Battle over EU Green Bond Standard intensifies

IFR 2439 - 25 Jun 2022 - 01 Jul 2022
7 min read
Julian Lewis

The fight over the European Union’s Green Bond Standard is reaching the bare-knuckle stage as the European Commission, EU member states and financial trade bodies push back against efforts by the European Parliament to broaden the measure.

Unlike the commission’s product-focused proposal, European lawmakers want to introduce legal liability into the standard, apply it to all sustainable bonds sold in the EU, require issuers to deliver entity-level disclosures and auditor-approved transition plans, and have the standard made mandatory in five years’ time.

So-called “trilogue” negotiations on the GBS began this month. These involve representatives of the parliament, the European Commission (which published the original GBS proposal a year ago) and the European Council. The latter represents EU member states and is headed by the revolving EU presidency, which the Czech Republic takes over from France on July 1.

The parliament agreed on June 8 to enter “interinstitutional” negotiations after its economic and monetary affairs committee published its own significantly amended proposal in May. The committee is led by its “rapporteur” Paul Tang, a Dutch MEP from the parliament’s “progressive alliance of socialists and democrats” grouping.

Numerous changes

Tang’s committee described its “numerous changes” to the commission’s proposal, which its members supported in a 44–12 vote, as seeking “to better regulate the green bond market, improve its supervision, reduce greenwashing, and add clarity when money goes to gas or nuclear”. It contrasts these ambitions with Brussels’ aim of “only” establishing the standard’s EuGB label.

The demand on gas and nuclear refers to the commission’s controversial decision to include the two energy sources in its taxonomy of sustainable activities, which the GBS is to incorporate. The separate taxonomy battle, which has spurred a cross-party coalition of MEPs in opposition, is to peak with a full parliamentary vote next month.

Although the committee has conceded that the GBS should remain a voluntary standard, as the commission proposed, its demands include a potential revision to mandatory status after five years. Moreover, its entity-level requirements would make disclosure mandatory – and these would apply to all issuers of sustainable bonds, including sustainability-linked bonds, rather than green bond issuers only.

“To facilitate comparison and prevent greenwashing, minimum sustainability disclosure requirements should apply to bonds marketed as environmentally sustainable and sustainability-linked bonds,” the proposal said.

Pushing back

Both the International Capital Market Association and the Association for Financial Markets in Europe are against the MEPs’ amendments. In an update this week ICMA, which provides the secretariat for the voluntary Green Bond Principles, Sustainability-Linked Bond Principles and Sustainability Bond Guidelines, said they are “largely superfluous as well as raising real implementation challenges”.

While “strongly support[ing] progress towards a consensus” on a voluntary but official European GBS that could co-exist with its voluntary international GBP-based standard, ICMA has “real concerns for the success of the EuGB label if proposals for fundamental changes to its legal requirements are taken forward”.

"If we stay on the current path, I fear an outcome with an EU GBS that will be used mainly by European official sector issuers because they have to, and for all sustainable bond issuers in the EU mandatory requirements largely duplicating company-level disclosures arising from other regulations," said Nicholas Pfaff, ICMA's deputy CEO and head of sustainable finance.

ICMA also points to implementation challenges such as the lack of a methodology for sovereigns and other public sector issuers to disclose entity-level taxonomy alignment. A similar problem exists for non-EU issuers.

Pressure group Climate Bonds Initiative supports ICMA’s analysis and recommendations.

Similarly, AFME terms the MEPs’ amendments “a meaningful shift from the original objectives of the proposal” that could “adversely impact the EU green and sustainable bonds market and therefore undermine the progress in developing sustainable finance in the EU”.

“Introducing these requirements is not only unnecessary, but it's actually detrimental because this huge, unnecessary burden and liability placed on all issuers can only discourage them from issuing in the EU,” said Giorgio Botta, AFME's senior associate for sustainable finance.

Existing EU sustainable finance legislation, such as the Corporate Sustainability Reporting Directive and Sustainable Finance Disclosure Regulation, addresses the same topics “in a much more effective, much more targeted way”, he said.

AFME calls on the negotiating parties to renew their focus on the GBS’ original objectives: “to enhance transparency, comparability and credibility in the green bond market."

Both AFME and ICMA also highlight the need for grandfathering of existing bonds.

Practitioner perspective

Banks are also concerned by the negotiation. “There's still quite a few aspects, especially in the parliament's version, that could be problematic from a market practitioner’s perspective,” said Jarek Olszowka, head of sustainable finance at Nomura.

He highlights several discrepancies, such as one between the 100% alignment with the taxonomy that the parliamentary proposal demands and the 20% “flexibility pocket” that member states have agreed to. Others include parliament expanding the standard's scope to a wider concept of “environmentally sustainable bonds”, enhanced SFDR-style entity-level disclosures and requiring issuers to publish transition plans to achieve net zero by 2050.

Olszowka also cites parliament’s demand that “[c]ivil liability provisions should apply to issuers of European green bonds in relation to damages incurred by investors due to an infringement of the taxonomy-aligned allocation of proceeds”.

Besides the challenge of proving damage of this type, strict liability could drive issuers to other jurisdictions. Alternatively, it may lead them to issue conventional debt instead – depriving investors of the benefits of use-of-proceeds or sustainability-linked structures.

Over by Christmas?

The timetable for a trilogue resolution of the competing versions of the GBS is unclear. But although sustainability is not high among the Czech EU presidency’s announced priorities, bankers and trade bodies hope that this may nonetheless come before the end of its six-month tenure.

However, this would require the MEPs to drop their demand for entity-level disclosures. “If the European Banking Authority has to develop regulatory standards for those disclosures, it will take years – like the SFDR,” said one observer.