European Parliament Adopts EU Green Bond Regulation

Key points

• EU Green Bond Standard likely to take effect in Q4 2024: the European Parliament has adopted the Commission's proposed regulation (EU Green Bond Regulation) in respect of an EU Green Bond Standard (EuGB), a key element of the EU's Action Plan on Financing Sustainable Growth. The European Council is expected to adopt the EU Green Bond Regulation imminently, and it will apply 12 months after its entry into force; therefore it is likely to take effect in Q4 of 2024.
• Voluntary adherence: the EuGB will be a voluntary standard. It will be open to both EU and non-EU issuers.
• Use of Proceeds: at least 85% of the net proceeds of an EuGB offering must be invested in "environmentally sustainable activities" aligned with the EU Taxonomy requirements and allocated to one or more specified categories; up to 15% of the net proceeds may be allocated to economic activities for which no technical screening criteria under the EU Taxonomy yet exist but which otherwise comply with the EU Taxonomy.
• Prospectus and other disclosure requirements and external review: the issuer of the bonds must publish a prospectus which has been approved under the EU Prospectus Regulation, unless the issuer is an exempt EU sovereign or quasi-sovereign entity. In addition, issuers must publish each of the following documents (pursuant to standardised templates):
  • Pre-issuance factsheet (with a report from an independent external reviewer);
  • Allocation report, annually until the net proceeds have been fully allocated (with a report from an independent external reviewer); and
  • Impact report, following full allocation of the net proceeds.
• Registration of external reviewers: following an initial 18-month transition period, companies that wish to act as external reviewers of EU green bonds will be required to be registered with ESMA, and will need to satisfy certain requirements.
• Compliance and sanctions: the competent authority of the EU member state which has responsibility for approving the relevant prospectus will also have responsibility for policing compliance with the EuGB requirements. This will include the power to suspend approval of a prospectus, an offering and/or listing application, suspend or prohibit advertisements, withdraw the EuGB label or prohibit an issuer from issuing EU green bonds for up to a year. The competent authority will also have the power to issue fines of up to 0.5% of an issuer’s turnover and EU member states may choose to impose criminal sanctions for non-compliance.
• Comment: the European Commission aims for the EuGB to become the international 'gold standard' for green bonds. This may well come to pass. However, at least initially, take-up will likely be slow whilst potential users grapple with major challenges such as alignment with a still developing EU Taxonomy, absorbing substantial costs in producing a prospectus and the other disclosure documents together with obtaining external reviews, and navigating the not insubstantial legal and reputational risks of the new regime. 

Background

Following the 2015 Paris Agreement on climate change, in 2018 the European Commission published its Action Plan on Financing Sustainable Growth. As part of this plan, in 2021 the Commission published its proposal for a regulation on European green bonds (the "EU Green Bond Regulation") which would establish a 'European green bond' standard ("EU Green Bond Standard").  On 5 October 2023, the European Parliament formally adopted the Regulation and the European Council is expected to adopt it shortly, without further amendments.

The EU Green Bond Regulation lays down uniform requirements for issuers of bonds that wish 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 EuGB is intended to 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. The Commission hopes that the EU Green Bond Standard will become an international best practice benchmark - a "gold standard" for green bonds. 

We describe the key elements of the EuGB designation and the EU Green Bond Regulation below.

Voluntary adherence

The EuGB is a voluntary standard open to issuers of bonds that wish to use the designation 'European Green Bond' or 'EuGB'. Any issuer - whether domiciled within or outside of the EU – may adopt the designation.

Use of proceeds

In order to be able to use the designation 'European green bond' or 'EuGB', the issuer must ensure that at least 85 per cent. of the net proceeds (i.e. after deduction of issuance costs) of the bonds are fully allocated before maturity in accordance with 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 that Regulation.

Further, the net proceeds must be allocated to one or more of the following categories:

• fixed assets that are not financial assets;
• taxonomy-aligned capital expenditure;
• taxonomy-aligned operating expenditure incurred no more than three years before the issuance of the bond;
• financial assets created no more than five years after the issuance of the bond;
• assets and expenditure of households.

"Environmentally sustainable activities" may be financed directly (through paying for assets and expenditures) or indirectly (through financial assets, such as loans), and across a portfolio of assets.

EU sovereign and quasi sovereign issuers have additional flexibility to allocate the net proceeds to tax relief, subsidies, intermediate consumption, current transfers within a general government, current international cooperation or other types of public expenditure.

Up to 15 per cent. of the net proceeds of an EuGB may be allocated to economic activities for which no technical screening criteria under the EU Taxonomy yet exist – the so-called flexibility pocket. However, such activities must comply with the other requirements of the EU Taxonomy.

Prospectus and other disclosure requirements and external review

In order for a bond to meet the EU Green Bond Standard the EU Green Bond Regulation requires the publication by the issuer of a number of documents: 

• a prospectus under the EU Prospectus Regulation, unless the issuer or guarantor is an EU sovereign or quasi sovereign entity (see "Prospectus requirement" below)
• factsheet;
• allocation report; and
• impact report.

