Implications for the established green bond market
In its opinion statement, the ECB contends that the current green bond market suffers from some shortcomings, specifically a lack of sufficient standardisation and common definitions relating to underlying green projects. The absence of common reporting frameworks could reduce the economic attractiveness of green bond instruments and increase transaction costs compared to conventional financing tools. As such, the ECB welcomes ESMA to supervise external reviewers of European green bonds at the EU level, as proposed.
The scope of the proposed regulation is voluntary, which implies that existing standards for the industry regarding green bonds are still applicable. The ECB views it as “necessary” that outstanding bonds continue to maintain their “green bond” designation. At present, industry standards for the green bond market refer to the International Capital Markets Association’s (ICMA) Green Bond Principles.
It is likely that significant efforts will be made to preserve the integrity and reputation of existing standards and the green bond market as a whole, with the grandfathering in of previously labelled “green bonds” an open possibility.
Timelines for mandatory alignment remain tentative
In order to mitigate potential sudden divestments from non-taxonomy-aligned green bonds and green bond issuance, the ECB emphasises a “balanced approach” in the short-term. The ECB recognises that setting a concrete timeline for when the new proposition should become mandatory is not straightforward. The risks associated with a potential regulation shift, principally market volatility and disruptions, must first be considered.
The ECB initially suggests three to five years as a reasonable time period for the EuGBS to become mandatory for newly issued green bonds, with transition periods to be fine-tuned following a proposed impact analysis.
As seen in the practical implementation of other mechanisms aimed at increasing transparency and best practice relating to sustainability impacts, voluntary adoption of the new standard is both expected and encouraged well ahead of any mandatory requirements.