The provisional agreement on European Green Bonds
Last week, a provisional agreement was finally reached between negotiators of the Council and the European Parliament on European Green Bonds. Initial information released about the agreement reveals that issuers seeking the European Green Bond label must allocate the proceeds from bonds to EU Taxonomy-aligned economic activities. In addition to this requirement, issuers will also have to show how the use of proceeds aligns with their overarching company transition plans.
The provisional agreement also includes a 15% “flexibility pocket” for the allocation of proceeds to activities not yet covered by the EU Taxonomy. While this “flexibility pocket” allows for some expenditures that are not explicitly defined under the EU taxonomy, issuers will likely have to demonstrate that those expenditures contribute to environmental objectives and that they meet the generic “Do No Significant Harm to other objectives” and the Minimum Safeguards criteria, meaning that all expenditures may still be tied to the Taxonomy regulation in some way. Although not stated under the provisional agreement, these Taxonomy-related requirements for the 15% pocket suggest that the allowance for flexibility will only tighten in the future.
One key issue widely discussed in the market has been the potential requirements the European Green Bond standard may place on “regular” green bonds as well as environmentally-focused sustainability-linked bonds. In the provisional agreement, any mandatory requirements for other bonds have been dropped. The latest version now includes voluntary disclosure requirements for other sustainable bond formats, with an aim of setting best practices for transparency.
In the future, other formats will also see the possibility to achieve a EU label, as the European Commission committed to developing a regulatory proposal on sustainability-linked bonds within three years, as part of the agreement.
In a step towards assuring trust in the system as a whole, the European Securities and Markets Authority (ESMA) has been given a supervisory role as the external reviewers (including Second Opinion Providers) of European Green Bonds. Within the proposed supervisory framework and registration system for external reviewers, reviewers will have to identify and disclose any potential conflicts of interest.
The agreement is provisional until formally adopted by the Council and Parliament and is expected to be effective 12 months after adoption.