Europaudvalget 2021
KOM (2021) 0391
Offentligt
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EUROPEAN
COMMISSION
Strasbourg, 6.7.2021
SWD(2021) 181 final
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT REPORT
Accompanying the document
Proposal for a
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
on European green bonds
{COM(2021) 391 final} - {SEC(2021) 390 final} - {SWD(2021) 182 final}
EN
EN
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Table of contents
1.
INTRODUCTION: POLITICAL, ECONOMIC AND LEGAL CONTEXT ........................................ 5
1.1.
1.2.
1.3.
1.4.
2.
Political context ................................................................................................. 5
Market context ................................................................................................... 6
Legal context ..................................................................................................... 8
Analytical context ............................................................................................ 10
What are the problems? ................................................................................... 11
Consequences .................................................................................................. 14
Wider consequences ........................................................................................ 15
What are the problem drivers? ........................................................................ 16
How will the problem evolve? ........................................................................ 18
PROBLEM DEFINITION .................................................................................................................. 11
2.1.
2.2.
2.3.
2.4.
2.5.
3.
WHY SHOULD THE EU ACT? ........................................................................................................ 19
3.1. Legal basis ....................................................................................................... 19
3.2. Subsidiarity: Necessity of EU action ............................................................... 20
3.3. Subsidiarity: Added value of EU action .......................................................... 20
4.
OBJECTIVES: WHAT IS TO BE ACHIEVED? ............................................................................... 20
4.1. General objectives ........................................................................................... 21
4.2. Specific objectives ........................................................................................... 21
5.
WHAT ARE THE AVAILABLE POLICY OPTIONS AND HOW DO THEY COMPARE? .......... 22
5.1. What is the baseline from which options are assessed? .................................. 22
5.2. Description of the policy options .................................................................... 24
5.3. Policy Dimension 1: Scope of application for green bond issuers (and
core requirements of the EU GBS) .................................................................. 24
5.4. Policy dimension 2: Regulatory treatment of external reviewers of EU
GBS-aligned green bonds ................................................................................ 31
5.5. Policy dimension 3: Flexibility for sovereign issuers ..................................... 38
5.6. Options discarded at an early stage ................................................................. 45
6.
PREFERRED OPTION ...................................................................................................................... 46
6.1. Policy dimension 1: scope of application ........................................................ 46
6.2. Regulatory treatment of external reviewers of EU GBS-aligned green
bonds................................................................................................................ 46
6.3. The extent of flexibility for sovereign users of the EU GBS .......................... 47
6.4. Alignment with objectives ............................................................................... 48
6.5. Analysis of the expected take-up of standard .................................................. 48
7.
1.
2.
HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? .................................. 53
LEAD DG, DECIDE PLANNING/CWP REFERENCES .................................................................. 56
ORGANISATION AND TIMING...................................................................................................... 56
ANNEX 1: PROCEDURAL INFORMATION ............................................................................................ 56
2
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3.
4.
1.
2.
CONSULTATION OF THE RSB....................................................................................................... 57
EVIDENCE, SOURCES AND QUALITY......................................................................................... 57
TARGETED CONSULTATION ON THE EU GREEN BOND STANDARD ................................. 60
ONLINE CONSULTATION ON THE RENEWED SUSTAINABLE FINANCE
STRATEGY ........................................................................................................................................ 73
PRACTICAL IMPLICATIONS OF THE INITIATIVE..................................................................... 78
SUMMARY OF COSTS AND BENEFITS ....................................................................................... 79
ANNEX 2: STAKEHOLDER CONSULTATIONS AND SELECTED INTERVIEWS ............................. 60
ANNEX 3: WHO IS AFFECTED AND HOW? .......................................................................................... 78
1.
2.
ANNEX 4: MARKET CONTEXT AND CONTROVERSIES .................................................................... 83
ANNEX 5: MARKET DEVELOPMENTS .................................................................................................. 87
ANNEX 6: COSTS AND BENEFITS OF ISSUING GREEN BONDS ...................................................... 93
ANNEX 7: STANDARDS AND DEFINITIONS OF GREEN .................................................................... 99
ANNEX 8: EU TAXONOMY
–
COVERAGE AND RELATED DISCLOSURE OBLIGATIONS ........ 108
1.
3.
4.
5.
WHAT IS THE TAXONOMY? ....................................................................................................... 108
WHAT DOES THE EU TAXONOMY COVER? ............................................................................ 109
STUDIES ON TAXONOMY ALIGNMENT AND COVERAGE................................................... 110
CASE STUDY: ENERGY INTENSIVE INDUSTRY AND HARD-TO-ABATE
MANUFACTURING SECTORS ..................................................................................................... 120
ANNEX 9: EXTERNAL REVIEW ............................................................................................................ 125
ANNEX 10: SOVEREIGN BONDS .......................................................................................................... 134
1.
2.
3.
4.
5.
MARKET SITUATION.................................................................................................................... 134
POTENTIAL FLEXIBILITY ........................................................................................................... 136
SUMMARY OF RESPONSES TO QUESTIONNAIRE ON SOVEREIGN GREEN
BONDS ............................................................................................................................................. 138
ANALYSIS: COMPARISON OF KEY EU SOVEREIGN GREEN BONDS AND THE EU
GREEN BOND STANDARD .......................................................................................................... 143
CASE STUDY: LUXEMBOURG’S
SUSTAINABILITY
BOND FRAMEWORK ........................ 149
ANNEX 11: ESG DISCLOSURE OBLIGATIONS .................................................................................. 151
ANNEX 12: LEGAL BASIS ...................................................................................................................... 156
1.
2.
3.
LEGAL BASIS ................................................................................................................................. 156
SUBSIDIARITY: NECESSITY OF EU ACTION ........................................................................... 157
SUBSIDIARITY: ADDED VALUE OF EU ACTION .................................................................... 159
ANNEX 13: OPTIONS DISCARDED AT AN EARLY STAGE .............................................................. 162
ANNEX 14: EU GREEN BOND STANDARD AS RECOMMENDED BY TEG ................................... 167
ANNEX 15: PROJECT GREEN BONDS TO SUPPORT THE GREEN TRANSITION AND
THE EU GREEN DEAL ................................................................................................................... 172
ANNEX 16: SUMMARY OF RESPONSES TO STAKEHOLDER QUESTIONS ON SOCIAL
BONDS ............................................................................................................................................. 174
3
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Glossary
Term or acronym
AUM
CBI
CSR
DG FISMA
Meaning or definition
Assets Under Management
Climate Bonds Initiative
Corporate Social Responsibility
Directorate-General for Financial Stability, Financial Services and
Capital Markets Union
Do No Significant Harm
European Investment Bank
European Supervisory Authorities
Environmental, Social and Governance
European Securities and Markets Authority
EU Green Bond Standard
Emissions Trading System
Full-Time Equivalent
Green Bond Principles
Greenhouse Gas
High Level Expert Group [on Sustainable Finance]
International Capital Markets Association
Key Information Document
Key Performance Indicators
Member States
Statistical Classification of Economic Activities in the European
Community
National Energy and Climate Plans
Non-Financial Reporting Directive
Non-Governmental Organisations
Organisation for Economic Co-operation and Development
Pan-European Personal Pension Product
Principles for Responsible Investment
Renewed Sustainable Finance Strategy
Regulatory Technical Standards
Sustainable Development Goal
Sustainable Finance Disclosure Regulation
Second Party Opinion
Transition Énergétique et Écologique pour le Climat (French Label
for the Energy and Ecological Transition)
Technical Expert Group on Sustainable Finance
Treaty on the Functioning of the European Union
Technical Screening Criteria
Undertakings for the Collective Investment of Transferable
Securities
DNSH
EIB
ESAs
ESG
ESMA
EU GBS
ETS
FTE
GBP
GHG
HLEG
ICMA
KID
KPIs
MS
NACE
NECPs
NFRD
NGOs
OECD
PEPP
PRI
RSFS
RTS
SDG
SFDR
SPO
TEEC
TEG
TFEU
TSC
UCITS
4
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1.
I
NTRODUCTION
: P
OLITICAL
,
ECONOMIC AND LEGAL CONTEXT
This impact assessment concerns a proposed initiative to establish an official EU standard for
green bonds based on the EU Taxonomy for sustainable finance, and to establish a regime for
registering and supervising companies acting as external reviewers for green bonds aligned with
this standard.
1.1.
Political context
This initiative is part of the European Commission’s
2021 Work Programme
and is one of the
actions proposed by the European Commission to implement the
European Green Deal.
1
In
their
December 2020 Conclusions,
the European Council mentioned
that “the
EU should
promote the development of common, global standards for green finance”,
and invited the
Commission to “put
forward a legislative proposal for an EU green bond standard by June
2021 at the latest.”
To transition to a climate neutral
economy and reach the EU’s environmental sustainability
objectives, significant investment is required across all sectors of the economy. The
achievement of the EU’s current 2030 climate and energy targets would require in the period
2021-30 energy system investments (excluding transport) of EUR 336 billion per annum (in
constant prices of 2015), equivalent to 2.3% of GDP.
2
The bond market can facilitate green transition investments and thereby help reach the EU’s
environmental targets. Bonds are already one of the main instruments used for financing
fixed assets in sectors related to energy and resource efficiency. In addition, several industry-
led initiatives and guidance documents exist for the purpose of issuing so called ‘green
bonds’.
This green bond market has seen vigorous growth in the number and volume of green bonds
issued, both in the EU and globally. Despite this trend, green bonds remain a fraction of the
overall bond market, representing about 3 to 3.5 % of overall bond issuance in 2019
3
. Further
growth in the market for high quality green bonds could be a source of significant green
investment, thereby helping to meet the investment gap of the European Green Deal.
The EU is a global leader in green bonds, with 48% of the around EUR 253 billion of global
green bond issuances in 2020 denominated in euro
4
. Providing a trusted regulated
environment that supports the issuance and creation of green bonds would also promote the
international role of the euro, and help to achieve the goal of developing EU financial
markets into a new ‘green finance’ hub.
The European Green Deal (EGD)
is the EU’ response to the climate and environment-related
challenges that
are this generation’s defining task.
It is a new growth strategy that aims to transform the EU into a fair and
prosperous society, with a modern, resource-efficient and competitive economy where there are no net
emissions of greenhouse gases in 2050, where the environment and health of citizens are protected, and where
economic growth is decoupled from resource use. The
EGD Investment Plan
of 14 January 2020 announced the
establishment of an EU Green Bond Standard.
2
Impact Assessment Accompanying the Communication “Stepping up Europe’s 2030 climate ambition
Investing in a climate-neutral
future for the benefit of our people”
SWD/2020/176 final
3
Moody’s:“Green,
social and sustainability bonds accounted for 4.5% of total global bond issuance in
2019”(link),
77% of which was green bonds.
4
For more information, see
Annex 5
–
Market developments
1
5
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The Commission committed to developing an EU Green Bond Standard (EU GBS) in its
Action Plan Financing Sustainable Growth
adopted in March 2018. As a first step, the
Commission asked the Technical Expert Group on Sustainable Finance (TEG) to produce a
report on an EU GBS. The TEG published its interim report in March 2019, followed by a
call for feedback period. The
final report
with a draft EU Green Bond Standard was published
in June 2019, and the TEG also published
a usability guide
for the draft standard in March
2020.
1.2.
Market context
5
Green bonds are a relatively new form of debt instrument that provide investors with
additional commitments and transparency on the green use of proceeds. In the typical “use of
proceeds” model, issuers commit to spend the money raised or an equivalent amount on
environmentally sustainable investments. This information is usually contained in separate
stand-alone
documents, not within the bond’s prospectus or other legal documentation (bond
covenants etc). Under existing market practices and regulations, green bonds are legally no
different from conventional bonds
6
.
The use of proceeds model enables a wide-range of approaches, including securitisation
bonds, revenue bonds, project bonds, covered bonds, and other debt instruments.
The success of green bonds can be traced back to growing demand for green financial assets
from investors, especially institutional investors such as insurance companies, pension funds,
and investment funds. These assets allow them to meet their self-set targets for the green
proportion of their investment portfolios.
As evidenced by the recent growth of the green bond market, some issuers have been willing
to absorb the additional administrative costs associated with the greater transparency and
credibility requirements for investors. For issuers, issuing a green bond offers a strategic
marketing opportunity to showcase their green commitment and ambition to existing or new
investors, possibly as part of the broader corporate or institutional green transition
7
. This
allows issuers to enlarge and diversify their investor base, as new dedicated green and
socially responsible investors enter the market and drive demand for these types of bonds.
Alongside the signalling effect, green bond issuance also provides issuers with an opportunity
to improve their procedures for handling and acting on sustainability-related information,
such as climate-related risks. In this way, issuers may use green bonds as an organisational
opportunity to boost their adaptability to the changing environmental and regulatory context,
thereby improving their future competitiveness and profitability through a first-mover
advantage, or allowing public organisations to better respond to the demands of their
stakeholders.
Analysis of the current market for green bonds in the EU and world-wide indicates that the
market is growing rapidly. In the EU27, the number of green bonds issued has been growing
by about 47.2%, while the volume has been growing by about 50.9% per year between 2015
and 2020. This growth is driven by inter alia the following factors:
5
6
For more information on the market context, see
Annex 4
–
Market Context and controversies
A
“conventional bond” is here referring to a bond that is neither green, nor explicitly sustainable.
7
Evidence from a JRC study based on a sample of non-financial companies suggests that green bonds act as a
credible signal of the issuers’ climate-related engagement. Fatica, S., and Panzica, R. (2021), “Green Bonds as a
tool against climate change?”, Business
Strategy and the Environment,
https://doi.org/10.1002/bse.2771
6
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-
-
-
-
Increasing need to finance investments that help to mitigate the risk of climate change
Increasing demand from institutional investors and their clients to hold green financial assets,
for example to hedge against the risk of stranded assets and make a positive impact against
climate change.
Intensifying competition among financial market participants to offer such green financial
products (such as green investment funds) to investors.
An overall legislative and political environment favouring transparency on the sustainability
of investments (including requirements for financial market participants to disclose the
alignment of their investments with the EU Taxonomy Regulation
8
).
These factors are all linked to the growing awareness about the need to tackle the risk of
climate change, and are therefore likely to remain relevant factors in the long run. For this
reason, it is reasonable to assume that the green bond market is likely to continue growing,
potentially at or close to its current course. Based on projections in annex 5, this would mean
that yearly EU green bond issuance in 2023
9
could reach EUR 430 billion, spread out over
roughly 1350 green bond issuances.
The development of standards
10
Along with the growth of the green bond market, market players have cooperated to
standardise practices and develop guidelines for green bond issuance. Such so-called
standards benefit both issuers and investors:
1.
For issuers,
a widely accepted standard conveys investors’ expectations and thus reduces the
need for specialised advisory services to issue a green bond that would be accepted as green
by investors. It increases the credibility of
the issuer’s sustainability commitments
and
mitigates the potential reputational risk of accusations of ‘greenwashing’.
2.
For investors,
it provides increased certainty that their investments are being used to deliver
real environmental objectives without having to conduct their own extensive due diligence.
Currently, the most commonly-used market standard is the Green Bond Principles (GBPs),
which are process-based guidelines maintained by the International Capital Market
Association, or
ICMA.
To align
with this standard, a green bond’s proceeds should finance
assets and projects with positive environmental impacts. The standard sets out a clear process
for the selection of projects and the allocation and tracking of funds, although it lacks a clear
definition of green economic activities. Bond issuers should also report on the use of
proceeds including, if possible, information on the environmental impact of the projects. In
addition, the GBPs recommend obtaining a third party external review.
Other standards are also widely used, including the more prescriptive Climate Bond Standard,
developed by the
Climate Bonds Initiative
(CBI). The CBI standard sets the same basic
requirements as the ICMA standard, which means that any bond compatible with the former
should normally also be compatible with the latter. However, unlike the GBPs, the CBI
includes a taxonomy with screening criteria to define green economic activities, and the
requirement for green bonds to be certified by approved external reviewers. About a quarter
of green bonds issued in 2020 were certified according to the CBI standard. Table 1 below
8
9
See
Annex 11
–
ESG Disclosure obligations
2023 is the likely first full calendar year where a potential legislative initiative for an EU GBS might be in
application.
10
More details on green bond standards in
Annex 7
–
Standards and Definitions of green
7
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compares ICMA’s Green Bond Principles and CBI’s Climate Bonds Standard.
More details
are available in
annex 7.
Owner
Reach
Green Bond Principles
International Capital Markets
Association
The dominant international
standard (used by most of the
international green bond market)
Climate mitigation and adaptation,
natural resources, biodiversity, and
pollution prevention and control.
100% green
High level categories for eligible
projects
N/A
Recommended
High level guidelines for external
review
Not required
Recommended
Climate Bonds Standard
Climate Bonds Initiative
24% of all green bonds issued in 2020
Low-carbon and climate resilience
100% aligned with climate bonds Taxonomy
and certified by external reviewer.
Climate Bonds Taxonomy covering eight
sectors.
Screening criteria available for some sectors,
including power generation, transport,
buildings, and other sectors.
Dedicated certification scheme
–
certification
is required both pre-issuance and post-issuance
(2 years after)
External reviewers must be pre-approved by
CBI. High-level requirements.
Required
Recommended
Environmental
objectives
Main requirement on
use of proceeds
Definition of green
Screening criteria
External review
requirements
Requirements for
external reviewers
Allocation reporting
Impact reporting
Table 1 - ICMA GBP and CBI standard
External review
11
The development of these new standards has been accompanied by the growing use of
external review to provide assurance to investors. It is common market practice for green
bonds issuers to contract a third party to review the green bond documentation, either prior to
bond issuance (to check alignment of the bond framework against the respective standard) or
post-issuance (to check alignment of the projects funded by the bond against eligibility
criteria). This is recommended under the ICMA GBPs and required under the CBI standard.
External review is sometimes referred to as “verification”, for example in the TEG’s draft EU
GBS.
According to the TEG report, external reviews have become common market practice in the
EU green bond market. Research conducted by the Luxembourg Stock Exchange indicated
that more than 85% of issuers use some form of pre-issuance review and of this grouping,
98% were in the form of an external review.
1.3.
Legal context
12
This section sets out the main relevant legislation.
Rather than being a self-standing initiative, the EU Green Bond Standard is part of a bigger
puzzle, namely the EU’s actions on sustainable finance as set out by the
2018 Sustainable
More details in
Annex 9
–
External review
For more information on disclosure requirements under the Taxonomy Regulation, the NFRD, and the SFDR,
see
annex 11 on ESG disclosure rules
11
12
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Finance Action Plan.
As that plan is increasingly coming into fruition, with the adoption of
several initiatives and the development of related Level 2 Delegated Acts advancing rapidly,
the EU Green Bond Standard would emerge into an environment that is already
–
to a certain
extent - prepared for it. At the same time, the Commission has been working on the
development of the Renewed Sustainable Finance Strategy.
The main legislative initiative that would impact on an EU GBS initiative is
the Taxonomy
Regulation
13
, which was adopted by co-legislators in 2020. It sets out a classification of
economic activities as environmentally sustainable, while complying with minimum social
safeguards
14
. This framework can be used as a benchmark to classify whether an economic
activity and, by extension, assets or projects are green. In turn, it is intended to facilitate the
assessment of the greenness of related equity and debt. The Taxonomy Regulation mainly
influences the future EU Green Bond Standard initiative in two ways:
First, under the Taxonomy Regulation article 4, the EU must apply the criteria of the
Taxonomy when setting out any standards for green corporate bonds.
15
For this legal reason,
any future EU Green Bond Standard must use the same definition of environmental
sustainability as set by the Taxonomy Regulation as far as corporate issuers are concerned.
For sovereign issuers, this requirement does not apply the same way.
16
Second,
as part of the Taxonomy Regulation’s Article 8, financial and non-financial
undertakings falling under the scope of the
Non-Financial Reporting Directive (NFRD)
17
will be required to disclose, as of 31 December 2021, the extent to which their activities
substantially contribute to the EU environmental objectives as defined by the Taxonomy
Regulation (henceforth: Taxonomy-aligned). Concretely, they will have to calculate and
disclose the extent to which their activities are Taxonomy-aligned, including the percentage
of their capital expenditure (CapEx), operating expenditure (OpEx), and revenue associated
with such activities. Consequently, such companies will have adjusted their internal processes
to be able to track and account for the respective Taxonomy-aligned financial flows.
