The Green Bond label brings predictability, but issuers may have doubts due to the stringent rules

The EU Green Bond Regulation, which will apply from 21 December 2024, establishes a more rigorous and transparent framework. The regulation not only impacts issuers aiming for the EuGB label, but it also offers alternative pathways for issuers keen to demonstrate their green credentials in the field of sustainable finance. The EuGB label also goes further than the current market practices and industry standards for green bonds, such as the International Capital Market Association’s Green Bond Principles. In this context, this blog summarises certain key aspects of the EuGB label. As the financial community navigates this new regulatory landscape, the future adoption and the potential implications of the changes for the sustainable bond market remain subjects of keen interest going forward.

The EuGB label is voluntary yet stringent

While the EuGB label is voluntary, issuers must adhere to strict criteria to use it. These criteria include compliance with allocation requirements, comprehensive pre- and post-issuance disclosure, external review of these disclosures and oversight by the competent authority of their home Member State. There are alternatives for issuers who opt not to pursue the EuGB label, such as providing sustainability disclosures for bonds marketed as environmentally sustainable or issuing sustainability-linked bonds in accordance with the regulation. The issuers will also in future be able to issue bonds in accordance with industry standards, such as the ICMA Principles.

Use of proceeds and the EU Taxonomy

The key distinction of the EuGB label is the detailed requirements for the allocation of proceeds. The proceeds from any EuGB must align with the EU Taxonomy Regulation, ensuring that they contribute substantially to environmental objectives, do no significant harm (DNSH) to other environmental goals, comply with minimum social safeguards and meet technical screening criteria. The Green Bond Regulation allows flexibility, permitting up to 15 percent of proceeds to be allocated to taxonomy-compliant activities without meeting the technical screening criteria, provided they do no significant harm and no technical screening criteria exist for the taxonomy-compliant activity in question. The new stringent rules for the use of proceeds of the EuGBs deviate from the ICMA Principles. The latter provides that the issuer needs to assess how to define the eligible green projects and assets to which the proceeds are used, while the EuGB label goes further than this by linking the use to the taxonomy.

Alignment with the taxonomy is not an easy requirement as it requires that the proceeds are allocated to economic activities aligning with the specific technical screening criteria, the DNSH requirements and the minimum social safeguards. In certain sectors, such as energy, finding taxonomy-alignment can be easier than in others, which may indicate that the first private issuers of EuGBs will be from specific sectors.

Enhanced disclosure requirements for issuers

The Green Bond Regulation introduces disclosure requirements beyond publishing a prospectus in accordance with the EU Prospectus Regulation. Issuers must provide a pre-issuance factsheet detailing the use of the bond’s proceeds, alignment with the issuer’s environmental strategy and taxonomy-aligned assets, turnover and expenditures. In addition, issuers are required to publish allocation reports and an impact report post-issuance. All these documents must be based on the templates of the Green Bond Regulation and be available on the issuer’s website for at least 12 months post-maturity. The disclosure requirements differ from the Green Bond Frameworks or Green Finance Frameworks that issuers have prepared in connection with the ICMA Principles.

New regime for external review is established

The Green Bond Regulation also establishes a new regime for external review of the disclosure documents. The regime requires, for example, a mandatory review of the factsheet and, in minimum, the final allocation report. External reviewers of the disclosure documentation must register with the European Securities and Markets Authority ESMA and comply with the requirements of the regulation. In contrast to this, the ICMA Principles only recommend a third party review of certain disclosure documents. The registration requirement, ESMA’s supervision of external reviewers and the compulsory nature of the external review are new in the Green Bond Regulation.

Alternative disclosure regime for sustainable bonds

The Green Bond Regulation offers an optional disclosure regime for bonds marketed as environmentally sustainable and for sustainability-linked bonds. This provides flexibility for issuers not meeting the EuGB label standards but wanting to demonstrate their commitment to green finance. The European Commission will publish guidelines and adopt delegated acts to establish the content and methodologies for these disclosures.

Future outlook

Looking ahead, the adoption rate of the EuGB label remains uncertain due to concerns about the operation of the taxonomy and the more stringent requirements of the Green Bond Regulation compared to the market practice and existing industry standards, such as the ICMA Principles. The Green Bond Regulation brings predictability, but many issuers may be reluctant to proceed due to the stringent rules. However, as issuers become increasingly familiar with reporting their activities under the taxonomy, it may lower the threshold for issuers to issue EuGBs and speed up the adoption rate of the EuGB label.