European Green Bond Standards pass in Parliament

The European Parliamant and the European Council are in the final process of reaching an agreement on the Green Bonds Standards. The regulation aims to create a voluntary standard available to all issuers to help finance sustainable investments and combat greenwashing. The debate showcased a range of opinions and perspectives, with the focus on transparency, trust, and transition.

On 4 October 2023, the European Parliament voted to approve the compromise text reached in trialogue back in February on the European Green Bond Standard. Recalling that trialogue takes place toward the end of the EU legislative process when there are differences between the positions of the European Parliament and European Council on a file. In these cases, the Commission invites both parties to a negotiation behind closed doors, where the parties usually can come to an agreement after a bit of haggling back and forth.

After an agreement has been reached, called a compromise text, the agreement must be adopted by both Council and Parliament before becoming official. Hence, following its adoption in the Parliament, we’re about at the end of the process of having the Green Bond Standard.

The debate

During the debate preceding the vote, the Parliament rapporteur on the file, Paul Tang (S&D, NL), initiated the discussion, emphasizing the need for transparency, trust, and a focus on transition in the regulation. He underscored the importance of addressing investor concerns regarding green bonds and emphasized the three Ts: Transparency, Trust, and Transition. Tang’s insights emphasized that this regulation intends to bolster the green bond market, solidifying the EU’s standing in sustainable finance markets.

Financial Affairs Commissioner Mairead McGuinness also commended the agreement, echoing the significance of the three Ts. She emphasized the voluntary nature of this standard and the importance of establishing comprehensive templates for issuers.

Ville Niinistö (Greens/EFA, FI) praised the link to the taxonomy and the regulation’s efforts to enhance transparency. However, Niinistö advocated for more stringent transparency requirements for bonds labelled as green, suggesting room for improvement and further progress.

Christophe Hansen (EPP, LU) noted the importance of bridging the gap between the capital market and climate measures, emphasizing the significance of credibility in the taxonomy and advocating for simplicity in the instrument.

Overall, the debate showcased a range of opinions and perspectives, with the focus on transparency, trust, and transition underscoring the critical aspects of sustainable finance, setting a precedent for further discussions and actions to combat greenwashing, promote green investments, and encourage a sustainable future for all. As we move forward, it will remain imperative to balance ambition with pragmatism and ensure that sustainability remains at the core of financial decisions, driving positive change towards a greener tomorrow.

Background
The regulation first came about in July 2021, when the European Commission proposed a voluntary Green Bond Standard (EuGBs). The proposal aimed to create a voluntary standard available to all issuers (private and sovereigns) to help finance sustainable investments. The EuGBs sets a ‘gold standard’ for how companies and public authorities can use green bonds to raise funds on capital markets to finance investments while meeting sustainability requirements and protecting investors from greenwashing. There are four key requirements under the proposed framework:

• The funds raised by the bond should be allocated fully to projects aligned with the EU Taxonomy;
• There must be full transparency on how bond proceeds are allocated through detailed reporting requirements;
• All EU green bonds must be checked by an external reviewer to ensure compliance with the Regulation and that funded projects are aligned with the Taxonomy. Specific, limited flexibility is foreseen here for sovereign issuers;
• External reviewers providing services to issuers of EU green bonds must be registered with and supervised by the European Securities Markets Authority. This will ensure the quality and reliability of their services and reviews to protect investors and ensure market integrity. Specific, limited flexibility is foreseen here for sovereign issuers

Following the negotiations that took place during the trialogue, the provisional agreement states that all proceeds of EuGBs will need to be invested in economic activities that are aligned with the EU taxonomy, provided the sectors concerned are already covered by it. However, if a sector is not yet covered by the EU taxonomy, 15% of the proceeds of an EUBGS can be invested in it under what is known as a ‘flexibility pocket’. This is to ensure the usability of the European green bond standard from the start of its existence. The use and the need for this flexibility pocket will be re-evaluated as Europe’s transition towards climate neutrality progresses and with the ever-increasing number of attractive and green investment opportunities that are expected to become available in the coming years.

As regards supervision, the national competent authorities of the home member state designated (in line with the Prospectus Regulation) shall supervise that issuers comply with their obligations under the new standard.

So far, countries have already been issuing Green Bonds, however, these have been much less structured in framework and transparent outcomes. European entities issued $87.67 billion of green bonds in the April-June quarter, up 30% on the previous three months, according to data from the nonprofit Climate Bonds Initiative. Germany was the top issuer in the June quarter, with $24.13 billion, followed by China with $18.71 billion and then Italy at $15.38 billion. The US, which was the third-largest issuer in the first quarter, ranked fourth with $14.48 billion.

NFU for its part, very much supports the development of clearer standards for financial instruments when it comes to sustainability. In order to avoid greenwashing and inject consumer confidence in the project to move financing toward sustainable solutions, initiatives like this one are important. It should, although be noted that these rules will only apply to environment-focused bonds, and NFU, therefore, hopes to see in the near future a similar framework to be developed for social bonds.

Morten Clausen, Policy Officer NFU