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10-10-2023 08:39

EU Green Bond Standard – Slowly getting there

EU lawmakers have approved the final version of the European Green Bond Standard, the first-of-its-kind voluntary standard linked to the EU Taxonomy. We look at some of the challenges with the new regulation and how to overcome them.
European union flag against parliament in Brussels

The EU Parliament recently published the amended final text of the European Green Bond Standard (EuGBS). While the number of amendments compared to the May 2023 version seems large, the actual impacts are not that significant – for better and worse.

The main concept and scope remain intact: The GBS is a voluntary standard that issuers must use if they wish to label their green bond issuances “European Green Bonds” or “EuGBs.” There’s an initial five-year period after which the European Commission will evaluate the impact and feasibility of the standard. As of now, it appears the standard will likely remain voluntary for a longer period of time.

We expect the final form of the regulation to be published in the coming months in the Official Journal, provided the process proceeds smoothly.

Below, we look at some of the extreme situations under the EuGBS. Keep in mind that each issuer is a unique case of its own, and not all points below apply universally.

Real economy transition?

With the GBS nearly in final form, we focus on one key question hovering around its usage: Does the GBS incentivise the transition of the real economy or not?

While the benefits of the GBS are subjective for each issuer, perhaps one way to try and answer that question would be to turn it the other way around: Are there elements in the regulation that encourage a backward instead of forward-looking view?

One of the most widely-discussed concepts of the regulation relates to “grandfathering.” That refers, simply put, to how and when an issuer has to consider the underlying changes in the regulation for their outstanding green bonds.

Grandfathering in brief

Grandfathering currently has two main approaches, depending on whether the issuer chooses to use gradual allocation or portfolio allocation. For simplicity, we assume below the majority of corporates would opt for gradual allocation, while FIG (financial institutions group) issuers and the majority of real estate issuers would work with portfolio allocation.

  • Corporate issuers, after a relevant amendment to the EU Taxonomy’s technical screening criteria, should ensure that they allocate i) any unallocated proceeds and/or ii) proceeds covered by a capex plan within seven years from the relevant amendment to technical screening criteria.
  • FIG issuers should ensure that, when they report on annual allocation, the reporting (and allocation) should only include such assets that are aligned with the EU Taxonomy’s technical screening criteria from the past seven-year period.

How to mitigate grandfathering risks

Issuers may be required to reconsider some of their underlying investments in the event the EU Taxonomy’s relevant technical screening criteria change during the tenor of the issuer’s outstanding EuGB. This is not merely an “admin burden,” but should be considered, especially in light of the latest update from the European Securities and Markets Authority (ESMA). That update suggested that the standard risk clauses in prospectuses regarding allocation of proceeds may not be used to the same extent they’ve been used in the market, highlighting the importance of achieving 100% allocation with high certainty.

A risk-averse corporate treasury team (arguably the majority of treasuries) is more likely to work out ways to mitigate grandfathering-related risks. There are three main ways to do that:

  1. Don’t use a capex plan in connection with EuGB issuance and allocation. Focus only on those assets and expenses that are already green as of now.
  2. Cap your bond tenors in a way that prevents any impact from subsequent changes in technical screening criteria.
  3. Do full allocation at issuance, i.e. only refinancing.

In the current market, perhaps the seven-year period is not such a massive challenge for one single issuance, but what happens if you can’t refinance an EuGB with a subsequent EuGB? 

In summary, with the grandfathering rules, the predictability and stability of policymaking around the EU Taxonomy become increasingly important from an issuer (and investor) perspective to achieve widespread usage of the EuGBS.

The predictability and stability of policymaking around the EU Taxonomy become increasingly important from an issuer (and investor) perspective to achieve widespread usage of the EuGBS.

Any silver lining in sight?

Are there any mechanisms that incentivise issuers to aim for more forward-looking impact? Technically yes, such as a five-year asset origination window mainly targeting FIG issuers. In theory, a bank can issue an EuGB without having any taxonomy-aligned assets on its balance sheet by building up a sufficient asset pool within five years from the issuance date. Neat, right? 

However, while technically possible, it is perhaps not the kind of a risk an issuer would be willing to take, unless they have their lending pipeline confirmed for the next five years. And that seems about 4 years and 11 months too far out, give or take.

In some instances, the above-mentioned approach could be a workable solution if the issuer only has, say, 90% of the nominal amount’s equivalent of green assets on the balance sheet at issuance. But then again, that’s what the 15% flexibility pocket (see the box below) is also targeting. It is, however, positive to see some incentives remaining in the standard to support potential early movers in using the EuGB label.

The 15% flexibility pocket in brief

Issuers can allocate up to 15% of their European Green Bonds to activities not covered by the EU Taxonomy, provided such activities still contribute towards the EU Taxonomy's environmental objectives and meet the relevant Do No Significant Harm criteria.

Harmonisation and next steps

While the EuGBS is intended as “The Standard” to rule them all, there’s still one higher authority overruling on details. The European Central Bank (ECB) has communicated certain criteria and legal provisions to be included in green bond prospectuses. Once the EuGBS is officially published, we would expect that, while ECB’s presence has significantly diminished in the primary market, the central bank would also consider aligning some of its own green bond requirements with the EuGBS text. One example of a mismatch is that ECB currently has stricter verification requirements compared to the EuGBS, creating a headache for issuers.

However, given the current state of the EU Taxonomy, only a handful of issuers in the Nordics could take full advantage of the EuGB label. There is room for those issuers to distinguish themselves from the rest of the market in a positive manner. Arguably, the standard comes with higher costs for setting up an EuGBS-aligned green debt programme, but at the same time it does bring some rarity value for those issuers and may confer benefits in the primary market.

The latest amendment to the GBS also comes with additional details in the appendices (namely in disclosure templates), adding to issuers’ to-do list when contemplating an EuGB labelled bond. Given the vast amount of sustainable finance-related regulation in recent years, the EuGBS five-year checkpoint will, at the latest, hopefully then also bring much needed harmonisation around various data and transparency needs in the market.

Again, the stability and predictability of policymaking will remain a crucial element going forward, also for the EuGBS.


Juho Maalahti
Sustainable Finance Advisory