Furthermore, on 21 April 2021 the Commission adopted a proposal to review the NFRD,
which currently imposes reporting requirements on large public interest entities with more
than 500 employees. It is expected that this review will expand the scope of companies
falling under the NFRD from 11 700 to close to 50 000 companies. The Commission also
proposed that companies subject to the NFRD should be required to obtain limited assurance
on their non-financial reporting. This would substantially increase the availability of
information on the share of Taxonomy-aligned assets of EU companies, and should help
facilitate and reduce the costs of issuing Taxonomy-aligned green bonds.
13
Regulation on the establishment of a framework to facilitate sustainable investment (Regulation
(EU)
2020/852 (Taxonomy)).
More information on the Taxonomy Regulation is available in
Annex 8.
14
Those minimum safeguards defined in the Taxonomy Regulation are without prejudice to the application of
more stringent requirements related to the environment, health, safety and social sustainability set out in Union
law, where applicable.
15
Article 4 of the EU Taxonomy Regulation: “Member
States and the Union shall apply the same criteria set
out in Article 3 to determine whether an economic activity qualifies as environmentally sustainable for the
purposes of any measure setting out requirements for financial market participants or issuers in respect of
financial products or corporate bonds that are made available as environmentally sustainable.”
16
See
Annex 10 on sovereign bonds.
17
Non Financial Reporting Directive (Directive
2014/95/EU)
9
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Another relevant development is the entry into application, as of March 2021,
of the
Sustainable Finance Disclosure Regulation (SFDR)
18
, which governs how financial market
participants (including asset managers and financial advisers) should disclose sustainability
information towards end investors and asset owners. Under this Regulation, financial market
participants will also be required to report on the share of Taxonomy-alignment of the assets
in which they invest, including potentially, green bonds.
The European Commission is also currently working on establishing criteria for a new
EU
Ecolabel for Financial Products
19
.
It will apply to retail financial products, such as equity
funds and bond funds, and it will be legislated using an extension of the EU-ecolabel
Regulation. This means the EU Ecolabel for financial products would rely on an existing
“brand”, which already benefits from a certain consumer recognition. While financial
instruments such as bonds and equity will not be directly eligible for the EU Ecolabel, as they
are financial instruments and not retail financial products, they will qualify indirectly, as part
of bond or equity fund portfolios.
The Commission aims to create a coherent approach to sustainable financial products based
on increased transparency and the use of the EU Taxonomy. It is expected that the definition
of green in the criteria for the new EU Ecolabel for financial products will be based on the
EU Taxonomy, and that EU GBS bonds would be eligible for EU Ecolabel bond fund
portfolios. This could incentivise investment in bonds aligned with the future EU GBS.
In conclusion, the EU Green Bond Standard is one of several interlinked initiatives that aim
to incentivise (in the case of the EU GBS) or require (in the case of the Taxonomy, reviewed
NFRD, and SFDR) the disclosure of Taxonomy aligned green assets by corporations in the
EU. For this reason, the impact of the EU GBS initiative should be considered in the context
of the aforementioned initiatives.
The Delegated Acts setting out the technical screening criteria for the
“Substantial
Contribution” and “Do No Significant Harm” conditions for the two environmental
objectives of climate mitigation and climate adaptation
was adopted
in June 2021 and will
enter into force by the end of 2021 subject to a 6-month scrutiny period by co-legislators. The
entry into force of the
delegated acts covering the other four environmental objectives of the
Taxonomy should follow 12 months later. For this reason, it is expected that at least the
climate-related part of the Taxonomy would be in place before the EU GBS enters into force,
and potentially all six environmental objectives of the Taxonomy.
1.4.
Analytical context
This impact assessment aims at providing an unbiased, comprehensive and evidence-based
assessment of the trade-offs implied by the potential policy options. Significant efforts have
been undertaken to support the analysis. In addition to the evaluation of the stakeholder
consultations and the work of the TEG, market data was collected from external databases to
map the green bonds market with a view to informing the regulatory response. Further cost
data and cost estimates were collected from stakeholders and supervisors directly.
18
19
Sustainable Finance Disclosure Regulation (Regulation
(EU) 2019/2088)
Under the EU Ecolabel Regulation (Regulation
(EC) No 66/2010)
10
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A key limitation of the analysis pertains to the extent to which the current green bond market
aligns with the technical criteria under the Taxonomy Regulation. Given the current
supervisory reporting and public disclosure frameworks, the availability of relevant data and
information is sporadic and lacks necessary depth to carry out a data-driven analysis.
Information was however collected in the form of stakeholder feedback.
It should be noted that an assessment of the taxonomy criteria is not material to the available
policy choices under this initiative. Co-legislators have already taken such choice in the form
of adopted primary legislation. As mentioned above, the legal drafting of the Taxonomy
Regulation rules out a Commission initiative on green bonds which stands disassociated from
the taxonomy-based criteria
20
. Only the taxonomy criteria may be used to define an
‘environmentally sustainable economic activity’. The choice to deviate from this definition is
excluded given the objective to define and standardise bonds which finance environmentally
sustainable activities. As such, there is no policy option that would require a further
assessment of the usability of the taxonomy criteria (excluding for sovereign bonds
21
). A
broader market assessment based on the available data is provided in the impact assessment
supporting the Delegated Regulation on the Taxonomy.
In view of these constraints on the initiative, the collective evidence stemming from the
different methodological approaches overall can be considered to be sufficiently sound as a
basis for the impact assessment.
Two factors limit the amount of quantitative analysis included in the present report, namely
(1) the difficulties with using existing data to estimate the effect of a currently inexistent
framework, and (2) the intangible nature of certain benefits of green bond issuance, such as
the green bond premium, or a reputational boost.
Despite these hindrances, this analysis takes a quantitative approach to cost benefit
assessment where possible. Annex 3 sets out a quantitative estimate of the costs of
registration and supervision by ESMA for external reviewers, as well as a related estimate of
the cost for issuers of making use of external review services under the proposed EU GBS.
Annex 6 includes estimated ranges for the green bond premium, although the data on the size
of this premium is inconclusive. At the same time, other reported benefits of green bond
issuance, such as a reputational boost for the issuer, could not be quantified, and little
relevant literature was found no this topic. For these reasons, the cost-benefit assessment in
section 6, which brings together all these elements, is mostly qualitative.
2.
P
ROBLEM DEFINITION
2.1.
What are the problems?
The current impact assessment considers the functioning and interplay of two closely
interlinked markets: the market for green bonds (in particular high quality green bonds) and
the market for external review services, used to give investors assurance about the alignment
of their green bond to existing market standards. This section will identify the main problems
affecting the two markets in scope, and their consequences. It will then consider the
underlying problem drivers.
20
21
c.f. Article 4
Taxonomy Regulation
See Section 5
–
Policy Options and
Annex 10
–
Sovereign Bonds
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2.1.1. For investors: Costly/difficult to identify high quality green bonds
The green bond market suffers from a moral hazard problem that reduces trust in the market
and drives up costs for investors (and issuers). The problem can be summarised as follows:
once an investor has bought a “use of proceed” green bond, it relies on the issuer to follow up
on the green commitments made, usually in terms of investing bond proceeds in certain
activities. From the issuer side, green bond issuance can be profitable, for instance due to
reputational gains or potential price benefits from issuing green debt
22
. But the real costs
associated with following up on green commitments create an incentive for the issuer to shirk
on the commitments made to investors once the bond has been issued. If so, investors will be
the main losers, as the bonds they hold will no longer be green. For these reasons, investors
may worry about the greenness
of the bond and want to verify the bond’s greenness ex ante.
However, investors currently face significant constraints to (i) determine the positive
environmental impact of a bond, and (ii) compare different green bonds. Despite the
existence of several commonly used market standards, which to a certain degree overlap and
can be used conjunctively, the green bond market does not sufficiently enable investors to
identify high quality green bonds.
In particular, definitions of green projects vary or are inexistent. For example, the dominant
market standard (ICMA’s Green Bond Principles) relies on high-level
principles for eligible
green projects, not detailed criteria. As for the more prescriptive CBI standard, its privately
maintained definitions omit many potential sectors of green economic activities.
Also, the quality and role of external review varies widely. ICMA GBPs has no clear and
formalised mechanism to guarantee the quality and integrity of the external review process,
for example through registration and supervision of external reviewers of green bonds. As for
the CBI standard, it includes certification but lacks a rigorous mechanism for supervising the
conduct of those external reviewers.
Because of this lack of standardised definitions of green projects, lack of standardised
transparency requirements, and the varying quality of external review, investors may need to
expend time and resources on assessing and double-checking information published by
existing green bonds issuers.
While this situation is already problematic today, two trends further aggravate the moral
hazard problem, which could accentuate the issue in the future:
1) As explained in Annex 6, demand for green bonds is increasing, which may have the
effect of driving up green bond premia, and thereby increase the incentive for issuers
to issue green bonds.
2) As explained in
Annex 8,
the green bond market is increasingly expanding into
sectors where it is more difficult agree on what is sustainable, such as manufacturing.
While sovereigns also are confronted with controversies around green bonds, and in
particular the need to better define green proceeds, the risk to investors is less acute, as
sovereigns generally have a transparent approach to use of proceeds, and benefit from high
levels of trust in the green bond market, as evidenced by green bond premia for sovereigns,
which are relatively high
23
.
22
23
See
Annex 6
–
Costs and Benefits of issuing green bonds
See
Annex 6
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2.1.2. For issuers: Additional costs for issuing a green bond (due to market
fragmentation)
Issuing a green bond already requires additional cost for issuers, for example in terms of
reporting, external review, and internal reorganisation and training. However, the moral
hazard problem referred to in 2.1.1 means that issuers are under increasing pressure to
demonstrate the greenness of their bonds. The diversity of market practices in the green bond
market (both with regards to definitions of green, and the market for external review) means
that issuers may need to incur additional costs in order to enhance the credibility of their
green issuance:
In the case of corporate green bond issuers, investors frequently require issuers to obtain
an ESG rating for their company. This is in principle an unnecessary cost, since the green
bond itself and the underlying projects are usually already reviewed by an external
reviewer.
Issuers, and in particular first-time issuers, may need to spend significant resources
deciding which standard to make use of, due to the diversity of market practices.
The lack of a common definition of green and of a green bond means that issuers may
need to spend additional resources, e.g. on additional advisory services, to demonstrate the
green credentials of their bond, even after the requirements of the chosen standard has
been met.
2.1.3. For issuers: Uncertainty around green assets, potential reputational risks
There is overall uncertainty on the type of economic activities that can be considered green,
due to a lack of international agreement on such definitions. This has helped to cause some
issuers to experience reputational damage as stakeholders questioned the greenness of their
bond
24
.
Collected feedback shows that the fear of adverse publicity because a deal is deemed
“insufficiently green” has prevented some issuers from tapping the
market
25
. This is
particularly the case in economic sectors that are very important for the transition to a low
carbon economy, but where the identification of green assets and projects is not
straightforward due to a lack of carbon neutral and/or otherwise fully sustainable alternative
production process and technology, such as steel or cement industries.
So far, these sectors have seen relatively limited green bond issuance
26
.
See
Annex 4 on market context and controversies,
and also the following articles: “Bond
market asking what
is green curbs climate friendly debt”
and
“How green are green bonds?”
(In addition, the issuer of a green bond
could come under criticism should the proceeds of the bond finance an activity with questionable social
practices that do not meet minimum social safeguards.).
25
A fear often cited by stakeholders is that investors would challenge the greenness of bonds issued by such
corporates based on their overall corporate activities rather than focusing on the asset or project financed as per
the use-of-proceeds approach.
26
According to the
June report of the TEG
24
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Drivers
What can we address
directly?
Problems
What are we aiming to
address?
Consequences
What do these problems
lead to?
Wider
consequences
How does this impact
society and citizens?
External review
market:
heterogeneity,
lack of
transparency,
conflicts of
interest
Green bond
market:
Lack of clear and
harmonised
definitions of
green projects
and green bonds
For investors:
Costly to identify
genuine high-
quality green
bonds
For issuers:
- Additional costs
due to market
fragmentation
- Uncertainty
around green
projects,
potential
reputational risks
Potential for
market disruption
from
greenwashing
Not enough high
quality green
bonds issued
compared to
market demand
Risk that not
enough
investment is
directed towards
projects with
substantial
climate and
environmental
impact
Figure 1: Problem tree
2.2.
Consequences
2.2.1. Potential future market disruption from greenwashing
As the current market for green bonds is based on voluntary market standards with minimal
government intervention, it mainly relies on trust among investors and issuers. While
controversies relating to alleged greenwashing of the bond itself or the underlying projects
are relatively rare, a more frequent criticism relates to the sustainability credentials of the
green bond itself. However, with continued fast market growth and in the absence of
regulatory intervention, the risk of major controversies regarding greenwashing, insufficient
environmental impact of a bond, or issues linked to a bond not complying with minimum
social standards, for example, will only increase.
27
But as the market grows, and as the
problems identified in section 2.1 become more acute, the risk of such incidents and their
potential impact on the functioning of the whole of the green bond market increase.
In addition, while issuers might communicate their green promises for the use of proceeds in
their marketing and standard related documents, such information is not systematically
included in the contractual and regulatory documents for the bond transaction, which can
make it difficult for investors to hold issuers to account for honouring their green
commitments.
The combination of these factors may lead to situations where investors are given a false
sense of the sustainability impact of the funded project or asset. In effect, the sustainability
impact may fall short of investor’s
initial expectations. If this should occur, investors could
27
See
Annex 4
for more information on greenwashing controversies.
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risk financial losses, as they may have to sell their bonds because they no longer comply with
investment guidance or criteria, particularly in the case of institutional investors.
Any such incident could disrupt the current green bond market by creating reputational
problems for the whole sustainable investment market, reducing the trust of investors on
which this market relies, and further increasing costs for issuers.
2.2.2. Not enough high quality green bonds issued compared to market demand
In their June 2019 report, the TEG found that there was a fundamental problem of lack of
supply in the market for green bonds, as evidenced by the frequent oversubscription of green
bond auctions or sales. In 2019, demand for green bonds outstripped supply by more than 5 to
1, compared to a ratio of 3 to 1 for conventional bonds.
28
This means that the green bond
market is not exploiting its full potential for growth.
Green bond issuance is conditional on the existence (or creation) of a corresponding amount
of green investments on the issuer’s balance sheet. For this reason, the lack of eligible
investment is the main limiting factor for green bond issuance. This factor is out of the scope
of this impact assessment.
However, the problems for issuers identified in 2.1 also play a part in limiting supply. The
problem of uncertainty around green assets and potential reputational risks serves to dissuade
potential green bond issuers. At the same time, the additional costs for issuing a green bond
due to market fragmentation contribute to reducing the net benefits of green bonds, and
therefore indirectly reducing issuance.
2.3.
Wider consequences
2.3.1. Risk that not enough investment is channeled towards projects with
substantial climate and environmental impact
The market for high quality green bonds is important for channelling funding into the type of
fixed investments needed to reach the EU’s climate targets. However, despite the overall
situation of growth, the problems and consequences identified in 2.1 and 2.2 constitute
market barriers that could trap the market in an inefficient equilibrium
29
and hinder future
market development.
30
If not enough high quality green bonds are issued to respond to market demand, there is a risk
that substantial funding is instead diverted to activities and projects that
–
while they may
have environmental benefits
–
are not substantially contributing to the EU climate and
environmental objectives.
In order to fund climate mitigation, climate adaptation, and wider environmentally
sustainable purposes, the market for high quality green bonds therefore needs to be supported
to reach its maximum potential.
CBI: “Green
bond pricing in the primary market: January
–
June 2020”
Pauline Deschryver & Frederic de Mariz: “What
Future for the Green Bond Market?”,
2020
30
As noted by Bowman (2019), due to a lack of credibility, credentials, and supply
—there
is a risk that the
infancy of the market does not offer enough data to investors to make an educated investment decision and as a
result, investors are reluctant to move forward creating a “chicken and egg” problem”. (Source: Louise
Bowman: “ESG:
green bonds have a chicken and egg problem”,
2019)
28
29
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2.4.
What are the problem drivers?
The problem drivers can be divided into those affecting the market for external reviewers,
and those affecting the market for green bond issuance.
2.4.1. External review market: Heterogeneity, lack of transparency, and potential
issues relating to conflicts of interest in the external review market
The external review (see
Annex 9)
is usually carried out by third parties, according to
procedures which are specific to each reviewer, and which have emerged organically
alongside the development of various market standards. For this reason, there is also a
considerable amount of diversity in market practices and in the quality of services provided.
In turn, this diversity obstructs market transparency and hinders the market from functioning
effectively and from delivering high quality external review services that serve the interests
of issuers and investors alike.
To give only a few examples of market diversity:
-
-
-
-
External reviews may include a consideration of the ESG rating of the issuer, or not.
They may rely on the project categories of ICMA’s Green Bond Principles, or
more
prescriptive definitions of green projects.
They may be valid for several transactions or concern specifically the pre-issuance or post-
issuance stage of the bond.
There is also a wide variety of actors: non-financial rating agencies specialising in second
party opinions, big-four audit firms providing mostly post-issuance verification, credit rating
agencies, and global technical inspection and certification bodies are all active in the external
review market.
In its report, the TEG also highlighted a number of challenges in this sector, including
variable quality of assessments, potential lack of independence or management of potential
and actual conflicts of interest and the handling of potentially price sensitive information.
This situation can lead to information asymmetries and a reduction in overall trust in the
green bond market and the integrity of the credentials of specific bonds. The range of
differing approaches by entities with varying levels of expertise in environmental matters can
create uncertainty for issuers and investors on the actual value, quality and impact of external
reviews. It can also lead to duplication and increased costs. In Deschryver and de Mariz
(2020)
31
, investors note the lack of a consistent certification system, in comparison with credit
ratings in the conventional bond market.
In addition, given the lack of a common classification system and criteria, some issuers in
fact engage with multiple reviewers in order to attain a higher degree of certainty and
investor confidence. Another common practice is for issuers to obtain ESG ratings in addition
to the external review, as many investors associate the greenness of the bond with the
greenness of the company itself. This gives rise to additional costs that would potentially not
arise if these issuers could instead more fully rely on the opinion of the external reviewer.
31
Deschryver and de Mariz (2020):
What Future for the Green Bond Market? How Can Policymakers,
Companies, and Investors Unlock the Potential of the Green Bond Market?
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In January 2021 the Commission published an extensive study on the market for
Sustainability-Related Ratings, Data and Research
32
, which overlaps to some extent with the
market for external review services. The study noted that while efforts to develop common
voluntary standards for sustainability-related product and service providers have been
undertaken, none have been firmly established across the market. The study also highlighted
the increasing array of sustainability-related product and service providers operating in this
growing market, which emphasises the need for greater transparency across the industry in
terms of methodologies, disclosures and how research providers assess the performance of
green assets and investments.
Amid increasing demand, more financial data and research providers and credit ratings
providers are entering the sustainability-related products and services market, which is
leading to increased merger and acquisition activity as those traditional players to expand
their service offerings by buying up specialised sustainability-related providers.
The high level of industry consolidation identified in the study also highlights the potential
for conflicts of interest to emerge, particularly associated with providers both evaluating
companies and offering paid advisory services. Concerns have been raised about potential
conflicts of interest and quality control issues: at present, there is no legal framework in place
for minimum operational requirements and safeguards, nor for registration or authorisation
and supervision of external reviewers, as the industry has developed organically without
regulatory support.
A report by Bloomberg Law
33
indicates that most external reviewers are not subject to any
stand-alone independence requirements and in some cases, reviewers and their affiliates also
provide advisory services to potential green bond issuers, which may raise independence
issues. The report highlighted that the conclusion or opinion provided by external reviewers
can vary depending on the provider in particular, and on differing definitions of what
constitutes a ‘green’ investment, particularly the difference between ‘dark’ and ‘light’ green.
