The European Union has reached a deal on what it says is the “world’s first” set of comprehensive rules for issuing green bonds to meet the bloc’s net zero goals, although compliance will be on a voluntary basis.
EU member states and the European Parliament jointly agreed on standards for companies that want to use the term “European green bond” or EuGB. Currently, investors are faced with a plethora of national practices on green bonds which can be hard to compare, though an attempt to make the EU norms mandatory failed.
The “European Green Bonds Standard,” which companies issuing a bond can choose to comply with, will primarily enable investors to orient their investments more confidently toward more sustainable technologies and businesses. It will also give the company issuing the bond more certainty that its bond will be suitable for investors seeking green bonds in their portfolio. The standard aligns with the more horizontal taxonomy legislation which defines which economic activities can be considered environmentally sustainable.
All companies choosing to use the standard when marketing a green bond will be required to disclose much information about how the bond’s proceeds will be used, but are also obliged to show how those investments feed into the transition plans of the company as a whole. The standard, therefore, requires companies to be engaging in a general green transition. The adoption of the standard will also guarantee to investors that the bond is taxonomy aligned.
The disclosure requirements, set out in template formats, will also be open to being used by companies issuing bonds that cannot fulfill all the requirements to qualify for the EUGBS. These companies would thereby subject themselves to ambitious transparency requirements and, as a result, benefit from better trust among investors.
The rules will enable investors to identify high-quality green bonds and companies, thereby reducing greenwashing or exaggerated environmentally-friendly claims, parliament said.
According to Barclays, global sales of corporate bonds with ESG criteria will exceed $460 billion this year, after the asset class suffered its first setback in 2022 as rising interest rates weighed on credit markets.
ESG bond volumes increased in recent years but fell by 22% in 2022, as corporations faced much higher borrowing costs as a result of significant monetary tightening operations by global central banks combating inflation. According to a credit research note from Barclays, corporate ESG bond issuance dropped to $362 billion last year from $461 billion the previous year. The lender estimates that this year, ESG bond sales will increase by 30% due primarily to the sale of green bonds.