In February, the European Council and the European Parliament provisional agreed on the creation of the European green bond standard (EUGBS) as part of their plan to support sustainable growth and transition to a climate-neutral economy. The standards are the most comprehensive standards on green bonds to date.
The new standards set up clear guidance for bond issuers looking to label their bonds as green. The recently approved framework is based on the EU taxonomy and makes EU approved bonds available to investors globally. While it’s still early to make predictions about the future of the EUGBS, our consultant Laila Lippert sees a few noteworthy potential future developments:
- The EUGBS is likely become the gold standard for green bonds globally. The EUGBS could provide a consistent framework for green bond issuers and investors alike. This could lead to greater transparency, reduced greenwashing, and increased confidence in the market.
- EUGBS aligns with the EU taxonomy, defining which economic activities can be considered as environmentally sustainable. Therefore, it has the potential to become a benchmark for other international markets, leading to increased harmonization and standardization in the global green bond market.
- Clear guidelines and standards for green bonds can help mitigate risks for creditors through clarity of standards. This will increase confidence and therefore make it easier for creditors to navigate, leading to increased confidence and participation in environmentally sustainable investments.
The EUGBS sets the bar high for green bonds, ushering in a new era for green bonds to be driven by greater transparency, accountability, and environmental responsibility.
The standard will allow issuers to showcase their commitment to funding legitimate green projects that align with the EU taxonomy. For investors, it will provide a more straightforward way to evaluate, compare, and trust the sustainability of their investments. This is a significant step to curbing the risks posed by greenwashing and ensuring that investments truly support sustainable initiatives.
In contrast with the Green Bond Principles by the ICMA (the International Capital Market Association), the EUGBS must align with the EU taxonomy. However, there is some flexibility with up to 15% of the proceeds allowed to be invested in sectors that do not yet have established taxonomy criteria but still comply with the same requirements. Additionally, the agreement sets up a registration system and supervisory framework for external reviewers of European green bonds. This aims to improve the review process by standardising the procedures followed by reviewers, thereby increasing trust in their verification work. However, Laila also acknowledges that this initiative is not immune to criticisms:
“One of the main concerns is the potential disproportionate financial impact on smaller entities (SME’s) in meeting the new requirements, which may hinder their participation in the green bond markets. Moreover, there are worries about possible conflicts and inconsistencies between the EUGBS and other global green bond standards – such as the Climate Bonds Standard (CBS) – which could create confusion and a more fragmented market,” she says.
Despite these concerns, the adoption of the EUGBS is an important step forward in promoting sustainable investment and can serve as a model for other markets to follow. A great example for the necessity of a bond regulation is to avoid cases such as the instance of the National Australia Bank (NAB) granting a sustainability-linked loan to the Port of Newcastle in Australia in May 2021. While NAB’s loan requires the coal facility to make environmental improvements, critics argued that it reduced the cost of capital and extends the lifespan of the world’s largest coal export facility. According to some estimations, the coal throughput at Newcastle contributes up to 1.5% of global greenhouse gas emissions and is crucial for the newly approved coal mines in New South Wales.
The agreement still awaits final confirmation by the Council and the European Parliament. Once the final text has been confirmed and adopted, the (voluntary) standard will enter into force after 12 months.