External reviewers fulfil an important role in bridging the gap between analysing potentially
complex green projects and assessing them against the requirements of the EU Taxonomy
and assisting investors with making suitably informed investment decisions. It is therefore
important that potential conflicts of interest are managed and averted, ensuring an appropriate
level of market transparency. The absence of a supervisory framework for external reviewers
with minimum standards to ensure the quality and objectivity of their reviews combined with
a lack of transparency regarding their activities could lead to the misallocation of investments
or even greenwashing, which would damage investor confidence in the EU GBS market and
undermine the future development of the EU GBS market.
The situation is less urgent in the case of sovereign issuers, who frequently make use of state
auditors instead of external reviewers. These state auditors typically have legally guaranteed
independence, and there does not appear to have been any controversies regarding their
performance of the external review tasks.
More information available in
Annex 9 on external review.
32
33
Link to study
Green Bond Second Party Opinions: Legal and Practice Considerations’
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2.4.2. Green bond market: Imperfect information due to a lack of clear and
harmonised definitions of green projects and green bonds.
The market for green bonds is hampered by the lack of clear and comprehensive definitions
of a green economic activities to guide green bond issuance, and of a common yet
prescriptive standard for green bond issuance.
The most commonly used standard, ICMA’s Green Bond Principles, is market-developed,
mostly principles-based and does not refer to a specific taxonomy of eligible green projects.
The more ambitious CBI standard includes a market-based Taxonomy, but it only covers
climate-related matters, leaving out important sectors for further emission reductions, or areas
where it is more difficult to agree on the definition of green, such as high emission
manufacturing
34
.
The creation of the EU Taxonomy is an attempt to address this situation, by providing
comprehensive and granular definitions of how various economic activities can qualify as
environmentally sustainable (more information in
Annex 8
–
the Taxonomy).
The EU
Taxonomy will be freely available for existing standards to make use of, if they wish.
However, in order to make use of the detailed definitions of the Taxonomy
in the “use of
proceeds” space, and ensure that investors can have proper trust that the strict criteria are
complied with, it is necessary to have a standardised system of verification with qualified and
experienced entities checking that the relevant Taxonomy-criteria have been met.
As explained in 2.4.1, the current practices around external review do not currently meet this
requirement, and so far there are no indications that existing market-based standards intend to
impose a more stringent oversight over external reviewers. It is also not clear whether it
would be feasible for market based standards to operate a rigorous system of monitoring of
external reviewers. For this reason, it is unlikely that market-based standards will be able to
credibly enforce Taxonomy-alignment of standards within an acceptable timeframe.
This situation of imperfect information poses problems for both issuers and investors, in
particular those with high sustainability-related ambitions. Without a clear definition of
green, environmentally ambitious issuers are lacking a clear and reliable way to signal this to
investors. As for investors, who are increasingly on the lookout for green debt instruments to
add to their portfolios
35
, their search is complicated by the fact that there is no commonly
accepted definition of a green bond, in particular on the more environmentally ambitious
segment of the market.
2.5.
How will the problem evolve?
Without EU action regarding green bonds, the most likely outcome would be the continued
development of differing market-based standards for green bonds or new legislative
initiatives at national level. For more information, see section 5.1
–
what is the baseline?
The TEG has pointed to the large range of approaches in the field of external review as a
potential source of problems, creating uncertainties for issuers and investors on the actual
value, quality and impact of the external reviews. Concerns have been also raised about
34
The CBI Taxonomy is mostly used in the market for green bonds (although other sectors have also made use
of it to some extent), and it only covers about a quarter of the green bond market (26% of green bonds obtained
CBI certification in 2020). The CBI Taxonomy does not contain screening criteria for transitional sectors such
as energy intensive and hard-to-abate industry.
35
CBI: “Green Bond European Investor Survey”, 2019 (Link)
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potential conflicts and quality control issues in this market. Without a legal framework in
place, the market cannot provide for the registration and supervision of external review on its
own, and thus most of these issues would likely remain unaddressed.
Because of the expected strong growth of the green bond market, the vulnerabilities that exist
within the current market-based system are likely to grow, which may amplify the risk of a
potential high impact or high visibility occurrence of greenwashing. Such an incident could
potentially create reputational problems for the whole green bond market, thereby reducing
the trust of investors on which this market relies, and increasing costs for issuers.
3.
W
HY SHOULD THE
EU
ACT
?
3.1.
Legal basis
The legal basis for this initiative is Article 114 of the Treaty on the Functioning of the
European Union (TFEU), which confers to the European institutions the competence to lay
down appropriate provisions that have as their objective the establishment and functioning of
the internal market.
Taking into account the criteria set out in the Vodafone case (C-58/08) Article 114 TFEU
allows the EU to take measures not only to eliminate existing obstacles to the exercise of the
fundamental freedoms, but also to prevent the likely emergence of such obstacles in the
future. This also includes those obstacles that make it difficult for market participants, such as
issuers of green bonds or investors, to take full advantage of the benefits of the internal
market.
Although other national legislation exists stipulating a framework for green bond issuance
(e.g. in China), no EU Member State has yet legislated to establish an official green bond
standard at national level. The current EU market for green bonds is therefore entirely based
around market-defined standards and practices, with assurance to investors provided by
companies acting as external reviewers. These market-based standards set out high-level
process-based guidelines or recommendations, but as outlined in Section 2, the underlying
definitions of green projects are insufficiently standardised, rigorous, and comprehensive. For
this reason, various practices co-exist, which make it costly for investors to identify genuine
green bonds.
In light of the continued growth of the green bond market and its role in funding the type of
fixed investments needed to reach the goals of the Paris agreement, it is likely that some
Member States would consider creating a standard at national level, or establishing national
guidelines.
Such national standards would likely seek to address the same problems that the proposed EU
GBS initiative aims to address, but the results may be divergence across EU Member States.
There are already examples of Member States operating with diverging frameworks in their
issuance of sovereign green bonds, or in the area of labels for environmentally sustainable
financial products. For this reason, it is likely that disparities between national laws would
emerge that obstruct the fundamental freedoms and undermine a European level playing
field. Therefore there is an identifiable need for a harmonized green bond standard to be
applied across the EU.
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3.2.
Subsidiarity: Necessity of EU action
36
For now, Member States seem to refrain from establishing national legislation, which is
likely linked to the widespread expectation that the Commission will act in this area, as
announced in the 2018 Sustainable Finance Action Plan. In consultation feedback, many EU
Member States have been calling for a harmonized green bond standard at EU level.
However, in the absence of such a harmonised standard, it is predictable that Member States
would bring forward their own legislation in the area of green bonds.
Without EU action regarding green bonds, the most likely outcome would be the continued
development of market-based standards for green bonds or new legislative initiatives at
national level. Such uncoordinated actions at national level may lead to a proliferation of
diverging green bond standards, which would fragment the green bond market in the EU and
potentially hamper cross-border investment flows. The EU GBS would ensure a level playing
field and reduce the potential scope for disparities across the EU while supporting the
attainment of the EU’s sustainable finance policy objectives. It also has the potential to
become a leading global standard for green bonds. An intervention at the EU level is more
likely to successfully define consistent requirements for the internal market and thereby
prevent market distortions. Therefore, a legislative measure (based on Article 114 TFEU)
would further improve the functioning of the Single Market.
3.3.
Subsidiarity: Added value of EU action
In a similar way to the bond market, the green bond is an inherently international market
made up of issuers, typically larger companies, seeking out a broad and diverse population of
investors, and investors seeking out the highest possible liquidity and frequently trading debt
on cross-border secondary markets. For this reason, national legislation to tackle the failures
identified in the green bond market would have the potential effect of fragmenting a market
which is inherently international.
The market for external reviewers of green bonds is also a cross-border market. In order to
preserve a level playing field for the companies providing external review services, any
legislation setting up a regime for the registration and supervision of these entities should also
be at EU level. Finally, given the many interactions between a potential initiative for an EU
Green Bond Standard, and other relevant EU-level legislation, such as the Taxonomy
Regulation, an EU instrument appears to be more suitable. A possible intervention at EU
level therefore complies with the principle of subsidiarity as set out in Article 5 of the TFEU.
For a detailed analysis of the legal basis, see
Annex 12.
4.
O
BJECTIVES
: W
HAT IS TO BE ACHIEVED
?
This initiative is a direct response to vocal requests from green bond investors and issuers
alike for a credible and high-quality standard for Taxonomy-aligned green bonds, as
expressed for example in the targeted consultation on the EU GBS. According to this
36
According to the principle of subsidiarity, the EU should act where it can provide better results than
intervention at Member State level. In addition, EU action should be limited to what is necessary in order to
attain the objectives, and comply with the principle of proportionality.
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feedback, such an initiative should standardise and develop the market for green bonds and
set the global standard for the application of the EU Taxonomy in green bond markets, so that
green bonds become a genuine tool for the EU to transition towards climate neutrality.
Building on this feedback, this section sets out the main objectives for this initiative.
4.1.
General objectives
The general objective is to better exploit the potential of the single market to contribute to
meeting the EU’s climate and environmental objectives, in accordance with Article 2(1)c of
the Paris Agreement, by
-
-
-
facilitating further development of the market for high quality green bonds, while
minimising disruption to existing green bond markets, and
attracting sovereign issuers to the framework while catering to their specificities
This would be achieved by establishing a standard (or similar) for high quality green bond
issuance that would:
-
-
Improve the ability of investors to identify and trust high quality green bonds
Facilitate the issuance of high quality green bonds, by:
- reducing costs from market fragmentation
- clarifying green definitions and reducing the reputational risk for issuers from sectors
that are not sufficiently covered by existing market-based taxonomies
include some flexibility for sovereigns issuers.
4.2.
Specific objectives
-
There are two specific objectives, which relate to the two problem drivers identified in
section 2.4.
4.2.1. The EU GBS should clarify and harmonise definitions of green projects and
green bonds
By aligning green bonds with the EU Taxonomy, this initiative should contribute to clarifying
green definitions on the bond market. This should help investors in the process of identifying
high quality green bonds, comparing them against each other, and mitigating against the risk
of greenwashing. It should also help issuers in the process of issuing green bonds and
identifying green economic activities on their balance sheets.
4.2.2. The EU GBS should harmonise outcomes, improve transparency, and address
potential conflicts of interest for external reviewers
External review is a well-established market practice and a core part of almost any green
bond issuance, irrespective of the type of issuer or the standard followed. However, as
detailed in 2.2, a wide-range of market practices and actors co-exist in a limited space. This
initiative will aim to strengthen external review for the high quality EU green bonds, and
improve its quality, usefulness, and trustworthiness for investors, by harmonising outcomes,
addressing conflicts of interest, and improving transparency and oversight over the overall
process.
For the EU GBS itself, the requirements for external reviewers are intended to provide an
additional level of assurance to issuers and investors that those external reviewers that are
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registered have implemented effective policies and procedures to ensure the quality,
independence and overall integrity of their assessments. This will make the EU GBS distinct
from other green bond standards in the market and support the intention to establish the EU
GBS as the gold standard for green bonds.
Problems
For investors:
Costly/difficult to identify
high quality green bonds
For issuers:
-
Additional costs for issuing a green
bond due to market fragmentation
-
Uncertainty around green assets,
potential reputational risks
Problem drivers in the external review
market
Heterogeneity, lack of transparency, issues
related to conflicts of interest
Objectives
Improve the ability of investors to identify and trust
high quality green bonds
Facilitating issuance of high quality green bonds by:
-
Reducing costs from market fragmentation.
-
Clarifying green definitions and reducing the
reputational risk for issuers.
Specific objectives in the external review market
Harmonising outcomes, improving transparency, and
addressing conflicts of interest.
Problem drivers in the green bond Specific objectives in the green bond market
market
Lack of clear and harmonised definitions of Clarifying and harmonising definitions of green
green projects and green bonds.
projects and procedures for issuing green bonds.
Table 2: Problems and objectives
5.
W
HAT ARE THE AVAILABLE POLICY OPTIONS AND HOW DO THEY COMPARE
?
5.1.
What is the baseline from which options are assessed?
Under the baseline, there would be no Commission action in the green bond market, whether
in the form of legislation or guidance. This would maintain the status quo in the market, with
most green bond issuers relying on existing market-based principles and guidance
37
. The
principle characteristics of the baseline scenario are:
Continued market growth along or slightly below current trajectories.
2015-2020 saw an
impressive average annual growth of 46% in terms of green bonds issued, and also 46% in
terms of volume
38
. It is expected that the green bond market will continue to grow along or
slightly below these trajectories. The main factors driving this trend are an enhanced
awareness for sustainability factors of downstream consumers, increasing market demand for
green bonds, and a reinforced sustainability focus in many Member State and EU policies.
Growth of external review market, but no legal framework in place for the registration
and supervision of external reviewers.
The assessment of green bonds by an external
reviewer will likely remain the market norm, and hence this market will grow in line with
market needs. However, the differing approaches of the range of entities in this field will
continue to be a potential source of problems, creating uncertainties for issuers and investors
37
38
e.g. ICMAs Green Bond Principles, Climate Bonds Initiative
Source: CBI data (see
Annex 5
–
Market Developments
for more info)
22
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on the added value, quality and impact of the external reviews. Issues relating to potential
conflicts of interest and quality control would not be addressed and the EU GBS would
therefore have to rely on existing market processes and external reviewers.
No dominant classification system to determine the greenness of projects and assets, and
continued use of partial and high-level taxonomies.
While the Taxonomy Regulation for
climate mitigation and climate adaptation will enter into force in 2021, the Commission
would not take any action to promote it as part of an official green bond standard. While
existing market-based
guidance provides broad ‘green criteria’, they generally lack
specificity and granularity for more detailed assessments. Some issuers also prefer to refer to
their own taxonomies, rather than using the CBI Taxonomy. This indicates that the market is
unable to converge around a single standard classification system that is at the same time
comprehensive and granular.
Continued uncertainty for investors and issuers on the definition of green.
This in turn
generates inefficiencies in terms of search costs, increased risk exposure for investors and,
depending on the applied market practice, higher issuing costs. On the one hand, issuers will
continue to face reputational risks in cases where there is doubt over the greenness of assets
or projects. This is particularly a concern for non-traditional green issuers which generate
revenue mainly from carbon intensive activities. In effect, their green bond issuance levels
are likely to remain very low with potential negative impacts on their ability to transition.
On the other hand, investors would lack clarity and transparency on the greenness of
investments. Since there is no common classification system in place, each bond and its
corresponding activities need to be assessed individually to determine whether it meets the
individual investor’s understanding and expectations of ‘green’, thus driving search costs.
It can be expected that there will be some uptake of ‘taxonomy aligned’ bonds (i.e. making
use of the EU taxonomy) even without EU intervention. It is expected that market standards
would allow the use of the EU Taxonomy as one of several definitions of green. However,
the issues set out in terms of consistency, comparability and certainty would still largely
persist. The market would also remain heavily fragmented due to possible different
understandings of the taxonomy criteria. As there would not be any means of enforcement,
issuers could claim taxonomy-alignment without facing supervisory repercussions. This may
in fact lower transparency and confidence in the market and negatively affect the wider
uptake of the taxonomy criteria as a benchmark. It is unclear whether the CBI Taxonomy
would converge or diverge from the EU Taxonomy.
Amplified risk of high visibility or high impact market controversy.
Seen against the
expected growth of the green bond market, the vulnerabilities that exist within the current
market-based system may amplify the risk of a potential high impact or high visibility
occurrence of greenwashing. Such an incident could potentially create reputational problems
for the whole green bond market, thereby reducing the trust of investors on which this market
relies, and increasing costs for issuers.
Potential national action:
There is also the potential that Member States may develop their
own legal regimes for green bonds, potentially based on discrepant Taxonomies. We have
seen a similar development in the case of labels for green investment funds (see section 3
–
legal basis). The fact that Member States are not actively pursuing such plans at this moment
is likely due to the Commission’s ongoing work on the EU GBS. Should the Commission
abandon these efforts, it is likely that Member States would seek to compensate with national
initiatives, given the growing importance of sustainable finance for the financial industry and
for low-carbon investments.
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5.2.
Description of the policy options
This impact assessment focuses in particular on the three key policy dimensions set out
below. The three dimensions are related, but the policy choices do not depend on each other
across policy dimensions.
1) Scope of application for green bond issuers (and core requirements of EU GBS)
Option 1: EU GBS alignment voluntary for all green bond issuers
Option 2: EU GBS alignment mandatory for non-sovereign EU green bond issuers, following
transition-period
2) Regulatory treatment of external reviewers of EU GBS-aligned bonds
Option 1: Registration and limited supervisory oversight
Option 2: Authorisation and supervision with more stringent requirements
3)
The extent of flexibility for sovereign users of the EU GBS
Option 1: No flexibility compared to corporate issuers
Option 2: Flexibility regarding non-Taxonomy-related requirements.
Option 3: Flexibility regarding non-Taxonomy- and Taxonomy-related requirements
Each policy option is described and also assessed below. The potential willingness of green
bond issuers to make use of the proposed standard, based on the preferred policy choices
across all policy dimensions, is assessed in section 6: Preferred option.
5.3.
Policy Dimension 1: Scope of application for green bond issuers (and core
requirements of the EU GBS)
The current section will assess the extent to which the EU GBS should apply to current and
future green bond issuers, and the core requirements of the standard.
In the 2018 Sustainable Finance Action Plan, the Commission tasked the Technical Expert
Group on Sustainable Finance (TEG) with drawing up a report on an EU Green Bond
Standard, based on current market best practices. In line with this mission, the TEG proposed
the standard that is summarised in table 2 below (full standard is available in
Annex 14).
TEG’S PROPOSAL FOR THE EU GREEN BOND STANDARD
ELIGIBLE GREEN PROJECTS:
Physical or financial assets.
CapEx or selected Opex (with 3-year look-back period)
Public investments or public subsidies
Must be aligned with Taxonomy Regulation:
1. Contribute substantially to at least 1 environmental objective.
2. Not significantly harm any other objective
3. Comply with the minimum social safeguards
4. Align with Technical Screening Criteria (TSCs) where available.
Flexibility:
If no TSCs are available or applicable, an external reviewer shall
confirm that projects nonetheless meet the 3 other requirements.
Grandfathering:
Subsequent changes to TSCs should not apply to
REQUIRED REPORTING:
Green Bond Framework:
setting out
environmental objectives, process to
determine Taxonomy alignment and track
proceeds, projects to be financed by the
bond, and what impact metrics will be
used.
Allocation Reporting (annually):
Shall
include a breakdown of allocated amounts
to Green Projects at least on sector level.
Impact Reporting:
At least once during
bond lifetime after full allocation of the
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outstanding EU Green Bonds (grandfathering).
bond proceeds.
VERIFICATION REQUIREMENTS (a.k.a. EXTERNAL REVIEW):
-
The issuer shall appoint an external reviewer to confirm alignment of the Green Bond Framework with the EU GBS.
-
Verification of the Final Allocation Report is required.
Verification providers will be subject to accreditation including explicit requirements related to:
1.
professional codes of conduct related to business ethics, conflicts of interest and independence;
2.
professional minimum qualifications and quality assurance and control;
3.
standardised procedures for Verification.
Table 3
– TEG’s proposal for an EU GBS
39
Alignment with market best practices
The final set of requirements of the EU GBS itself that are being examined in this impact
assessment are based on the draft standard proposed by the TEG, which in turn is based on
(or similar to) market best practices, including best practice within the existing standards such
as the ICMA GBPs and the CBI standard
40
(for example where an existing standard does not
require but recommends certain practices):
o
with regards to reporting, these include the publication of a green bond framework, of
allocation reports, and impact reports
41
.
o
With regards to external review, these include external review of the green bond
framework and the final allocation report.
o
With regards to eligible green
projects, these include the “use of proceeds” approach.
This model enables a wide-range of approaches, including securitisation bonds, revenue
bonds, project bonds, covered bonds, and other debt instruments.
