European Commission publishes proposals for European Green Bond Standard

The European Commission (the Commission) published a draft legislative proposal for the long-awaited European Green Bond Standard (EU GBS) which was published alongside the Strategy for Financing the Transition to a Sustainable Economy on 6 July 2021. The EU GBS is intended to be a voluntary “gold standard” for green bonds and will provide a framework for issuers to issue bonds that can be designated as ‘European green bonds’ or ‘EU GBS’ provided that the proceeds of the bond are allocated to assets and expenditure in full compliance with the requirements of the EU Taxonomy Regulation (the EU Taxonomy). The EU GBS will be open to all EU and non-EU issuers, including corporates, sovereigns, financial institutions, governments and other public bodies and is intended for a broad range of securities, including covered bonds and asset-backed securities. Some requirements of the EU GBS are in line with existing practice in the debt capital markets, but others go further (such as EU Taxonomy alignment, some reporting requirements and the supervision of external reviewers) as discussed below.

What are the key features of the EU GBS?

• Voluntary: The voluntary nature of the EU GBS will welcomed by market participants. Given that the ESG bond markets are already well developed, the voluntary label will likely compliment existing labels and minimise disruption to the market.
• Alignment with EU Taxonomy: The EU GBS requires that issuers must allocate 100%. of the proceeds raised by the bonds to economic activities that meet the EU Taxonomy requirements by the time the bonds mature. One potential issue with alignment is that the proposals do not provide for flexibility in situations where the technical screen criteria (i) may not be directly applicable as a result of the innovative nature, the complexity, the location and/or other legitimate factors of the projects, or (ii) have not yet been developed. This may likely impact whether issuers decide to use to EU GBS label, particularly non-EU issuers.
• Grandfathering: To account for possible changes to the EU Taxonomy technical screening criteria, the proposal contains partial grandfathering to allow issuers to make use of the delegated act applicable at the time of issue. However, this is time limited such that issuers must apply the amended delegated act within five years after its entry into application.
• Requirements and reporting: The EU GBS sets out some detailed requirements, particularly on pre- and post-issuance reporting. Prior to issue, issuers will be required to publish a ‘green bond factsheet' setting out the concrete funding goals and environmental objectives of the bonds. The concept of a factsheet is not dissimilar to bond frameworks which are typically published by green bond issuers, however, the EU GBS sets out a prescribed format in the form of a template. The factsheet will be subject to a ‘pre-issuance review' by a registered external reviewer to ensure that the bonds meet the requirements of the EU GBS. Once the bonds have been issued, issuers will be required to provide yearly allocation reporting until full allocation and obtain a post-issuance review by an external reviewer following full allocation. Issuers are also expected to publish at least one impact report on the overall environmental impact of the bond.
• External reviews: The EU GBS sets out detailed provisions on external reviewers of EU GBS.  They are required to register with the European Securities and Markets Authority (ESMA) to perform their role and will need to meet the conditions for registration on an ongoing basis. ESMA is empowered to develop draft regulatory technical standards specifying conditions for registration, organisational requirements, qualifications of senior management and staff, internal policies and procedures, as well as assessment methodologies.
• Transition: The EU GBS is focused on use of proceeds green bonds. It does not address social bonds, although issuers will have to respect minimum social safeguards under the EU Taxonomy. The Commission has suggested that further proposals may be issued in respect of transition bonds and sustainability-linked bonds in due course. In addition, on transition, the proposals set out ways in which the EU GBS could be utilised by issuers to support their sustainability transition, ie, by funding long term EU Taxonomy-aligned projects or acquiring EU Taxonomy-aligned assets. The EU Taxonomy also sets out criteria for some transition activities.

Next steps

The proposals will now be submitted to the European Parliament and among Members of the Council of the European Union as part of the co-legislative process.

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