At the end of October 2023, the European legislator approved the proposal for a Regulation (2021/0191) on European green bonds or EuGB.
The European bonds market has known green, social and other sustainable bonds for a considerable time. Up until now, the designation of such bonds was not subject to formal conditions. However, over time the market has developed its own standards for green and sustainable bonds. For example, as early as 2014, the “ICMA Green Bond Principles” already provided a framework for “green” bonds; these principles are applied on a voluntary basis but are widely used in the bonds market.
In other words, up until now, the standards in the industry have been self-regulating. The European legislator wants to change this: in 2021, the European Commission launched a proposal for a regulatory framework. In February 2023, the European Parliament and the Council of the European Union reached a political agreement on implementation, which was recently approved at first reading by the European Parliament on 5 October 2023 and adopted by the Council on 23 October 2023.
With the European Green Bond Standard (EuGBS), the European legislator aims to make green bonds more accessible, trusted, and attractive for investors, issuers and other market participants, by ensuring that the proceeds of these bonds are actually used for sustainable projects, such as renewable energy, sustainable real estate and less-polluting mobility. In other words, the legislator wants to promote a higher level of confidence for investors that they are indeed investing in “green” bonds.
The EuGBS largely builds on existing market practices such as the ICMA Green Bond Principles and adopts their structure and approach. The new legislation, therefore, does not come as a shock to the industry. A major innovation is that the Regulation establishes the link with the Taxonomy Regulation, which defines the criteria that projects and activities must meet in order to qualify as “sustainable”. This fits within the broader European Green Deal approach to embed the Taxonomy Regulation as the benchmark for sustainability within the European Union.
Issuers can choose to issue their bonds under the “European green bond” label provided that they undertake (i) to use the proceeds of such bonds for actually sustainable projects, in accordance with the Taxonomy Regulation, and (ii) to offer full transparency to investors and other market participants, by means of self-reporting and by having external reviews carried out at regular intervals (pre-issuance, periodically post-issuance and after full allocation). In addition to what was provided in the original proposal, the European legislator has also provided a prospectus requirement (with limited exceptions for governments). To make use of the EuGB label, a prospectus is required. As a result, the Regulation is likely to have less impact on the private placement market (where no prospectus is required).
An essential feature of the EuGBS is the voluntary nature of the standard. An issuer of green bonds can choose – but is by no means obliged – to apply this standard. If the issuer does not do so, it can still issue green bonds and label them as such but will not be allowed to label its product as a European green bond or EuGB.
The Regulation also introduces a form of regulatory control: issuers who choose to apply this standard will also be subject to supervision by the national competent authority – for Belgium, the Financial Services and Markets Authority (FSMA).
Special regimes apply for (local, regional or national) governments and for securitisation transactions. Furthermore, the most recent version of this standard also provides a light regime for “environmentally sustainable” and “sustainability-linked” bonds, which do not fulfil all the criteria for being labelled as “European green bonds”.
Despite the approval of the proposal of Regulation at the end of October 2023, interested issuers still need to remain patient for a while: the Regulation, once finally adopted, will only become fully effective one year after its entry into force. Issuers who wish to issue a green bond today cannot yet do so under the framework set by the EuGBS, but they can already anticipate this by making their bonds conform to the EuGBS as much as possible.
The European legislator’s initiative mainly targets green bonds for now (with a light regime for “environmentally sustainable” and “sustainability-linked” bonds), but the EuGBS paves the way for further sustainability initiatives for other types of products.
The European Commission has already announced that in the future it will develop standards for “sustainability-linked bonds” and “transition bonds”. We will therefore likely not have to wait long for a sequel.