The European Council and European Parliament have reached a provisional agreement on a European green bond standard ("EuGBS"). We have previously written about the proposed EuGBS, which is intended to create a high-quality voluntary standard for bonds financing sustainable investment.
Background
The European Commission first presented its proposal for the EuGBS on 6 July 2021. The Council published its proposal on 13 April 2022. On 16 May 2022, the ECON committee of the Parliament published its position, proposing substantial amendments to the Commission's proposal aimed at, among other things, strengthening the protections against greenwashing and regulating the entire European green bond market, rather than just those issuers choosing to utilise the EuGBS. Trilogue negotiations began on 12 July 2022. The institutions failed to reach an agreement at the end of 2022, but a provisional agreement was announced between the Council and the Parliament on 28 February 2023.
The agreed position
Although the full text of the final agreement has not yet been released, the Council has highlighted a number of features of the agreed position:
- All proceeds of EuGBS-compliant bonds 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%. This will allow the EuGBS to be used from the outset.
- Provision will be made for a voluntary disclosure framework for issuers of bonds which do not meet all the requirements of the EuGBS.
- A registration and supervisory regime will be established for external reviewers of EuGBS-compliant bonds. This regime will fall within the European Securities and Markets Authority's responsibility.
Reaction and next steps
Market participants will welcome the voluntary nature of the EuGBS, as there had been concerns that the EuGBS could be made a mandatory standard for any issuer marketing its bonds as sustainable or sustainability-linked. The inclusion of the flexibility pocket for activities that are not yet taxonomy-aligned will also be welcomed by issuers.
The International Capital Markets Association ("ICMA"), the industry body representing the international capital markets, has previously identified a number of challenges that market participants face in using the EU taxonomy. The uptake of the EuGBS once it is in force will likely depend on the ability of regulators and market participants to overcome these challenges.
The progress of the EuGBS is relevant not just to corporate bond issuers but also 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 includes provision that certain of the EuGBS requirements apply to the originator, rather than the issuer. This and other aspects of the EuGBS will be closely scrutinised by market participants as the full details of the final agreement become clear.
The agreement is still provisional in nature and must now be approved by both the Council and the Parliament. Once it is approved by those institutions, it will begin to apply 12 months after it enters into force.