The European Green Bonds Regulation (the "EuGB Regulation") was published yesterday in the European Union's Official Journal.1
The EuGB Regulation introduces the “European Green Bond Standard” or ("EuGBS"), as a designation which can be used on a voluntary basis by bond issuers. The EuGBS also establishes a system to register and supervise external reviewers of European Green Bonds. The EuGBS is intended to provide issuers and investors with greater confidence when issuing and investing in green bonds.
Requirements for EuGBS
All types of issuers can opt in to the EuGBS. To use the designation "European Green Bond" ("EuGB"), securities made available to investors in the European Union will need to satisfy certain requirements with respect to the use of proceeds, reporting and disclosure.
Use of proceeds requirements
The general position is that the proceeds of an EuGB must be fully invested in environmentally sustainable economic activities in accordance with Regulation (EU) 2020/852 (the "Taxonomy Regulation")2.
An environmentally sustainable economic activity is an economic activity :
- contributing substantially to an environmental objective ("Limb A");
- not significantly harming the environmental objective ("Limb B");
- being carried out in compliance with the minimum safeguards3 ("Limb C"); and
- complying with technical screening criteria established by the European Commission ("Limb D").
Article 5 provides a derogation whereby an issuer may allocate up to 15% of the proceeds in (i) economic activities satisfying Limbs A, B, and C of the definition of environmentally sustainable economic activities but in sectors which are not yet covered by the Taxonomy Regulation; or, especially for EU Sovereigns, (ii) activities in the context of international support.4
EU Green Bond Standard
| Issuer Type | Use of Proceeds | Disclosure | External reviewers |
|
EU Corporate |
Taxonomy sustainable activities and does no significant harm to other objectives, complies with social safeguards, and adheres to technical screening criteria. Any proceeds can then be allocated to fixed assets, capital expenditures (Capex), financial assets created within five years, or assets and expenditures meeting Taxonomy requirements |
Aligned to CSRD plus Capex plan as applicable |
EU regulated and registered External Reviewers |
|
EU Financial Institution |
Financial Institutions look to Article 6 and Article 8 of the EU Taxonomy i.e. to what environmental objective(s) the investments contribute. A Taxonomy aligned Use of Proceeds may require an analysis of underlying investments and a look through to value chains of underlying investments. |
Aligned to SFDR |
EU regulated and registered External Reviewers |
|
EU Sovereign |
Sovereign issuers can use the proceeds of European green bonds to indirectly finance economic activities that are aligned with the taxonomy requirements through the use of programmes of tax expenditures or programmes of transfers, including subsidies. |
N/A |
State auditors, or any other public entity that is mandated by a sovereign |
|
EU Securitisation Vehicle |
Use of Proceeds requirement to be applied to the originator instead of the Issuer | Aligned to SFDR | EU regulated and registered External Reviewers |
|
EU Funds |
Same as financial institutions but also analysis would look through to the underlying investments and whether they are Taxonomy-aligned | Aligned to SFDR. Additionally, the proportion of underlying investments that are Taxonomy-aligned, as a percentage of the investment, fund or portfolio. Funds will have to integrate suitability preferences into their Product Governance Framework and their Target Market controls. | EU regulated and registered External Reviewers |
Disclosure requirements
The EuGB designation shall only be used for securities issued within the scope of Regulation (EU) 2017/1129 ("Prospectus Regulation")5.
Issuers of EuGB need to meet the disclosure requirements under the Prospectus Regulation and if applicable provide a CapEx plan (in case the proceeds are allocated to expenditures of environmentally sustainable economic activities).
Mandatory disclosure
In addition to the disclosure requirements under the current legal framework, issuers are required to prepare the following documents:
- Pre-issuance: European green bond factsheet and CapEx plan (if applicable), and
- Post issuance: Annual allocation report and impact report.
To provide investors with a cost-effective access to reliable information about EuGB, the EuGB Regulation requires issuers6 to appoint independent EU regulated external reviewers ("External Reviewer(s)").
Mandatory pre-issuance review: The EuGB factsheet must be reviewed by an External Reviewer regarding compliance with the use of proceeds requirements and the template provided in Annex I of the EuGB Regulation.
Mandatory post-issuance review: The CapEx plan (if applicable) and annual allocation reports must be reviewed by an External Reviewer(s) after the issuance of EuGB. The CapEx plan will be assessed in terms of Taxonomy-alignment of expenditures funded by the proceeds. The annual allocation reports will be assessed in terms of compliance with the use of proceeds requirements. Similar to the pre-issuance review, the external reviewer will express a positive or negative opinion in the respective mandatory post-issuance review.
Impact reports: After the full allocation of proceeds, issuers are required to produce an impact report on the environmental impact of the use of proceeds. The impact report may be reviewed by an External Reviewer regarding alignment of the EuGB issuance with the issuer’s broader environmental strategy and environmental impact of the proceeds. The impact report review will include the External Reviewer’s opinion on whether the issuance of the EuGB is in line with the broader environmental strategy and rationale of the issuer and an assessment of the indicated environmental impact of the proceeds. Although review of the impact report is optional, it may serve as a useful tool to mitigate against threats of greenwashing risk.
EU Sovereigns
EU Sovereigns have some notable flexibilities and exemptions as outlined in the chart above. Not only are they exempt from having to produce a Prospectus Directive compliant prospectus, but they are also exempt from having to use External Reviewers and can opt to use their own auditors. Sovereign EuGB issuers also have some flexibility on the use of proceeds such as, financing public assets or expenditures that meet or are expected to meet the Taxonomy Regulation requirements, such as tax relief, subsidies or international support activities mentioned above.
Challenges – nearer term
Applying the Taxonomy Regulation in practice and issuing in accordance with the other requirements in the EuGBS may present challenges for some issuers. Most issuers have gaps between their existing internal data collection and the data requirements under the Taxonomy Regulation and EuGB Regulation. Sustainability-related reporting and a general lack of data causes difficulties in the assessment of technical screening criteria. Overall, increased documentation, monitoring and time are necessary to complete and monitor the use of proceeds.
Costs and timing in the short term will also need to be factored in as the new External Reviewer regime beds down.
Conclusion
EuGBs will increasingly over time help issuers and investors to issue and invest in green bonds with confidence which will be further supported as the Corporate Sustainability Reporting Directive7 and other remaining parts of the European Green Deal8 come into force from 2024 onwards.
1 EUR-Lex - 32023R2631 - EN - EUR-Lex (europa.eu) - OJ L, 2023/2631, 30.11.2023. It will enter into force 20 days after publication and start applying 12 months after entry into force.
2 Regulation (EU) 2020/852 of the European Parliament and of the Council
3 According to Article 3 of Taxonomy Regulation.
4 Examples of activities in the context of international support are those that meet internationally agreed guidelines, criteria and reporting obligations, including climate financing reported to the Commission under the United Nations Framework Convention on Climate Change as referred to in Article 19(3) of Regulation (EU) 2018/1999, and official development assistance reported to the Development Assistance Committee of the Organisation for Economic Cooperation and Development. Green Bond Regulation, Article 5(1)(b).
5 See box below for notable exception for EU Sovereign issuers.
6 See box below for notable exception for EU Sovereign issuers.
7 Directive (EU) 2022/2464 of the European Parliament and of the Council
8 The European Green Deal: Striving to be the first climate-neutral continent
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