Sustainable investment

Brussels unveils EU green bond framework

The €750 billion post-Covid European recovery plan will be 30% financed by green bonds. Photo: Shutterstock

The €750 billion post-Covid European recovery plan will be 30% financed by green bonds. Photo: Shutterstock

The European Commission has presented its strategy for making the EU’s financial system more sustainable, proposing a voluntary but highly recommended EU standard for green bonds.

The Commission has adopted a package of measures to raise its level of ambition on sustainable finance. The idea is both to address current environmental challenges, including global warming, and to strengthen investment in the EU’s transition to a sustainable economy. The strategy contains six sets of measures, aiming respectively (1) to broaden the range of sustainable finance instruments available, easing access to transition finance; (2) to include SMEs and customers more by providing them with tools and incentives to access transition finance; (3) to make the economic and financial system more resilient to sustainability risks; (4) to increase the contribution of the financial sector to sustainability; (5) to preserve the integrity of the EU financial system during the transition; and (6) to propose international initiatives and standards for sustainable finance while supporting EU partner countries.

A regulatory gold standard for sustainable bonds

At the same time, the Commission has adopted a new European green bond standard, the EUGBS, in the form of a draft regulation. The aims are to create a new “gold standard” for green bonds against which other market standards can be compared, to seek alignment and to avoid greenwashing. Such a gold standard will give European financial centres a head start over other financial centres.

Until now, the market has been organised around two professional guidelines: the “green bond principles”, published under the sponsorship of the International Capital Markets Association (ICMA); and the standards of the Climate Bond Initiative. The voluntary rules outlined in these documents have been strengthened over the years, but remain fairly flexible in their application. The EUGBS standard is also voluntary, but is much more restrictive. To qualify for the new European label, bond issuers will have to comply with four essential requirements: (1) all funds raised must go to projects aligned with the EU taxonomy; (2) the allocation of the proceeds must be fully transparent; (3) all green bond issues must be audited by an external auditor; (4) and this external auditor must be registered with and supervised by the European Securities and Markets Authority.

Taxonomy requirements clarified

In line with these decisions, the Commission also adopted the delegated act supplementing Article 8 of the taxonomy regulation, which requires both financial and non-financial companies to provide investors with information on the environmental performance of their assets and economic activities. Non-financial companies will have to disclose how much of their turnover, capital expenditure and operating expenditure was associated with environmentally sustainable economic activities as defined in the taxonomy regulation, the delegated act on the climate component of the taxonomy (formally adopted on 4 June 2021), and any future delegated act regarding other environmental targets. For their part, financial institutions--mainly banks, asset managers, investment firms and large insurance and reinsurance companies--will have to disclose what proportion of the total assets they’ve financed is made up of environmentally sustainable economic activities.