In a previous article, we discussed the main features of the proposal for a Regulation on European Green Bonds, which introduces a voluntary “gold standard” for the issuance of green bonds under the label “European Green Bond” or “EuGB”. This proposal led to Regulation 2023/2631 dated 23 November 2023 (EuGB Regulation).
Interested issuers, investors and market participants at the time had to remain patient a while longer, as the Regulation would only become fully effective one year after its entry into force. In the meantime, this wait is over. The EuGB Regulation became fully effective on 21 December 2024, allowing the EU’s gold standard for green bonds to be applied in practice going forward into 2025.
The first applications of the EuGB Regulation
It did not take long for the EuGB Regulation to be applied a first time.
On 23 January 2025, the Italian utility company A2A was the first European corporate issuer making use of the EuGB Regulation, raising EUR 500 million by means of the first ever offering of European Green Bonds, approved by the Italian market supervisor and listed on the Borsa Italiana.
Île-de-France Mobilités, a French government authority controlling and coordinating the public transport network in the Paris capital region, followed suit shortly after on 5 February 2025 as the first European public issuer, with a EUR 1 billion European Green Bonds issuance approved by the French market supervisor and listed on Euronext Paris.
These inaugural issuances were enthusiastically responded to by investors; the A2A bonds were even oversubscribed approximately 4.4 times. As both issuers have in the past years issued green bonds under the ICMA Green Bonds Principles for substantial amounts, these are clearly seasoned green bonds issuers.
Hurdles to wide-spread use
While the successful inaugural issuances were a success, it should be noted that the European Green Bond still faces some important hurdles on the road to become a widely used instrument.
Taxonomy-alignment
Ironically, one of these hurdles relates to a key component and major innovation of the EuGB Regulation, being the link with the Taxonomy Regulation, which defines the criteria that projects and activities must meet in order to qualify as “sustainable”. In principle, all proceeds of European Green Bonds need to be used in full for sustainable projects, taking into account the strict classification criteria and requirements imposed by the Taxonomy Regulation.
While this approach is intended to take away any doubt for investors in relation to the sustainable character of their investments, reduce the risk of greenwashing and promote a higher level of confidence in sustainable investments, the application in practice may prove challenging for several reasons:
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Since its adoption in 2020, the Taxonomy Regulation is itself still being implemented and clarified by means of delegated regulations, introducing additional technical screening criteria. It is expected that the further refinement and development of these criteria will continue over the coming years.
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One of the selling points of the Taxonomy-linked approach is that it clearly defines what “sustainable” means. However, compliance with the Taxonomy Regulation may at present be too complex for some less seasoned or sophisticated issuers, notably small and medium-sized enterprises (SMEs). In this vein, the Platform on Sustainable Finance in its report of 5 February 2025 recommends Taxonomy reporting be simplified for, among others, SMEs.
The EuGB Regulation attempts to tackle some of these concerns by introducing a flexibility pocket in the use of proceeds is provided under article 5 of the EuGB Regulation: up to 15% of the proceeds of the European Green Bonds may under certain conditions be used to finance economic activities which are generally compliant with the taxonomy requirements, except technical screening criteria. This threshold may however still not be sufficiently flexible for many potential issuers.
As it stands, the Taxonomy-alignment of the EuGB might during the early stages be a limiting factor for less seasoned or sophisticated issuers, although various initiatives are ongoing to increase the user-friendliness of the Taxonomy in the long run.
Prospectus requirement
A second important hurdle in practice is that a prospectus within the meaning of the Prospectus Regulation is in principle required to make use of the label European Green Bond, except for bonds issued by or guaranteed by governmental authorities (Article 14 of the EuGB Regulation).
The original proposal for the EuGB Regulation drafted by the European Commission did not include the requirement to publish a prospectus for every European Green Bond. During the legislative procedure, the European Parliament however stressed that the issuer should take full responsibility of the green allocation of the proceeds and should be held liable towards investors for any damages incurred. It appears that the compromise reached was to require a prospectus, so the liability provisions under the Prospectus Regulation would apply (see consideration (29) of the EuGB Regulation).
Although it is of importance that issuers which do not correctly allocate the proceeds of European Green Bonds can be held liable, the requirement to draft and publish a prospectus might be too strict for many corporate issuers.
In the existing (green) bonds market, many corporate green bonds are issued by means of a so-called private placement, utilising one of the many private placement safe harbours under the Prospectus Regulation (for instance, bonds with a minimum denomination of EUR 100,000) to avoid having to draft and publish a prospectus. Although these private placements still require a “light” prospectus (often called an information memorandum), this document is not regulated in the same way as a prospectus and does not need to be submitted for approval to the competent market authority, which could significantly reduce the time and resources spent by issuers as well as the administrative burden.
For issuers who already intend issuing a green “retail bond”, the requirement of a prospectus would likely not deter the use of the “European Green Bond” label. However, it remains to be seen whether issuers who would otherwise be able to issue green bonds under a private placement safe harbour will be inclined to publish a prospectus in order to be allowed to use the “European Green Bond” label. It seems likely that a significant part of the existing green bonds market (private placements) will continue operating outside the scope of the EuGB Regulation.
Preliminary conclusions
Whilst the EuGB Regulation has seen its first successful application shortly after going live, there are still significant hurdles to the wide-spread application of the “European Green Bond” label, especially for less seasoned or smaller corporate issuers.
For the moment, the instrument seems to be tailored more to the needs of seasoned corporate issuers which already developed a higher level of sophistication in the area of sustainability and green bonds and governmental or government-backed issuers.
It remains to be seen whether the European Green Bond could also become an attractive instrument for other issuers over the coming months.
