This is an extract from a recent briefing “European Green Bond Regulation” by Clifford Chance

Since the European Commission published its proposal for a Regulation on European green bonds (“EU GBS”) in July 2021 as part of its agenda on sustainable finance to meet the goals of the Paris Agreement and the European Green Deal, the draft EU GBS has been widely discussed and commented on – most recently by the Report of the Committee on Economic and Monetary Affairs of the European Parliament (A9-0156/2022) (“ECON Report”) published end of May 2022.

Currently, the green bond market is mainly organised through market-based and industry group standards. This includes the International Capital Market Association’s (“ICMA”) Green Bond Principles and the Climate Bond Initiative’s (“CBI”) Climate Bond Standard which are voluntary standards that significantly supported the growth of the green bond market to date. While these voluntary standards provided a basis for the development of the green bond market, the European Commission aims to provide issuers and investors with a more extensive and uniform regulatory framework based on Regulation (EU) 2020/852 (the “EU Taxonomy”) with the introduction of a European green bond standard which will address obstacles issuers and investors face with the present market standards and facilitate the further development of the green bond market.

What does the EU GBS comprise?

The EU GBS is focused on the alignment of the use of proceeds of European green bonds with the EU Taxonomy, additional reporting requirements for issuers of European green bonds (pre- and post-issuance) as well as regulating the external review process. The EU GBS is voluntary and can be applied by both EU and non-EU issuers and by all types of issuers, i.e. from the private and public sector, including financial and non-financial undertakings, and sovereigns.

• Use of Proceeds: Definition of “green” and EU Taxonomy alignment: The main characteristic of green bonds is the financing of environmentally sustainable activities of the issuer. This includes the transformation of any ongoing “brown” activities into “green” activities. However, there is no uniform or standardised definition of “green” or “sustainable”. The proposed EU GBS requires that any green bond with the “European Green Bond” label must fund only environmentally sustainable economic activities that align with the EU Taxonomy. The EU Taxonomy and respective delegated acts will provide a classification system for economic activities by categorising economic activities based on their environmental impact. The process of determining which economic activities shall be included in the EU Taxonomy is still ongoing.

• Reporting requirements: Under the draft EU GBS, issuers of European green bonds will be required to disclose information pre-issuance by completing a so-called European Green Bond Factsheet and to comply with post-issuance allocation and impact reporting requirements. The pre-issuance disclosure, including the European Green Bond Factsheet, prospectuses and investor presentations, is focused mainly on information on the activities which the issuer intends to finance with the bond proceeds. The issuer’s post-issuance reporting will consist of a so-called European Green Bond Annual Allocation Report which will confirm the allocation of the proceeds of European green bonds in accordance with Articles 4 to 7 of the EU GBS. The European Green Bond Impact Report for its part will contain information on the financed activities or projects and reflect the influence such activities or projects have in regard to the environmental objectives which the issuer disclosed in its pre-issuance documentation.

• External review: The disclosure and reporting provided by issuers of European green bonds will be subject to external review under the draft EU GBS, which follows the concept established by the ICMA and CBI principles. The EU aims to optimise and regulate the external review process in the EU GBS by enhancing accountability and transparency of providers of external reviews. Accordingly, the EU GBS proposes to establish a registration and supervisory regime for external reviewers that will fall within the European Securities and Markets Authority’s (“ESMA”) responsibility.

Recent Publication of ECON Report on the EU GBS

Based on the European Commission’s proposal, the Committee on Economic and Monetary Affairs (ECON) of the European Parliament published its report at the end of May 2022 and suggested several substantive amendments. These include increasing disclosure requirements and extending the scope of the EU GBS to all issuers of “bonds marketed as environmentally sustainable” in the EU and issuers of sustainability linked bonds, and this would therefore include issuers of green bonds where the proceeds are not applied to taxonomy-aligned projects and sustainability linked bonds issued in accordance with the ICMA Green Bond Principles and Sustainability-Linked Bond Principles. However, the ECON Report suggests a “dual track” approach with certain of the more stringent requirements only applying to “European green bonds”. The ECON Report further provides for increased liability and sanctions in case of non-compliance. More generally, the ECON Report attempts to align the EU GBS with other aspect of the EU’s sustainability legislation, namely disclosure requirements under Regulation (EU) 2019/2088 on sustainability-related disclosure in the financial services sector (“SFDR”), the EU Taxonomy and the Corporate Sustainability Reporting Directive (Proposal for a Directive COM(2021) 189 final, “CSRD”).

The European Commission, European Council and European Parliament will be entering trilogue discussions and while it is unlikely that all the ECON committee proposals will be taken forward into the final agreement the expectation is that the final Regulation on European green bonds will adopt some elements of both the ECON Report and the European Council’s general approach, meaning it may differ substantially from the initial Commission proposal from July 2021.

Next Stops of the European Green Bond Regulation

The EU GBS is subject to the EU’s ordinary legislative procedure. The European Parliament is expected to commence the trilogue negotiations with the European Council and the European Commission. The European Council already agreed on its general approach on 13 April 2022.

In addition to the legislative procedure on the EU GBS, the further development of the EU Taxonomy is crucial to the EU GBS. The EU Taxonomy Delegated Acts will dictate how strict the requirements for activities labelled “green” will be.

While a global standard seems unlikely, the forum of the IPSF provides the opportunity for policymakers to achieve more standardisation on the green bond market across jurisdictions.

Finally, the development of the EU GBS may serve as an example for the development of further standards in the ESG bond market, e.g. social bonds or securitisation-specific green or sustainable frameworks.