European Union lawmakers approved new voluntary standards for companies issuing green bonds, opening up new opportunities for issuers and investors to tackle greenwashing.
Introduction
The European Green Bond Regulation (the Regulation) was published in the Official Journal of the EU on 30 November 2023 and will come into force on 21 December 2024. The Regulation lays down the foundation for a common framework that must be followed by any bond issuer, both within and outside the EU, wanting to label their product as a European Green Bond (EuGB). The European Green Bond Standard (the Standard) aims to provide market certainty ahead of the issuance of environmentally friendly green bonds later this year.
What is a Green Bond?
Similar to conventional bonds, which are fixed-income instruments representing loans from investors to borrowers, green bonds serve as a means for organisations to secure funds, with the distinctive feature of channelling the proceeds specifically into environmentally friendly projects. These bonds earmark their funds for initiatives contributing to positive climate outcomes, with a primary focus on areas such as renewable energy, energy efficiency, sustainable agriculture, and other endeavours aimed at addressing the impact of climate change.
Issuers are expected to provide transparent reporting on the use of proceeds and the environmental impact of the financed projects, allowing investors to assess the environmental performance of their investments.
Legislative context
In recent years, the green bond market has experienced rapid growth, emerging as a key financial tool for supporting the shift towards a more sustainable economy. However, the current market standards fail to define environmentally sustainable activities and lack consistency in the rules and procedures employed by external reviewers when evaluating these financial instruments. This absence of harmonisation restricts investors' ability to discern bonds whose proceeds are aligned with the EU’s environmental objectives.
It was under these circumstances, as well as the EU’s target of achieving climate neutrality by 2050, that the European Commission envisaged the establishment of a standard for green bonds to further increase investment opportunities and facilitate the identification of environmentally sustainable investments by means of clear labels.
The Regulation
Although any issuer offering bonds in the EU can opt-in to the EuGB, the Regulation implements certain requirements with respect to the use of proceeds, reporting and disclosure.
Use of proceeds. The general position is that the proceeds from EuGB must be fully invested in environmentally sustainable economic activities, as defined by the Taxonomy Regulation (Regulation (EU) 2020/852). This includes activity that contributes substantially to an environmental objective, that does not significantly harm the environmental objective, that is being carried out in compliance with the minimum safeguards, and that is in compliance with technical screening criteria established by the European Commission.
Disclosure requirements. Issuers of EuGB need to meet the disclosure requirements under the Prospectus Regulation (Regulation (EU) 2017/1129) and if applicable, provide a CapEx plan (in accordance with the Commission Delegated Regulation 2021/2178). The new Regulation designates standardised disclosure templates to facilitate comparability among bonds, as well as pre-issuance and post-issuance documents.
Reporting and external review. External reviewers play a crucial role in providing independent assessments, and their reviews should be transparent, highlighting methodologies and key assumptions. After the allocation of proceeds, issuers are required to produce an impact report on the environmental impact of the use of proceeds, which can optionally be reviewed by an external reviewer.
Despite the name of the regulation, it further extends to securitisation transactions and includes specific requirements for bonds resulting from securitisation. For green securitisations within the scope of the Regulation, EuGB proceeds requirements will be applied to the originator of the securitised assets rather than the issuer directly.
Several requirements under the Regulation differ in respect of issues by EU Sovereigns, allowing a degree of flexibility and exemptions. For instance, Sovereign EuGB issuers can choose to utilise their own auditors instead of an external reviewer and have fewer restrictions on the use of proceeds.
The EuGB lite regime
For issuers that wish to label their bonds as environmentally sustainable or sustainability-linked but do not meet the EuGB requirements, the Regulation provides a ‘lighter’ optional regime. Pursuant to this regime, issuers of green bonds that do not meet the EU Taxonomy Regulation alignment requirement for use of proceeds, or sustainability-linked bonds that have certain environmental sustainability objectives may voluntarily submit certain disclosure documents. Such voluntary disclosure would be subject to the supervision of the EU national competent authority, and non-compliance with its obligations affords the competent authority the right to publicise that fact.
Final remarks
Renowned as the first in the world of its kind, the Regulation’s primary objective is to empower investors in making informed choices by selecting genuinely sustainable companies, protecting them from potential greenwashing tactics and deceptive climate-positive assertions. Simultaneously, the Regulation provides issuing companies with a level of assurance, ensuring that their bonds align with the preferences of investors seeking to incorporate green bonds into their portfolios.
The Regulation holds significant implications for businesses in Cyprus, offering a structured approach to green financing. This harmonisation ensures that Cypriot businesses can tap into the growing market for green bonds, facilitating their transition to environmentally sustainable practices and supporting the broader EU goal of climate neutrality.
By Jomana Nayed
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