Here at last – the EU’s gold standard in green bonds

We have obtained the consolidated text of the political agreement on the European Green Bond Regulation (including annexes) (the Regulation), reached on 28 February (as announced by press releases from the Council and Parliament).

This text may be subject to further change as it goes through legal and linguistic checks and is voted on by the Parliament.

Key provisions

The full text confirms the headline information already in the public domain, as well as providing further details.

• The Regulation provides a voluntary label for issuers of green use of proceeds bonds (called a European Green Bond or EU GB) where the proceeds must be invested in economic activities aligned with the EU taxonomy requirements before maturity of each bond. This label will only be available for issuers that publish an EU Prospectus Regulation (EU PR) compliant prospectus, as well as sovereign or quasi-sovereign issuers of EU Member States that are exempt from the requirement to publish a prospectus under the EU PR. This is an important restriction given that issuers of wholesale debt have increasingly elected to admit their debt securities to venues outside of the scope of the EU PR (including exchange-regulated markets or MTFs in the EU). Such issuers would need to bring themselves back within the EU prospectus regime to use the European Green Bond label.
• Issuers will be permitted to deduct certain issuance costs, where those costs are directly linked to the issuance of the bonds, from the proceeds meaning that the requirement to allocate the proceeds to taxonomy-aligned activities will apply to net proceeds only.
• Issuers using the label must use issue proceeds to finance environmentally sustainable activities either: (i) directly via the financing of assets and expenditures that relate to economic activities that comply with the taxonomy requirements; or (ii) under certain conditions, indirectly, through financial assets that finance economic activities that meet the taxonomy requirements.
• The Regulation provides further detail on different ways issuers can apply proceeds of an EU GB labelled bond in a compliant manner. One such alternative is to finance capital expenditures relating to economic activities that will meet the taxonomy requirements within a reasonably short period from the issuance of the bond concerned, which requires the issuer to publish a CapEx plan. Another is a portfolio approach where proceeds of one or more bonds are allocated to a portfolio of assets, provided that the total value of eligible assets in the portfolio exceeds the total value of the portfolio of outstanding bonds (on a balance sheet basis). The portfolio approach is currently the most used mechanism by issuers adopting existing voluntary standards for use of proceeds bonds and other green finance instruments.
• The full text confirms the limited use cases for the “15% flexibility pocket” of proceeds which do not need to be fully taxonomy-aligned. Such flexibility will only be available for certain economic activities for which there are no technical screening criteria (TSC) (or in the context of certain international support). An issuer will still need to demonstrate that the activities contribute substantially to one or more of the environmental objectives and do no significant harm to any of the environmental objectives.
• To address concerns regarding future changes to TSC, “grandfathering” provisions will apply where relevant criteria are amended post-issuance. Issuers will need to ensure that unallocated proceeds and proceeds covered by a CapEx plan that have not yet met the taxonomy requirements comply with the amended TSC within seven years. Issuers applying a portfolio approach will be permitted to include an asset, financed by an EU GB, that does not align with amended TSC as part of the pool of financed assets for at most seven years.
• Issuers adopting the label will need to comply with detailed pre- and post-issuance transparency requirements. These will include the completion of a pre-issuance green bond factsheet, post-issuance allocation report(s) and post-allocation impact report, each following templates set out in the Annexes to the Regulation.
• Among other things, green bond factsheets will need to include information about how the bonds are expected to contribute to the issuer’s broader environmental strategy and, where the issuer is required to (for example, pursuant to the EU Corporate Sustainability Reporting Directive for in-scope issuers), or voluntarily choses to, publish a transition plan, how the bond proceeds are intended to contribute to funding and implementing those plans.
• The green bond factsheet and other reporting and external reviews will need to be published by an issuer on its website. The Regulation does not require the factsheet or other pre-issuance documentation to be included (or incorporated by reference) in an issuer’s prospectus, however information in the factsheet will be “regulated information” which may be incorporated by reference in an EU PR compliant prospectus.
• Specific transparency requirements will apply for nuclear energy and fossil gas related activities, to the extent that such activities are covered by the TSC.
• Where an issuer intends to use an EU GB to fund CapEx, the issuer shall include a summary of its plan in its prospectus as well as reporting on progress made in the implementation of its plan in its annual allocation reports.
• The Regulation also provides specific disclosure and exclusion requirements for securitisations that can apply the EU GB label, which for a transition phase will apply the use of proceeds requirement to the securitisation originator, until the EU economy has generated adequate volume of taxonomy-aligned assets to provide for an alternative model.

Opt-in to additional voluntary disclosures

In addition to the voluntary label, issuers of green use of proceeds bonds, who are not able to fully align issuance proceeds with the taxonomy requirements, or issuers of sustainability-linked bonds with environmentally sustainable objectives, will be able to opt-in to provide additional pre-issuance disclosure information thereby subjecting themselves to ambitious transparency requirements. These additional disclosures will follow standard public templates which will be developed in the future by the European Commission.

This was one of the important compromises of the political agreement between the Parliament, which was seeking to impose mandatory requirements on all bonds marketed as environmentally sustainable in the Union, and the Commission, which had originally proposed a voluntary-only label for green use of proceeds bonds. This compromise position will create a two-tier system of bonds under the Regulation and also allow for issuers to apply existing market-based standards such as the ICMA Principles. However, proposed changes to the EU PR via the EU Listing Act illustrate that legislators will be seeking heightened ESG disclosures in cases where a prospectus is required.

External reviewers

Issuers will be required to contract an independent external reviewer to provide a pre-issuance review of the EU GB factsheet, and a post-issuance review of the EU GB annual allocation reports. Issuers may contract an external reviewer to provide an impact report review.

External reviewers will be subject to a registration system and supervisory framework and will need to provide their independent opinion on whether the issuer has aligned with the Taxonomy criteria. The European Securities and Markets Authority (ESMA) will be tasked with establishing the register and supervision regime for EU and third-country external reviewers.

A transitional regime for external reviewers will apply for the first 18 months following the entry into application of the Regulation, to enable issuance of EU GBs before the registration system is fully implemented.

Other points to note

By linking the EU GB label into the publication of a prospectus under the EU PR, the Regulation aims to apply prospectus liability, with the competent authority of an issuer’s home Member State being granted the necessary supervisory and investigatory powers.

Further, the proposed EU Listing Act, which is currently under consideration, is expected to require the inclusion of certain ESG-related information in an issuer’s prospectus for debt securities which are advertised as taking into account ESG factors or pursuing ESG objectives. This is expected to take the form of a new disclosure annex to be developed by the Commission. The EU Listing Act is also expected to require incorporation by reference of certain regulated information.

The recitals provide a clear indication that EU institutions and bodies and the European Investment Bank are likely to be amongst the first issuers of EU GBs.

Timing

According to the current timetable, we can expect adoption to follow in the autumn.

The provisions of the Regulation are expressed to apply 12 months after publication in the Official Journal.

The Commission is tasked with producing a report assessing the need to regulate sustainability-linked bonds three years after the entry into force of the Regulation.

In addition, whilst the current Regulation does not cover synthetic securitisations, an assessment will be made to extend the regime to synthetic securitisations within five years.