Legal development

European Commission Proposes EU Green Bond Standard Regulation

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    Key points

    • European Commission proposes EU Green Bond Standard, a key element of the EU's Action Plan on Financing Sustainable Growth.
    • It will be a voluntary standard, open to all EU and non-EU issuers.
    • The standard requires that issuers must allocate the net proceeds to economic activities that meet the EU Taxonomy requirements.
    • The use of proceeds will be subject to external review.
    • External reviewers must be approved by and registered with ESMA, but need not be established in the EU.

    Background

    Following on from the 2015 Paris Agreement on climate change, in 2018 the European Commission published its Action Plan on Financing Sustainable Growth, unveiling its strategy for a financial system that supports the EU's climate and sustainable development agenda. As part of its plan, the Commission committed to establishing a 'European green bond' standard ("EU Green Bond Standard"). Following an earlier consultation, on 6 July 2021 the Commission published its proposal for a regulation on European green bonds (the "Regulation").

    Purpose

    The Regulation is intended to lay down uniform requirements for issuers of bonds that want to signal to investors in the EU that their environmentally sustainable bonds meet the EU Green Bond Standard and can therefore be given the label "European green bond" or "EuGB".

    The principles behind the Regulation are that the EU Green Bond Standard should be a voluntary standard which is built on market best practices, such as the Green Bond Principles and the Green Bond governance framework for which the International Capital Market Association (ICMA) serves as Secretariat. It is hoped that the EU Green Bond Standard will become an international best practice benchmark (a “gold standard” for green bonds). As a result, it will be available for any type of issuer globally and could be applied to any type of bond whether listed or unlisted, public or private or straightforward or structured. The EU Green Bond Standard is also open to sovereign and quasi sovereign issuers although slightly different criteria apply to these issuers primarily involving the ability to use state auditors or other public entities instead of registered external reviewers.

    The Commission believes that external reviewers play a crucial role in maintaining the integrity of the green bond market so the Regulation proposes requirements for external reviewers concerning transparency, professional qualifications and avoiding conflicts of interest. The role of supervising compliance with these requirements will be given to the European Securities and Markets Authority (ESMA).

    EU Taxonomy

    In recent years, as one of the key deliverables of its Action Plan on Financing Sustainable Growth, the EU has devoted much time and effort to developing a taxonomy which sets out the conditions that an economic activity has to meet in order to qualify as environmentally sustainable. The legislative backbone of this taxonomy is the EU Taxonomy Regulation which entered into force in July 2020, setting out overarching conditions and objectives and tasking the Commission with establishing the actual list of environmentally sustainable activities by defining technical screening criteria for each environmental objective through delegated acts. The first of these delegated acts (on sustainable activities for climate change adaptation and mitigation objectives) was formally adopted in June 2021 and further delegated acts are currently in process.

    The Commission's proposal for the Regulation relies comprehensively on the EU Taxonomy Regulation regime for the detailed definitions of green economic activities and what is considered a green investment.

    Use of proceeds

    In order to be able to use the designation ‘European green bond’ or ‘EuGB’ an issuer must comply with the relevant requirements of the Regulation until maturity of the bond. The principal requirement is that the issue proceeds must be fully allocated before maturity to economic activities that meet the criteria for environmentally sustainable economic activities set out in Article 3 of the EU Taxonomy Regulation, namely:

    • making a substantial contribution to one or more of the environmental objectives set out in Article 9 of that Regulation;
    • not significantly harming any of those environmental objectives;
    • being carried out in compliance with the minimum safeguards laid down in Article 18 of that Regulation; and
    • complying with the technical screening criteria established by the Commission by delegated acts under the Regulation.

    The proposed Regulation expressly provides that it does not restrict an issuer’s ability to use the net proceeds to cover losses resulting from other activities, nor does it restrict the power of resolution authorities to write down or convert any bonds that constitute relevant capital instruments or liabilities of a financial institution. Furthermore, a European green bond may be refinanced by issuing a new European green bond.

    Transparency and external review

    In order for a bond to meet the EU Green Bond Standard the Regulation requires that the bond may only be offered to the public in the EU after:

    • the issuer has prepared a European green bond factsheet in the form prescribed in the Regulation;
    • the factsheet has been approved by an external reviewer; and
    • the factsheet has been published on the issuer’s website together with the external reviewer's pre-issuance review.

    Following issuance, the issuer must draw up European green bond annual allocation reports yearly, in the form prescribed in the Regulation, until the full allocation of the net proceeds of the bond has been made. Thereafter, the issuer must:

    • draw up a final allocation report and provide it to an external reviewer within 30 days following the end of the year to which the report refers for the purpose of obtaining a post-issuance review of this report; and
    • publish the post-issuance review within 90 days of the external reviewer's receipt of the allocation report.

    Finally, after the full allocation of the net proceeds (and at least once during the lifetime of the bond), the issuer must draw up a European green bond impact report on the environmental impact of the use of proceeds in the form prescribed in the Regulation.

    Publication

    The proposed Regulation requires an issuer of European green bonds to publish on its website (in a distinct section titled ‘European green bonds’) until at least the maturity of the bonds:

    • the completed European green bond factsheet (before the issuance of the bond);
    • the pre-issuance review (before the issuance of the bond);
    • the annual allocation reports every year until the full allocation of the net proceeds (no later than three months following the end of the relevant year);
    • the post-issuance review of the allocation reports; and
    • the impact report.

    All of these must also be made available by the issuer free of charge until at least the maturity of the bonds and the issuer must notify its national competent authority and ESMA of each such publication.

    Prospectuses

    Where the issuer wants a bond to satisfy the EU Green Bond Standard and it is required to publish a prospectus pursuant to the EU Prospectus Regulation , the proposed Regulation will require the use of proceeds section of the prospectus to state that the bond is issued in accordance with the Regulation. Furthermore, the proposed Regulation will also add the European green bond factsheet which the issuer is required to produce to the list of documents from which information may be incorporated by reference into a prospectus.

    External reviewers

    The proposed Regulation establishes criteria for registration with ESMA as an approved external reviewer for European green bonds. These criteria do not apply to state auditors and other public entities mandated by sovereign or quasi-sovereign issuers to assess compliance with the Regulation.

    An external reviewer has to apply for registration from ESMA and, after registration, must notify ESMA in case of material changes to the conditions for its initial registration before any such changes are implemented. The criteria include requirements regarding the organisation, processes and governance of external reviewers.

    Issuers of European green bonds will not be obliged to use external reviewers established in the EU. The proposed Regulation lays down a third-country regime for external reviewers on the basis of an equivalence assessment, recognition or endorsement under which non-EU external reviewers may provide external review services.

    Next steps

    The proposed Regulation will now be submitted to the European Parliament and Council as part of the co-legislative procedure.

    Visit our Finance Hub for analysis and commentary on developments affecting global financial markets, including the EU Prospectus Regulation, EU PRIIPs/KID, EU EMIR and LIBOR transition.

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