The long-awaited EU Green Bond Standard (EU GBS) has taken a step forward this week after European lawmakers struck a provisional agreement on the label, which would require eligible deals to be at least 85% aligned with the green taxonomy.
The agreement states that all proceeds from an EU-labelled green bond must either be taxonomy aligned or be allocated to credible projects and activities not yet covered by the taxonomy. That latter category can account for no more than 15% of the overall allocations – an allowance which is expected to be revised down as the taxonomy broadens its scope.
Issuers will also have to demonstrate that those proceeds contribute to achieving an entity-level transition plan.
Earlier this year, Sean Kidney, founder of the Climate Bonds Initiative, warned against excluding companies without a transition plan already in place. In an interview with IPE, he said it was important not to discourage new issuance by “having a rule that says you have to have it all figured out before you can come to market”, arguing that, as long as a green bond finances a credible green project, it should be welcomed by green investors.
But others have argued that firms that issue green bonds whilst continuing to finance polluting activities with the rest of their balance sheets are greenwashing.
The EU GBS was first floated in 2017 by members of the EU’s High Level Expert Group on Sustainable Finance, whose members included representatives from Aviva, APG and the Climate Bonds Initiative.
Formal negotiations between the European Council, Parliament and Commission have been underway since last July, and the agreement reached by the three bodies on Tuesday still needs to be formally adopted by Council and Parliament.
The Parliament was originally pushing to make the label mandatory for green, social and sustainability-linked bonds, but the negotiations saw it agree on a voluntary approach.
The agreement also paves the way for the supervision of organisations that sign off on the credibility of a green bond framework – known as second-party opinion providers or external reviews.
As part of that supervision, reviewers will have to qualify for inclusion in a new EU registry that issuers using the green bond standard must use.