Greening the bond markets: MEPs approve new standard to fight greenwashing

On October 5, 2023, the European Parliament (EP) informs that its members have finally adopted the long awaited, first of its kind voluntary standard for the use of a European Green Bond (EuGB) label, marking a significant step in the fight against greenwashing. This regulation, which was adopted by a majority vote of the EP, establishes uniform standards for issuers seeking to market their bonds as European green bonds. The aim is to provide investors with greater confidence in directing their funds towards sustainable technologies and businesses, while also ensuring that companies issuing these bonds meet the expectations of environmentally conscious investors. The key pillars of the standard are as follows:
(1) Transparency and Disclosure Requirements:
Companies opting to adopt the EuGB label must disclose substantial information about how the bond proceeds will be utilized. Additionally, they are required to demonstrate how these investments contribute to the overall green transition plans of the company. The disclosure requirements, presented in template formats, can also be utilized by companies issuing bonds that may not fully adhere to the strict EuGB standards but still wish to convey their green aspirations.
(2) External Reviewers:
The regulation establishes a registration system and supervisory framework for external reviewers of European green bonds. These independent entities are responsible for assessing whether issuers adhere to the defined standards. The regulation also addresses the identification, elimination, and transparent disclosure of any actual or potential conflicts of interest that external reviewers may face.
(3) Flexibility and Taxonomy Alignment:
While the taxonomy framework is being developed, issuers of European Green Bonds must ensure that at least 85% of the funds raised are allocated to economic activities aligned with the EU’s Taxonomy Regulation. The remaining 15% can be allocated to other economic activities, provided the issuer clearly explains the purpose of these investments.
According to the corresponding press release, the adoption of this regulation responds to the growing demands of investors and aligns with the conclusions of the Conference on the Future of Europe. In fact, the green bond market has experienced exponential growth, with annual issuance surpassing half a trillion USD in 2021, a 75% increase compared to the previous year. Europe leads in green bond issuance, accounting for 51% of the global volume in 2020. However, green bonds still represent a small portion, approximately 3-3.5%, of overall bond issuance.