Allocation and impact reports
Building on a practice established in the CBI standard, the EU GBS would require issuers to
publish yearly allocation reports detailing the use of green bond proceeds, and providing
evidence on the Taxonomy-alignment of the projects funded by their bonds. These allocation
reports are what enable external reviewers and investors to check the issuer’s progress and
hold the issuer to account for fulfilling its sustainability commitment. In line with market best
practice, the EU GBS will require issuers to have their allocation report reviewed by an
external reviewer after a certain amount of time.
As is also common market practice, the impact report is the issuer’s review of the
environmental impact of the bond once all the proceeds have been allocated. This allows
investors to quantify and compare the environmental impact of their investment, and
mitigates against the risk of “greenwashing”. For transparency reasons, both reports would be
publicly made available to ensure full transparency.
Feedback from stakeholders
See
Annex 14
for more information on the TEG’s proposed standard
See section 1 for a description and comparison of these two standards.
41
79% of green bonds issued prior to November 2017 already had impact reporting in place. (Source: CBI:
“Post-issuance
reporting in the green bond market”)
39
40
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By following established market practice, the EU GBS would avoid needlessly changing
well-established practices regarding the format, frequency, and type of reporting. It would
also avoid needlessly disrupting the market for external review. The alignment with market
best practices is also justified based on the desire to position the EU GBS as the foremost
standard in terms of transparency and environmental credibility. Finally, the alignment with
existing market best practice was preferred by a large majority of respondents to the targeted
consultation on the EU GBS, who also agreed with all the main requirements of the EU GBS
as proposed by the TEG.
In particular, investors argued that the core requirements of the EU GBS would respond to
their needs for clarity, consistency, comparability, transparency and assurance that the
financed projects are aligned with the EU Taxonomy. A majority of issuers and financial
service-providers also agreed with the proposed requirements, arguing that the EU GBS
could help to standardise, clarify, and create a genuine market for high quality green bonds.
However, some respondents worried that the requirements would be difficult to meet for
SMEs wishing to issue green bonds, especially with regards to reporting and external review.
Table 3 below provides a summary of the consultation feedback on this issue.
Requirements proposed by the TEG
Answers to Strongly agreed + Strongly disagreed +
the question rather agreed
rather disagreed
Aligning eligible green projects with the 160
136 (87%)
8 (5%)
EU Taxonomy:
Publishing a Green Bond Framework 160
145 (90.5%)
2 (1.5%)
before issuance
Publishing an annual allocation report
161
145 (90%)
6 (4%)
Publishing an environmental impact report 159
126 (79%)
15 (9.5%)
at least once before final allocation
Having the (final) allocation report and the 157
139 (81.5%)
12 (8%)
Green Bond Framework verified
Table 4
–
Feedback from targeted consultation on the EU GBS
For the reasons set out above, it is recommended that the core elements of the EU GBS
should be aligned with market best practice.
Alignment with the EU Taxonomy
While being modelled on market best practice, the potential EU GBS would also go beyond
existing standards by including a requirement to align bond proceeds with the Taxonomy.
42
As noted in section 1, this is a legal requirement for the EU GBS. In practical terms, this
means that only those issuers with existing Taxonomy-aligned assets on their balance sheets,
or plans to invest in new assets aligned with the EU Taxonomy, would be able to issue using
the EU GBS.
Given that the Taxonomy sets out comprehensive and detailed criteria for the definition of
projects that are green, some potential green bond issuers may struggle to meet this
requirement. This means the standard would likely be more costly for the average green bond
issuer to align with, compared to current market standards.
42
In addition, it may include a requirement to only use authorised and supervised external reviewers, depending
on the outcome of this impact assessment (see section 5.4).
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At the same time, the EU GBS would likely allow certain issuers to increase the benefits
typically associated with green bond issuance, such as a reputational boost for the issuer, a
diversification of the investor base, and a potential green bond premium, since these benefits
typically increase with the level of ambition and green assurance of the bond.
For the reasons set out above, the issuers most likely to benefit from (and therefore employ)
the EU GBS are those wishing to demonstrate a strong green commitment. The overall
positive feedback from issuers to the targeted consultation indicates that there are many such
issuers. A more detailed assessment of the impact of the link with the Taxonomy is carried
out in section 6
–
Preferred option.
Transitional sectors in the Taxonomy
Because the EU Taxonomy includes transitional sectors, such as manufacturing, proceeds
from EU GBS could also be used to fund activities that are not low carbon. These sectors are
included because there is a need to stimulate emission reductions even in those sectors where
zero carbon is challenging or impossible to achieve today. At the same time, many of these
sectors have significant potential for CO2 reduction.
However, this inclusion creates a theoretical risk of undermining the green credibility of the
standard, in particular given the fact that the leading ambitious green bond standard on the
market, CBI, does not include such activities in its Taxonomy. At the same time, this risk is
mitigated by the strict conditions impose by the Taxonomy Regulation, as also explained in
annex 8.5, on those activities that may be considered transitional.
In particular, in order to be considered transitional, activities must have greenhouse gas
emissions that are substantially lower than the sector or industry average and they must not
hamper the development and deployment of low-carbon alternatives or lead to a lock-in of
assets incompatible with the objective of climate-neutrality.
For green bond market participants, the advantages of including such activities are clear:
issuers in transitional sectors, which has been an underperforming sector for green bonds,
will have clear EU-sanctioned definitions of green to underpin their green bond issuance,
substantially reducing the reputational risk of issuing. This could allow issuers that are
currently wary of issuing green bonds to join the market. For investors, the EU Taxonomy
will provide clarity on what is considered best in class
43
, allowing those investors that wish to
fund transitional activities to do so with more confidence in the greenness of their bond.
Grandfathering
The EU GBS proposal would envisage to allow issuers of existing green bonds to opt-in and
designate their bond as an EU green bond, provided that all criteria for a new EU GBS bond
are met. Green bonds that financed assets which do not meet the taxonomy criteria will not be
able to carry the EU GBS designation. Deviating from this strict approach would undermine
the increased transparency and consistency (in particular as concerns the green definition)
that the standard aims to achieve.
43
For example, for manufacturing sectors covered by the EU Emission Trading Scheme, TEG recommends
using the ETS benchmark for free allocation for a sector (i.e. best 10% of carbon intensity) in order to specify
the best performance in that sector.
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As concerns grandfathering in the case of subsequent changes to the taxonomy, the proposal
could stipulate that an EU green bond would retain this designation until it matures (= full
grandfathering), even if a later amended version of the taxonomy would no longer classify
the underlying asset or project as green. Options that would deviate from this approach have
been excluded at an early stage (for more information, see
Annex 13).
5.3.1. Policy options
For non-sovereign green bond issuers, such as Corporates, there are two alternatives:
1) Option 1: EU GBS alignment voluntary for green bond issuers in the EU
Under this option, issuers of green bonds would retain the freedom to decide whether to issue
green bonds using the EU GBS or not. Should they choose to align with the EU GBS, they
would have to meet all the requirements under the standard. Other market standards would
still be available, and could potentially be used in combination with the EU GBS. For
sovereign green bond issuers, this is the only alternative, since for legal reasons the standard
cannot be made mandatory for these issuers.
2) Option 2: EU GBS alignment mandatory for non-sovereign green bond issuers in the
EU, with transitional phase in:
The second option would be a mandatory standard for non-sovereign issuers, where all green
bonds issued by such an issuer in the EU would need to make use of the EU GBS in order to
be able to be called a green bond. The option of a mandatory standard also covering
sovereign issuers was not assessed (see
Annex 13).
For corporate issuers, the mandatory
alignment with the EU GBS would be phased in over a defined transitional period, with
grandfathering of existing bonds to ensure that investors who have purchased green bonds in
good faith are not penalised. After the transitional period, any green bonds that are issued
without being aligned with the EU GBS would lose the right to label themselves as green
bonds in the EU.
In addition, the policy option of “Flexibility
for corporate issuers with regards to
Taxonomy-alignment”
was discarded at an early stage.
Annex 13
describes the policy
option in detail, as well as the reasons for discarding it at an early stage.
5.3.2. How do the policy options compare?
1) Option 1: EU GBS alignment voluntary for green bond issuers in the EU
PROs: This approach minimises the risk of holding back the market. It provides issuers of
high quality green bonds with a dedicated standard to signal to investors their sustainability
ambitions or achievements, without imposing it on those green bond issuers who are less
ambitious. It would allow use of the standard to grow over time in line with market
experience with the use of the taxonomy, and as legal requirements for Taxonomy-aligned
disclosure gradually enter into force. Several respondents to the targeted consultation made
the comment that it was important to keep the standard voluntary, and were worried that
otherwise existing green bonds could lose their status as green. Depending on the
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development of the green bond market and the success and take-up of the EU GBS, its
voluntary nature could be reviewed (and potentially changed to binding) after a certain
amount of time.
CONs: Take-up of EU GBS may be limited at first, or permanently. The risk of green-
washing and potential market disruption from a controversy could persist. The lack of
transparency and confusion about the green credentials of those green bonds not making use
of the EU GBS would continue. Financial flows labelled ‘green’ would only partially
contribute to achieving the EU climate objectives.
Impact on
issuers
Issuers would be given an extra standard which they can make use of. This would in
particular benefit issuers of high quality green bonds, as the EU GBS is better
tailored to such issuers. This would allow those investors the opportunity to better
differentiate themselves from the market competition, which could contribute to
increasing the benefits of green bond issuance for those issuers (i.e. reputational
boost, green bond premium).
The additional cost of using the EU GBS would be lower for (1) issuers with a
higher existing share of Taxonomy-aligned assets on their balanced sheet, and (2)
issuers falling under the scope of the current NFRD, the future revised NFRD, or
the SFDR (for financial institutions), who would all be required to disclose their
share of Taxonomy-aligned assets and expenditure. For those issuers, some of the
costs of identifying and reporting on the Taxonomy-aligned assets would already
have been incurred.
For issuers active in sectors underserved by existing market-based taxonomies (e.g.
steel, cement, aluminium or chemicals) the link to the EU Taxonomy in the EU
GBS may persuade some of them to issue new green bonds to fund mitigating
measures in their manufacturing process
44
.
In the targeted consultation, some respondents worried that the requirements would
be difficult to meet for SMEs wishing to issue green bonds, especially with regards
to reporting and external review.
Investors would on the one hand be faced with yet another standard, which may
increase confusion and fragmentation of the market.
On the other hand, they would benefit from the existence of a green bond standard
with high quality assurance, allowing them more easily identify high quality green
bonds, and to be less exposed to the risk of greenwashing.
Institutional investors wishing to bolster the green credentials of their portfolios
would have at their disposal a new tool for identifying Taxonomy-aligned bonds,
and this should help for example with increasing the share of taxonomy-alignment
for the purposes of disclosures to clients under the SFDR.
Ultimately, this could also help retail investors access more high-quality green
investment opportunities, for example through bond funds whose assets include EU
GBS aligned bonds.
External reviewers would be given a new business opportunity as registered
reviewers of the EU GBS.
Even if a supervisory regime is set up, they would not be under any obligation to
seek registration, as they would be free to continue serving other parts of the green
bond market.
Impact on
smaller
issuers
Impact on
investors
Impact on
external
reviewers
Table 5: Impact of voluntary standard
44
See annex 7
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2) Option 2: EU GBS alignment mandatory for green bond issuers in the EU, with
transitional phase in:
PROs: The average quality of green bonds traded on EU markets would be higher. The clarity
regarding green projects for all green bonds on the market would be higher. Investors would
benefit from reduced cost of due-diligence.
Financial flows labelled ‘green’ would strongly
contribute to achieving the EU climate objectives as per the criteria in the Taxonomy
Regulation.
CONs: There is a risk of constraining the market as the mandatory requirement is phased in.
The Taxonomy remains untested in practice so it is difficult to assess the feasibility of using
the EU GBS for current green bond issuers. There is a strong risk of issuance and trading
moving to markets in third countries, especially as many issuers currently cannot comply
with the Taxonomy at this stage. Only a very small group of respondents to the targeted
consultation (3 out of 167) called for a mandatory standard.
Impact on
issuers
Impact on
investors
Impact on
external
reviewers
Since the term “green bond” would be reserved for green bonds aligned with the
EU GBS, this option would narrow the available options for existing and
prospective green bonds issuers. They would have the choice between issuing a
green bond according to the EU GBS, or opting for another type of bond or debt
instrument altogether. There would be no other forms of green bonds available.
For those issuers who are not able to identify Taxonomy-aligned assets on their
balance sheets, or willing to invest in Taxonomy-aligned assets, issuing a green
bond in the EU would no longer be possible. For this reason, they may choose to
issue under third country jurisdictions.
The clarity regarding green projects for all green bonds on the market would be
higher, which would reduce the risk of greenwashing.
However, the flow of green bonds would likely be reduced, at least in the short run,
which is a bad outcome for investors, given the current high demand and
oversubscription for green bonds.
In the short run, the flow of green bonds would likely be reduced, so business
opportunities would be reduced for external reviewers. However, in the long run, it
is possible that business opportunities would increase, if the EU GBS leads to
increased use of external review, especially for post-issuance review of the
Taxonomy-alignment of proceeds.
If a supervisory regime is set up, all external reviewers of green bonds that wish to
continue offering this service would need to seek registration under this regime. The
costs of this for the reviewer will be assessed in section 5.4
Table 6: Impact of mandatory standard with phase-in
Comparison table:
The following table summarises the assessment of the options against those objectives which
are relevant for the green bond market:
Clarifying and
harmonising definitions
of green projects and
Option 1: Voluntary standard
+
Depends on take-up. If EU GBS is
used, it will help to disseminate
Option 2: Mandatory standard
++
EU Taxonomy and market best practices on
reporting and external review would become the
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procedures for issuance
Taxonomy and harmonise
definitions. Further fragmentation
will be limited by alignment of EU
GBS with market best practice.
Reduce costs for issuers 0
No net costs, as only those issuers
who estimate a benefit from using
standard would do so.
Efficiency (cost-
+
Achieves objectives (partially)
effectiveness)
without imposing net costs on any
issuers.
0
Impact on SMEs
SMEs will be free to disregard the
standard, but in some cases they
may also be disadvantaged by not
being able to afford to use the
standard.
Other economic,
+
environmental, social and Positive environmental impact and
fundamental rights
positive economic impact. Social
impacts
safeguards are included in
Taxonomy.
Coherence with EU
++
policy objectives
Aligned with overall EU sustainable
finance strategy and transition to
carbon neutrality
norm. Full harmonisation.
-
While there may be a net benefit for some
issuers, others may forego green bond issuance
altogether.
-
Achieves objectives but imposes net costs on
some issuers, and may end up disrupting
market.
-
Some issuers may struggle to use standard due
to market best practice requirements.
+
Positive environmental impact but less positive
economic impact, as there may be less green
bond issuance.
Social safeguards are included in Taxonomy.
+
Aligned with overall EU sustainable finance
strategy and transition to carbon neutrality, but
market disruption may harm Capital Markets
Union. (Issuers could choose to stop issuing
green bonds altogether)
5.4.
Policy dimension 2: Regulatory treatment of external reviewers of EU
GBS-aligned green bonds
This policy dimension assesses two potential options for the regulatory treatment of third
parties providing external review services to issuers of EU GBS-aligned green bonds, in light
of the issues identified as part of problem driver 2.4.1
45
Stakeholder feedback to both the RSFS public consultation and the EU GBS targeted
consultation indicated broad market support for an external reviewer regime
46
. In the RSFS
public consultation, a significant majority (78.8% of 141 responses) supported the
introduction of a certification and supervision regime for external reviewers administered at
the EU level. At the same time, respondents highlighted the importance of proportionality in
any new regime to ensure that smaller entities can continue to provide these services.
The introduction of a formalised regime for external reviewers would be a forward-looking
and pre-emptive action.
47
. So far, there are no significant issues identified in the market for
external review of green bonds, which in any case is still quite small, with annual revenue
estimated between EUR 5 million and EUR 10 million. But the market for EU GBS bonds
Heterogeneity, lack of transparency, and potential issues relating to conflicts of interest in the external review
market
46
See Annex 2 for more info on stakeholder feedback.
47
Preliminary ESMA market estimations, based on an average fee of EUR 40,000 per issuer and overall green
bond issuance of EUR 490 billion
45
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does not yet exist, so it is impossible to say for certain what issues may be encountered in the
external review market for such EU GBS bonds.
In particular, the potential regime for external reviewers would aim to raise overall trust
levels in the external review process and the protection of the integrity of the EU GBS. By
raising the level of trust in the market, investors will be able to more easily identify green
high quality green bonds, which will support the further development and growth of the
market. Integrity is particularly important for the EU GBS, since it will cater to the higher
quality segment of green bonds, thanks to its alignment with the EU Taxonomy and market
best practice.
Imposing a framework on all external reviewers would undermine the voluntary approach
being taken for the EU GBS which is intended to only be used by those market players that
fully support its objectives and are willing to bear the additional cost or administrative burden
to deliver meaningful and trustworthy green investments to the market.
In the same vein, the TEG recommended
48
the establishment of a regime to promote the
development of the European green bond market by improving the quality and
standardisation of the review process for the EU GBS, while ensuring a level playing field
across the Union and meet the high demand from investors seeking quality green financial
assets.
The framework should build upon the existing pool of service providers while ensuring a
level-playing field for companies that have the relevant skills to provide external review
services.
The calibration of the framework’s requirements are key to ensuring that it does not
act as a disincentive for firms to register or force smaller firms out of the market. It is also
important to consider the resource requirements at supervisor level to minimise costs and
resource demands to administer the new scheme.
In order to support the entry of smaller participants into the market, the framework must be
proportionate in its requirements in order to reflect the nature and scale of activity. By
including proportionality measures and limiting the framework’s requirements that would
necessitate organizational changes and require additional financial resources, risks associated
with insufficient competition can be avoided. Such risks include higher prices or other
barriers to entry, and inadequate choice for smaller issuers.
As the market grows in size and importance or if specific issues arise regarding the conduct
of external reviewers more generally, the framework could be reviewed and extended to
encompass all external reviewers or could be incorporated into other potential Commission
initiatives to improve supervision of entities in the green market more generally.
While the majority of existing external reviewers are based in the EU, provision could be
made in the proposed framework to facilitate third country reviewers that wish to assess
compliance with the EU GBS. Existing frameworks contain equivalence provisions or allow
for certification or endorsement of third country entities
49
.
48
49
June 2019
TEG report on an EU GBS
Additional information is contained in the
External Review Annex.
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5.4.1. Policy options
With regard to a potential regulatory regime for external reviewers, the two main policy
options are:
1)
Registration and limited supervisory oversight and requirements:
This option consists of
tasking ESMA with registering external reviewers of the EU GBS, which would require a
legislative instrument. Under this approach, external reviewers would be required to only
register with ESMA with limited ongoing supervisory requirements.
2) Authorisation and supervision with more stringent requirements:
This option consists of
tasking ESMA with authorising and supervising external reviewers of the EU GBS, which
would require a legislative instrument. This approach entails a more stringent framework for
the authorisation and supervision of external reviewers.
In addition, the policy option of “tasking
national competent authorities (NCAs) with
managing a regime for external reviewers”
was discarded at an early stage.
Annex 13
describes the policy option in detail, as well as the reasons for discarding it at an early stage.
5.4.2. How do the policy options compare?
1) Option 1: ESMA registration with limited ongoing supervision
The framework for external reviewers of the EU GBS could set out requirements on their
minimum professional conduct, transparency and registration and supervision. For example,
external reviewers could be subject to requirements on professional ethics, good repute,
objectivity, independence and conflicts of interest, and be required to demonstrate and
maintain professional minimum qualifications, quality assurance and control and be required
to follow specific procedures when carrying out verification activities, in particular whether
bond proceeds have been used to finance Taxonomy aligned expenditures. In order to be
registered, the external reviewer would need to demonstrate that it only charges non-
discriminatory and cost-based fees to issuers and that its fees are not dependent on the results
of its assessment activities.
The external reviewer would be required to ensure that the members of its management body
have appropriate levels of qualification and expertise to fulfil its tasks and that they conduct
their activities with integrity and good repute. The external reviewer should have proper
operational safeguards and internal processes that enable it to assess the compliance of a
green bond with the EU GBS requirements.