European green bond factsheet, including external pre-issuance review

Prior to the issuance of the bonds, the issuer must prepare a European green bond factsheet in the form prescribed in the EU Green Bond Regulation. The factsheet must be subject to a pre-issuance review with a positive opinion by an external reviewer. The factsheet must be published on the issuer’s website together with the external reviewer's pre-issuance review.

European green bond allocation report, including external post-issuance review

Following issuance, the issuer must draw up European green bond allocation reports annually, in the form prescribed in the EU Green Bond Regulation, until the full allocation of the proceeds of the bonds has been made. Following full allocation, the issuer must draw up a final allocation report and provide it to an external reviewer for the purpose of obtaining a post-issuance review. The issuer must ensure that the annual allocation reports and post-issuance reviews are made public within 270 days of the end of every relevant 12-month period and, within that period, the issuer must ensure that the external reviewer has at least 90 days to review the allocation report.

European green bond impact report

After the full allocation of the net proceeds (and at least once during the lifetime of the bonds), 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 EU Green Bond Regulation.

Publication of reports 

The above reports must remain on the issuer's website until at least 12 months after maturity of the bonds, and the issuer must notify its national competent authority and ESMA of each such publication.

Prospectus requirement

In order to use the designation 'European Green Bond' or 'EuGB', the issuer of the bonds must publish a prospectus pursuant to the EU Prospectus Regulation. The only exception to this requirement is in relation to EU sovereign and quasi sovereign issuers and guarantors which are exempt from the requirement to publish a prospectus under the EU Prospectus Regulation.

The EU Green Bond Regulation does not impose any significant disclosure obligations in respect of the prospectus, save that a summary of the issuer’s capex plan must be included where an issuer chooses to finance opex or capex with the proceeds from an EuGB. However, in December 2022, as part of a Capital Markets Union package on listing and corporate insolvency known as the EU Listing Act, the European Commission adopted proposals for a Regulation which will, among other things, empower the Commission to adopt a new Annex to the EU Prospectus Regulation by delegated act specifying the ESG-related information to be included in any prospectus relating to non-equity securities that are advertised as taking into account ESG factors or pursuing ESG objectives (see this Ashurst briefing).

The EU maintains a list of non-cooperative jurisdictions for tax purposes as part of its efforts to fight tax evasion and avoidance and the EU Green Bond Regulation provides that a competent authority must not approve a prospectus of an issuer from any such jurisdiction. The list currently includes not only Russia but other, less obvious countries such as Bahamas and the British and US Virgin Islands.

External reviewers

The EU Green Bond 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 EU sovereign or quasi-sovereign issuers to assess compliance with the EU Green Bond Regulation.

Following an initial 18-month transition period after the Regulation comes into effect, an external reviewer must 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 the external reviewer.

External reviewers do not have to be established in the EU. The EU Green Bond Regulation sets out 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.

'EuGB-Lite' regime

The Regulation includes an optional disclosure regime – so-called 'EuGB-lite' - for 'bonds marketed as environmentally sustainable (but which do not qualify as 'EuGB') or sustainability linked bonds (SLBs). In particular, the EU Green Bond Regulation provides that issuers of such non-EuGB green bonds or SLBs may make periodic disclosures of post-issuance information pursuant to common templates prescribed in the Regulation. Issuers which provide such voluntary disclosures will come under the supervision of the relevant EU competent authority to ensure that the disclosures comply with the requirements set out in the templates.

Green securitisations

For green securitisations, due to the scarcity of EU Taxonomy-aligned assets suitable for securitisation, the EuGB use of proceeds requirement will be applied to the originator of the securitised assets, in relation to the proceeds obtained by the originator from selling the securitised exposures to the issuer, instead of the issuer directly. This will be subject to review five years after the coming into force of the Regulation.

Synthetic securitisations and securitisations with certain types of underlying exposures - such as those financing certain fossil fuel-related activities – will not be eligible to use the 'EuGB' label.

Compliance and sanctions

The competent authority of the EU member state which has the responsibility of approving the relevant prospectus will also have extensive supervisory and investigatory powers for policing compliance with the EuGB requirements. This will include the power to suspend approval of a prospectus, an offering and/or listing application, suspend or prohibit advertisements, withdraw the EuGB label or prohibit an issuer from issuing EuGBs for up to a year. The competent authority will also have the power to issue monetary fines of up to 0.5% of an issuer’s turnover and EU member states may choose to impose criminal sanctions for non-compliance.

Next steps

The European Council is expected to adopt the EU Green Bond Regulation without further amendments.  The Regulation will then be published in the Official Journal of the EU and enter into force. It will start applying 12 months after its entry into force, which should be in Q4 of 2024.

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