After extensive negotiations, the European Parliament (the EP) and the Council of the EU (the Council) adopted the European Green Bond Regulation (the Regulation) on 5 October 2023 and 23 October 2023, respectively. The Regulation has been adopted after the European Commission (the EC) submitted a legislative proposal for the introduction of a European Green Bond Standard (EUGBS) on 6 July 2021 and after the Council and the EP announced that a provisional agreement had been reached on an EU green bonds framework on 28 February 2023. The Regulation will be signed and published in the EU’s Official Journal before entering into force 20 days later. The Regulation will then apply 12 months after its entry into force.
The Regulation introduces a EUGBS to promote sustainable finance. As such, the Regulation is a next step in the EU’s strategy in respect of sustainable finance and is part of more extensive initiatives such as the European Green Deal the European Green Deal Investment Plan and the action plan on sustainable finance (the Action Plan).
The Action Plan has three main objectives: (1) reorienting capital flows towards sustainable investment to achieve sustainable and inclusive growth, (2) managing financial risks stemming from climate change, resource depletion, environmental degradation and social issues, and (3) safeguarding transparency and long-termism in financial and economic activity.
It is clear that the EC expects that public funds available for sustainable investments will not be sufficient and that the private sector should reorient its funds towards sustainable investments as well. The Regulation, providing for the EUGBS which is aligned with the Taxonomy Regulation this Taxonomy Regulation provides for (in short) a classification system (taxonomy) resulting in common language to identify whether a given economic activity should be considered “environmentally sustainable”), should contribute to this reorientation of funds. Green bonds are considered one of the main instruments that could be used to finance the transition to a greener economy. However, current market standards such as the green bond principles from the International Capital Markets Association, do not sufficiently support investors (in short) to properly identify genuine green bonds that are aligned with the overall environmental and climate objectives to ensure a transition to a greener economy.
The Regulation lays down a framework for issuers of bonds to be applied on a voluntary basis that must be followed in order to use the designation ‘European green bond’ or ‘EUGB’. It is expected that by using bonds that comply with the EUGBS, and that are therefore aligned with the Taxonomy Regulation and can be designated as a EUGB, market participants will raise financing for climate and environmentally-friendly investments more easily. Bonds that qualify as EUGB are expected to demonstrate that legitimate green projects, that are aligned with the Taxonomy Regulation, are funded. As a result, an increase in investors’ confidence is expected to occur as the EUGBS reduces risks in relation to (for example) greenwashing.
Key aspects of the EUGBS framework are:
Use of proceeds and taxonomy-alignment: in principle, the net proceeds raised by the EUGB must be invested in “environmentally sustainable” activities within the meaning of the Taxonomy Regulation prior to the maturity of the EUGB. Consequently:
- the proceeds must be used for economic activities that contribute substantially to one or more of the six environmental objectives under the Taxonomy Regulation (being: 1. climate change mitigation, 2. climate change adaption, 3. protection of water and marine resources, 4. transition to a circular economy, 5. pollution prevention and control, and 6. protection of biodiversity and ecosystems);
- the use of proceeds must not significantly harm any of the aforementioned objectives within the meaning of the Taxonomy Regulation;
- the proceeds must be used for economic activities that are carried out in compliance with minimum safeguards as set out in the Taxonomy Regulation that ensure alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles for Business and Human Rights; and
- the proceeds must be used for economic activities that comply with technical screening criteria.
In addition, the proceeds must be used to finance the following asset classes: fixed assets that are not financial assets, capital expenditures, operating expenditures (incurred no more than three years before issuance, financial assets (created no more than five years after issuance), and assets and expenditures of households.
Notwithstanding the above, the Regulation also provides for a 15% flexibility pocket. This flexibility pocket entails that 15% of the net proceeds may be used for:
- economic activities for which no technical screening criteria apply at the date of issuance but that otherwise qualify as “environmentally sustainable” within the meaning of the Taxonomy Regulation;
- certain very specific activities in the context of international support.
Transparency and external review: transparency and external review are also key elements within the EUGBS. There are several disclosure requirements under the EUGBS, such as:
- a pre-issuance green bond fact sheet, containing (among other things) general information in relation to the bonds, confirmation that the bonds are EUGBS compliant, the environmental strategy and rationale of the bonds and the intended allocation and impact of the bond proceeds and information in respect of reporting;
- a pre-issuance external review of the green bond fact sheet, on the Taxonomy Regulation alignment of the use of proceeds and on compliance with the requirements of the Regulation;
- a prospectus in compliance with the requirements under the Prospectus Regulation (approved by the national competent authority (NCA)), whereby it must stated that (among other things) the bonds are EUGBs, the bonds are issued in compliance with the Regulation;
- post-issuance reporting, consisting of allocation reports for every 12 month period until full allocation of proceeds and impact reports required upon full allocation of proceeds; and
- post-issuance (optional) external review of the allocation reports, assessing and opining whether the proceeds have been allocated in accordance with the Regulation and the green bond fact sheet, and (optional) of the impact reports, assessing and opining on whether the bonds issuance aligns with the issuer’s broader environmental strategy and assessing the impact of the bonds.
The green bond fact sheet, the allocation reports and the impact reports, including the related external reviews, must be published on the issuer’s website. The European Securities Market Authority (the ESMA) and NCA should be notified about publications on that website.
Supervision: under the Regulation, the external reviewers must be registered with ESMA. In order to be registered, external reviewers must comply with detailed requirements. ESMA will maintain a register of external reviewers and shall publish the information on its website. ESMA is also responsible for supervising the external reviewers. This registration and supervision framework is expected to further improve the trustworthiness of the bonds issued as EUGBs under the Regulation. The NCA is responsible for supervising issuers’ compliance with the obligations under the EUGBS.
Other: the Regulation also provides for a grandfathering possibility, making it possible to use pre-existing criteria in the event of a change of the criteria following the bond issuance. The Regulation also provides for a ‘lite’ or optional disclosures regime for use of proceeds bonds that are not aligned with the Taxonomy Regulation and for sustainability linked bonds. This is also expected to mitigate greenwashing risks and therewith to increase investors’ confidence in respect of these instruments.
The specialists at Meijburg Legal can assist issuers, external reviewers and other parties involved with EUGBs. If you are a party seeking advice on the interpretation and application of the Regulation and/or support with the issuance of EUGBs and related reporting obligations or if you are an external reviewer seeking support with the application with ESMA, feel free to contact one of our specialists at Meijburg Legal.