With regards to conflicts of interest, there could be specific requirements to ensure that the
external reviewer and its employees are independent from the issuer and the verification is
carried out objectively, independently and is not affected by any existing or potential
conflicts of interest or business relationship. Potential or existing conflicts of interest that
have been identified should be eliminated or mitigated and disclosed without delay. The
reviewer would also be required to document its relevant policies and procedures in order to
evaluate their effectiveness. The designated competent authority would be empowered to
investigate and take enforcement action if necessary to ensure the integrity of the market and
the EU GBS.
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The approach for registration and supervision of external reviewers could be similar to that
for third party verifying STS compliance
50
. This would allow for the registration of an
external reviewer with a designated competent authority, in order to register them to assess
the compliance of a green bond with the EU GBS and to carry out post-issuance verification
of the use of proceeds. A current list of registered external reviewers and green bonds that
have been issued with an SPO (Second Party Opinion) on their compliance with the EU GBS
requirements could be provided on an official website maintained by ESMA.
PROs: This approach would have the benefit of a single registration process for external
reviewers with a limited ongoing supervisory burden. The framework would be based on a
set of proportionate requirements covering professional conduct and transparency of the
external reviewer’s policies
and procedures that the designated competent authority would
assess an application against. These requirements would be proportionate to the current size
of the external reviewers, the general market and the non-systemic nature of their activity.
This approach would minimise the cost and resource implications for both external reviewers
and the designated competent authority whilst increasing accountability and market
transparency.
CONs: Under this option, external reviewers would not be subject to more stringent
requirements covering their organisational structure and financial resources. This might
create the risk that the external reviewer’s activity is of lower quality, which could lead to
increased reputational risk for issuers and negatively impact the reputation of EU GBS bonds.
Less intensive ongoing supervision would limit the ability of the designated competent
authority to actively detect and intervene in the event of a failure to comply with the
requirements of the framework by an external reviewer.
Impact
•
on
reviewers
•
•
•
•
This option could impose initial compliance costs for reviewers, because they will
have to fulfil a number of on-boarding requirements, including paying an initial
application fee, set under the registration process which they may not necessarily do
at the moment.
They have to pay a fee for registration.
There will only be limited costs for ongoing supervision. For example, 1 FTE may be
required for compliance purposes.
Registration is mandatory only for reviewers of EU GBS bonds.
While existing industry-based green bond standards might evolve and incorporate the
Taxonomy, only issuers of EU GBS bonds will be able to show that their external
reviewers are registered and supervised. Registering will allow external reviewers to
access the additional business segment of verifying bonds issued according to the EU
GBS. It will also give a proof of quality comparative advantage over those reviewers
that chose not to register when competing for verification business in the segment of
industry-based green bond standards.
1
–
1.5 FTE for compliance activity.
Initial application fee between EUR 1,500 and EUR 5,000.
Ongoing supervision EUR 500 to EUR 2,000 per year.
Issuers may have to pay more, because reviewers might pass on their compliance
costs to them.
If issuers do not want to pay for external review, they can choose to follow other
practices or market standards as the EU-GBS is a voluntary standard.
The TEG expects that, even if only voluntary, the EU-GBS would rapidly gain
Impact
on
issuers
•
•
•
•
•
•
50
Article 28 of
Securitisation Regulation (EU) 2017/2402
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•
Impact
on
investors
•
Impact
•
on
EU
budget
•
•
significant market recognition. Investors may expect issuers to use the EU GBS and
this may lead to a market preference or pricing advantage over other standards.
Non-compliance with the verification standards entails a reputational cost for the
company. It is reasonable to assume that external verification provides a stronger
signal to investors of the environmental commitment of the green issuers than a self-
attributed green label.
The benefits for investors are dependent on the types of requirements that will be
imposed on external reviewers. For instance, investors will benefit from more
credible external reviews where the independence, objectivity and quality assurance
of the service is guaranteed by the framework. Greater standardisation of reporting
templates would improve transparency and comparability. Investor confidence in the
integrity and independence of the process would be enhanced.
ESMA would require additional resources to carry out supervisory tasks with a one-
off cost to cover the development of the IT platform.
According to the TEG, even under a scenario that assumes strong and continued
growth in the green bond market the number of external reviewers to be registered is
expected to remain relatively small
51
implying that the additional supervisory
resources required would also be limited.
<0.3 FTE per regulated entity. 1-2 FTE for database and ICT development and
maintenance.
Table 8 - Impact of centralised registration by ESMA
2) Option 2: ESMA Authorisation with more stringent ongoing supervisory oversight
and requirements:
Under this approach, external reviewers of the EU GBS would be required to submit
significant information on their business plans, organisational and resourcing arrangements,
governance structures, policies and procedures for ensuring compliance with the Regulation
and their assessment methodologies. Once an application is deemed complete, the
supervising body would then have to carry out a detailed analysis to ensure it meets the
Regulation’s requirements before submitting a decision on authorisation to ESMA’s Board of
Supervisors or the NCAs’ Board. A fee would be payable to
submit the application and
reviewers would be subject to ongoing supervisory fees depending on their size and turnover.
This approach would be similar to that taken in the Credit Rating Agency Regulation (EU)
462/2013 with stringent requirements imposed on external reviewers that wish to provide
services to issuers of the EU GBS.
In this regard, it is important to note the key differences between CRAs and external
reviewers
–
CRAs are systemically important entities relied upon by the market to issue
independent ratings on the creditworthiness of a financial instrument. The determination of a
rating is a complex and detailed process requiring forecasting and modelling of potential
impacts of changes in market conditions or in the underlying assets. Credit ratings have
significant implications for the pricing of an instrument.
In the case of credit ratings, there are requirements in the EU legislations (CRR, Solvency II)
related to the use of credit ratings in the process of determination of the amount of regulatory
capital. Credit ratings therefore have an impact on the type and amount of financial
Currently only six external review providers account for more than ¾ of the market. CICERO:
“Milestones
2018. A practitioner’s perspective on the Green Bond Market”, 2018
(Link)
51
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instruments that credit institutions and insurance undertakings need to hold for the regulatory
purposes.
In contrast, external reviewers operate in a niche market for green bonds, and while their
opinions are an important source of assurance for investors and issuers regarding the
sustainability of their investments, the activity is non-systemic and has limited pricing impact
on the final price of the bond.
PROs: This approach would have the benefit of a single authorisation process for external
reviewers and harmonised supervision across the union. It could improve standardisation and
quality of the external review process and transparency for issuers and investors about the
activities of external reviewers.
CONs: ESMA or the designated national bodies will require additional resources to establish
and administer this new process, and it will take time to complete the legislative process to
grant the necessary powers to ESMA or the designated national bodies. A comprehensive
framework would create significant additional costs for external reviewers and ESMA or the
designated national bodies. A more stringent framework, similar to the Credit Rating Agency
Regulation, is not proportionate given the size of the market and the non-systemic nature of
their activities.
Impact
•
on
reviewers
•
•
•
This option would impose higher compliance costs for reviewers, because they will
have to fulfil the requirements set under the supervision framework, which they may
not necessarily do at the moment.
They will have to pay a fee for registration
They will have to bear costs for ongoing supervision.
They would have to incur organisational and resource costs to comply with the
framework. For example, a minimum headcount of 5 FTEs is required for a small
entity to be able to comply with the full CRA framework. Based on average salary of
EUR 50,000 to EUR 90,000 this would be approximately EUR 250,000 to EUR
350,000.
Authorisation would be mandatory only for reviewers of the EU GBS bonds.
Given the small size of the market for external review in terms of annual total
revenue, external reviewers may not see the benefits of seeking authorisation
compared to the costs they have to bear for it.
This approach could favour larger entities in particular CRAs that are active in the
space and can more easily comply with the requirements. The overall burden of the
new regime could be too much for smaller entities.
ESMA application fees under the CRA Regulation range from EUR 30,000 to over
EUR 100,000 for larger entities. Ongoing supervision costs of up to EUR 20,000 per
year.
•
•
•
•
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Impact
on
issuers
(larger
entities)
•
•
•
•
Issuers may have to pay more, because reviewers might pass on their compliance
costs to them
If issuers do not want to pay for external review, they can choose to follow other
practices, because the EU-GBS is a voluntary standard. However, the TEG believes
that, even if only voluntary, the EU-GBS could rapidly gain market recognition and
become the new standard for green bonds. Investors may have a preference for EU
GBS aligned green bonds.
Non-compliance with the verification standards entails a reputational cost for the
company. Hence, it is plausible to assume that external verification provides a
stronger signal of the environmental commitment of the green issuers than a self-
attributed green label.
At least 1 authorised external reviewer would be required to provide the necessary
SPO and/or post-issuance reporting. If the compliance costs are too high there is a
risk that no external reviewers seek authorisation which would have a significant
impact on the ability of issuers to issue bonds under the EU GBS.
If smaller entities are forced out of the market by larger entities, this leads to market
concentration of external reviewers, which could lead to higher costs for issuers
The EU-GBS is a voluntary standard, so smaller entities can also choose to follow
other practices in order to avoid any additional costs of the EU GBS framework.
The TEG expects that, even if only voluntary, the EU-GBS would rapidly gain
significant market recognition. Investors may expect issuers to use the EU GBS and
this may lead to a market preference or pricing advantage over other standards.
Non-compliance with the verification standards entails a reputational cost for the
company. Hence, it is plausible to assume that external verification provides a
stronger signal of the environmental commitment of the green issuers than a self-
attributed green label.
Investors will benefit from more credible and comparable external reviews
ESMA will require additional resources to carry out supervisory tasks. Initial
estimates based on the approach taken with CRAs indicates a requirement of 0.3 FTE
per authorised entity. The associated development and maintenance of IT systems
and databases could require up to 2 FTE. Based on an assumption of 10 regulated
entities the annual cost of supervision would range from EUR 1.1 million in year 1 to
EUR 850,000 from year 2 onwards. The additional cost in year 1 is to cover the cost
of associated ICT development
The implied cost of the decentralised regime would be a multiple of the resource
requirements indicated for ESMA as each competent authority would need to recruit
additional staff and build the necessary IT systems.
ESMA envisages environmental issues as becoming part of its mandate going
forward. For example, ESMA has been asked to build capacity on sustainability for
other purposes (MiFID II; fiduciary duty). Additional green expertise and capacity
within ESMA will be required, but can be used for multiple supervisory purposes.
ESMA also participated in the work of the TEG and supports taking on this new role.
Differing approaches at national level could lead to divergence between Member
States. Some Member States may also lack the necessary expertise and knowledge to
effectively carry out these functions at the national level or may not have a suitable
existing body to designate.
Impact
on
issuers
(smaller
entities)
•
•
•
•
Impact
on
investors
Impact
•
on
EU
budget
•
•
•
Table 9- Impact of centralised authorisation and supervision by ESMA
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Comparison table
The following table summarises the assessment of the options against the objectives set out in
section:
Option 1
Harmonising outcomes,
++
improving transparency and Improved transparency and accountability
addressing conflicts of
Better informed investment decisions
interest in the external
Cost savings from having to gather, assess
review market
and compare information
Reduce costs for external
reviewers
Efficiency (cost-
effectiveness)
-
Increased supervisory and organisation
costs due to additional compliance
activities
+
Improved reliability, usability and
comparability of reports and data reducing
costs for issuers and investors
Documented policies and procedures for
addressing conflicts of interest reducing
level of investor research required
Mitigates against potential reputational
damage for issuers and reviewers or need
to seek multiple external reviews
Option 2
+++
Improved transparency and
accountability
Better informed investment decisions
Cost savings from having to gather,
assess and compare information
--
Increased supervisory and organisation
costs due to more stringent compliance
requirements
--
Limited size of current market and
non-systemic nature of the activity
reduce the efficiency benefit of more
stringent measures as the imposed
costs would be outsized in comparison
to the perceived risks
The significant additional costs in
terms of the minimum FTE
requirement for compliance may
discourage firms from seeking
authorisation
--
Additional supervisory costs may be
passed on to issuers Smaller reviewers
would also be impacted to a greater
extent by increased supervisor and
compliance costs.
++
Behavioural changes of companies to
be more sustainable
Increased investment flows to
sustainable projects and companies
++
Aligned with overall EU sustainable
finance strategy and transition to
carbon neutrality
Impact on SMEs
-
Increased costs may be passed on to issuers
which proportionally would have a greater
impact on smaller issuers such as SMEs.
Smaller reviewers would also be impacted
to a greater extent by increased supervisor
and compliance costs.
Other economic,
++
environmental, social and Behavioural changes of companies to be
fundamental rights impacts more sustainable
Increased investment flows to sustainable
projects and companies
Coherence with EU policy ++
objectives
Aligned with overall EU sustainable
finance strategy and transition to carbon
neutrality
Costs under option 3 are based on the application of a regime based on the CRA Regulation.
Option 2 is costed relative to this.
5.5.
Policy dimension 3: Flexibility for sovereign issuers
52
Sovereigns are important issuers of green bonds: public sector green bond issuances
represented more than one third of global issuances of green bonds in 2018
53
. In order to
cover the market for green bonds, the EU GBS should also cater to sovereigns. This section
52
53
(see
annex 10 on sovereign bonds
for more details).
Moody’s Investor Services:
“2019 Global Green Bond Outlook”, 2019
(Link)
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explores the extent to which specific flexibility in meeting the requirements of the EU GBS is
justified to allow sovereigns to make use of the standard on a voluntary basis.
The TEG proposed that the EU GBS should apply equally to private and public (including
sovereign) issuers. In their report, they specified that green expenditures for sovereigns and
sub-sovereigns could include relevant public investments, subsidies and expenditures. This
section will focus exclusively on the case of a voluntary EU GBS for sovereign issuers
–
there is no policy option for a mandatory standard for sovereign green bonds, as the chosen
legal basis
–
Article 114 TFEU
–
does not warrant such type of legislative action (see
Annex
13
–
discarded options).
Specificities of sovereign issuers
The process of issuing a Sovereign green bond is similar to that of issuing a corporate green
bond, with some specificities. Stakeholders have mentioned the following particularities of
Sovereign green bond issuers, and how it might affect their use of the EU GBS:
Types of expenditure funded:
Although Sovereign green bonds may directly finance
tangible assets such as infrastructure, they also target more indirect and decentralised
expenditures, such as subsidies and operational expenditures. Intangible assets, such as
research and innovation, also appear more frequently in sovereign bonds than corporates.
Lack of project level overview of impacts:
It may be difficult for a sovereign to state with
certainty that all items funded are aligned with the Taxonomy, in particular the Do No
Significant Harm (DNSH) criterion. Sovereigns typically fund grant schemes, and are not
always in the supply chain for individual projects. Energy efficiency grants which are
distributed to firms in many different industries were mentioned as a potential example.
A preference for state auditors:
public issuers may prefer to use existing state agencies
specialised in government accounts rather than external third parties for the review of the
allocation of bond proceeds.
Legal restrictions on committing unspent proceeds:
In some cases, a forward-looking
approach to the allocation of green funds is not possible. This could be for example if the
Green Bond Framework of a sovereign issuer cannot commit a Parliament or pre-empt the
final decision on the allocation of state funds.
This means that two types of flexibility may be relevant for Member States wishing to apply
the EU GBS: flexibility linked to the EU Taxonomy Regulation (i.e. on use of proceeds) and
flexibility linked to other requirements. These two will now be discussed in order.
1) Flexibility linked to the EU Taxonomy Regulation
In its draft report on the EU GBS, the TEG advocated for the inclusion of a limited degree of
flexibility related to the specific technical screening criteria set out in the Taxonomy
Delegated Acts, by relying on the fundamental principles of the Taxonomy Regulation to
verify that investments align with the Taxonomy (the “TEG approach”). This was justified by
the need to handle gaps in the gradual development of the Taxonomy, and areas where the
criteria would not directly
applicable, such as outside the EU’s borders or for particularly
innovative projects.
While Member States that responded to the targeted consultation on the EU Green Bond
Standard were in general supportive of the core components of the EU GBS as proposed by
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the TEG, and especially of the alignment with the Taxonomy, a number of Member States
also agreed with the TEG’s proposal for flexibility.
However, there is an important legal dimension to the question of flexibility from the
requirements of the EU Taxonomy Regulation. Article 4 of The EU Taxonomy Regulation
specifies that: “Member
States and the Union shall apply the same criteria set out in Article 3
to determine whether an economic activity qualifies as environmentally sustainable for the
purposes of any measure setting out requirements for financial market participants or issuers
in respect of financial products or corporate bonds that are made available as
environmentally sustainable.
“
Given that the EU GBS initiative will pursue, as its core objective, the aim of delineating the
boundaries of what shall constitute an ‘environmentally sustainable’ bond, the EU Taxonomy
will need to be applied fully to determine the eligibility of the proceeds of the bond issuance,
for corporate issuers. This excludes the type of flexibility suggested by the TEG for corporate
bonds.
However, although the EU is not legally allowed to deviate from the Taxonomy Regulation
when setting out standards for green bonds issued by corporates
54
, this restriction does not
apply in the case of Sovereign issuers. Accordingly, there is legal scope for affording
flexibility around the definition of eligible green proceeds for potential sovereign issuers of
EU GBS green bonds. Two such potential flexibility approaches are explained below.
1)
“Flexibility pocket” approach
One potential approach is to allow Sovereign issuers to include as proceeds in their EU GBS-
aligned bond expenditure that has a positive environmental impact, but is not Taxonomy
aligned. Under such a “flexibility pocket” approach, the proceeds of the sovereign EU GBS
bond would be clearly divided into two parts: one part that would be 100% aligned with the
criteria of Article 3 of the Taxonomy Regulation, and a second part (the “pocket”) where
there would be flexibility to diverge from the Taxonomy.
The size of this pocket would be capped, and subject to some minimum criteria: for example,
only economic activities not covered by existing Technical Screening Criteria under the EU
Taxonomy, because those criteria are not yet developed for a specific sector or a specific
environmental objective, would be eligible for the flexibility pocket. Furthermore, economic
activities would still need to (i) substantially contribute to one of the six environmental
objectives as set out in the Taxonomy Regulation, (ii) do no significant harm to any of these
objectives, and (iii) meet the minimum safeguards of the Taxonomy Regulation. The projects
in the flexibility-pocket would not be considered Taxonomy-aligned.
The separation into two parts would facilitate the task for financial institutions holding these
bonds of disclosing Taxonomy-alignment under the Sustainable Finance Disclosures
Regulation.
55
Any use of flexibility would be accompanied by appropriate disclosures, to
ensure that investors are fully aware of its extent, and can discount the Taxonomy-alignment
of the bond accordingly.
54
55
Cf. Article 4 of the Taxonomy Regulation, see
discarded options
Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on
sustainability‐ related disclosures in the financial services sector (Link)
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Member States were consulted on the “flexibility pocket” approach using a targeted
questionnaire (see
Annex 9
for full results).
2)
Applying the “TEG approach” only to sovereign issuers: applying the Taxonomy by relying
on its fundamental principles
Another potential approach would have been to follow the TEG approach outlined on the
previous page, but only for sovereign issuers.
In practice this approach could lead to certain paradoxical outcomes: given that sovereigns
and corporates often ultimately fund the same economic activities, flexibility in the
application of the Taxonomy could lead to inconsistencies. In particular, such flexibility
could lead to the exact same economic activity being judged differently based on the source
of its funding.
For example, a project outside the EU could potentially be deemed Taxonomy-aligned while
an identical one inside the EU would not be. Or a project in a sector not yet covered by the
Taxonomy could be deemed Taxonomy-aligned
if it’s funded by a sovereign, but not if it’s
funded by a corporate. This could lead to unwanted outcomes, such as allowing public actors
to crowd out private actors
by being able to offer “Taxonomy-aligned” funding where the
private sector is not. In order to avoid this inconsistency, it is not recommended to give
sovereigns the flexibility to interpret or apply the Taxonomy differently to corporates. For
these reasons,
Member States were not actively consulted on the “TEG approach” to
flexibility.
