Legislative proposal

Further to a request from the European Council that the Commission put forward a legislative proposal for a green bond standard (the EUGBs), on 6 July 2021[2] the Commission presented the proposed Regulation. The proposed Regulation was intended to set the ‘gold standard' for the use of green bonds to raise funds on capital markets to finance green investments. It set out the requirements for a factsheet in relation to green bonds, the information the factsheet should contain and how green bonds should be classified, as well as the requirement for allocation and impact reporting[3].

Provisional agreement

On 1 March 2023, the Commission announced that the European Parliament and the Council had reached a provisional agreement on the proposed Regulation.

Pursuant to the provisional agreement, all proceeds received from EUGBs must be invested in economic activities which are aligned with the EU taxonomy, provided the sectors concerned are already covered by it. Where a sector is not covered by the EU taxonomy, specific activities will be afforded a flexibility pocket of 15%. This means up to 15% of proceeds received from EUGBs may be initially allocated to sectors not yet covered by the EU Taxonomy where they contribute to environmental objectives as defined under EU Taxonomy. This is to ensure the EUGBs can be used from the outset. The flexibility pocket will be re-evaluated as Europe’s transition towards climate neutrality progresses, and as the number of green investment opportunities increases in the coming years[4].

As part of the provisional agreement, and in order to provide greater transparency to investors, the Commission announced it will make available templates for issuers of bonds with environmental objectives, but which do not make use of the EUGBs. The use of these templates will be voluntary. Providing a standardised template for issuers to report information on the taxonomy-alignment of green bonds will reduce administrative burdens and uncertainty for green bond issuers and their investors. While it is unclear whether EUGBs and non-EUGBs compliant bonds will use the same templates, it is likely that - in order to ensure transparency of the voluntary regime – one standardised template will be used.

Timeline to application

The provisional agreement must now be scrutinised by COREPER (the Committee of the Permanent Representatives of the Governments of the Member States to the European Union) on behalf of the Council, and  ECON (the Economic and Monetary Affairs Committee) on behalf of the European Parliament. Once this scrutiny is completed, the agreement will be adopted by both institutions. It will then need to be published in the Official Journal of the EU and shall apply 12 months after its entry into force.

Challenges remain

While the provisional agreement has been hailed by politicians as "useful for both issuer and investors", and a "step in improving access to sustainable investment"[5], industry bodies have been less enthusiastic. The head of sustainable finance for ICMA, Nicholas Pfaff, has stressed that there should be "more discussion around the role that external reviews play, about their actions in mitigating greenwashing as well as a much broader discussion on possible regulation of their activities".

Mr. Pfaff expressed his doubts in relation to the functionality and uptake of the standards set out in the proposed Regulation "unless we deal with the long list of taxonomy usability issues[6]". Such sentiments were echoed by the managing director of sustainable finance for the Association for Financial Markets in Europe, Oliver Moulin, who noted that, while he welcomed the voluntary, science-based gold standard in this developing market, "it is important that work continues to enhance the usability of taxonomy"[7].

Step in the right direction

While the provisional agreement is a step in the right direction for green bonds, given the need to adhere to the EU taxonomy, it remains to be seen how usable the EUGBs will be in practice. Potential issuers will need to ensure that their products align with the EU taxonomy from the outset to ensure they can avail of the benefits of EUGBs.

However, once in force the new Regulation should provide issuers and investors with transparent criteria for the financing of sustainable investments, in the necessary move towards a low carbon economy. Widespread implementation and uptake could ensure access to, and transparency and comparability of, green bonds for investors. 

The standardised nature of EUGBs reporting should also reduce administrative burdens for both green bond issuers and their investors, as the standardisation of reporting templates will reduce the expertise needed to prepare and review the information being reported. The measure should also provide more certainty for investors by allowing them to trust that their investments are sustainable and (subject to the flexibility pocket) taxonomy-aligned, thereby reducing the risk of greenwashing. The introduction of the EUGBs will advance the sustainable finance agenda.

We will continue to monitor future developments in this area. For more information on this topic, please contact Peter Walker, Partner, Jack Sheehy, Partner, Rebecca Scott, Associate, Elizabeth White, Knowledge Lawyer or any member of ALG's Capital Markets - Debt team.

Date published: 30 March 2023