New Voluntary EU Green Bond Standard to Apply Soon — Clarity, Transparency, and Supervision Expected for Green Bond Issuances Even Though the Strict Requirements May Deter Certain Issuers

Authors: Annemari Rosi, Pauliina Sutinen, Roope Sevón

As the world shifts towards sustainable finance, the long awaited European Green Bond Regulation ((EU) 2023/2631, as amended, the “EuGB Regulation”) will soon become applicable. The regulation introduces a new voluntary “gold standard” for green bonds and offers an alternative framework aimed at enabling debt investors to direct their funds more easily towards sustainable investments. It also gives issuers more certainty and a new clear way to demonstrate that their bond will be suitable for investors who want to add green bonds to their portfolio.

Background

In 2018, the European Commission adopted its action plan for financing sustainable growth and has actively been building towards a sustainable finance system. Creating standards and labels for green financial products was one of the central parts of the action plan adopted, and green bonds have an important role in financing investments related to green businesses. However, before the EuGB Regulation, there has been no official green bond standard within the European Union (the “EU”). Following thorough preparation, the EuGB Regulation was published in the Official Journal of the EU on 30 November 2023 and will apply from 21 December 2024.

The EuGB Regulation lays down a voluntary standard for the issuers who wish to use the designation “European Green Bond” or “EuGB” for their bonds that are environmentally sustainable as defined by the EU Taxonomy Regulation. The EuGB Regulation sets uniform and strict requirements for the use of the above-mentioned labels, going further than current market practices — thereby making it easier for investors to assess sustainability of their investments and preventing greenwashing. However, at the same time, the strict requirements may be harder to meet and might reduce the level of adoption.

Characteristics of the EU Green Bond Standard

Certain key characteristics of the standard are the following:

• Eligibility: Using the designation “European Green Bond” or “EuGB” requires issuers to allocate the proceeds in full, before the bond reaches maturity, in sustainable economic activities covered by the EU Taxonomy Regulation (gradual approach). Alternatively, issuers can allocate the proceeds from these bonds to a portfolio of fixed or financial assets in accordance with the EU Taxonomy requirements (portfolio approach). As issuers may deduct issuance costs from the proceeds of the EuGB before allocating the proceeds, the requirements apply to net proceeds only. Allocation of proceeds in alignment with the EU Taxonomy may be challenging in practice, since the allocation must follow, for instance, specific technical screening criteria and the “do no significant harm” requirements. Furthermore, due to the requirement for the EU Taxonomy alignment, issuance of an EuGB may not be necessarily available for all issuers.
• Flexibility: Under a “flexibility pocket” included in the EuGB Regulation, up to 15% of the proceeds can be allocated to economic activities that meet, but are not officially covered by, the taxonomy requirements.
• Transparency: The EuGB Regulation has broader disclosure requirements compared to current market practice. Issuers who want to use the designations when marketing their bond are required to disclose a pre-issuance factsheet with information about, for instance, how the bond's proceeds will be used and information on the manner in which the bond is expected to contribute to their broader environmental strategy. Issuers are also required to provide allocation reports and an environmental impact report on the use of the funds. Templates for all the above-mentioned documents have been included in the EuGB Regulation.
• Prospectus: In order to use the label, issuers are required to publish a prospectus in line with the Prospectus Regulation ((EU) 2017/1129, as amended), using the term “European Green Bond” or “EuGB” throughout (exceptions apply to sovereigns).
• Optional disclosure templates: For bonds marketed as environmentally sustainable or sustainability-linked, the European Commission will publish templates by 21 December 2024 for voluntary pre- and post-issuance disclosures, which will offer alternative structures for companies that are not able or do not opt to use the EuGB framework but still wish to show their green ambitions.
• External reviewers: The standard sets up a registration system and supervisory framework for external reviewers for EuGBs – the independent entities responsible for assessing whether a bond meets the green requirements laid down by the standard. External reviewers will need to be registered with the European Securities and Markets Authority (ESMA) as well as satisfy the specific requirements of the regulation.

What’s Next?

The EuGB Regulation will become applicable as of 21 December 2024. There are, however, some concerns about the level of adoption of the standard due to its strictness compared to previous market practices. While the regulation offers clarity, transparency, and structure, its strict requirements may deter issuers. The debt capital markets experts of our M&A and Finance Teams are closely following the mentioned regulatory developments and assessing related legal implications to bond transactions. For any related questions, please do not hesitate to contact us.