Sustainable Finance: Council Adopts Green Bond Standard

The Council has recently delivered a regulation that introduces the European Green Bonds. This new standard sets uniform prerequisites for issuers who intend to label their bonds as EuGB or European green bonds. These bonds are particularly intended for environmentally sustainable projects.

The Purpose and Benefits of European Green Bonds

European Green Bonds serve as a pivotal instrument to finance investments in green technologies, energy efficiency, sustainable transport infrastructure, research infrastructure, and resource efficiency. These bonds are aligned with the EU taxonomy for sustainable activities and are available to investors worldwide.

The introduction of the European Green Bond standard is a significant step forward in implementing the EU’s strategy on funding sustainable growth and transitioning towards a climate-neutral, resource-efficient economy. This standard will enhance consistency and comparability in the green bond market, which is beneficial both for issuers and investors of green bonds.

The issuers of these bonds can demonstrate that their funding is directed towards legitimate green projects that align with the EU taxonomy. This alignment enhances investors’ confidence in green investment, offering a framework that mitigates the risks associated with greenwashing. As a result, it encourages the flow of capital into environmentally sustainable projects.

Greenwashing: Limitations on The Promotion of Carbon Neutrality Initiatives. By Pierre Frühling, Alix d’Arjuzon and Enzo Pannozzo, HFW Paris/Brussels. Page 19. Green Mobility Magazine II.

Regulatory Measures Against Greenwashing

The regulation introduces a registration system and a supervisory framework for external reviewers of European green bonds. This measure is designed to prevent greenwashing in the green bonds market. Additionally, the regulation also mandates voluntary disclosure requirements for other environmentally sustainable bonds and sustainability-linked bonds issued within the EU.

All proceeds from European green bonds are expected to be invested in economic activities that are compatible with the EU taxonomy for sustainable activities, on the condition that the sectors involved are already encompassed by the taxonomy.

Flexibility Pocket: An Exceptional Measure

For sectors not yet covered by the EU taxonomy and for certain very specific activities, the regulation allows for a flexibility pocket of 15%. This provision ensures that the European Green Bond standard is usable from its inception.

The necessity and application of this flexibility pocket will be reassessed as Europe’s transition towards climate neutrality progresses and with the anticipated rise in attractive green investment opportunities in the forthcoming years.

Origin and Future of European Green Bonds

The European Green Bond proposal was first presented by the Commission on 6 July 2021. The proposal aimed to regulate the use of the designation ‘European green bond’ or ‘EuGB’ for bonds pursuing environmentally sustainable objectives.

The proposal also sought to establish a system for the registration and supervision of entities serving as external reviewers for European green bonds and to regulate the supervision of issuers of European green bonds.

The Council established its position on the proposal on 13 April 2022. Trilogue negotiations began on 12 July 2022 and concluded with a provisional agreement on 28 February 2023. The European Parliament adopted the contents of the agreement in its position on 5 October 2023 with 418 votes in favour, 79 against and 72 abstentions. 

The Council adopted the regulation on 23 October 2023. The regulation will be signed and published in the EU’s Official Journal before coming into effect 20 days later. It will start applying 12 months after its entry into force.

The emergence of the European Green Bonds is a crucial milestone in sustainable finance. It not only promotes green initiatives but also protects investors from the risk of greenwashing. It strengthens the Council’s commitment to sustainable growth and demonstrates a proactive approach towards a climate-neutral and resource-efficient economy.