There has been a significant development in the international green bond market this week. The EU Green Bond Standard Regulation (the “Regulation”) was published in the Official Journal of the European Union on 30 November 2023 and will apply from 21 December 2024. While the European Green Bond Standard ("EuGBS") provided for in the Regulation is a voluntary standard, it has the potential to become the leading standard in the international green bond market. It is an ambitious standard which goes well beyond existing guidelines and labels in the international green bond market. The new EuGBS will be open to any issuer of green bonds, including issuers located outside of the European Union.
We have previously provided updates and more detailed analysis on the Regulation as it has progressed through the legislative process: in June 2023, March 2023 and July 2021 respectively.
Key Provisions
As anticipated in our previous update, the final version of the Regulation materially aligns with the provisionally agreed text between the Council of the EU and the European Parliament (which provisionally agreed text was announced on 28 February 2023 and published on 10 May 2023).
The key terms of the Regulation include the following:
- The funds raised by EuGBS bonds must be allocated to projects aligned with the taxonomy outlined in the EU Taxonomy Regulation (the "EU Taxonomy").
- Transparency requirements on how EuGBS bond proceeds are allocated through detailed reporting requirements. There are pre-issuance and post-issuance reporting requirements in this regard.
- All EuGBS bonds must be checked by an external reviewer to ensure compliance with the Regulation and that funded projects are aligned with the EU Taxonomy.
- External reviewers providing services to issuers of EuGBS bonds will need to be registered with and supervised by the European Securities and Markets Authority.
- The issuers of EuGBS bonds must publish a prospectus which has been approved under the EU Prospectus Regulation.
- The national competent authorities of the home member state designated (in line with the EU Prospectus Regulation) shall supervise that issuers comply with their obligations under the new EuGBS.
Flexibility
In order to enhance take up of the EuGBS in the international green bonds market, the Regulation builds in some important flexibility. We have outlined some examples of that flexibility below.
Under the EuGBS, all proceeds of EuGBS will need to be invested in economic activities that are aligned with the EU Taxonomy, provided the sectors concerned are already covered by it. For those sectors not yet covered by the EU Taxonomy and for certain very specific activities there will be a "flexibility pocket" of 15%. Up to 15% of the net proceeds of EuGBS may be allocated to economic activities for which no technical screening criteria under the EU Taxonomy yet exist but which otherwise comply with the EU Taxonomy.
In addition, the Regulation includes specific provisions for issues by sovereigns, regional / local authorities and EEA supranational issuers or those guaranteed by EEA members states and local authorities – which provisions somewhat mitigate the compliance burden on those entities. For example, EEA member states, local authorities, the European Central Bank and member state central banks and issuers of securities guaranteed by member states and local authorities are exempt from the requirement to prepare a EU Prospectus Regulation compliant prospectus for the purposes of any EuGBS issuance, dovetailing with the existing EU Prospectus Regulation exemption. Consequently, those issuers will not be subject to supervision and imposition of sanctions by a national competent authority.
Moreover, the Regulation contains a separate optional disclosure regime for issuers of green use of proceeds bonds that are not aligned with the EU Taxonomy and / or sustainability-linked bonds to voluntarily opt-in to a number of the Regulation’s disclosure requirements. This is sometimes referred to as the 'EUGB lite' regime.
Securitisations
As well as corporate bond issuers, the Regulation is also relevant to issuers, sponsors and originators of securitisations.
In 2022, both the European Banking Authority and the European Commission expressed the view that, rather than developing a specific framework for sustainable securitisations in the EU, legislators should ensure that the EuGBS is appropriate for use by securitisations. This has been reflected in the final text of the Regulation which includes provision that certain of the EuGBS requirements apply to the originator, rather than the issuer. This ensures that rather than being limited to including green collateral at the issuer level, a securitisation may now benefit from looking at the originator’s role in sourcing green assets and still meet the EuGBS.
However, the final text of the Regulation also confirms that bonds issued for the purpose of synthetic securitisation shall not be eligible to meet the EuGBS. The European Supervisory Authorities will review and report on possible changes to this exclusion within four years of entry into force of the Regulation subject to which the European Commission may produce a further report, and possibly a legislative proposal.
The Regulation also contains some exclusions for securitised exposures and additional specific disclosure requirements for securitisations.
Adoption of EuGBS
An unknown here is the likely breadth of adoption of the EuGBS label by issuers, particularly given the stringency of its requirements compared with current market-based green bond principles. We anticipate that EU institutions and EU member states will perhaps be the first to use the EuGBS following the Regulation entering into force next year.
It is less clear when and to what extent financial institutions and corporates will adopt the new standard. However, those entities with disclosure obligations under the Corporate Sustainability Reporting Directive (which we have separately written on previously, including here, here, here and here) may benefit from helpful synergies in terms of being already up the disclosure curve. As well as the requirements of the Regulation, the adoption of the EuGBS by issuers will be driven by factors such as investor appetite, reputational considerations, the usability of the EU Taxonomy, pricing impacts and the financial costs involved in meeting the new standard.
For further information on the Regulation, please contact Alan Bunbury or your usual Matheson contact.
This article is provided for general information purposes only and does not purport to cover every aspect of the themes and subject matter discussed, nor is it intended to provide, and does not constitute or comprise, legal or any other advice on any particular matter.