03 April 2019
[This article has been updated to say that the deadline to respond to the consultation has been postponed to 11pm on Sunday.]
Fears that the EU's green bond standard will restrict the growth of the market are premature, according to Aila Aho, the rapporteur for the sub group that is devising proposals for the standard.
Aho, who is also an executive adviser on sustainability at Nordea Bank, told Environmental Finance that it is her "intuition" that the standard and the taxonomy that underpins it won't deviate drastically from current market practices.
Her comments come in response to fears that a draft taxonomy – issued in December by a Technical Expert Group appointed by the European Commission – that seeks to define eligible green activities, was so strict that it effectively excludes many existing green bonds.
For example, Norwegian second opinion provider Cicero Shades of Green, which was recently again voted best External Verifier in Environmental Finance's Bond Awards, released a report saying that it believed two-thirds of the frameworks it had assessed as being green would not meet the criteria set by the draft taxonomy.
"We are on a learning curve when it comes to evaluating and discussing what is green," said Aho. "There's a lot for us all to do on this journey.
"For that purpose, I think [the standard] is good. If the end result is that not everything that some people thought should be green [meets the standard], then so be it!
"But I don't think that will be the conclusion, especially not over time as the taxonomy develops. If you look at the current most-used categories in the green bond market, there's a lot of buildings and renewables. These areas will be defined in the taxonomy.
"The final criteria and thresholds will be published in June. It's my intuition that it won't be that far from the current market in terms of climate change mitigation."
She added that green bonds that did not meet the voluntary EU standard would still be able to be issued under the Green Bond Principles.
Cicero's paper, called Unintended consequences of proposed EU Taxonomy, warned that the draft taxonomy "could significantly slow down new issuers from coming to market".
It said that some 67% of the green bond frameworks it has reviewed would probably not comply, mainly because "renovated buildings wouldn't meet threshold criteria despite strong governance on energy efficiency targets and climate goals".
"Without consideration of the regional context, and without consideration of the specific activities of the issuer and how they fit with governance for a green transition, many green bond market leaders run the risk of not complying," it warned.
But Aho said the Cicero paper was "premature" in its judgment, adding that there is another, less strict critierion for energy efficiency in buildings alluded to in the taxonomy, which had yet to be fully defined.
"The taxonomy is challenging to understand because it's still under development," Aho said. "Some people have jumped to conclusions.
"Cicero only used one of the two criteria in reaching their conclusion – it was difficult to use the other one because there wasn't a number [attached to it].
"This led to a conclusion that was probably a bit premature. We are taking all the feedback seriously. I wouldn't make strong conclusions based on a methodology that was done in December at the early stage of the process and it was in an incomplete form."
Aho also countered arguments that the process of formulating the EU's taxonomy and standard was slowing the green bond market, amid reports that issuers are waiting for the standard to be finalised before issuing.
"We have issued our proposal, so issuers can see there's a proposal for a framework, for the content of framework, reporting and verification," she argued.
"There's some indication of a taxonomy already. There's already guidance issuers can use, and issue under the GBPs or Climate Bonds Initiative.
"They can requalify existing issues by complying with the terms of the standard – it's not more complicated than that. The elements are there, so there's some guidance on how to prepare, at least."
Overall, the feedback received so far to the draft standard has been positive, said Aho: "It seems there's support for the standard. There seems to be support for strengthening the role of reporting, although there's challenges to how it should be done so it's not too much of a burden. Issuers need to feel it's worthwhile issuing green.
She added: "We hope it will become a gold standard for the market globally. It would be great for all the market players to have a harmonised way of thinking. It would make companies' lives easier.
"I believe there's plenty of potential for this to happen."
Aho said the sub-group is on track to publish its final report on the standard in June. But she said it was still keen to receive feedback. The deadline has been extended to 11pm on Sunday.