Introduction
On 23 October 2023, the Council of the European Union (the Council) adopted in first reading the regulation on European green bonds standards (the EU GB Regulation)[1]. This formal adoption ends a two-year process, from the European Commission (the EC)’s initial proposal on 6 July 2021 to the provisional agreement reached with the European Parliament (the EP) on 28 February 2023, which was formally adopted by the EP on 5 October 2023.
Within those two years, interest in sustainable investments significantly increased and sustainable-related financial products has reached an impressive number, answering investors’ demand and regulation compliance. Consequently, the initial proposal has undergone significant changes to adapt to the current state of play of the EU financial market.
Key elements of the EU GB Regulation
The trilogue negotiations led to adjustments and new disclosure regimes, namely for (i) securitisation and (ii) bonds marketed as environmentally sustainable and for sustainability-linked bonds in the European Union (EU), with the aim to enhance transparency and ensuring applicability of the standards in the current EU market. Key elements are highlighted below.
Flexibility in the use of proceeds for European Green Bonds
Two approaches were introduced on the use of the proceeds of the European green bonds (the EuGB).
The gradual approach foresees that the proceeds from the EuGB are, in principle and before the maturity of such bond, fully allocated to economic activities meeting the Taxonomy requirements[2], which must belong to specific categories, including fixed assets that are not financial assets, capital expenditure (the CapEx), operating expenditure, financial assets and expenditure and assets of households.
As per the portfolio approach, issuers can allocate the proceeds from outstanding EuGB to a portfolio of fixed assets or financial assets pursuant to the Taxonomy requirements.
When reviewing the EU GB Regulation, the EP acknowledged the difficulties faced by the market players to implement and report on the Taxonomy-alignment of their activities. In August 2023, only half of in-scope entities published Taxonomy information and an average of 7% of the turnover was reported as Taxonomy-aligned[3]. Part of the lack of reporting may be explained by the absence of applicable technical screening criteria for four of the six environmental objectives under the Taxonomy, however necessary in order to identify those economic activities that are in line with the Taxonomy.
In that context, the EP chose to introduce flexibility in the “gradual approach”, giving the possibility to allocate up to 15 percent of the proceeds of a EuGB to economic activities that comply with the Taxonomy requirements, except for the technical screening criteria to the extent that:
- the technical screening criteria have entered into force by the date of issuance of the EuGB or
- that the proceeds are allocated to activities in the context of international support in line with agreed guidelines, criteria and reporting cycles, with a focus on not causing significant harm or meeting the relevant technical screening criteria.
CapEX plans
In line with the aim of enhancing transparency in the sphere of sustainable finance, a safeguard for the alignment of the EuGB with the Taxonomy was introduced.
The issuer of EuGB would indeed be required to publish a CapEx plan for the proceeds that are claimed “Taxonomy-aligned” setting a specific deadline, prior to the maturity of the EuGB, for aligning all capital and operating expenditure with the Taxonomy standards. Within 60 days of this deadline, an external reviewer assessment shall take place to assess the alignment of the capital and operating expenditures with the Taxonomy.
Application of the technical screening criteria and grandfathering
When issuers follow the gradual approach, they must allocate their proceeds in accordance with the technical screening applicable at the time of issuance of the EuGB. Given the constant evolution of the Taxonomy regulatory framework, a grandfathering rule was introduced, allowing issuers to have a seven years’ period to align with any updated for (i) proceeds that have not yet been allocated and (ii) proceeds that are covered by the CapEx plan.
When issuers follow the portfolio approach, only assets linked to activities aligning with the technical screening criteria from the past seven years can be included in the portfolio.
If an outstanding EuGB’s proceeds are not aligned with the applicable technical screening criteria, the issuer shall draw up an alignment plan, submit it to external review by an external reviewer and publish it within seven years after the date of application of the amended technical screening criteria.
Additional disclosure requirements in case of securitisation bonds
An interesting addition from the EP relates to specific disclosures in case of bonds issued in the scope of a securitisation, within the meaning of Article 2(1) of Regulation (EU) 2017/2402.
Whereas regulating “Green Securitisation” is still a project,[4] the EP opens the door to an applicable regime to securitisation as a tool to finance “green” projects by confirming that an SSPE may issue European Green Bonds. The EP hereby strengthens transparency for EuGB securitisations by requiring issuers to include, to the best of their efforts and to the best of the originator's ability and available data, in their prospectus published pursuant to Regulation (EU) 2017/1129, information namely related to the share of securitised exposures funding economic taxonomy-eligible economic activities.
The originator would also be subject to disclosure of an EuGB factsheet and annual reporting.
Optional disclosures for bonds marketed as environmentally sustainable or sustainability-linked bonds
The EU GB Regulation also introduces the use of voluntary disclosure templates for bonds marketed as environmentally sustainable or sustainability linked bonds. It provides that the EC should publish guidelines establishing such templates regarding pre-issuance and post-issuance disclosures regarding bonds marketed as environmentally sustainable and sustainability-linked bonds.
The initiative of setting voluntary templates for issuers of bonds marketed as environmentally sustainable or sustainability-linked bonds is welcome in the current context of greenwashing risks threatening the EU market. Adoption of common templates would increase the accessibility and transparency of the sustainability profile of a financial product and provide investors, other market players and the public with sufficient information to trust the sustainable marketing of such product and make an informed decision.
Next steps
The EU GB Regulation is expected to be signed and published in the Official Journal of the EU before entering into force 20 days later. It will take effect 12 months after its entry into force.
[1] The Regulation (EU) 2023/… of the European Parliament and of the Council on European Green Bonds and optional disclosures for bonds marketed as environmentally sustainable and for sustainability-linked bonds, https://data.consilium.europa.eu/doc/document/PE-27-2023-INIT/en/pdf.
[2] Activities defined as “environmentally sustainable economic activities” pursuant to Article 3 of the Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment.
[3] “EU Taxonomy Report” PwC August 2023 - https://www.pwc.lu/en/sustainable-finance/eu-taxonomy-reporting-2023.html.
[4] EBA Report: Developing a Framework for Sustainable Securitisation, EBA/REP/2022/06.
