The European Commission has launched the first official green bond standard linked to the EU taxonomy. Nordea’s Sustainable Finance Advisory team shares its take on the proposed regulation for European green bonds and the implications for bond issuers going forward.
The European Commission on 6 July released an updated version of the EU Green Bond Standard (EU GBS), now as a proposed regulation for European green bonds (EuGBs), designed to pave the way to net-zero carbon emissions by 2050. The Commission has been exploring the possibility of a legislative initiative following proposals from its Technical Expert Group (TEG) as well as a public consultation in 2020. Nordea’s Sustainable Finance Advisory team has reviewed the proposal and shares its key takeaways.
Eu GBS likely to remain voluntary
In line with the TEG’s recommendation, the latest version proposes a voluntary Eu GBS. The European Commission considered a mandatory approach, where all green bonds issued in the EU or by an EU-domiciled issuer would have to follow the standard. There has been some speculation in the market over whether the updated proposal would make it mandatory. However, this speculation could reflect confusion around why a legislative process is required. The Eu GBS requires a legislative process to appoint an organ to oversee external reviewers, not to make it mandatory. The voluntariness of the standard is still subject to change, although we consider a mandatory Eu GBS very unlikely.
Heavily based on TEG’s proposal, but also the Green Bond Principles (GBPs)
The proposal closely tracks the previous version of the Eu GBS proposed by the TEG. The main updates provide more extensive information to issuers on how to apply the regulation and also address the establishment of a registration system and supervisory framework for external reviewers of European green bonds. Given that the TEG’s proposed version of the Eu GBS was heavily based on the GBPs, the new proposal is also aligned with current best market practices.
The voluntariness of the standard is still subject to change, although we consider a mandatory Eu GBS very unlikely.
Main difference from the GBPs: ‘Use of proceeds’
Use of proceeds
While the GBPs suggest green categories for assets and projects to be financed by a green bond, the Eu GBS requires issuers to allocate proceeds to economic activities that meet the EU taxonomy criteria within a defined period of time as set out in a taxonomy-alignment plan.
Prior to issuing a bond under the Eu GBS, issuers are required to fill out a factsheet, comparable to the frameworks recommended for GBP bonds. While an external review of a GBP framework is recommended, the factsheet will require a pre-issuance review by an external reviewer.
Reporting is one of the GBPs’ core components, and both allocation and impact reporting is required. Market practice is to publish an allocation and an impact report on an annual basis. Under the Eu GBS, allocation and impact reporting is mandatory as well. What differs between the two frameworks is that issuers under the Eu GBS have to obtain a post-issuance review of the final allocation report by an external reviewer after the full allocation of the proceeds has been made. The impact report for an European green bond must be produced after full allocation of proceeds, as well as once during the lifetime of the bond.
Timing considerations on taxonomy alignment for an Eu green bond
A relevant question when issuing European green bonds is when to assess alignment with the EU taxonomy. The EU taxonomy is intended as a living document subject to change. Given that bonds can have tenors of several years, it is important to understand if the issuer needs to fulfil the EU taxonomy criteria during the bond’s outstanding time. The new proposal indicates that issuers should apply the EU taxonomy criteria applicable at the time of issuance of the bond. This is also the case when a bond is refinanced: The criteria valid at the time of refinancing are the ones to apply.
The new proposal indicates that issuers should apply the EU taxonomy criteria applicable at the time of issuance of the bond.
Guiding documents and templates
The Annexes of the proposal include the following templates clarifying the requirements of a European green bond:
Annex I: European Green Bond Factsheet – similar to a Green Bond Framework
Annex II: European Green Bond Annual Allocation Report – allocation must be done in line with the EU taxonomy
Annex III: European Green Bond Impact Report – at least once during the lifetime of the bond and after full allocation
Annex IV: Contents of Pre-issuance and Post-issuance reviews – provides a standard for external reviewers
Nordea Sustainable Finance Advisory continues to follow the updates on the proposed regulation for European green bonds, as well as the renewed sustainable finance strategy. For additional information on the Eu GBS, we recommend our interview with Aila Aho, former Nordea executive adviser and TEG member.
Find out more about the EU’s Renewed Sustainable Finance Strategy, also released on 6 July 2021.
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