The EU Green Bond Standard: a welcome leap forward for sustainable finance?

The long-awaited EU Green Bond Standard (the “EU GBS”) has been approved by the European Parliament and adopted by the Council of the EU, following a lengthy period of negotiation between the co-legislators. The final text now awaits publication in the EU’s Official Journal before entering into force 20 days later. 

First put forward as part of the European green deal investment plan, the standard forms part of the EU sustainable finance agenda which aims to leverage financial markets to support sustainable economic growth in Europe.

The EU GBS is a voluntary “gold standard” available to all green bond issuers (in and outside the EU) to help the financing of sustainable investments. It is the first attempt to regulate the green bond market which has so far operated on the basis of voluntary adoption of market based standards: the ICMA Green Bond Principles.

Compliance with the various requirements discussed below will allow issuers to use the label ‘European Green Bond’ or ‘EU GB’ in their green bond prospectus, provided that the prospectus is published pursuant to the EU Prospectus Regulation.

GBS Requirements

1. Taxonomy Alignment. The proceeds of the bond should be allocated to projects aligned with the EU Taxonomy (subject to a 15 per cent. flexibility pocket for when there is no technical screening criteria available at the time of issue and certain other activities).
    
2. Factsheet and Reporting. The EU GBS requires an issuer to publish a green bond ‘factsheet’ prior to issue as well as comply with various pre- and post-issuance reporting requirements. External reviewers must provide a pre-issuance review of the factsheet as well as post-issuance review of the allocation reports.
    
3. External Review. All EU GBS bonds must be checked by an external reviewer to ensure compliance with the EU GBS and that funded projects are aligned with the EU Taxonomy.
    
4. Supervision of External Reviewers. The EU GBS sets out detailed rules for external reviewers including registration with and supervision by the European Securities Markets Authority.
    
5. Voluntary disclosure requirements for the wider market. The EU GBS also separately includes voluntary sustainability disclosure requirements for bonds ‘marketed as environmentally sustainable’ (i.e. use of proceeds green bonds and sustainability-linked bonds  with environmental key performance indicators and targets). These voluntary disclosure templates can be used by issuers even if they do not intend to use the EU GBS label and are intended to facilitate comparison of green bonds and sustainability-linked bonds for investors in the wider market as well as addressing greenwashing concerns. The full detail is expected to be set out by the Commission in due course. 

Sanctions

Competent authorities have wide-ranging powers to ensure compliance including the ability to require publication of factsheets or reports in line with the EU GBS, impose fines, suspend trading and also make public the fact that the issuer is not in compliance with its obligations and require the issuer to publish that information on its website.

Future of the label

There is no doubt that the EU GBS is an ambitious standard and goes well beyond existing guidelines and labels in the green bond market. The co-legislators have made it clear that their intention is for the standard to be for high quality green bonds, integrating European green bonds within the wider remit of the EU sustainable finance regulatory framework and tackling greenwashing concerns.

This raises the question of which issuers are in a position to use the standard. At the outset at least, the EU GBS is likely to be used by EU institutions as well as ‘pure play’ issuers. The key concern around take up of the label more broadly is linked to usability of the EU Taxonomy. Take up will further depend on investor demand, pricing advantages and if issuers can be otherwise incentivised to move away from an existing well-functioning market based on voluntary best practice.  For further details on the EU GBS, please see our briefing here.