The EU Green Bond Regulation and draft regulatory technical standards set out in-depth requirements for issuers and independent external reviewers for bonds labelled as “EU Green Bonds”. These rules break away from the existing global green bond market and demonstrate an advanced level of accountability and transparency towards building an environmentally and socially sustainable economic model. In line with the sustainable finance agenda, the EU Green Bond rules establish an equal footing for environmental, social, and financial accountability.

With the recent publication of ‘The future of European competitiveness’ chaired by Mario Draghi (Commission, 2024), it is clear that ongoing European policy aims to redouble efforts to raise productivity as part of a joint plan for decarbonisation and competitiveness. This policy report signals ways on how the financial sector can support market investment in green products, technologies, and materials. It furthermore targets access to finance by proposing simplification of the EU Taxonomy and sustainability reporting, particularly for smaller companies.  This is a feasible task that serves to benefit the emerging EU Green Bond Framework.

The appetite for EU Green Bonds has gained momentum since President of the ECB Christine Lagarde called for EU-issued green bonds as a tool in the greening of the Capital Markets Union, necessary to close the financing gap for the green transition (Euractive, 2023). In its June 2024 report on climate-related financial disclosures of Eurosystem assets, the ECB’s tilting framework aims to tilt corporate bond purchases towards companies with a better climate performance (ECB, 2024). This means preferential treatment for green bonds that fulfil stringent criteria of the EU Taxonomy.

The EU Green Bond rules operate along two regulatory dimensions, implementing Europe’s:

• securitisation framework of financial oversight, and
• sustainable finance framework of environmental, social and governance (ESG) oversight.

The first dimension focuses on securitisation rules for all types of bond issuances and relate to credit risk due diligence, risk-retention, and transparency. The second dimension relates to the cornerstone of the EU’s sustainable finance framework, the EU Taxonomy. At least 85% of an EU Green bond proceeds must demonstrate the achievement of substantial contribution and do no significant harm to climate and environmental objectives, and the attainment of minimum social safeguards in accordance with the EU Taxonomy requirements. An integral part of the EU rules is the conduct of an independent external review at critical stages throughout the EU Green bond lifetime. Such comprehensive and rigorous requirements are not in place for the existing global green bond market.

The existing global green bond market, which promotes climate, environmental and social goals originated less than 20 years ago. It has advanced in the intervening period, particularly since the technical expert group of the EU Taxonomy first commenced development of the EU Green Bond principles. The global green bond market presents a mix of green, social, sustainable, sustainability linked and transition bonds. During 2023 such bonds were valued globally at over 939 billion USD under 1.5% of the total conventional bond market (Bloomberg, 2024).

The issuance of any type of bond is a voluntary decision. Prior to the EU Green Bond market, issuers such as corporates, financial institutions and sovereign governments had two choices:
1. Issue a conventional ‘vanilla’ bond lacking an ESG dimension but with regulatory oversight of the financial dimension, or
2. Issue a standard green bond with capital market guidance on the ESG dimension and with regulatory oversight of the financial dimension.
Now with the implementation of the EU Green Bond Framework issuers have a third way:
3. Issue an EU Green Bond with regulatory oversight of both the ESG and financial dimensions.

As a new entrant to the market, the EU Green Bond may be considered by market participants as a late entrant. By now investors have other well-trodden alternatives to the EU green bond framework. The pressing question is whether issuers and investors, in particular institutional investors will view the rigour of the EU Green Bond framework as an asset. The ECB’s tilting framework indicates they will.
In conclusion, ELS Europe outlines key comparisons between EU Green Bond rules and the existing global green bond market as concerns the ESG dimension as follows:

1. The wider sustainable finance framework and EU Green Bond market has regulatory oversight from the European Supervisory Authorities, in particular the European Securities and Market Authority (ESMA). ESMA’s oversight introduces specific disclosure requirements that apply to EU Green Bonds to ensure investors are fully informed about the environmental characteristics of the transaction. For existing global green bonds, it is mainly capital market actors who conduct the oversight.
2. The EU Taxonomy provides a cohesive and rigorous set of technical screening criteria from which to compare asset performance. The existing global green bond market is based on various voluntary principles and guidance.
3. An EU Green Bond issuance must take into account improved technologies and processes by way of amendments to technical screening criteria which occur after issuance of the bond. Such continuous performance improvement, if found in the existing global green bond market, is unlikely to have clear rules on how issuers must respond to such changes.
4. The EU Green Bond regulatory framework requires mandatory external review at critical stages of the bond lifetime. Mandatory external review is conducted pre-issuance of the factsheet, post-issuance after full allocation of proceeds, before the end of the capital expenditure (CapEx) Plan, and under other circumstances such as where corrections and amendments to allocation of proceeds are made, or alterations to assets are undertaken. The existing green bond generally has a single pre-issuance external review undertaken in its lifetime.

Opinions expressed are those of the author, Dawn Slevin, Managing Director, ELS Europe. This information does not constitute legal, regulatory or other advice.

References
‘The future of EU competitiveness: a competitiveness strategy for Europe’, European Commission, 9 September 2024
‘Climate-related financial disclosures of Eurosystem assets held for monetary policy purposes and of the ECB’s foreign reserves’, European Central Bank, June 2024
‘Green Bonds reach new heights in 2023’, Bloomberg Professional Services, 8 February 2024
‘ECB’s Lagarde calls for EU-issued green bonds,’ Euractiv, 29 September 2023