2) Flexibility linked to other requirements
Taking into account the issues mentioned by sovereign respondents to the consultation,
potential flexibility for sovereign green bond issuers could also be possible with regards to
other aspects, such as the reporting and review requirements of the EU GBS. In particular, the
following types of flexibility could be considered for sovereign issuers of EU GBS-aligned
green bonds:
Allowing, if necessary, sovereign issuers and the reviewers of their EU GBS-aligned green
bonds to assess the alignment with the criteria of the Taxonomy Regulation based on the
terms and conditions of funding programmes, rather than at project level. This could greatly
facilitate the process of assessing Taxonomy-alignment for sovereigns, especially in case of
government programs funding multiple projects according to Taxonomy-aligned terms and
conditions.
Allowing sovereign issuers to rely on internal state auditors instead of external third parties
for the review of the allocation of proceeds.
5.5.1. Policy options
Based on this feedback, the following three options are proposed to grant flexibility to
sovereign issuers wishing to make use of the EU GBS when compared to the requirements
for private issuers:
-
Option 1: No flexibility compared to corporate issuers
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-
-
Option 2: Flexibility regarding other requirements, but not the EU Taxonomy
Regulation)
Option 3: Flexibility regarding other requirements and the EU Taxonomy Regulation
These options are cumulative in the level of flexibility, i.e. option 3 includes the flexibility of
option 2 but goes further by adding flexibility on taxonomy requirements. Keeping this in
mind, the following assessment will focus on the impact of the additional flexibility
introduced for each option.
5.5.2. How do the policy options compare?
1) Option 1: No flexibility compared to corporate issuers
PROs: Full consistency. No preferential treatment of the public sector. The credibility of the
standard will be boosted.
CONs: Additional difficulties for sovereign issuers to make use of the EU GBS.
Impact on
Impact of no EU Taxonomy Regulation-related flexibility:
sovereigns
Sovereigns wishing to use the EU GBS would need to comply fully with the Taxonomy.
Depending on when the EU GBS is adopted, sovereigns may struggle at first to identify
enough Taxonomy-aligned expenditure to justify issuing an EU GBS bond. But the time
it will take co-legislators to negotiate and adopt the EU GBS (estimated Q2 2022) may
give some MS the time to make the necessary preparations.
Sometimes it may be the case that MS have expenditure which is green and of equal
ambition to something which would be Taxonomy-aligned, but still not Taxonomy
aligned due to differences with the Taxonomy TSCs. In such cases, MS would need to
adapt their sustainable expenditure (e.g. relevant funding programs) to ensure
Taxonomy alignment. In the medium to long run this could lead to more Taxonomy-
alignment in general, as it would also incite the private sector to follow suit. In the
meantime, sovereigns could also chose to follow other standards, as in any case the EU
GBS would be voluntary for sovereigns.
Impact of no flexibility on other aspects:
Sovereigns wishing to use the EU GBS would also need to comply fully with the EU
GBS-related requirements for corporate issuers, including on external review, project-
by-project reporting, and refinancing.
- On project-by-project reporting, it is likely that the lack of this flexibility would
cause significant hindrances for MS issuers, as they are not used to proving
alignment by assessing every single project, and they gave quite strong support for
this flexibility in their stakeholder feedback.
- On external review, only a couple of sovereign issuers have made not made use of
external third parties, so the loss of this flexibility would mean that only a small
minority of MS would need to adapt their practices.
Impact on
Corporates issuing the EU GBS would benefit from a level playing field with sovereigns
corporates
in terms of use of proceeds. In particular, this means that they would not be
disadvantaged when seeking to finance green expenditure using the EU GBS.
Impact on
Investors would benefit from full clarity as there would be no exceptions for sovereigns.
They would be able to treat sovereign EU GBS bonds as fully Taxonomy aligned, even
investors
at the individual project level.
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However it is also likely that sovereign issuance of EU GBS would be lower under this
option, meaning that there would be fewer bonds to meet the demand for high quality
green bonds.
Table 10- Impact of no flexibility option
2) Option 2: Flexibility regarding other requirements, but not the EU Taxonomy
Regulation
PROs: Consistency with regards to the Taxonomy. Coherent definitions of what is green.
Flexibility on EU GBS requirements overcomes the main obstacles sovereigns would face in
using the EU GBS. Feedback from MS shows that they are mostly in favour of flexibility
related to other (i.e. non Taxonomy-related) requirements.
CONs: Sovereigns may struggle to apply the Taxonomy 100%, which would be challenging
for them and may limit their use of the EU GBS.
Impact on
Impact of no Taxonomy-related flexibility:
sovereigns
Similar to option 1.
Impact of flexibility with regards to other requirements:
Sovereigns wishing to use the EU GBS would be given flexibility with regards to other
requirements, including on external review, project-by-project reporting, and
refinancing.
- On project-by-project reporting, the additional flexibility will help MS that wish to
issue green bonds to fund decentralised spending programmes, such as subsidies for
renewable energy installation or energy efficiency measures. The flexibility to
assess government spending programmes based on their terms and conditions,
instead of assessing each of the individual projects funded, would greatly facilitate
the process of assessing Taxonomy-alignment for sovereign issuers, and could
support increased sovereign use of the EU Taxonomy.
- On external review, those MS who wish to do so will be able to make use of their
state auditors to review allocation reports.
Impact on
Despite some flexibility given to sovereigns, corporates issuing the EU GBS would still
corporates
benefit from a level playing field with sovereigns in terms of use of proceeds. In
particular, this means that they would not be disadvantaged when seeking to finance
green expenditure using the EU GBS.
Impact on
Investors would benefit from full clarity on use of proceeds and Taxonomy-alignment,
as there would be no exceptions in this respect for sovereigns. They would be able to
investors
treat sovereign EU GBS bonds as fully Taxonomy aligned, although they may
occasionally ask for additional clarifications at project level.
However it is also likely that sovereign issuance of EU GBS would be slightly lower
under this option (although still higher than under option 1), meaning that there would
be fewer bonds to meet the demand for high quality green bonds.
Table 11 - Impact of some flexibility option
3) Option 3: Flexibility regarding other requirements and the EU Taxonomy Regulation
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PROs: Sovereigns would be fully facilitated in their use of the EU GBS, and their ability to
identify EU GBS-eligible expenditure on their balance sheets may be higher, potentially
allowing them to more easily issue EU GBS-aligned green bonds if they choose to.
CONs: Feedback from MS shows that they are divided on the question of flexibility on
Taxonomy-related requirements, with some expressing significant reservations. So far, the
green bond market has not operated with separate requirements for sovereigns and
sovereigns, so this would be an untested approach. Inconsistencies within the EU GBS could
lead to paradoxical situations, and it could weaken the usefulness of the EU GBS as a gold
standard for high quality green bonds, as it would give less certainty on the positive
environmental impact of use of proceeds.
Impact on
Impact of Taxonomy-related flexibility:
sovereigns
Sovereigns would be fully facilitated in their use of the EU GBS. By using the
flexibility pocket, their ability to identify EU GBS-eligible expenditure would rise. This
could facilitate the issuance of EU GBS-aligned green bonds, in particular for smaller
MS.
At the same time, as pointed out by a majority of MS in feedback, such inconsistencies
between sovereigns and corporates could lead to a situation where sovereign EU GBS
bonds are considered less green than corporate EU GBS bonds. Investors would need to
account for the potentially lower share of Taxonomy-alignment of sovereign EU GBS
bonds. There is a risk that this would cause them to treat sovereign EU GBS bonds as
less desirable than corporate bonds, which means that funding costs for sovereigns
using green bonds could rise (i.e. their green bond premium would be lower). For this
reason, it is not clear to what extent sovereigns would choose to make use of the
flexibility pocket.
Overall, feedback from MS shows that they are divided on the question of flexibility on
Taxonomy-related requirements, with some expressing significant reservations.
Impact of flexibility with regards to other requirements:
Similar to option 1.
Impact on
Corporates would in effect have stricter conditions for using the EU GBS compared to
corporates
sovereigns. Depending on the extent to which sovereigns make use of the flexibility
pocket, they may find themselves at a disadvantage in certain situations. For example, a
sovereign would be able to issue an EU GBS-aligned bond for funding certain projects,
where corporates would not be able to do the same.
Impact on
Because of the flexibility pocket following different requirements from the rest of the
bond, investors would need to devote resources to checking the greenness of the
investors
expenditure in the flexibility pocket.
There is a risk that this would cause them to treat sovereign EU GBS bonds as less
desirable than corporate bonds.
Table 12 - Impact of full flexibility option
Comparison table:
The following table summarises the assessment of the options against those objectives which
are relevant for the green bond market. The options are assess compared to each other (not
compared to the baseline).
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Clarifying and
harmonising
definitions of
green projects
and procedures
for issuance
Reduce costs for 0
This option would not
issuers
reduce costs for
sovereigns
Option 1
++
This option would
preserve full
harmonisation between
sovereign and corporates
Efficiency (cost- 0
This option does not
effectiveness)
reduce costs for
sovereigns.
Impact on SMEs 0
N/A
Other economic, 0
environmental,
Positive environmental
social and
impact, negative
fundamental
economic impact as
rights impacts
sovereign issuance is not
facilitated.
Coherence with
EU policy
objectives
0
Aligned with overall EU
sustainable finance
strategy and transition to
carbon neutrality, but
sovereigns will not be
encouraged to issue EU
GBS, which may harm
Capital Markets Union
Option 3:
-
This option would create
divergence in the definition of
“green”, and could lead investors
to discriminate against sovereign
bonds.
+
+
This option would reduce costs This option would allow
for issuers, including potentially sovereigns to include elements in
quite significant costs associated use of proceeds without
with assessing Taxonomy-
assessing Taxonomy-alignment.
alignment of individual projects. But the market price of their
bonds may go down due to being
perceived as less green.
+
-
This option reduces costs while This option reduces costs, but
achieving most objectives.
does not achieve the objective.
0
N/A
+
Positive environmental impact
and positive economic impact, as
sovereign issuance is facilitated.
0
N/A
0
Potential negative environmental
impact, as coherence of
Taxonomy definitions
challenged. Positive economic
impact, as sovereign issuance is
facilitated.
-
Not aligned with overall EU
sustainable finance strategy due
to deviations from harmonisation
under Taxonomy definitions.
Option 2
+
This option would mostly
preserve harmonisation between
sovereign and corporates.
+
Aligned with overall EU
sustainable finance strategy and
transition to carbon neutrality
5.6.
Options discarded at an early stage
The following options were considered but discarded at an early stage:
(1) Non-legislative measure: Commission Communication on an EU GBS
(2) Developing other standards and labels as part of a framework
(3) Tasking national competent authorities (NCAs) with managing a regime for external
reviewers
(4) Flexibility for corporate issuers with regards to Taxonomy-alignment
(5) A mandatory standard for sovereign issuers
(6) Banning the refinancing of existing green assets and expenditure by the EU GBS
(7) Options which may imply the loss of green status before the bond matures.
Annex 13
describes each of these options in detail and the reasons for discarding them at an
early stage.
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6.
P
REFERRED OPTION
The chosen option builds on market best practices in the field of reporting and external
review, and on the alignment with the EU Taxonomy. The alignment with market best
practices is justified based on the desire to position the EU GBS as the foremost standard in
terms of transparency, legal certainty, and environmental credibility. It will also help avoid
fragmentation and reduce confusion for issuers and investors. The link with the criteria in the
Taxonomy is legally mandated. In feedback from the targeted consultation on the EU GBS,
the vast majority of respondents agree with these choices.
6.1.
Policy dimension 1: scope of application
The current data and stakeholder evidence indicates that under the mandatory option, there is
a risk of strong disruption to the green bond market. In contrast, the voluntary standard
achieves many of the same objectives, while minimising market disruption. Whereas a
mandatory standard forces net costs on some, a voluntary standard will likely only be used by
those who see a net benefit in doing so. For this reason, the voluntary option avoids
discouraging issuers from issuing green bonds, and impairing the development of green bond
markets.
A voluntary standard would in particular appeal to issuers of high quality green bonds,
allowing them to highlight more clearly to investors and others their environmental
credentials. For these issuers, the potential additional costs of complying with the EU GBS
(in particular related to the assessment of taxonomy-alignment and external review) would
more likely be cancelled out by higher benefits, such as investor demand and a potential
green bond premium, would also likely be higher. This possibility is supported by the strong
interest shown from stakeholders in the EU GBS.
In the targeted consultation, several respondents made the comment that it was important to
keep the standard voluntary, and expressed worries that existing green bonds could otherwise
lose their status as green. Only a very small group (3 respondents out of over 160) called for a
mandatory standard.
The conclusion of this assessment is therefore that option 1 (EU GBS alignment
voluntary for green bond issuers) is the best policy option.
This means that green bond
issuers in the EU and elsewhere will be free to align their green bonds with the standard if
they wish to, based on their own cost-benefit assessments. The voluntary nature of the EU
GBS will apply to all potential issuers, whether private or public. Issuers will also have the
option of using the EU GBS alongside other standards, for example. This facilitates the
creation of a competitive market environment that allows investor demand to drive future
issuances rather than regulatory requirements.
6.2.
bonds
Regulatory treatment of external reviewers of EU GBS-aligned green
The second policy dimension concerns the nature of a registration and supervision regime for
external reviewers.
Based on the analysis of the available policy options and taking into account stakeholder
feedback, the EU GBS should proceed with option 1.
This option would require external
reviewers to seek registration from ESMA with limited ongoing supervisory requirements,
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which are proportionate to the size of the market and the non-systemic nature of their
activities. This approach would also limit the additional supervisory and organizational costs
for external reviewers and supervisors.
Given the non-systemic nature of external reviewer activity and the relatively small size of
the market, a more stringent regime which would incur greater organisation and supervisory
costs is not required at the present time. However, developments in the market should be
monitored to ensure the framework is functioning as intended and the number of external
reviewers that have sought registration would be a key performance metric.
Registration and limited supervision by ESMA would support a harmonized application of
rules as well as uniform supervision and ESMA staff would also be able to leverage their
experience from the supervision of credit ratings agencies and trade repositories. While this
option would impose compliance costs on external reviewers, all investors and users of
opinions from external verifiers would benefit from the same level of investor protection,
transparency and integrity across the market. In contrast, if a national competent body were to
fulfil the same function, this could lead to divergent approaches and fee levels across the
Union and additional national rules could restrict the ability of reviewers to provide their
services on a cross-border basis.
6.3.
The extent of flexibility for sovereign users of the EU GBS
The third policy dimension concerns the extent of flexibility which should be given to
sovereign issuers of the EU GBS.
According to the responses to a dedicated stakeholder questionnaire on the matter, Member
States are evenly divided on the idea of a flexibility pocket for non-Taxonomy aligned
expenditure, but the strongest arguments weigh against such flexibility. In particular, having
two grades of green expenditure within the use of proceeds could lead to a singling out of
sovereign users of the EU GBS as less green, or it could harm the credibility of the standard,
or undermine its legal certainty and transparency. Some MS also argued that as sovereigns,
they should set the bar, and they feared that the flexibility pocket would introduce additional
complexity.
However, Member States are broadly very positive to the suggestions for flexibility with
regards to other requirements, such as on project-by-project reporting, such as on external
review, and refinancing.
Hence, the chosen approach is option 2 (flexibility with regards to other requirements,
but not the requirements of the Taxonomy Regulation).
By pursuing this option, MS
should be able to make use of the EU GBS (on a voluntary basis) on a level playing field with
corporates, while still benefiting from some flexibility that takes into account their
institutional specificities. In particular, the flexibility to assess government spending
programmes based on their terms and conditions, instead of assessing each of the individual
projects funded, would greatly facilitate the process of assessing Taxonomy-alignment for
sovereign issuers, and could support increased sovereign use of the EU Taxonomy.
It is important context that any Commission proposal on the EU GBS would need adoption
by co-legislators before it can enter into force. This means that the Taxonomy-alignment of
sovereigns today is less relevant than the expected and actual Taxonomy-alignment in 2022,
when the EU GBS may actually be available to use. Meanwhile, given the dynamic nature of
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the taxonomy, regular monitoring and evaluation is also foreseen to update technical
screening criteria in line with market developments.
In addition, the Commission is currently assessing how to give more space within the
taxonomy level 2 rules for transition or other activities in line with the taxonomy’s
objectives. Creating more flexibility or widening the scope also for Sovereign issuers in this
way seems to offer a more coherent, reliable approach than doing this for sovereign EU GBS
issuance alone.
6.4.
Alignment with objectives
As shown in the table below, the preferred option package is aligned with the objectives
detailed in section 4.
Objectives
Alignment of preferred policy options
Facilitate further development of the - The alignment with market best practices meets this
market for high quality green bonds…
objective, as it caters to higher quality green bonds.
…while minimising disruption to
- The choice of a voluntary rather than mandatory
existing green bond markets.
standard meets this objective.
- The choice of a light rather than stringent regulatory
regime for external reviewers meets this objective.
… and attracting sovereign issuers to
- The choice of the some amount of flexibility for
the framework while catering to their
sovereign issuers, without risking discrimination against
specificities
sovereign issuers for insufficient Taxonomy alignment
of green bonds, meets this objective.
Improve the ability of investors to - The choice of a regulatory regime for external reviewers
identify and trust high quality green
(rather than relying on existing market processes) meets
bonds
this objective.
Facilitate the issuance of high quality - The lack of flexibility w.r.t. the Taxonomy Regulation
green bonds, by reducing costs from
meets this objective by avoiding fragmentation between
market fragmentation
corporate and sovereign green bonds.
- The alignment with market best practices meets this
objective by avoiding market fragmentation.
- The choice of a voluntary rather than mandatory
standard is not well aligned with this objective
–
a
mandatory standard would have reduced fragmentation
more, by unifying the market around one standard.
Facilitate the issuance of high quality - The alignment with the EU Taxonomy meets this
green bonds, by clarifying green
objective, as it clarifies green definitions.
definitions
and
reducing
the
reputational risk for issuers from
sectors not sufficiently covered by
existing market-based taxonomies
Table 13 - Alignment with objectives
6.5.
Analysis of the expected take-up of standard
The following section will assess the expected take up and use of the EU GBS, provided that
a legislative initiative as proposed in line with the preferred option identified in this impact
assessment. The analysis begins by assessing the extent to which current green bond issuers
be able to meet the requirement for 100% taxonomy-aligned use of proceeds. It then conducts
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a partial and high-level cost-benefit analysis of using the EU GBS compared to other green
bond standards.
6.5.1. Taxonomy-alignment
–
general results
The first condition for an issuer to use the EU GBS is that they can locate enough Taxonomy-
aligned assets, operating expenditure, or capital expenditure on their balance sheet to match
the amount of the prospective EU GBS bond.
Annex 8.3 contains a summary of the most relevant studies that have been carried out to
gauge the level of Taxonomy alignment, usually by estimating the share of Taxonomy-
aligned revenue for a set of European or global equities. This exercise is rendered more
difficult by a range of constraints, notably the fact that no part of Taxonomy is yet finalised,
and that requirements for Taxonomy- aligned disclosures are not yet in force, so there is a
lack of available data. These studied indicate that for companies in the EU today, the
percentage of taxonomy-aligned activities would likely be in lower single digit number
(likely below 5%)
56
.
However, it is important to note that the Taxonomy is a tool for encouraging transition
towards Paris-alignment. In that sense, a lower percentages today indicates a greater need for
more effort. Crucially, while the study results mentioned above give us a rough indication of
the current state of play, what matters for EU GBS issuance is the ability of companies to
invest and create Taxonomy-aligned assets going forward. If so, the share of Taxonomy-
alignment will increase over time.
In this respect,
a study by EY
where a group of consultants identified over €200 billion of
shovel- ready green investment projects across the EU is a useful reference. EY identified at
least € 20.6 billion worth of Taxonomy-aligned
projects spread over several sectors. While
the study does not give a comprehensive overview of the potential for Taxonomy-aligned
investments in Europe, it gives an indication of the sheer scale of green and Taxonomy-
aligned projects potentially in the pipeline, and which could be funded using EU GBS bonds.
