Q&A with Nordea’s Aila Aho on the EU Green Bond Standard

The European Commission's expert group on sustainable finance has released a guide for how to use the EU's new Green Bond Standard. A member of that group, Nordea's own Aila Aho, discusses the ins-and-outs of the new standard and what it means for sustainable finance going forward.

The European Union is closing in on its first official green bond standard, designed to help pave the way to net zero carbon emissions by 2050.

Aila Aho, Nordea executive adviser and TEG member

Aila Aho, Nordea executive adviser and TEG member

On 9 March 2020, the European Commission’s Technical Expert Group on Sustainable Finance (TEG) released a new Usability Guide for the EU Green Bond Standard (GBS) to complement its final report published last June. The GBS is the first green bond standard linked to the taxonomy, an encyclopaedia of  economic activities and performance criteria in line with the EU’s environmental goals.

While companies are increasingly putting sustainability into the core of their strategies, more accuracy and accountability is needed to link the financial investments with real outcomes, Nordea’s Aila Aho told an EU conference on 12 March.

“The Green Bond Standard is really the first tool that links this. It’s a label you can use in a credible and safe way,” said Aho, who in addition to her role as executive adviser on sustainability at Nordea serves as a member of the TEG and rapporteur to the EU GBS subgroup.

The latest update retains essential features of the GBS sketched out in mid-2019 but adds a Usability Guide for its practical application. The terminology is also updated to reflect the latest legislation. We caught up with Aila to find out more about the ins-and-outs of the GBS and the TEG’s latest recommendations.

To start with, what would you highlight as the most important contribution of the GBS? How does it differ from the Green Bond Principles and the existing market practice?

The TEG has proposed a voluntary EU GBS that’s largely based on existing market practice, such as the Green Bond Principles. However, one of the main barriers the green bond market has faced has been a lack of precision over what is “green.” That’s where the GBS breaks new ground, by formally linking green bond investments to the taxonomy. The taxonomy bridges the gap between international goals like the Paris Agreement and investment practice, clearly laying out the types of activities consistent with the low-carbon transition, adaptation and other environmental objectives. If you buy an EU Green Bond, you know it’s contributing towards these goals.

"One of the main barriers the green bond market has faced has been a lack of precision over what is 'green.' That’s where the GBS breaks new ground, by formally linking green bond investments to the taxonomy."

What are the main features of the EU GBS and Usability Guide?

The taxonomy is about significant action towards the most important environmental targets. We are seriously lagging behind the trajectory to meet the Paris Agreement, and other alarming signals emerge more often than we bear to hear. The growing will to act could, and should, be directed towards impactful investments implemented at a faster pace. The taxonomy gives the direction and metrics, and the EU GBS gives the framework for companies and investors to demonstrate and explain what they do, with what impact, and to report on both. These freely-available tools are created to facilitate and demonstrate change. There is no need to hire a league of in-house experts, but there is a need to be transparent. The green bond framework and mandatory reporting of allocation and impact as described in the EU GBS do this. With a robust scheme for external verifiers, issuers can start to issue EU Green Bonds with confidence.

Who can use the GBS? Is it possible to issue green bonds according to the EU GBS even if you have a very low or no alignment with the taxonomy on a company level?

The GBS is intended as a tool to allow all kinds of issuers to align their debt issuance with the taxonomy to showcase what they are doing and how they invest in this space. It captures a much wider issuer base than listed corporates. The use-of-proceeds approach allows any issuer to issue green bonds, as long as they finance eligible green projects. A company may not have taxonomy-aligned turnover, but it may have a top-notch headquarters that meets the taxonomy criteria. Or a cement company may invest in new technology to make a part of its production taxonomy aligned. If the GBS were only designed for 100% taxonomy-compliant companies, it would be almost useless in advancing the transition to a climate-neutral economy by 2050.

"The GBS is intended as a tool to allow all kinds of issuers to align their debt issuance with the taxonomy to showcase what they are doing and how they invest in this space."

How is the GBS intended to work for activities not yet defined in the taxonomy?

Where the technical screening criteria have not yet been developed, such as for specific sectors or the four outstanding environmental objectives, we propose that a registered or supervised verifier confirm that the green projects: 1) contribute to at least one of the six environmental objectives of the EU taxonomy (see neighbouring box), while 2) not significantly harming any of the other objectives and 3) complying with minimum safeguards, such as fundamental labour rights. The verifier or issuer should then inform the Platform on Sustainable Finance, which will replace the TEG, for their future consideration. This allows including a variety of operations without compromising on the ultimate targets and ambition level.

TEG event on the EU taxonomy and EU Green Bond Standard March 12

Aila Aho and other TEG members presented the EU Green Bond Standard at a European Commission event on 12 March. With much of Europe on lockdown due to the coronavirus, what should have been a physical event turned into a live webcast with a total audience of around 15,000.

