We wrote recently on the updated Green Bond Principles published by the International Capital Markets Association (“ICMA”). While the ICMA and other industry bodies have so far been at the forefront of setting standards for ESG Bonds as we have also written about how the European Commission has now set out its own criteria with the publication of its proposed Green Bond Standard.

This was part of a package of items the European Commission published at the same time relating to sustainable finance. The package included the Sustainable Finance Strategy, the Climate Neutrality Regulation and a Delegated Act supplementing Article 8 of the Taxonomy Regulation.

European Green Bond Standard

The European Green Bond Standard proposal will create a high-quality voluntary standard for bonds financing sustainable investment. Issuers will have a recognised way of demonstrating that they are funding green projects aligned with the EU Taxonomy. Investors will be better able to ascertain that their investments are sustainable, thereby reducing the risk of greenwashing.

The standard will be open to any issuer of green bonds, including those located outside the EU. There are four key requirements under the proposed framework:

  1. The funds raised by the bond should be allocated fully to projects aligned with the EU Taxonomy;
  2. There must be full transparency on how bond proceeds are allocated through detailed reporting requirements;
  3. All EU green bonds must be checked by an external reviewer to ensure compliance and to ensure that funded projects are aligned with the Taxonomy. Specific, limited flexibility is foreseen here for sovereign issuers;
  4. External reviewers providing services to issuers of EU green bonds must be registered with and supervised by ESMA.

Prior to issuance, issuers must draw up a factsheet, similar to what is currently referred to as a green or sustainable bond framework. The factsheet may be incorporated by reference in a prospectus prepared pursuant to the Prospectus Regulation. A pre-issuance review by an external reviewer of the factsheet is required to confirm that it complies with EU green bond requirements.

Annual allocation reports must be published until full allocation of the proceeds is achieved, showing that they have been allocated as required.

A post-issuance review must be prepared by an external reviewer on the first allocation report following full allocation, assessing whether the issuer has allocated the proceeds in compliance with requirements and has complied with the intended use of proceeds set out in the factsheet.

Issuers must also draw up a report on the environmental impact of the use of proceeds on an aggregated basis, after full allocation of the proceeds and at least once during the lifetime of the bond.

ICMA Analysis

ICMA published on 8 July 2021 its analysis of the EU's green bond proposal. In general, ICMA was pleased with the proposal, which includes many of the recommendations of the Technical Expert Group (“TEG”) to which ICMA contributed.

However, ICMA noted some areas of concern, notably the absence of any of the flexibility provisions recommended by the TEG for alignment with the EU Taxonomy, which ICMA believes might hinder the potential for international uptake of the label. There is also only partial grandfathering for an EU green bond if the Taxonomy criteria change during the life of the bond.

The Commission proposal will be submitted to the European Parliament and Council as part of the co-legislative procedure.