6.5.2. Taxonomy-alignment
–
the case of high-emission manufacturing specifically
As explained further in annex 8.4, the link of the EU GBS with the Taxonomy may facilitate
green bond issuance by certain sectors currently lagging behind in issuance. The Taxonomy
sets out criteria for investments in certain transitional activities to be considered as green
even if they are not low-carbon activities per se. One example is the sector of energy-
intensive industry, which has been insufficiently covered by market-based taxonomies, and
where green bond issuance is relatively low. According to the TEG, the fear of adverse
publicity because
a deal is deemed “insufficiently green” has prevented some issuers in such
sectors from tapping the green bond market.
Potential green bond issuers in this sector are likely to benefit from being covered by the
clear criteria of the EU Taxonomy. Annex 8.4 explains how sectors such as steel, aluminium,
cement, or chemicals, which are among the largest emitters in the EU, may be able to use the
EU Taxonomy to grow their green bond issuance, with significantly less fear of accusations
of green-washing from sceptical investors or civil society. For this reason, the EU Green
56
Purely as a reference for sake of comparison, it can be noted that this share is higher than the share of the
green bond market compared to the overall bond market, which is 3.5%.
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Bond Standard can, thanks to its link with the EU Taxonomy, help companies in this sector
enter the green bond market.
6.5.3. Cost-benefit analysis of issuing a green bond using the EU GBS, versus
another green bond standard
An issuer would likely only choose to make use of the EU GBS if the net benefits of doing so
exceeds the net benefits of all other options for raising financing, including issuing a green
bond using one of the other available green bond standards, issuing a conventional bond, or
raising financing using other means.
In line with the mandate given to it by the Commission, the TEG has proposed an EU GBS
draft standard based on market best practice. Given the additional requirements for use of
proceeds to be Taxonomy-aligned, and to contract only registered external reviewers, the
standard would likely be more costly - on average - for issuers to align with, compared with
current market standards. However, for issuers already following market best practice,
alignment with the potential EU GBS would be less costly.
At the same time, the EU GBS would likely also bring in more of the benefits typically
associated with green bond issuance, such as a reputational boost for the issuer, a
diversification of the investor base, and a potential green bond premium. These benefits
would increase with the greenness of the bond. For these two reasons, issuers of high quality
green bonds are the ones who are the most likely to make use of the potential EU GBS, in
order to reap higher benefits from their existing green credentials. The positive feedback from
many green bond issuers to the targeted consultation indicates that there are many such
issuers who are eager to make use of the EU GBS.
6.5.4. Costs of issuing using EU GBS (compared to current green bond standards)
Issuing a green bond usually implies extra costs compared to a conventional bond, such as for
administrative efforts, staffing and training needs related to the creation of a green bond
program, the management and monitoring of the use of green bond proceeds, and carrying
out of reporting requirements after issuance. In addition, there are costs for external review
(ranging from EUR 20.000 to 40.000 per issuance, based on stakeholder input).
Although views vary, the average expectation from stakeholders is for slightly higher costs
for reporting and external review for those using the EU GBS (in particular those who not
otherwise follow market best practice, such as aligning with the more ambitious CBI
standard).
The following section goes through the various costs in details to see how the EU GBS would
differ from existing market standards.
1) Costs of reporting obligations
If the EU GBS follows market best practice, it would require the publication of a Green Bond
Framework, of yearly allocation reports, and an impact report following full allocation of
proceeds. The related costs are unlikely to vary significantly from current green bond
standards.
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2) Costs of external review
57
If the EU GBS follows market best practice, it would require issuers to obtain external review
of the green bond framework and of their final allocation report. This indicates that the costs
of external review obligations under the EU GBS will not vary materially from the cost of
current green bond standards, in particular the CBI standard, which requires both forms of
external review.
58
The real change in costs might therefore come from the effect of the potential registration and
supervision regime for external reviewers, under which external reviewers who wish to cater
to EU GBS issuers may need to pay a fee to ESMA. Many respondents to the targeted
consultation indicated that the additional costs would depend on the design of the future
regime for external reviewers. Annex 3 quantifies the average additional cost per issuer of
using the services of an external reviewer registered and supervised under a regime set up by
the EU GBS. The result of the analysis is that additional costs per client are likely to be in the
range of EUR 1,334 to EUR 3,281. For larger entities with significant organisational
capacity, the costs may be lower.
At the same time, the TEG found that the range of approaches and services provided by
external reviewers can create uncertainty for issuers and investors on the actual value, quality
and impact of the external reviews, and can also lead to increased costs, for example, where
an issuer must obtain more than one external reviewer second opinion, or an ESG rating. For
this reason, it is possible that the intended standardisation brought to the market for external
review by the EU GBS could help to bring prices down, provided that enough external
reviewers apply for registration to review EU GBS bonds to encourage meaningful
competition.
In the targeted consultation, several respondents from the financial sector were of the view
that the EU GBS would reduce costs for issuers in the long-run, due to standardisation,
consolidation, and more competition among external reviewers (by reducing the ability of
external reviewers to differentiate their offers based on content).
3) Cost of identifying and tracking assets aligned with the EU Taxonomy
Issuers using the EU GBS would need to integrate the taxonomy criteria into their internal
assessment of what is considered sustainable, and use it to identify green assets for the bond.
In the targeted consultation, many pointed to the additional cost from screening proceeds
against the EU Taxonomy as the main factor of increased costs. Some mentioned in particular
the need to carry out due diligence according to the DNSH criteria as a major cost factor.
However, as mentioned in section 1 parallel disclosure requirements under the SFDR
59
and
the Taxonomy Regulation mean that such costs would likely need to be absorbed regardless.
In particular, companies under the scope of the NFRD
60
will have to report as of January
2022 their share of Taxonomy-aligned expenditure and revenues. This would incur a cost
linked to collecting relevant environmental data, matching them with financial data at activity
level, and disclosing on the resulting alignment.
The disclosure requirements enter into force
in a phased way over the first few years, alleviating these effects.
As the Commission
57
58
For more information, see
Annex 3.
External review also brings benefits, see next section.
59
Sustainable Finance Disclosures Regulation
60
Non-Financial Reporting Directive
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published a proposal to extend the scope of the NFRD, it is increasingly likely that any
Corporates considering issuing according to the EU GBS would already fall under the
requirement to publish these Taxonomy-alignment metrics.
Due to these legislative developments, a large part of the internal costs related to the
assessment of Taxonomy-alignment may already be incurred by issuers, irrespective of the
EU GBS.
6.5.5. Benefits of issuing using EU GBS (compared to current green bond standards)
For reasons discussed previously, the alignment of EU GBS with market best practice and in
particular with the EU Taxonomy Regulation may allow issuers to more clearly and easily
demonstrate their green commitment. The additional benefits of the external review process
for the EU GBS may also be valued by both investors and issuers in terms of the additional
assurance and transparency it provides regarding the greenness of their investment.
This should increase the signalling effect of the green bond, allowing the EU GBS to amplify
some of the benefits for green bond issuers:
1) Increased reputational boost
For example, issuers of green bonds typically obtain a reputational boost, as the label of
being a green bond issuer can be a strong signal about the environmental credentials of a
corporation. Such a signalling effect is likely to be at least as strong, if not a stronger, in the
case of the EU Green Bond Standard. The EU is also known worldwide to have some of the
highest environmental standards, so EU GSB alignment could help a company establish itself
as a green front-runner internationally.
2) Increased demand from investors
According to Agliardi and Agliardi (2019)
61
, the rising environmental awareness among
investors contributes to increased demand for green bonds and to oversubscriptions.
According to Climate Bond Initiative, 62% of green bonds in 2018 achieved a higher
oversubscription and spread compression than their vanilla equivalents after 28 days. A
separate effect on demand may come from the SFDR, which may facilitate the process for
holders of EU GBS-aligned bonds to report their share of Taxonomy-aligned assets.
3) Increased green bond premium
There is growing evidence that issuers of green bonds benefit from a so-called green bond
premium, a small but consistent pricing advantage due to investors accepting a lower yield on
green bonds, which allows issuers of green bonds to borrow more cheaply. Although there is
no definitive proof on the extent and pervasiveness of such a green bond premium, academic
research indicates that it ranges between 1 and 20 basis points, and in some cases even
higher. Stakeholders, including a prominent investment bank, have suggested estimates
ranging from 2 to 30 basis points, although these depend on the sector and issuer type. For
more information on the estimated size of the green bond premium, please see
Annex 6.
The size of the green bond premium also seems to correlate rather strongly with the level of
green commitment from the issuer, such as the extent to which the issuer has made use of
external review, as well as their history of green bond issuance. This would suggest that there
is positive relation between the ability to trust the greenness of a bond and the size of the
potential green bond premium for the issuer. If so, issuers making use of the EU GBS may
61
Agliardi, E., Agliardi, R:
“Financing environmentally-sustainable projects with green bonds”, 2019
(Link)
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benefit from an
–
on average
–
higher green bond premium than those using market
standards, given the rigorous requirements and high green quality of the EU GBS.
6.5.6. Cost and benefits: Summary table
The following table sums up the potential costs and benefits for green bond issuers of using
the EU GBS, versus using another green bond standard.
Potential Benefits of EU GBS VS other
green bond standards
Higher investor demand
due to alignment
with EU Taxonomy, and synergies with other
EU legislation (companies can use EU GBS
when reporting Taxonomy-aligned assets.
Potential synergies with EU-ecolabel).
Increased reputational boost
for the issuer
due to use of clear, recognisable market
standard with EU-brand.
Potential Costs of EU GBS VS other green bond
standards
Administrative costs of identifying Taxonomy-
aligned assets
(unless the cost is already incurred,
due to legal requirements for companies under NFRD
scope to report Taxonomy-alignment.
Potentially higher costs of external review,
if
external reviewers pass on costs of complying with
registration requirements to issuers (which is likely).
These costs are quantified as being between EUR
1,334 to EUR 3,281 per issuer, although in the long-
run the additional cost could fall due to increased
standardisation and competition.
Potential green bond premium,
ranging
from 1 to over 20 bps, due to additional
green commitment inherent in EU GBS
requirements (study finds link between post-
Roughly similar cost for reporting
and other EU
issuance verification and size of green bond GBS requirements, since standard is aligned with
market standard / best practice.
premium).
Other potential benefits,
such as the
OUT OF SCOPE: Costs of investing in Taxonomy-
learning process for the issuer, opportunities
aligned assets
(this is only relevant for companies
to attract a more diverse set of investors, etc. that do not already have sufficient Taxonomy-aligned
assets or expenditure. It is out of scope, as there are
many factors that determine the Taxonomy-alignment
of an issuer’s assets, beyond their issuance of green
bonds)
Table 14 - Costs and benefits for issuers of using the EU GBS
7.
H
OW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED
?
A robust monitoring and evaluation mechanism is crucial to assess the extent to which the
envisaged standard meets its policy objectives. This will allow the Commission to review the
legislation effectively at a future stage. It will also facilitate the early detection of potential
unintended consequences and enable the Commission to address any such issues in a timely
manner.
The intrinsic link to the Taxonomy Regulation
62
implies that the information gathered will
provide key insights not only on the functioning of the EU GBS but also on the practical
applicability of the Taxonomy. Given the taxonomy-based constraints for defining
‘economically sustainable economic activities’, the uptake of the standard will critically
62
c.f. Art. 4 Taxonomy Regulation
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depend on the availability and/or economic feasibility of taxonomy eligible assets and
projects. The taxonomy thereby sets the limits within which issuers can adopt the EU GBS
(i.e. full market penetration is only possible if the whole market converges on a taxonomy-
based system). There are likely to be links also to other related sustainable finance initiatives,
such as the Ecolabel where the monitoring of the EU GBS will add useful information.
For the monitoring and preparation of a future evaluation of the impact of the legislative
initiative, the following non-exhaustive list of sources could provide for a basis for
information gathering:
a.
b.
c.
d.
ESMA database on registration of external reviewers,
ESMA database regarding regulatory fees and charges,
ESMA/NCA database on notifications and complaints,
External databases on bond market
The data and indicators for monitoring and evaluation linked to these sources would include
the following output:
Data / Indicator
Objective / reasoning
i.
Total amount of EU GBS issued per Aim for long-term growth of the EU GBS market
following initial launch; will not achieve high
annum and outstanding
market penetration, at least initially, due to
stringent taxonomy requirements
ii.
Total amount of bonds earmarked as Acts as a benchmark for success of the EU GBS
‘green’(but not EU GBS) issued per
and the Taxonomy; provides insights on
annum and outstanding
[EU and greenwashing / possible need for further
regulation
globally]
iii.
Data on the relative pricing of EU GBS, Data provides information on investor preference
bonds earmarked as ‘green’ (but not EU
and success of the EU GBS and Taxonomy;
GBS) and other bonds outstanding (as a pricing difference would also show impact of
benchmark i.e. from the same/similar potential future incentives provided at EU or
national level
issuers)
iv.
Data on liquidity in the markets for EU Additional insights on functioning of the market
GBS, bonds earmarked as ‘green’ and
versus others; liquidity data may also show
other bonds outstanding (as a benchmark impact of potential future incentives provided at
EU or national level
i.e. from the same/similar issuers)
v.
Number of external reviewers registered Measure of the market attractiveness of the
regime; indirect measure of the level of
under the EU GBS legislation
competition in the market
vi.
Data on the regulatory fees paid by Provides insights on the effectiveness of setting
up a lighter and proportionate supervisory
external reviewers
framework
vii.
Complaint and/or supervisory reports Information on the effectiveness of ensuring high
concerning compliance with the standard market integrity
viii.
Complaint and/or supervisory reports Provides insights on the effectiveness, efficiency
concerning the applicability of the and coherence of taxonomy related aspects
taxonomy
Table 15 - Data and indicators
The timing of the monitoring needs to consider the application date of the legislation. No
sooner than five years following this date, the Commission shall carry out an evaluation of
this initiative, unless underlying legislation provides for an earlier evaluation deadline. The
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Commission will take the sources and indicators mentioned above into account and rely on a
public consultation and discussions with ESMA and competent authorities.
In particular, the evaluation could assess the extent to which:
-
-
-
-
-
The yearly issuance of EU GBS-aligned green bonds grows faster or at the same pace
as the yearly issuance of all green bonds
A large share of green bonds backed by Taxonomy-aligned projects are issued using
the EU GS.
EU GBS-aligned bonds are associated with larger green bond premia than other green
bonds on average.
The yearly issuance of EU GBS-aligned bonds is sufficient to sustain the activities of
at least 3 registered external reviewers.
The EU GBS reduces the search costs of investors seeking high quality green bonds,
and the number of complaints receive by supervisory authorities stays relatively low.
The evaluation shall be conducted according to the Commission's better regulation
Guidelines.
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Annex 1: Procedural information
1. L
EAD
DG, D
ECIDE
P
LANNING
/CWP
REFERENCES
This Impact Assessment Report was prepared by Directorate C (in conjunction with
Directorates B
and E) “Financial Markets” of the Directorate General “Directorate-General
for Financial Stability, Financial Services and Capital Markets Union” (DG FISMA).
The Decide Planning reference of the initiative “Proposal for a Regulation of the European
Parliament
and of the Council on the Establishment of an EU Green Bond Standard” is
PLAN/2020/7030.
This initiative is part of the Commission Work Programme 2021 (COM2020 690 final
–
19.10.2020) and is one of the actions proposed (number 16) by the European Commission in
the context of “an Economy that Works for People”.
2. O
RGANISATION AND TIMING
Several services of the Commission with an interest in the initiative have been involved in the
development of this analysis.
Four Inter-Service Steering Group (ISSG) meetings, consisting of representatives from
various Directorates-General of the Commission, were held in 2020.
The first meeting took place on 19 February 2020, attended by DG ENV, CLIMA, ECFIN,
EMPL, DEVCO, TRADE, ENER, BUDG, TAXUD, MOVE, RTD, MARE, NEAR, GROW,
CNECT, EEAS, JRC, SJ and the Secretariat General (SG).
The second meeting was held on 28 May 2020. Representatives from DG ENV, CLIMA,
ECFIN, EMPL, DEVCO, TRADE, ENER, BUDG, TAXUD, MOVE, RTD, MARE, NEAR,
CNECT, JRC, SJ and the SG were present.
The third meeting was held on 20 November 2020 and was attended by DG ENER, TRADE,
RTD, NEAR, ECFIN, DEVCO, EMPL, MOVE, ENV, MARE, CLIMA, GROW, BUDG,
EEAS, JRC, SJ and the SG.
The fourth meeting took place on 10 December 2020, attended by DG CLIMA, ECFIN,
EMPL, TRADE, ENER, BUDG, MOVE, RTD, MARE, CNECT, JRC, DEVCO, EEAS, SJ
and the SG. This was the last meeting of the ISSG before the submission to the Regulatory
Scrutiny Board on 20 January 2021.
The meetings were chaired by SG.
DG FISMA has considered the comments made by DGs in the final version of the IA. In
particular, it has simplified the structure of the policy options, reduced the length of the report
and clarified the links with other EU legislation and initiatives. The analysis of impacts and
the preferred option takes account of the views and input of different DGs.
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3.
C
ONSULTATION OF THE
RSB
The Impact Assessment report was examined by the Regulatory Scrutiny Board on 17
February, 2021. The Board gave a positive opinion with reservations. Taking into account the
feedback received from the Board, the Impact Assessment was especially revised on the
following aspects:
Further specification of the problem definition/ problem analysis: e.g. concerning deficiencies
of current green bond market standards, shortcomings on use of EU Taxonomy, description
of moral hazard problem of the green bond market linked to lack of clarity on green
investments, justification for regulating an area before significant problems arise, risks of not
regulating the area of external reviews, different treatment of sovereign green bond issuers
due to specificities of sovereigns.
Better assessment on how market standards would evolve in the absence of a new EU
initiative.
Adjustment/ deletion of option that corresponds to the baseline on external reviews.
Additional clarification for the need for further supervision on external reviews, also in
context of problem description and definition of options. In addition, better reasoning for
choosing a more proportionate approach to regulating evolving segment and not considering
an option to regulate the external review of existing market standards, in addition to the EU
GBS.
Clarification of explanations on legal reasons for discarding the option of a mandatory
standard for sovereign issuers.
Explanation in further depths of the purpose and consequences of allocation and impact
reporting.
Providing additional details on the degree of grandfathering which is foreseen for the EU
GBS.
Addressing possible challenges of aligning the EU GBS with the EU Taxonomy, for example
related to the inclusion of the greening of brown sectors.
Description of reasons for the mainly qualitative assessment and the limitations regarding
quantitative data, and the efforts made in that respect.
Explanations on how success of the EU GBs initiative will be measured (taking into account
the estimated costs and benefits of the preferred options of this initiative).
4.
E
VIDENCE
,
SOURCES AND QUALITY
The impact assessment draws on an extensive amount of desk research, expert group
meetings, in-depths interviews with selected stakeholders, call for feedback, open public
consultation, targeted consultation, opinions and advice by the potential supervising
authorities, targeted questionnaire, academic research papers and other.
The material used has been gathered since the Commission Services started the EU GBS
initiative as set out in the Commission’s Action Plan on Financing Sustainable Growth as of
March 2018 (see “Action
2: Creating standards and labels for green financial products”).
This material includes but is not limited to the following:
As set out in Action 2 of the Action Plan on Financing Sustainable Growth and at the request
of the Commission, the Technical Expert Group (TEG) on Sustainable Finance started its
work in June 2018. As a result of many meetings (13 physical TEG meetings) and intense
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discussion, the TEG prepared a comprehensive report with recommendations for an EU GBS
that was published in June 2019. The TEG suggested the establishment of an official and
voluntary EU GBS based on the EU Taxonomy, building on existing market standards. Next
to that, it provided a usability guide in March 2020, including an updated proposal for an EU
GBS. The mandate of the TEG ended in September 2020.
Regarding the draft TEG report, the TEG conducted a call for feedback that ran from 6
March 2019 until 7 April 2019. It received 104 replies from a balanced group of stakeholders
(issuers, investors, banks, verifiers, NGOs, main associations and NCAs) with a strong
majority of respondents supporting the creation of a voluntary EU GBS standard as well as a
strong link to the EU Taxonomy. The results from this call for feedback were considered in
the final June 2019 TEG report.