Where does the GBS stand on the discussion around “capex vs. opex” for Green projects?

In the GBS, eligible green projects include green assets, physical or financial, and green expenditures that help improve and maintain the value of such green assets. Green expenditures can include capex and selected opex, such as maintenance costs related to green assets, that either prolong the lifetime or raise the present or future value of the assets, as well as research and development costs. However, opex, such as purchasing costs and certain leasing costs, would generally not be eligible, unless specified in the EU taxonomy regulation or future guidance.

Does the GBS have a view on new financing vs. re-financing, or specifically on “look-back periods”?

On that front, EU Green Bonds should be no different than traditional bonds, which are often used to refinance assets that have a longer operating lifetime than the bonds’ tenors. Eligible green assets would qualify for refinancing as long as they are in use and follow the relevant eligibility criteria at the time of issuance. And eligible green opex would qualify for refinancing with a maximum three-year look-back period before the bond’s issuance.

"If the GBS were only designed for 100% taxonomy-compliant companies, it would be almost useless in advancing the transition to a climate-neutral economy by 2050."

Where does the GBS stand in terms of the “transition bond” discussion as well as social bonds?

The market is constantly moving, and there are a number of developments unfolding, including target-linked bonds and talk about transition bonds. Since the GBS is based on taxonomy-aligned use-of-proceeds, and not on companies overall business, it does allow for green bonds based on transition activities. The taxonomy defines tightening thresholds towards the agreed target (net zero carbon by 2050 for climate change mitigation). Transitioning requires direction and an end goal, and the GBS and taxonomy do help define “transition” and are therefore useful tools for the market innovations taking place. The social aspects are somewhat captured in the taxonomy through the minimum safeguards. Regarding a social bond standard, that is currently not in the cards, although it is worth noting that the TEG recommends that a complete EU taxonomy in the future would also include specific social objectives.

How is the  supervision of external reviewers/second-party-opinion (SPO) providers intended to work? What are the short term considerations to ensure this works?

We have recommended that the oversight of the external reviewers eventually sit with the European Securities and Markets Authority (ESMA). However, until the legislative pieces are in place, we foresee a market-based, voluntary registration process for the verifiers for a transition period of up to three years. Verifiers would apply to this scheme and show that they meet certain requirements, including that they have the infrastructure and competence to provide these services. The verification of the corporate’s reporting of their taxonomy-aligned revenue and capex as part of their nonfinancial reporting may take more time to develop. But we have this fantastic solution in the GBS, where verification is at the core, so that is a good place to start.

"Until the legislative pieces are in place, we foresee a market-based, voluntary registration process for the verifiers for a transition period of up to three years."

What are the practical considerations around reporting on Green bonds issued according to the GBS?

The GBS requires two kinds of reporting: allocation and impact reporting. We encourage issuers to use the reporting templates we’ve provided in Annex 3. Allocation reports must be published at least annually, until full allocation, and also if there are any material changes, and the final allocation report after full allocation must be verified. Impact reports need to include information on the green projects and environmental objectives. They need to report on the environmental impact using metrics and thresholds described in the green bond framework or those developed under the technical screening criteria of the EU taxonomy. An impact report should be published at least once during the lifetime of the green bond after full allocation and after if there are material changes. However, verification of the impact report is recommended but not mandatory.

How does the GBS take into consideration some of the broader TEG developments, such as disclosure?

Under the political agreement EU co-legislators reached in December, companies subject to the Non-Financial Reporting Directive (NFRD) will have to disclose the share of their revenue and capex aligned with the taxonomy. It’s all about transparency, and we provide more clarity on the requirements that derive from the GBS and from the legislation in the Usability Guide.

How does the GBS allow for international alignment?

I expect what the TEG is doing will be very relevant internationally, and there has already been keen interest from outside the EU. The taxonomy, particularly the environmental objectives and the technical screening criteria, provide a structure for other jurisdictions to use. Some aspects, specifically around minimum safeguards or doing no significant harm, may be more challenging when you move away from EU and OECD issuers. Globally, we might not reach full alignment, but collectively we’ll raise the standard and unify the key reference points.

What are the next steps for the GBS?

The European Commission will publish its decision on what form the final GBS should have with the renewed Sustainable Finance Strategy in the third quarter of 2020, following a three-month consultation period. That’s also when TEG members will reach a decision on setting up a market-based registration scheme for verifiers. The Commission will work closely with the TEG during the extension of the TEG mandate until September 2020 when assessing the different options on how to take the GBS forward. The key components are expected to be in place by the beginning of 2021. We certainly hope that’s the case. The potential issuers and investors are very welcome to prepare for the voluntary uptake of the EU GBS that represents the best practise.

Find out more about the TEG’s final recommendations for the EU taxonomy.

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