EU Green Bond Standard (EU GBS) aims to address several barriers identified in the EU framework for a sustainable finance.
Firstly, by reducing uncertainty about what constitutes green investment by linking it to the EU taxonomy (avoiding greenwashing).
23 September 2020
Secondly, by standardising costly and complex verification and reporting processes, and thirdly, by establishing an official standard to which potential incentives could be linked.
The EU GBS as proposed by the Commission Technical Expert Group on Sustainable Finance (TEG) is intended to finance both physical and financial assets and includes the use of the latter as security (i.e. as a covered bonds or assetbacked securities).
The key components of such a standard – as recommended by the TEG and building on best market practices such as the Green Bond Principles and the Climate Bonds Initiative labelling scheme – should be:
(1) alignment of the use of the proceeds from the bond with the EU Taxonomy;
(2) the publication of a Green Bond Framework;
(3) mandatory reporting on the use of proceeds (allocation reports) and on environmental impact (impact report); and
(4) verification of compliance with the Green Bond Framework and the final allocation report by an external registered/authorised verifier.
Also the EBA Discussion Paper of 3 November 2020 on management and supervision of ESG risks for credit institutions and investment firms (EBA/DP/2020/03, p. 92) underlines the Green Bond Principles build around four key components:
(1) use of proceeds,
(2) process for project evaluation and selection,
(3) management of proceeds, and
However, the Green Bond Principles do not provide criteria for eligible projects.
The Climate Bonds Standard provides sector-specific eligibility criteria for assets and projects.
The proposal for the EU Green Bond standard comprises four key elements:
a. alignment with the EU Taxonomy, as stipulated according to the Taxonomy Regulation, as proceeds from EU Green Bonds should be used to finance or refinance activities that contribute substantially to at least one of the six environmental objectives, do not significantly harm any of the other objectives and comply with the minimum social safeguards. Where technical screening criteria have been developed, these should also be met, although the standard allows for deviations in specific cases;
b. publication of a green bond framework, which confirms the voluntary alignment of green bonds issued with the EU Green Bonds Standard, explains how the issuer’s strategy aligns with the environmental objectives, and provides details on all key aspects of the proposed use-of- proceeds, processes and reporting of the green bonds;
c. mandatory reporting on use of proceeds (allocation report) and on environmental impact (impact report);
d. mandatory verification of the green bond framework and final allocation report by an external reviewer.
The Usability Guide, TEG Proposal of March 2020 for an EU Green Bond Standard puts this into the following context (p. 12):
“The international bond markets are mainly used to raise capital for general (corporate or public) purposes, based on the risk profile of the issuer, represented by its credit rating and the remuneration offered in the form of interest paid.
Traditional bond investors focus on these parameters rather than on the use-of-proceeds, i.e. how issuers will actually employ the funds being raised. Bonds are also therefore typically (re)financing instruments where capital is raised on the strength of the entire balance sheet of the issuer and the level of debt it can support.
Green bonds represent a considerable innovation, through their focus on green use-of-proceeds, providing transparency for investors on the green projects that are being financed or refinanced, as well as additional information on the management of proceeds, impact reporting and external reviews. Green bonds have provided bond investors the capacity to become involved in corporate environmental strategies. It has also enabled bond markets to become a powerful force in green finance, notably including climate mitigation finance.
The EU GBS incorporates the use-of-proceeds approach along with a clear interpretation of other innovative aspects of green bonds”.
23 September 2020
12 June 2020