Europe is a key market for green bonds, with around half of issuances taking place in the EU last year, and the euro being the most popular currency for issuances.  It is also high on the radar politically, with the European Commission recently setting out its goal to make the EU the largest Green Bond issuer in the world.

EU Proposal to Develop Green Bond Market

While the growth in appetite for ESG and sustainable investment strategies has led to an increase in demand for green bonds, levels of issuance in the context of overall corporate bond issuance remains low.  To address this and ensure market growth in line with EU environmental standards, the European Commission published a proposal for a European green bond standard (EUGBS) in July of this year which, along with rules for use of the EUGBS designation, also provides for the establishment of an external review system under which reviewers would be regulated by the European markets regulator, ESMA.  

The European Green Bond Standard

The EUGBS is designed to be the gold standard for green bonds, allowing issuers to raise funding more readily for environmentally sustainable investments while also limiting the risk of greenwashing arising from the use of proprietary market standards. 

The standards aim to strike a balance between imposing unnecessary burdens on issuers wishing to avail of the EUGBS designation whilst ensuring that investors have enough information and oversight to make informed decisions relating to their ESG investments.

EUGBS: a framework for all green bond issuers

The EUGBS is intended to be usable by all green bond issuers including:

1. location of issuer:  EU and non-EU issuers making available bonds to EU investors
2. types of issuer:  corporates, sovereigns, financial institutions and issuers of covered bonds and asset-backed securities (and additional flexibility may be offered to sovereign issuers in some circumstances).
3. duration of projects:  for projects with a duration of up to 10 years.

EUGBS Rules

There are four key requirements for use of the EUGBS designation:

1. Alignment with EU Taxonomy Regulation:  bond proceeds must be used to fund environmentally sustainable activities per the EU Taxonomy (as previously discussed by our colleagues here).
2. Transparency: key requirements consist of (i) a green bond fact sheet published by an external reviewer, (ii) a publicly disclosed report produced annually to show issuance proceeds have been distributed in accordance with the EUGBS, (iii) a report prepared by an external reviewer following the allocation of all proceeds and (iv) production of an impact report following allocation of issuance proceeds and at least once during the lifetime of the bonds.
3. Review by external parties:  green bonds must be reviewed by external reviewers (registered with and supervised by the European Securities and Markets Authority (ESMA)) for compliance against the EUGBS (including the EU Taxonomy criteria).
4. Oversight be ESMA:  EUGBS issuers will be required to notify ESMA of compliance with transparency obligations.

Next Steps

The EUGBS proposal is progressing through the EU legislative process with a view to its adoption in 2022.   For issuers intending to use the designation once available, adherence to the high standards will require careful planning.  In contrast to existing market-led green bond principles, use of the EUGBS designation requires compliance with the applicable rules, including Taxonomy-alignment of investments, for the duration of the issuance. 

Contact Us

William Fry has considerable experience advising on all aspects of ESG bonds. For more information, please contact Matthew Cahill, David Maughan or your usual William Fry contact.

Contributed by Emily Ashford & David O’Shea