As the proposed Regulation for the EU Green Bond Standard (the “EU GBS”) makes its way through the European legislative process, the Rapporteur for the Committee on Economic and Monetary Affairs of the European Parliament (“ECON committee”) has proposed some significant changes.

In its Report of 30 November 2021, the Rapporteur emphasises the desire to “ensure that European green bonds live up to their potential to finance the transition to a sustainable economy”.

The Rapporteur’s proposals include:

  • An expansion of the scope of the EU GBS to include transparency requirements for all bonds marketed in the EU with a sustainable objective, including green, social or sustainability-linked bonds;
  • A new requirement that the Commission evaluate by December 2023 the setting of a deadline for and the practicalities of making the EU green bond designation mandatory for all environmentally sustainable bond issuances between 2025 and 2028;
  • A new requirement to incorporate a European sustainable bond factsheet into a prospectus drawn up in accordance with the EU Prospectus Regulation for all EU sustainable bonds - i.e. reflecting the expanded scope of the EU GBS mentioned above;
  • An expansion of the registration and supervision powers of ESMA to include external reviewers of all sustainable bonds;
  • An express provision generally prohibiting the use of the European green bond designation for bonds where the proceeds are to be allocated to nuclear power generation or electricity generation or production of heat/cool from fossil fuels;
  • An express provision obliging issuers of European green bonds to adhere to the principle of “do no significant harm” set out in Regulation (EU) 2019/2088;
  • A new requirement that a taxonomy alignment plan required where bond proceeds are not allocated to economic activities meeting the EU taxonomy as at the date of issue (but where such activities will do so within a five-year period) shall describe the annual intermediate steps to be achieved in order for such activity to meet the taxonomy requirements. Progress towards such steps is to be reviewed by an external reviewer annually and the failure to meet such steps twice in a row would lead to the loss of the EU green bond designation.

These proposals, if taken forward by the European Parliament, would reflect a significant departure from and expansion of the European Commission’s initial EU GBS proposal.

ICMA Analysis 

On 5 January 2022, ICMA published a paper discussing the key changes to the EU GBS proposed by the Rapporteur which outlines why, in its opinion, certain changes may hamper, rather than promote, the growth of the European green bond market.

ICMA cites the absence of incentives to counterbalance the additional costs and liability implications for issuers of the proposed changes to the EU GBS as potential barriers to take up of the EU GBS label, objecting to the broadening of the scope of the EU GBS to capture all European sustainable bonds.

ICMA also comments that making the EU GBS mandatory could have unintended negative consequences, such as fragmentation of the green bond market, migration by issuers away from the European market to other jurisdictions and could lead to issuers relying on alternative forms of finance.

AFME position paper

AFME has also published a position paper with respect to the EU GBS. Whilst this is not a direct response to the Rapporteur’s Report, it sets out the recommendations it considers key to ensuring the “establishment of an effective and successful label” for European green bonds.

These recommendations include ensuring: (i) the EU GBS remains a voluntary standard; (ii) the application of consistent requirements across issuers and issuances so that different categories of “green” are not established adding confusion and complexity to the EU GBS; (iii) the same criteria is applied for all types of issuers with no distinction made in the EU GBS between sovereign and private issuers; (iv) a European green bond retains its designation for the entire tenor of the bond to enhance certainty for investors; and (v) the EU GBS applies effectively to securitisation structures and supports the growth of EU securitisation markets.

The AFME position paper also seeks clarification with respect to the application of the EU GBS to third county issuers and the requirements of the green bond factsheet.  

Legislative timeline 

The EU GBS is still in the preliminary phases of the legislative process. It is currently making its way through the European Parliament. The Rapporteur’s report is anticipated to be presented to ECON during January with the MEP amendment process beginning shortly thereafter and throughout February 2022. This will be followed by a vote of the European Parliament’s ECON committee on the amended EU GBS proposal. 

The Council, in parallel, also needs to adopt its general approach. Once both co-legislators have adopted their negotiating positions, they will begin the so-called 'trilogue' negotiations. Negotiations usually last around 18 months, but the Council and European Parliament are anticipated to disagree on several important points on this matter so they may take longer.

For further details, see our previous blog posts and podcast on the EU GBS: