European Green Bond Standard – Where Do We Stand? – Financial Services

The European Commission published its proposal for the Standard
last summer. The Standard is proposed to be harmonised as an EU
regulation, i.e., the Standard will be legally binding in all EU
Member States, which means that issuers have the possibility to
issue EuGBs upon the Standard’s entry into force without
waiting for local implementation.

The aim of the Standard is to provide a framework that the
issuers may decide to rely on when issuing green bonds. The
designation “European green bond” or “EuGB”
will be reserved solely for bonds that meet the requirements set
forth in the Standard. The principal requirement is that the use of
the proceeds of the EuGB shall be allocated to the economic
activities that are aligned with the EU taxonomy¹
requirements. Opinions from certain market participants, such as
the European Central Bank (ECB), have suggested that the Standard
should be mandatory for issuers within the EU. European
Parliament’s recent official negotiation position published in
May 2022 (the “Position”) does not go so far, but
confirms the voluntary nature of the EuGB label. However, the
Position proposes additional disclosure requirements to issuers of
all bonds that are labelled as environmentally sustainable.

For all sustainability-linked bonds and bonds that are marketed
as environmentally sustainable in the EU, new transparency
requirements are proposed in the Position for the investors to be
able compare and evaluate the environmental impact of those
non-EuGBs. These include information about the percentage of
expected taxonomy-alignment of the use of proceeds of the bond and
publication of a statement on due diligence policies with respect
to principal adverse impacts of investment decisions on
sustainability factors. The issuers of these bonds should also
disclose specific information in pre-contractual disclosures and
annual periodic reports, which should be subject to the same
standard of external verification as that applying to EuGBs.

Additionally, issuers of both EuGBs and sustainability-linked
bonds subject to an obligation to prepare transition plans under
the Corporate Sustainability Reporting Directive (the
“CSRD”) will be required to prepare
audited plans for carbon emission reductions. Effectively, the
requirement to prepare a transition plan would only catch large
companies, as SMEs are not in the scope of the CSRD.

The proceeds of EuGBs (less issuance costs) still need to be
fully allocated to economic activities that meet the taxonomy
requirements or will meet them within 5 or 10 years, depending on
the relevant economic activity.

The Position did not amend the grandfathering provisions, so it
is still expected that issuers may issue under the previous version
of the taxonomy for five years. Pursuant to the Position,
allocatedbond proceeds will not be required to be reallocated
following an amendment to the taxonomy requirements.

Next, the EU Member States will negotiate on the Position before
the plenary votes on the final version. Even though green finance
is a hot topic at the moment, it will presumably take some time
until we see the final outcome of the Standard. The Standard could
be a great boost for the Finnish bond market that has lately been
stagnant due to the Russian invasion of Ukraine as it would make
comparison between green bonds easier and provide a tool for the
issuers and investors that share the same values to find each
other.

Footnote

1 Regulation (EU) 2020/852 of the European Parliament and
of the Council of 18 June 2020 on the establishment of a framework
to facilitate sustainable investment, and amending Regulation (EU)
2019/2088 [2020] OJ L198/13.

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