Nearly two years after the European Commission’s original proposal, key players have finally thrashed out an agreement over the EU Green Bond Standard.
While the European Parliament’s lead negotiator hailed the deal as “a world apart” from current requirements, the compromise fell short of the mandatory undertaking lawmakers sought – and may have little impact, as few bonds (including those of the European Union itself, strikingly) meet the GBS demand for full alignment with the EU Taxonomy of sustainable activities.
The deal followed protracted negotiations since June between lawmakers, the Commission and the revolving EU presidency, which Sweden took over at the start of the year.
Led by its “rapporteur” Paul Tang from the “progressive alliance of socialists and democrats” grouping, parliament demanded a radical overhaul of the Commission’s proposal. This sought to introduce legal liability, the application to all sustainable bonds in the EU, a requirement for entity-level disclosures and auditor-approved transition plans, and for the rules to become mandatory after five years.
Few of these proposals survived, however. Tang hailed the deal as “ambitious” and lauded the inclusion of voluntary disclosures for issuers of green and sustainability-linked bonds unable to meet GBS requirements. “Any green bonds not using this system will likely be looked at with increasing suspicion,” he said.
The agreement will soon go before the full parliament, whose president, Roberta Metsola, described it as “an important step in speeding up the green transition”. While it could in theory still be voted down, a spokesman for the parliament said this is highly unlikely in practice.
The regulation will apply around 13 months after member states approve the text and publish it.
Still voluntary
Market participants and advisers welcomed the deal. "This is a positive development as the EU GBS allows issuers to use it if they want and investors can see it, but it’s not mandatory. It will allay fears that it will restrict the ability to issue green bonds," said Peter Pears, a partner at law firm Mayer Brown. He said that the compromise makes the standard "more user-friendly".
“It’s good that we are now confirmed with an EuGB label which is voluntary. And it's good that the proposed wider disclosures for green bonds and sustainability-linked bonds in the EU will also remain voluntary,” said Nicholas Pfaff, deputy CEO and head of sustainable finance at the International Capital Market Association, which administers the market-developed Green Bond Principles.
“We welcome that the agreement maintains the original objective of establishing a voluntary, science-based 'gold standard' for bonds' funding activities aligned with the EU Taxonomy,” said Oliver Moullin, managing director for sustainable finance at the Association for Financial Markets in Europe.
Adoption will depend on flexibility over taxonomy alignment, treatment of green securitisation and grandfathering provisions, Moullin said.
The compromise allows issuers to apply 15% of proceeds to sectors where the taxonomy has yet to define technical screening criteria. But the still strict requirement for taxonomy alignment – the main difference between the official standard and the GBPs – makes the GBS relevant to only a small proportion of green bonds.
“The EU GBS will be of limited, if not very limited, application. We don’t think it is going to be a significant part of the market even in Europe,” said Pfaff.
“What you can't do is pretend that this is a template for the rest of the market,” he said, citing the EU’s own green bonds, whose first impact report shows that even the Commission, which manages EU borrowing, will not affirm that it meets full taxonomy alignment.
“If the Commission is acknowledging the usability challenges and the practical challenges, that is an illustration of the difficulties that other issuers will face.”
Challenges include the taxonomy’s EU-centricity, which makes it inapplicable to many international issuers; its requirement under “Do No Significant Harm” rules for data that some issuers do not have and cannot obtain; and its unfinished state.
The GBS “will work much better once the taxonomy is reformed. At the moment it remains pretty difficult to meet the aspirational standard. But we're working on that,” said Sean Kidney, chief executive at the Climate Bonds Initiative and a member of the EU's advisory Platform on Sustainable Finance. He expects “good progress in the next six months”.
ICMA is optimistic about the co-existence of the GBS and GBPs. Pfaff emphasised the two standards’ “complementarity” and insisted that the official standard is “absolutely not the end of the role of the Principles in the EU”.
“If the official label takes over in the long term, that’s fine. But I don’t see that happening any time soon.”
SFDR driver
One key question is whether investors’ obligations under the EU’s Sustainable Finance Disclosure Regulation could push issuers towards the GBS rather than GBPs. "We are wrestling with the question as to whether it will be a material regulatory driver to issue EU GBS for issuers because asset managers with regulatory requirements still need them to," said Pears.
Another is the likelihood of more issuers seeking taxonomy alignment, regardless of GBS compliance. Even before this week, sovereigns such as Belgium and the Netherlands and corporates like EDF, E.ON and Volkswagen claimed to have achieved at least partial alignment.
"We are already hearing some issuers making noises that ICMA green bonds will align with the taxonomy," Pears said.