In a significant move toward promoting sustainability and transparency in the financial sector, the European Union (EU) lawmakers have given their nod to ground-breaking standards for companies issuing “green” bonds. These standards aim to empower investors to make informed decisions by distinguishing genuinely sustainable initiatives from greenwashing or deceptive climate-friendly claims. The European Parliament’s resounding approval of this new voluntary standard for the “European Green Bond” label or “EuGB” marks a historic moment, as it is the first of its kind globally.
Pivotal impact of the regulation
- Combating greenwashing and ensuring transparency
- Having voluntary standards with global implications
- Paving the way for a greener future
Exploring the Roots and Evolution
Before we delve into the newly approved standards, it is essential to understand what “green bonds” entail. Green bonds are financial instruments companies and organizations issue to raise capital for projects and activities with positive environmental impacts. These projects can range from renewable energy installations to sustainable agriculture and biodiversity conservation.
However, the growing popularity of green bonds has brought concerns regarding the accuracy of the environmental claims made by issuers. This is where the EU’s pioneering move comes into play.
The European Green Deal, introduced on December 11, 2019, emphasized the imperative of channeling financial and capital resources more effectively toward environmentally sustainable investments. Subsequently, on January 14, 2020, the European Green Deal Investment Plan unveiled the Commission’s commitment to create a unified standard for European Green Bonds, known as the EU Green Bond Standard (EUGBS)
Green bonds have gained prominence in recent years as a financial instrument for raising capital to support environment-friendly projects and initiatives. However, the lack of standardized criteria has led to concerns of “greenwashing,” where some issuers falsely portray their bonds as environment-friendly, potentially misleading investors and undermining trust in sustainable finance.
Timeline
The New Standards
The newly approved standards perfectly align with the EU’s comprehensive taxonomy framework, which serves as a definitive guide to identifying environmentally sustainable economic activities.
Companies choosing to embrace these standards, and by extension, the “EUGBS” label when promoting their green bonds, will need to provide extensive information regarding how the proceeds from these bonds will be utilized. Moreover, they must demonstrate how these investments contribute to the broader sustainability plans of the company as a whole. In essence, these standards encourage companies to embark on a comprehensive green transition.
The disclosure requirements, presented in structured “template formats,” offer a valuable resource for companies issuing bonds, even if they may not meet all the stringent criteria of the European Green Bond standards. This allows such companies to signal their commitment to sustainability, providing clarity to investors about their green aspirations.
The proposed framework encompasses four essential fundamentals:
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Taxonomy Alignment: The entirety of the bond’s funds must be allocated exclusively to projects that adhere to the EU taxonomy.
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Transparency: A comprehensive level of transparency is mandatory, necessitating thorough reporting requirements that elucidate the allocation of bond proceeds.
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External Review: To ensure the integrity of the European green bonds, the EUGBS establishes a robust registration system and supervisory framework for external reviewers. All European green bonds must undergo evaluation by an external reviewer to confirm adherence to the regulation and alignment with the taxonomy for the funded projects. The regulation further mandates that any potential or actual conflicts of interest faced by these external reviewers must be identified, eliminated, or managed effectively, with full transparency throughout the process.
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ESMA Oversight of Reviewers: External reviewers offering their services to issuers of European green bonds must register with and be subject to supervision by the European Securities Markets Authority (ESMA). This regulatory oversight aims to uphold the quality of their services, ensuring the reliability of their assessments for investors’ protection and market integrity.
While the EU’s taxonomy framework is gradually taking shape, issuers of European Green Bonds will need to ensure that a minimum of 85% of the funds raised by these bonds are allocated to economic activities that align with the EU’s Taxonomy Regulation. This requirement ensures a clear connection between the bond’s proceeds and environmentally sustainable endeavors. As for the remaining 15%, issuers have flexibility, but they must meet specific conditions to transparently outline how these funds will be allocated.
Closing Thoughts
In the last ten years, the issuance of green bonds has experienced remarkable growth, surging to nearly USD500 billion globally in 2022 alone. These bonds have emerged as a vital tool in mitigating the impacts of climate change.
The EU’s move to establish a clear and universally recognized set of standards for green bonds is a significant step toward fostering transparency and accountability within the industry. By approving this framework, EU lawmakers have set a high bar for companies issuing green bonds and created a template for other regions to follow in their pursuit of sustainable finance. These standards pave the way for a financial future where sustainability is at the forefront, ensuring that investments genuinely contribute to environmental well-being and align with the EU’s ambitious goals for a greener tomorrow.
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SG Analytics is an industry-leading global insights and analytics firm providing data-centric research and contextual analytics services to its clients, including Fortune 500 companies, across BFSI, Technology, Media & Entertainment, and Healthcare sectors. Established in 2007, SG Analytics is a Great Place to Work® (GPTW) certified company and has a team of over 1100 employees and has presence across the U.S.A, the U.K., Switzerland, Canada, and India.
Apart from being recognized by reputed firms such as Analytics India Magazine, Everest Group, and ISG, SG Analytics has been recently awarded as the top ESG consultancy of the year 2022 and Idea Awards 2023 by Entrepreneur India in the “Best Use of Data” category.
