The European Green Bond Regulation: the first green ‘gold’ standard

With Europe being the biggest issuer of green bonds, it was only natural that the EU would be the one to introduce the first standard in the world defining green bonds.

This legal update outlines why the European Green Bond Regulation is important, and which are the requirements of this new standard that seek to promote sustainable investments and uniformity across them.

The European Green Bond Regulation, approved in October last year, creates a voluntary standard for labelling bonds offered or listed in the EU as EU Green Bonds (EuGB for short).

In 2022, green bonds issued within the EU were of a total value of nearly 230 billion US dollars and yet, available data shows that they still only represent about 8.9% of all bonds issued in the EU.  To that effect, the promotion of sustainable investments plays an important role in the EU achieving its goal of carbon neutrality under the Green Deal.

The standard introduced by the Regulation is voluntary, and issuers choosing to label their green bond as an “EuGB” will need to:

• meet the specific definition and standards under the Regulation, in alignment with EU’s Taxonomy Regulation;
• ensure that at least 85% of the bond’s proceeds will be invested into economic activities that are aligned with the EU Taxonomy Regulation;
• prepare a prospectus in accordance with the EU Prospectus Regulation which is approved by the national competent authority;
• disclose information in accordance with the so-called “template formats” about how the bond’s proceeds will be used (including the remaining 15%);
• show how the investments contribute to the company’s plan for a green transition;
• prepare pre-issuance and post-issuance reports (in the form of the Regulation’s templates) which will be reviewed by external reviewers;
• keep reports on their website for 12 months following the bonds’ maturity.

Alignment with the EU Taxonomy Regulation means that the activities into which the proceeds of the EuGBs should be invested must:

• contribute substantially to at least 1 of the 6 environmental objectives – climate change mitigation, climate change adaptation, protection of water and marine resources, transition to a circular economy, pollution prevention and control, and the protection of biodiversity and ecosystems;
• comply with the technical screening criteria;
• not significantly harm any of the other environmental objectives.

In terms of supervision, this will be carried out by external reviewers to be registered with, and overseen by ESMA. External reviewers will prepare reports on whether the EuGBs adhere to the standards.

Moreover, the national competent authorities (which shall cooperate with each other in the exchange of information, investigations, supervision and enforcement) will review and approve the issues and the relevant prospectus to ensure compliance with the Regulation. In case of non-compliance, the competent authority may suspend or prohibit an offer or admission to trading on a regulated market and will be able to impose penalties to issuers. In addition, the competent authority will be able to make public the fact that an issuer failed to comply with the Regulation, and to require the issuer to publish this on its own website too.

The Commission, by issuing a regulation as opposed to a directive that would require national transposition and hence result in diverging national requirements, aims to enhance uniformity in the green bonds market.

By regulating what constitutes a ‘green’ bond, the EU also seeks to enable investors to compare and evaluate green investments (with less cost) before making their choice, whilst at the same time fighting greenwashing.

This update is for information purposes only and is not intended to constitute legal advice.

 Our team monitors the evolving framework of the EuGB regime, sustainable finance and ESG in general. If you would like to learn more, please get in touch with us.