The proposal for a voluntary EU Green Bond Standard (EU GBS) has continued to move ahead since our last update (A voluntary or mandatory EU Green Bond Standard? The debate continues).
Against the backdrop of an ever-increasing focus on combatting ‘greenwashing’, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) published its report on the Commission’s EU GBS proposal, and the EU Council published a 3-column table setting out the negotiating position of each of the Commission, EU Council and Parliament in advance of the impending trilogue negotiations.
While the final shape of the EU GBS will not be known until at least Q3 2022, key themes from the Parliament’s position (as outlined by ECON in the recent report) are as follows:
- Nuclear and Gas: Depending on what happens at the end of the current ‘scrutiny’ period for the Commission’s proposal to include nuclear and fossil gas-related activities in the list of environmentally sustainable economic activities covered by the EU Taxonomy, specific transparency requirements may be added (into the EU GBS fact sheet) for nuclear and fossil gas-related activities.
- Minimum Disclosure Requirements for other Bonds: Bonds marketed in the EU as environmentally sustainable, and sustainability-linked bonds, in each case that do not use the EU GBS designation, should also be subject to minimum sustainability disclosure requirements, including a requirement to publish a statement on due diligence policies regarding principal adverse impacts of investment decisions on sustainability factors. Issuers of bonds marketed as environmentally sustainable in the EU would also have to disclose specific information in pre-contractual disclosures and annual periodic reports – the Parliament has proposed that an external verification requirement also be applied to those disclosures. Sustainability-linked bonds and bonds marketed as sustainable in the EU that have already been issued when the EU GBS becomes applicable would not be subject to those disclosure and review requirements.
- Taxonomy-alignment: Where issuers allocate bond proceeds to economic activities that are not yet taxonomy-aligned, but will be within a 5-year (or extended 10-year) period, the Parliament has proposed that those issuers be required to set out, in CapEx plans, how taxonomy-alignment for those activities will be achieved. The Parliament has also suggested civil liability for EU GBS issuers where investors incur damage as a result of a breach of the requirements for taxonomy-aligned allocation of proceeds. Where an EU GBS is to be used for securitisation purposes, the Parliament has suggested that the taxonomy-alignment requirements apply to the entity from which the issuance economically originates.
- Transitional Economic Activities: Issuers should be required to disclose what portion of a bond’s proceeds is being allocated towards transitional economic activities (i.e. economic activities for which there are no technologically and economically feasible low-carbon alternatives, as opposed to environmentally sustainable activities).
- Fact Sheet and Prospectus: Where there is a prospectus, the Parliament’s proposal is that the EU GBS fact sheet be fully integrated into that prospectus.
- Transition Plans: The Parliament has proposed that issuers of European green bonds and sustainability-linked bonds that are subject to an obligation to publish non-financial information under the Accounting Directive should have transition plans in place which are the subject of positive auditor opinions, and which are disclosed in the factsheet and impact reports (for EU GBS) or in pre-contractual disclosures and sustainability impact reports for sustainability-linked bonds. This is with a view to avoiding ‘greenwashing’ by so-called ‘brown’ companies.
- Impact Reports: The Parliament has also proposed that impact reports be published twice, rather than once, during the life of the bond. It has also suggested that impact reports be subject to scrutiny by external reviewers, and that each impact report relates to only one bond (save in the case of a portfolio).
- Equivalence: Bond proceeds allocated in a third country should be able to use a sustainable taxonomy from that third country provided that taxonomy has been deemed ‘equivalent’ to the EU Taxonomy.
- Supervision: The Parliament has suggested an increased supervisory role for national competent authorities (NCAs) whereby they would supervise compliance with the transparency and external review requirements by issuers of EU GBS, sustainability-linked bonds, and other bonds marketed as environmentally sustainable in the EU. As part of that, the Parliament has proposed that NCAs be given the power to prohibit an issuer from issuing a bond if it fails to comply with its EU GBS obligations, and the power to preclude an issuer from issuing bonds for a fixed time-period of up to 1 year in the case of repeated non-compliance.
- Tax Avoidance: Issuers of European green bonds that are located in countries on the EU list of non-cooperative jurisdictions for tax purposes or, in the case of sovereign issuers, that facilitate tax avoidance through their jurisdiction, will not be permitted to use the EU GBS designation.
Voluntary or Mandatory?
While the initial draft report published by ECON November 2021 suggested that the EU GBS become a mandatory standard between 2025 and 2028, the Parliament’s final pre-trilogue proposal is that the Commission produce an impact assessment, 2 years after the Regulation comes into force, on whether the EU GBS should be mandatory.
What happens next?
It is by no means certain whether the final agreed form of the EU GBS will include all of the above proposals, and we will issue a further update once the trilogue negotiations complete. In the meantime, if you wish to discuss any of the points mentioned above in more detail, please contact any member of our Debt Capital Markets team or your usual Arthur Cox contact.
"We are serious about ending greenwashing. When this regulation becomes law, simply saying your firm’s bond is green will no longer be good enough.” - Paul Tang MEP (EU GBS rapporteur)