EU Adopts Green Bonds Standard for Uniform Requirements

The European Investment Bank issued the first green bond back in 2007. Now the European Union wants to further promote green bonds. That is why the EU green bond standard was recently launched. 

Although the new regulation must be adopted by the EU states, this is considered a formality. If everything goes as it should, the new standard will come into force at the end of 2024. Metzler Asset Management pointed this out in its latest ESG update.

The EU’s goal is to provide investors with guidance and prevent greenwashing of bonds. Issuers should only be able to call their bonds “European green bonds” (“EuGBs”) if they comply with strict transparency and disclosure requirements and the issue proceeds are invested in projects that comply with the EU taxonomy.

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Flexibility framework is intended to support issuers 

What is positive here is that the EU is accommodating issuers with a flexibility framework so that the new standard can be used right from the start. Under certain conditions, up to 15 percent of the proceeds from the issuance of EU green bonds can also be invested in economic activities that are not currently covered by the taxonomy. This flexibility framework should be reassessed in the coming years and adjusted if necessary. 

In order to take possible subsequent adjustments to the EU taxonomy criteria into account,
a transition period of seven years is also planned. Issue proceeds that are not invested immediately are protected within this period; the evaluation criteria valid at the time of issue continue to apply to them.

Fact sheets must be published

Before issuing the EuGB, issuers are obliged to publish a “Green Bond Factsheet” which, among other things, provides information about which projects are being invested in. There is an obligation to provide a so-called “second party opinion”, which means that the information in the fact sheet must be checked by an external party such as a sustainability agency.

In order for the audit to be equivalent to a strict seal of quality, all external auditors must be registered with the European Securities and Markets Authority Esma and have appropriate qualifications and experience. Further disclosure obligations apply during the term of the EuGB.

Annual reports on the use of funds (“allocation reports”) and an impact report at least once must be published. The allocation reports must in turn be audited externally.

Standards compete with each other 

In addition to the explicit requirements for EAGBs, the regulation recommends optional disclosure principles for other sustainability-related bonds issued in the EU, such as “sustainability-linked bonds”. At this point, the EU Green Bond Standard competes with other standards for green bonds.

The most common standards include the “Green Bond Principles” of the ICMA (International Capital Market Association) and the “Climate Bond Standards” of the CBI (Climate Bond Initiative). Both are established standards that, like the EU Green Bond Standard, are voluntary in nature, but differ in some ways from the latter.

In all standards, the use of the emission proceeds is generally intended for green investment projects. ICMA’s Green Bond Principles provide broadly defined environmental categories for allocating proceeds. The description of possible investment projects within the framework of the Climate Bond Standard is more specific and detailed. 

A separate taxonomy is also intended to ensure the projects’ conformity with the Paris Climate Agreement. The EU Green Bond Standard, on the other hand, requires that the emission proceeds contribute at least 85 percent to the six environmental goals of the EU taxonomy, taking into account the flexibility framework of 15 percent.

New momentum for the green bonds market

The authors at Metzler believe that the new EU Green Bond Standard is likely to give new impetus to the still young European market segment for green bonds. Conventional bonds still dominate here. Metzler Asset Management points out in the report that of the more than 3,700 bonds universe for euro-denominated investment grade senior bonds, green bonds make up just 14.3 percent of all bonds, according to WM Data Service.

Looking at issuers, almost a third of companies have issued at least one green bond. A small proportion (5.3 percent) only have green bonds outstanding. What’s surprising is that issuers of exclusively green bonds have, on average, only slightly higher MSCI ESG rating scores (7.3) than issuers of exclusively conventional bonds (7.2).

Increasing returns

Looking at the returns on green bonds, the authors of the report explain that they have risen sharply over the past twelve months. The yield currently averages 4.2 percent with an average term of five and a half years. 

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(Featured image by artbaggage via Pixabay)

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