The European Union’s long-awaited rules for green bonds came into force at the weekend, although the strict process means a limited number of borrowers can take them on at the moment.
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(Bloomberg) — The European Union’s long-awaited rules for green bonds went into effect over the weekend, though the strict process means a limited number of borrowers can use them yet.
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The European Green Bond Standard is designed to help end green burning in the growing market for bonds that finance climate-friendly projects. Going forward, the EU says compliance is necessary if issuers want to market their debt as a “European green bond.”
It’s a bloc effort to provide the market’s gold standard with a mishmash of industry guidelines and labels, led by the International Capital Market Association’s Green Bond Principles. The EUGBS remains voluntary too, and bankers say most lenders are likely to avoid meeting its stricter conditions next year.
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“A large part of the market will continue to use the ICMA green bond standard,” said Hans Biemans, head of sustainable markets at ING Groep NV. Issuers with large amounts of “relatively simple green assets” such as renewable energy resources are the most likely to take them, he said.
The rules became available to borrowers on December 21 after lawmakers agreed on them in early 2023, after years of negotiations. The market continues to grow globally, countering the US backlash against ESG investments, with nearly $560 billion of green bonds issued this year alone.
One of the key criteria of EUGBS is that at least 85% of the bond proceeds are aligned with the EU’s taxonomy, a diverse and growing set of sustainability rules. All projects must comply with the “do not cause too much harm” condition, and must be approved by a designated EU green bond reviewer authorized by the European Securities and Markets Authority.
Although the additional work required may deter many, it is possible that the lure of low borrowing costs will convince those with enough suitable projects. Money managers may prefer default bonds given their alignment with the taxonomy, as that can help attract income from investors with sustainable commitments.
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“It is possible that EU sovereigns, supranationals and agencies, as well as green companies, are the first” to use the label, wrote a team at law firm A&O Shearman. After that, “it may become more popular as more issuers adapt to the growing trend of sustainability reporting.”
Tammo Diemer, director-general of the German Finance Agency, said earlier this month that although it will “take taxonomy proposals and increase transparency,” it has no intention of implementing a green bond standard. Austrian Treasury Managing Director Markus Stix also said that his country has no intention of issuing EUGBS bonds next year, saying there are still questions about its compatibility with the national green framework.
That will leave market participants watching to see how many green bond issuers decide to comply, and how their bond prices are relative to peers.
“Large companies and financial institutions with suitable projects and existing assets can be the frontrunners for the EUGB label,” said Kevin Leung, a sustainable finance analyst at the Institute for Energy Economics and Financial Analysis. “The label will be a dominant sub-segment of the green bond market.”
—Courtesy of Kamil Kowalcze and Marton Eder.
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