Stockholm (NordSIP) – After two years in the pipeline, the Council of the EU adopted a regulation creating a European Green Bond Standard (EGBS) on 23 October 2023, despite three prominent abstentions. The regulation lays down uniform requirements for issuers of bonds that wish to use the designation ‘European green bond’ or ‘EuGB’ for their environmentally sustainable bonds.
The Commission first presented its proposal for a regulation establishing European green bonds on 6 July 2021. The Council set its position on the proposal on 13 April 2022. Trilogue negotiations started on 12 July 2022 and ended with the provisional agreement reached on 28 February 2023. The European Parliament adopted the contents of the agreement in its position on 5 October 2023.
The adoption of the Green Bond Standard by the Council is one of the last steps in the legislative process of the EU on this issue. The regulation will be signed, and published in the EU’s Official Journal before entering into force 20 days later. It will start applying 12 months after its entry into force.
The EGBS was adopted without any opposition. Only Germany, Luxembourg and Austria abstained from the vote due to the issue of Nuclear Power.
“Germany maintains the view that nuclear energy is not sustainable. While we acknowledge that the European green bond standard is linked to the Taxonomy Regulation, we do not consider the inclusion of nuclear energy to be appropriate for the purposes of creating a gold standard for green bonds. Therefore, Germany cannot support the political agreement on the European Green Bond Regulation in its entirety,” a statement from the Council’s Permanent Secretariat disclosed.
Nevertheless, the regulation was adopted by qualified majority voting and will apply to the whole of the EU.
Why a EGBS?
Green bonds are one of the main instruments for financing investments related to green technologies, energy efficiency and resource efficiency as well as sustainable transport infrastructure and research infrastructure. The regulation is part of the EU’s strategy for financing sustainable growth and the transition to a climate-neutral, resource-efficient economy.
The EGBS is meant to increase transparency and accountability and foster consistency and comparability in the green bond market, It seeks to improve market efficiency and drive more investments into green projects, while hoping to mitigate the risk of greenwashing.
Beyond its trickle-down effects to the rest of society through green project funding, the new regulation is meant to assist both bond issuers and bond investors.
Issuers will be able to demonstrate that they are funding legitimate green projects aligned with the EU taxonomy. Investors’ confidence in green investment will be enhanced thanks to a framework that reduces the risks posed by greenwashing, ultimately stimulating capital flows into environmentally sustainable projects.
How Will the EGBS Work?
The EGBS aims to regulate the use of the designation ‘European green bond’ or ‘EuGB’ for bonds that pursue environmentally sustainable objectives. European green bonds will be aligned with the EU taxonomy for sustainable activities and made available to investors globally.
To ensure accountability, the regulation establishes a system for the registration and supervision of entities acting as external reviewers (often known as Second Party opinion providers) for European green bonds and to regulate the supervision of issuers of European green bonds.
All proceeds of European green bonds will need to be invested in economic activities that are aligned with the EU taxonomy for sustainable activities, provided the sectors concerned are already covered by it.
A “Flexibility Pocket” and Other Comments
For those sectors not yet covered by the EU taxonomy and for certain very specific activities, the EGBS allows a “flexibility pocket”, which allows up to 15% of the net proceeds of a green bond EuGB to be earmarked towards economic activities that comply with all requirements of the Taxonomy other than the technical screening criteria (TSC) under specific circumstances. These exceptions were added to ensure the usability of the EGBS 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 increasing number of attractive and green investment opportunities that are expected to become available in the coming years.
Beyond green bonds, the regulation also provides for some voluntary disclosure requirements for sustainable bonds and sustainability-linked bonds (SLBs) issued in the EU, to prevent greenwashing in the green bonds market in general.