EU legislators strike deal on a new standard to fight greenwashing in the bond markets

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EU negotiators on Tuesday struck a deal creating the first best in class standard for the issuing of green bonds.

The “European Green Bonds Standard” (EUGBS), which companies issuing a bond can choose to comply with, will primarily enable investors to orient their investments more confidently towards more sustainable technologies and businesses. It will also give the company issuing the bond more certainty that their bond will be suitable to investors seeking green bonds in their portfolio. The standard aligns with the more horizontal Taxonomy legislation which defines which economic activities can be considered as environmentally sustainable.

The deal was reached by EP negotiators, spearheaded by the rapporteur Paul Tang (S&D, NL), and the Swedish EU Presidency. It will enable investors to identify high quality green bonds and companies, thereby reducing greenwashing, clarify to bond issuers which economic activities can be undertaken with the bond’s proceeds, set in place a clear reporting process on the use of the proceeds from the bond sale, and standardise the verification work of external reviewers which will improve trust in the review process.

All companies choosing to use the standard when marketing a green bond will be required to disclose much information about how the bond’s proceeds will be used, but are also obliged to show how those investments feed into the transition plans of the company as a whole. The standard therefore requires companies to be engaging in a general green transition. The adoption of the standard will also guarantee to investors that the bond is taxonomy aligned.

The disclosure requirements, set out in template formats, will also be open to be used by companies issuing bonds which cannot fulfil all the requirements to qualify for the EUGBS. These companies would thereby subject themselves to ambitious transparency requirements and, as a result benefit from better trust among investors.

The regulation establishes a registration system and supervisory framework for external reviewers of European green bonds – the independent entities responsible for assessing whether a bond is green. Equally importantly, the regulation stipulates that any actual or even potential conflicts of interest are properly identified, eliminated or managed, and disclosed in a transparent manner. Technical standards may be developed specifying the criteria to assess the management of conflicts of interest.

Until the taxonomy framework will be fully up and running, legislators agreed to allow 15% of the proceeds from a green bond to be invested in economic activities that comply with the taxonomy requirements but for which no criteria would have yet been established to determine if that activity contributes to a green objective (technical screening criteria).

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