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Sustainable Finance: new standards for European Green Bond

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03 March 2023

Pexels - Photo by Pixabay Important instruments of the so-called “green finance”, green bonds are fixed-income securities designed to support climate and environmental projects. They came as an integral part of the European Green Deal and, along with the Commission opinion, they needed a regulatory scheme. Finally, the European bodies recently agreed on a new European green Bond Regulation.

Green bonds can play a crucial role in financing the transition to a low-carbon economy, and can help to mobilize the capital needed to achieve ambitious climate and sustainability goals. Since 2007, when the European Investment Bank issued the world’s first green bond - the Climate Awareness Bond -, the market has seen an exponential growth, with Europe in the forefront as the most prolific issuance region.

Although the growth has been very fast over the years, the green bond market needs to grow more quickly to achieve Paris Agreement’s targets. But reaching those goals will require lots of investments, and the green bond market is still young and quite small compared to the overall bond market. In order to reach green bond’s full potential, the Commission has required better harmonization of practices among external reviewers of green bonds and clearer definition of what constitutes ‘green’.

Establishing a green bond standard goes in this direction, with the aim of making it easier for investors and companies to identify sustainable investments and ensuring credibility.

EU Green Bond Standard: an instrument against greenwashing

Green bonds are committed to financing or refinancing investments, projects, expenditure or assets helping to address climate and environmental issues. Both governments and companies use them to finance the transition to a more sustainable and low-carbon economy.

The Commission first presented the legislative proposal known as the EU Green Bond Standard (EU GBS) in July 2021 and since then the Parliament and the Council worked on it, discussing what could be the best in class standard for the issuing of green bonds. On 1st March 2023 they finally came to a political agreement.

The proposal is based on the EU taxonomy for sustainable activities and complements a series of other measures included in the 2018 action plan on sustainable finance and, more recently, in the new strategy on sustainable finance presented in 2021.

EU GBS will be voluntary and available to companies and public entities that wish to raise funds on capital markets to finance their green investments, while meeting tough sustainability requirements.

Issuers of EU GBS would need to ensure that at least 85% of the funds raised by the bond are allocated to economic activities that align with the Taxonomy Regulation. For the first time, there will be a standardized template that issuers can use to report information on the Taxonomy-alignment of green bonds, thereby reducing administrative burdens and uncertainty both for green bond issuers and for their investors. This will allow investors to more easily assess, compare and trust that their investments are sustainable, thereby reducing the risks posed by greenwashing.

How? All companies choosing to use the standard when marketing a green bond will be required to disclose much information about how the bond’s proceeds will be used, but are also obliged to show how those investments feed into the transition plans of the company as a whole. 

The disclosure requirements, set out in template formats, will also be open to be used by companies issuing bonds which cannot fulfill all the requirements to qualify for the EU GBS. These companies would thereby subject themselves to ambitious transparency requirements and, as a result, benefit from better trust among investors.

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