18 June 2019

Proposed green bond standard to 'safeguard' market growth

The proposed EU green bond standard (EU GBS), released today, will ‘safeguard’ the growth of the green bond market by creating common and safe ground for issuance, delegates at Environmental Finance’s ESG in Fixed Income 2019 conference were told.

“It is a common framework for everybody to look at, to use as a benchmark or yardstick. And they [investors and asset managers] will get a very good guidance on what is at least safe ground,” Aila Aho, rapporteur for the green bond standard sub-group of the EU’s Technical Expert Group on Sustainable Finance (TEG), said.

It clarifies and defines what is considered ‘green’ based on the TEG’s taxonomy of climate mitigation and adaptation activities.

The EU GBS should be mostly positive for smaller investors, as they sometimes have limited in-house analysis capabilities, Aho said, and especially for issuers who “might have been struggling with potential accusations of greenwashing,” she argued.

While the EU GBS is suggested as a voluntary framework, verification will be mandatory for bond issuers using the standard.

The proposed mandatory verification requirement aims to support the integrity, credibility, harmonisation and efficiency of the green bond market, Aho said.

Verifiers should be registered to ensure their environmental competence and adequate governance and to prevent conflicts of interest. “This is a missing link at present,” and may require new legislation, she said.

A large majority of green bonds already receive a second party opinion, but mandatory verification by registered verifiers would help to create a “level playing field”, Aho said. Today, verifiers would differ in their capabilities to evaluate all six environmental objectives of the taxonomy, she continued.

The final proposal of the taxonomy, also released today, will feature some changes from those in the TEG’s draft report in December.  

The earlier draft report’s definition of eligible green activities was so strict that it would have effectively excluded many existing green bonds, some leading market participants such as Cicero feared.

When asked if this has changed with the new standard, Eila Kreivi, director and head of capital markets at the European Investment Bank, replied with an emphatic “Yes”.

“There will probably be some good surprises for a lot of people who criticised the first version to be dark green only,” Kreivi continued.

The final version includes “enabling sectors”, Kreivi said, which will entail the manufacturing of wind turbine components, and research and development.

The real estate sector thresholds, which were also criticised, have been amended as well, Aho said.

Kreivi also gave advice for those sectors that don’t fall under the green bond standard definition: “My advice to them would be to issue a normal corporate bond and highlight your good environmental, social and governance (ESG) credentials in general,” she explained.

Other frameworks, such as the Green Bond Principles (GBP), will coexist with the EU standard, and issuers will be free to choose the framework they find most suitable.

The GBPs apply globally and are “more nimble” than the EU standards, Kreivi said.

Green bonds that have already been issued will be able to upgrade to the EU GBS if they fulfil the requirements, Aho added.

The TEG also suggests that, for an interim period, supervision of the verifiers would take place via a market-based, voluntary scheme. But it proposes that this should be replaced by a centralised system organised by the European Securities and Markets Authority (ESMA).

Kreivi said that the green bond standard “is not one single silver bullet solution that fixes all the problems. [But] it addresses the biggest sectors [bringing benefits to climate mitigation], where benefits can be gained.”

Aho added that a “lack of green projects” is restricting the market growth.

“We are going to need other policy measures that are directly addressing how to price negative externalities … to [enable] growth in the real economy,” she said.

The final TEG reports on the taxonomy and green bond standard will need to be adopted by the European Union before its recommendations come into effect.