Green Bonds: Update on EU Green Bond Standard Regulation
The provisionally agreed text of the EU Green Bond Standard (EU GBS) Regulation is now available. Next steps are formal ratification by both the EU Council and the European Parliament, following its recent approval by the relevant committees (COREPER and ECON respectively) after trilogue negotiations concluded successfully in February 2023.
We will publish a more detailed update when the final text is available. In the meantime, key points to note from the provisional text are as follows:
| Voluntary designation | In line with the Commission’s original proposal (and notwithstanding a push from the Parliament to make it mandatory), the EU GBS framework will remain voluntary i.e. issuers can opt to use the ‘European green bond’ or ‘EuGB’ designation for bonds where an EU Prospectus Regulation prospectus is required, or where the issuer is an EU or third country sovereign issuer. |
| Allocation of proceeds is key | Allocation of bond proceeds will be the key determining factor as to whether the label can be used (and all proceeds must be allocated before the maturity of the bond). Proceeds will need to be allocated to ‘taxonomy-aligned’ activities i.e. activities aligned with the environmental objectives set out in the Taxonomy Regulation. |
| The 15% ‘flexibility pocket’ was included | Subject to certain conditions, issuers may allocate up to 15% of the proceeds of an EuGB to certain economic activities for which there are no technical screening criteria (TSC) under the Taxonomy Regulation, or which contribute to the environmental objectives of the Taxonomy Regulation. |
| Five allocation options | Bond proceeds can finance environmentally sustainable activities directly and indirectly. Five options are contemplated by the Regulation:
(1) Using the bond proceeds to finance fixed tangible or fixed intangible assets that aren’t financial assets, as long as those fixed assets relate to taxonomy-aligned economic activities. (2) Using the bond proceeds to finance financial assets created no later than 5 years after the issuance of the bond, as long as the proceeds from those or subsequent financial assets are allocated to taxonomy-aligned economic activities. (3) Using the proceeds to finance the assets and expenditures of households. (4) Using the proceeds to finance capital and operating expenditure that relates to taxonomy-aligned economic activities or that will meet those requirements within a reasonably short post-issuance period. With this option, the issuer must publish a CapEx plan in line with Annex I to the Disclosures Delegated Act under the Taxonomy Regulation. (5) Allocating proceeds from a portfolio of one or more outstanding EuGBs to a portfolio of fixed assets or financial assets, as long as the issuer demonstrates in the allocation reports that the total value of fixed / financial assets in their portfolio exceeds the total value of their portfolio of outstanding bonds. With this option, the issuer can only include in its portfolio those assets aligned with any applicable TSC within the 7 years leading up to publication of the allocation report. |
| Net Proceeds | Issuers will be allowed to deduct issuance costs so that only net bond proceeds need to be allocated as set out above (but they may allocate the gross proceeds if they wish to do so). |
| Relevant TSC | To give legal certainty to issuers and investors, when allocating the bond proceeds issuers must look to the relevant TSC in place on the allocation date. If the TSC are subsequently amended, any allocation of unallocated bond proceeds and of proceeds covered by a CapEx plan that haven’t yet met the taxonomy requirements should comply with the amended TSC within 7 years. |
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Transparency and Disclosure |
Key transparency and disclosure obligations are as follows:
(1) Before issuing an EuGB, the issuer must complete a European Green Bond Factsheet (Annex I to the Regulation) (the Factsheet) and procure an independent external reviewer to provide a pre-issuance review of the Factsheet. The information in the Factsheet will be ‘regulated information’ for the purposes of the EU Prospectus Regulation framework. (2) Issuers must also prepare annual allocation reports every 12 months until the EuGB proceeds are fully allocated, and must then procure a post-issuance review from an external reviewer of that allocation report. (3) At least once during the life of the bond (following allocation of proceeds) the issuer must also publish an impact report on the environmental impact of the use of proceeds (one report may cover several issuances). (4) All of this information must be published on the issuer’s website. It looks like that information may also form part of one of the implementation phases for the European Single Access Point. |
| Securitisations | The use-of-proceeds requirement will be applied to the originator, and not to the SSPE, and any reference in the Regulation to bond proceeds is to the proceeds obtained by the originator from selling the assets to the SSPE. Certain securitisations are out-of-scope (such as synthetic securitisations, and securitisations with certain types of underlying exposures (such as those financing certain fossil fuel-related activities). Additional disclosure requirements will also apply to the prospectus. |
| Sustainability-Linked Bonds | Optional disclosure requirements have been included for bonds marketed as environmentally sustainable and sustainability-linked bonds. For the purposes of the EU GBS, a sustainability-linked bond is one whose financial or structural characteristics varies depending on whether the issuer achieves predefined environmental sustainability objectives (i.e. social and governance objectives are out of scope). |
| External Reviewers | ESMA will be responsible for the registration and ongoing supervision of external reviewers in the EU. For third-country external reviewers, a framework for equivalence assessments (by ESMA), recognition (by ESMA) or endorsement (by a registered EU external reviewer) has been included in the Regulation. An 18 month transitional period will also apply to facilitate the provision of services by external reviewers while ESMA is putting its registration and supervision framework in place. |
Next Steps
Following final approval, the Regulation will be published in the Official Journal and is expected to apply 12 months later. Three years after it applies, the Commission must publish a report on whether to regulate sustainability-linked bonds, and the European Supervisory Authorities must look at whether to widen its scope to include synthetic securitisations five years after it applies
We’ll publish further details once the final form of the Regulation is available.
https://data.consilium.europa.eu/doc/document/ST-9074-2023-INIT/en/pdf