The proposal for the European Green Bond Standard will determine which bonds can be referred to as 'European green bonds' (or its abbreviation 'EuGB') with the ultimate objective to channel private capital into green and more sustainable projects in a framework that is credible in the eyes of the investors to curb risks of greenwashing. While the European Green Bond Standard (the "Standard") seems to remain as optional, certain minimum disclosure requirements are now proposed to catch issuers of all bonds labelled as environmentally sustainable.

The European Commission published its proposal for the Standard last summer. The Standard is proposed to be harmonised as an EU regulation, i.e., the Standard will be legally binding in all EU Member States, which means that issuers have the possibility to issue EuGBs upon the Standard's entry into force without waiting for local implementation.

The aim of the Standard is to provide a framework that the issuers may decide to rely on when issuing green bonds. The designation "European green bond" or "EuGB" will be reserved solely for bonds that meet the requirements set forth in the Standard. The principal requirement is that the use of the proceeds of the EuGB shall be allocated to the economic activities that are aligned with the EU taxonomy1 requirements. Opinions from certain market participants, such as the European Central Bank (ECB), have suggested that the Standard should be mandatory for issuers within the EU. European Parliament's recent official negotiation position published in May 2022 (the "Position") does not go so far, but confirms the voluntary nature of the EuGB label. However, the Position proposes additional disclosure requirements to issuers of all bonds that are labelled as environmentally sustainable.

European Parliament's recent official negotiation position published in May 2022 confirms the voluntary nature of the EuGB label. However, the Position proposes additional disclosure requirements to issuers of all bonds that are labelled as environmentally sustainable.

For all sustainability-linked bonds and bonds that are marketed as environmentally sustainable in the EU, new transparency requirements are proposed in the Position for the investors to be able compare and evaluate the environmental impact of those non-EuGBs. These include information about the percentage of expected taxonomy-alignment of the use of proceeds of the bond and publication of a statement on due diligence policies with respect to principal adverse impacts of investment decisions on sustainability factors. The issuers of these bonds should also disclose specific information in pre-contractual disclosures and annual periodic reports, which should be subject to the same standard of external verification as that applying to EuGBs.

Additionally, issuers of both EuGBs and sustainability-linked bonds subject to an obligation to prepare transition plans under the Corporate Sustainability Reporting Directive (the "CSRD") will be required to prepare audited plans for carbon emission reductions. Effectively, the requirement to prepare a transition plan would only catch large companies, as SMEs are not in the scope of the CSRD.

The proceeds of EuGBs (less issuance costs) still need to be fully allocated to economic activities that meet the taxonomy requirements or will meet them within 5 or 10 years, depending on the relevant economic activity.

The Position did not amend the grandfathering provisions, so it is still expected that issuers may issue under the previous version of the taxonomy for five years. Pursuant to the Position, allocatedbond proceeds will not be required to be reallocated following an amendment to the taxonomy requirements.

Next, the EU Member States will negotiate on the Position before the plenary votes on the final version. Even though green finance is a hot topic at the moment, it will presumably take some time until we see the final outcome of the Standard. The Standard could be a great boost for the Finnish bond market that has lately been stagnant due to the Russian invasion of Ukraine as it would make comparison between green bonds easier and provide a tool for the issuers and investors that share the same values to find each other.

Footnote

1 Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 [2020] OJ L198/13.

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