The Commission launched an open public consultation on the Renewed Sustainable Finance
Strategy on 8 April 2020 that was open for 16 weeks (due to the corona virus pandemic the
deadline for responses was extended by one month and closed on 15 July 2020). This
consultation provided for over 100 questions, including several questions on standards and
labels for financial products as well as on the EU GBS. The Commission received over 600
replies to this consultation from a large range of stakeholders. A Feedback Statement
providing an overview of the contributions to this public consultation will be published on the
Commission’s website.
DG FISMA carried out a set of in-depth interviews on the EU GBS with 11 selected
stakeholders different sectors and various Member States in the months of May and June
2020.
As part of the process, DG FISMA also launched a targeted consultation on 12 June 2020 to
seek further input from stakeholders on the EU GBS. This consultation was open for 16
weeks (due to the corona virus pandemic the deadline for responses was extended by one
month) and closed on 2 October 2020 after receiving 167 responses. The replies have been
published on DG FISMA webpage. The consultation document consisted of 19 questions in
total and focused on two main topics, namely on the EU GBS as well as on Social Bonds and
COVID-19. Contributions were received from a large range of stakeholders, including
company/business organisations, business association, consumer organisations, NGOs and
public authorities. Geographically, replies were received from 20 EU Member States, 2 other
European countries and 2 non-European countries. DG FISMA has analysed the feedback to
this targeted consultation and prepared a Feedback Statement, which will be published on DG
FISMA website.
A targeted “Questionnaire on
Sovereign green bond issuance using the EU Green Bond
Standard”
was shared with EU Member States on 2 December 2020 (DMOs) and 9 December
2020 (Finance and Environment Ministries) for feedback by 15 December 2020. The
questionnaire focused on the usage of the EU GBS by sovereign issuers and provided 10
questions. A large number of Member States (17 responses) provided concrete feedback to
this questionnaire.
DG FISMA had calls with European Securities and Markets Authority (ESMA) for its
opinion and advice (e.g. on 19 November and 8 December 2020) regarding a potential
registration/supervision regime of external reviewers at EU Level (giving a new role/ task to
ESMA).
The JRC prepared several academic / working papers / reports regarding green bonds: (1)
“Green bonds and companies’ environmental performance: a feasibility study”; (2) “Green
bonds and use of proceeds reporting: what do we know from market data providers?”; (3)
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“The pricing of green bonds. Are financial institutions special?”; (4) “Green Bonds as a tool
against climate change”.
The EU GBS has been on the agenda of the Member State Expert Group on Sustainable
Finance since 2019: Member States have been updated on the ongoing EU GBS initiative a
regular basis and specific issues, as e.g. the link to the EU Taxonomy or the format and the
nature of a potential EU GBS have been discussed.
The material used to inform this impact assessment comes from reputable and well-
recognised sources that act as benchmarks and reference points for the topic. Findings were
cross-checked with results in different publications in order to avoid biases caused by outliers
in the data or vested interests by authors.
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Annex 2: Stakeholder consultations and selected interviews
This section presents the full or partial results of two stakeholder consultations:
1. Targeted Consultation on the EU Green Bond Standard (12/06/2020 to 09/10/2020)
2. Online consultation on the Renewed Sustainable Finance Strategy (2019)
1. T
ARGETED
C
ONSULTATION ON THE
EU G
REEN
B
OND
S
TANDARD
On 12/06/2020 DG FISMA launched a targeted consultation on the Establishment of an EU
Green Bond Standard (EU GBS).
The initiative forms part of the Commission’s overall effort to encourage greater investment
in green and sustainable investments. It is a follow-up to the Commission
Action Plan on
Financing Sustainable Growth
of March 2018, which tasked the Commission Technical
Expert Group (TEG)
on Sustainable Finance to prepare “a
report on an EU green bond
Standard, building on best practices”
(Action 2: Creating standards and labels for green
financial products). In its
final report
of June 2019, the TEG put forward concrete
recommendations for an EU GBS. It included alignment of the use of bond proceeds with the
EU Taxonomy, the publication of a Green Bond Framework, mandatory reporting on the use
of proceeds (allocation reports) and on environmental impact (impact report), and
independent verification of the compliance with the Green Bond framework and final
allocation report by an external verifier. This work was supplemented by the
TEG’s
usability
guide
(with updated proposed Standard and Green Bond Framework) from March 2020.
Building on this work, the purpose of this targeted consultation was to collect further views
and opinions of interested parties on the content for the establishment of an EU GBS.
Respondents were invited to provide concise and operational suggestions on measures that
can be put in place to deliver the policy goals.
The consultation document consisted of 19 questions in total and focused on two main topics,
namely on the EU Green Bond Standard as well as on Social Bonds and COVID-19. The
questions focussed on several issues such as
inter alia
the rationale for establishing an EU
GBS, possible core components of a new standard, and other issues such as use of the EU
GBS by public sector issuers as well as establishment of additional standards and labels.
DG FISMA received 166 responses by the end of the consultation period on 09/10/2020.
Contributions were received from a large range of stakeholders (see Table 16 ).
Type
of
stakeholder
Company/business
org.
Business
Association
Public authority
Other
NGO
EU Citizen
Academic/research
institution
Number of
respondents
75
37
15
12
10
6
4
% of
respondents
45.2
22.3
9
7.2
6
3.6
2.4
Field of activity
Other
Banking
Investment
management
Not applicable
insurance
Market infrastructure
Pension provision
Accounting
Auditing
% of
respondents
42.2
30.7
17.5
9.6
8.4
6
5.4
3
2.4
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Trade union
Non-EU citizen
Consumer org.
Environmental
org.
3
2
1
1
1.8
1.2
0.6
0.6
Credit
Rating
Agencies
Social
entrepreneurship
2.4
1.8
Table 16 - Replies by type of stakeholder and field of activity
Geographically, replies were received from 20 EU Member States, 2 other European
countries and 2 non-European countries (see Table 17 for a detailed breakdown).
Country of origin
Germany
Belgium
France
Netherlands
Italy
UK
Greece
Finland, Spain, Sweden
Denmark, Norway, United States
Austria
Czechia, Luxembourg, Poland
Argentina
, Ireland, Latvia, Lithuania, Malta, Romania, Switzerland
Table 17 - Replies by country
Number of
respondents
29
23
22
15
14
12
8
5 each
4 each
3
2
1 each
This feedback statement summarizes the responses received to each question. It is not
intended as a detailed analysis of the responses, but seeks to give a general assessment of the
contributions received and highlight any common themes or issues related to the EU GBS as
well as to Social Bonds and COVID-19. The summary of the responses provides particular
insight into new areas for action proposed by the respondents. This feedback statement does
not give any indication of potential initiatives, which the European Commission may or may
not undertake in the future in this area.
Summary of individual responses
Q1) In your view, which of the problems mentioned below is negatively affecting the EU
green bond market today?
Based on the average scores among respondents for each of the questions, it is possible to
identify clusters of problems which issuers identify as having a similar degree of negative
impact on the green bond market today, ranked from most to least impactful:
Close to a rather high
impact
Somewhere between a
certain impact and
rather high impact
Slightly more than a
certain impact
Uncertainty regarding green definitions.
Doubt about the green quality of green bonds and risk of greenwashing,
Costly and burdensome reporting process, and
Uncertainty with regards to the eligibility of certain assets.
Absence of economic benefits associated with the issuance of green bonds,
Lack of available green projects and assets, and
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Lack of transparency and comparability in the market for green bonds.
Less than a certain
The complexity of external review procedures,
Costly and burdensome reporting process, and
impact
The lack of clarity concerning the practice for the tracking of proceeds.
Q2) To what extent do you agree that an EU GBS as proposed by the TEG would
address the problems and barriers mentioned above in question 1?
Based on the average scores among respondents for each of the questions, it is possible to
identify clusters of barriers and problems mentioned above in question 1 that issuers identify
as being addressed to a similar degree by an EU GBS as proposed by the TEG. In the
following, they are ranked from most to least impactful:
Somewhere between
Uncertainty regarding green definitions,
rather high and very
Lack of transparency and comparability in the market for green bonds,
Uncertainty with regards to the eligibility of certain types of assets, and
high impact:
Doubt about the green quality of green bonds and risk of greenwashing.
Slightly
less
than
Lack of clarity concerning the practice for the tracking of proceeds.
rather high impact:
Slightly more than a
Absence of economic benefits associated with the issuance of green bonds,
Lack of available green projects and assets, and
certain impact:
”Complexity of external review
procedures.
Less than a certain
Cost of the external review procedure and
Costly and burdensome reporting processes.
impact:
Q3) To what extent do you agree with the proposed core components of the EU GBS
as recommended by the TEG?
160 respondents answered this question, and the vast majority of them strongly agreed or
rather agreed with all the main requirements of the EU GBS as proposed by the TEG.
Investors argued that the core requirements of the EU GBS would respond to their needs for
clarity, consistency, comparability, transparency and assurance that the financed projects are
aligned with the EU Taxonomy.
Several respondents also pointed out that the EU GBS is largely aligned with current
voluntary market practices, not least with regards to the requirements for publishing a green
bond framework, reporting, and verification. Some respondents however worried that the
requirements would be difficult to meet for SMEs wishing to issue green bonds, especially
with regards to reporting and external review.
Several respondents made the comment that it was important to keep the standard voluntary,
and were worried that otherwise existing green bonds could lose their status as green. Only a
very small group (3 respondents) called for a mandatory standard.
Specific comments made on each of the sub-questions:
Requirement to align eligible green projects with the EU Taxonomy:
An overwhelming majority of respondents (136/160, or 87%) strongly agreed or rather
agreed with this requirement (while only 8 strongly disagreed or rather disagreed). A large
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number of comments concerned suggestions for flexibility with regards to the Taxonomy, for
example with regards to the TSCs, Transition activities, or DNSH, in particular with regards
to the progressive finalisation of the Taxonomy. Some respondents suggested that the EU
GBS should allow for general corporate purpose issuance, or target-linked approaches.
Requirement to publish a Green Bond Framework before issuance
An overwhelming majority of respondents (145/160, or 90.5%) strongly agreed or rather
agreed with this requirement. Some respondents asked that the standard should be defined
within the legal documentation (as an addition, or instead of the green bond framework)
Requirement to publish an annual allocation report
An overwhelming majority of respondents (145/161, or 90%) strongly agreed or rather
agreed with this requirement (while only 6 strongly disagreed or rather disagreed). Some
issuers pointed out potential synergies, such as including the allocation reporting in the
issuer’s non-financial
statement under the NFRD, or potential flexibility, such as giving
issuers the choice between a final report and yearly allocation reports. A small number of
issuers pointed out that the ongoing reporting obligations (i.e. the Allocation Report and the
Impact Report) would prove particularly burdensome for SMEs.
Requirement to publish an environmental impact report at least once before final allocation
A very large majority of respondents (126/159, or about 79% ) strongly agreed or rather
agreed with this requirement (while only 15 strongly disagreed or rather disagreed).
However, a number of comments mentioned that the requirement to publish an impact report
before full allocation of proceeds, as mentioned in the question, was impractical. The
consultation question was not clearly worded, as it should have said: “after full allocation and
before the end of the bond’s lifetime” (as in the TEG’s usability guide).
Stakeholders in favour pointed out that such reporting was already established market
practice, and that reporting on environmental impact based on standardised metrics is key to
facilitate investments in line with dedicated impact strategies. More sceptical respondents
mentioned that the monitoring of impact could be a considerable cost for issuers, and advised
against requiring issuers to disclose methodologies and assumptions for the calculation of
KPIs ex-ante. One respondent pointed out that the Taxonomy already has built-in impact
reporting, as the criteria are set according to impact, hence separate impact reports were not
necessary.
Requirement to have the (final) allocation report and the Green Bond Framework verified
An overwhelming majority of respondents (139/157, or 81.5%) strongly agreed or rather
agreed with this requirement (while only 12 strongly disagreed or rather disagreed).
Respondents argued that including these requirements would strengthen the credibility, trust,
and integrity of the EU Green Bond Standard, thereby adding to its value, while ensuring full
transparency, a simplified due diligence process, and increased accountability towards
potential and current investors. Some also asked that the requirement for external review
should be extended to the impact reporting. A few respondents argued that deals with
external verification benefit from higher market liquidity.
While few - if any - respondents objected to the requirement for external review of the green
bond framework, some respondents criticised the requirement for external review of the final
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allocation report. One line of argumentation was that this requirement had limited value
added, as the allocation of proceeds is quite straightforward, allowing market participants to
spot any misuse without help. A few respondents also pointed out that issuers would in any
case not dare to misallocate proceeds due to the potential reputational risk. Another criticism
related to the effort required by issuers, with some pointing out that issuers with several small
projects would suffer disproportionately. For this reason, verification of the methodology for
choosing eligible projects should suffice.
Finally, a small minority of respondents were concerned that the external review requirement
for the final allocation report was not appropriate for issuers employing the so-called
portfolio approach, where the portfolio of underlying assets is dynamic and therefore bonds
are never fully allocated (this is due to the fact that the project portfolio changes over time
and green bonds are not linked to individual projects).
Q4) Do you agree with the proposed content of the (a) Green Bond Framework, (b)
Green Bond allocation report, and (c) Green Bond impact report as recommended by
the TEG?
The vast majority of respondents agreed with the content of the TEG’s proposed Green Bond
Framework, Green Bond allocation report, and Green Bond impact report, though with some
minor suggestions for improvements for each of the three documents. Some respondents also
clarified that while they agreed with the spirit or the intention of the documents, they had
different views on how to design each document, and often reserved to answers given to other
questions in the consultation.
Q5) Do you expect that the requirement to have the Green Bond Framework and the
Final Allocation report verified (instead of alternatives such as a second-party
opinion) will create a disproportionate market barrier for third party opinion
providers that currently assess the alignment of EU green bonds with current market
standards or other evaluation criteria?
The majority of respondents responded positively that the requirement for verification could
create a disproportionate market barrier for third party opinion providers while a minority
responded negatively that it would not. However, there were no detailed responses provided
by negative respondents.
In the detailed responses, concerns were raised about potential additional costs of the
proposed verification requirement, particularly for smaller entities, given the need for
additional experience and expertise to carry out the assessment of an issuers overall
sustainability strategy, the alignment of the EU GBS use of proceeds and DNSH.
Other responses raised concerns about potential professional indemnity and liability issues
for verifiers as they may face increased risks given the need to also provide an explicit
opinion on the issuance’s alignment with the taxonomy and an assessment of DNSH. One
response suggested that post-issuance verification could be conducted by auditors as part of
the issuers annual report which would reduce the burden on other verifiers that could instead
focus on providing second opinions.
Another issue relates to the “portfolio approach”, where multiple green bonds finance a
portfolio of green loans. Given that the EU GBS is a bond-by-bond approach with specific
project allocation of proceeds there could be difficulties maintaining the link between bond
and project as the bonds mature and are replaced with new issuance.
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A number of respondents expressed concern about the use of the term ‘verifier’ in the EU
GBS as it may inadvertently exclude other types of entity from engaging in this activity and
limit the number of firms that can provide these services for the EU GBS. It was
recommended that the EU GBS use more established terms such as external reviewer or
second opinion provider and build upon existing market practices.
Q6) Do you agree that 100% of the use of proceeds of green bonds should be used to
finance or refinance physical or financial assets or green expenditures that are green
as defined by the Taxonomy?
Almost all respondents agreed that 100% of use of proceeds being of green bonds should be
to finance or refinance assets or expenditures that are defined as green by the Taxonomy.
However, a large majority of them are inclined for some degree of flexibility on its alignment
with the EU Taxonomy.
Majority of respondents have not proposed any threshold for percentage of alignment with
the Taxonomy. Those who did, their proposals varied for alignment varied mostly between
70% and 99%. Most respondents acknowledge that a lower threshold will damage the
credibility of the EU GBS and would risk greenwashing practices.
The main reason for this need of flexibility in the majority of responses is that the EU
Taxonomy is not yet completed, so this threshold would apply to activities not covered by
existing TSC; they usually believe that this flexibility should disappear as future criteria is
progressively added to the Taxonomy, but additional transparency should be ensured during
this period.
In the detailed responses, some respondents expressed concerns that certain existing green
bond market issuers might not be able to adapt to a 100% of alignment requirement, in
particular small projects or large and granular portfolios. In addition, the possibility of
constraining the innovation and a future alignment with international standards have been put
forward as reasons to implement some flexibility.
Some of the responses also reflect a concern related to the differences between the Taxonomy
criteria and current market practices, specifically for the renovation of buildings and green
mortgages.
Other responses highlight the possible negative effect that a 100% alignment requirement
without flexibility would have on transitioning activities.
Q7)
Do you agree with the TEG’s approach
63
to flexibility with regards to applying
the Technical Screening Criteria of the EU Taxonomy? Do you see any other reasons
to deviate from the technical screening criteria when devising the conditions that
Green Bond eligible projects or assets need to meet?
63
The TEG proposes that in cases where (1) the technical screening criteria have not yet been developed for a
specific sector or a specific environmental objective or (2) where the developed technical screening criteria are
considered not directly applicable due to the innovative nature, complexity, and/or the location of the green
projects, the issuer should be allowed to rely on the fundamentals of the Taxonomy to verify the alignment of
their green projects with the Taxonomy. This would mean that the verifier confirms that the green projects
would nevertheless (i) substantially contribute to one of the six environmental objectives as set out in the
Taxonomy Regulation, (ii) do not do significant harm to any of these objectives, and (iii) meet the minimum
safeguards of the Taxonomy Regulation.
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A large majority of responses support allowing the issuer to rely on fundamentals of the
Taxonomy when it comes to verify the alignment of their green projects. The main reasons
put forward are avoiding that innovation is stifled, and ensuring non-EU companies have a
chance to comply with the standard.
The main concerns centre on the role of the verifier and the increased costs this will imply.
Respondents ask for flexibility on Taxonomy interpretation, deep knowledge of both the
Taxonomy and the national specifics, and clear guidelines while maintaining a solid bond
with the Platform on Sustainable Finance (which, in turn, should be inclusive, transparent and
follow up on innovation and ESG changes).
There are also some suggestions to limit the involvement of the verifiers to the verification of
the issuer´s eligibility criteria for green projects or assets, instead of the assets themselves.
Most of the responses emphasize the need for reinforced transparency and reporting
obligations for issuers making use of this type of flexibility and suggest that issuers explain
why they are not complying
with Taxonomy’s technical screening criteria (TSC) through
additional disclosures, such as disclosing at project level, or providing the details in GB
framework and in allocation reports.
A minority of the responses raise concerns about the treatment of cases enjoying this
flexibility when detailed TSC covering them are developed in the future. For all of those
respondents, reassessment could be a problem and therefore they suggest a grandfathering
system as an alternative.
Some responses ask for further clarification of the do no significant harm criteria.
As regards the last sub-question, the majority do not see other reasons to deviate from the
technical screening criteria when devising the conditions that Green Bond eligible projects or
assets need to meet. For the minority, who take the opposite view, there is some
correspondence with the concerns expressed in question 6 with respect to renovation and
green buildings. Those respondents suggest that activities that currently qualify for a green
bond according to market standards should be able to be qualified as green under the EU
GBS.
Q8) As part of the alignment with the EU Taxonomy, issuers of EU Green Bonds will
need to demonstrate that the investments funded by the bond meet the requirements
on do-no-significant-harm (DNSH) and minimum safeguards. The TEG has provided
guidance in both its Taxonomy Final Report and the EU GBS user guide on how
issuers could show this alignment. Do you foresee any problems in the practical
application of the DNSH and minimum safeguards for the purpose of issuing EU
green bonds?
A large majority of respondents thinks that there will be problems in the practical application
of the DNSH and minimum safeguards for the purpose of issuing EU green bonds.
The main problem identified in the detailed responses is the complexity of demonstrating
compliance with the DNSH and minimum safeguards criteria. Respondents consider this a
difficult procedure. They suggest that the Platform on Sustainable Finance and the EC should
offer more guidance on how the compliance should be demonstrated, further clarifying the
criteria or providing additional examples.
In the same way, many respondents see qualitative aspects of the DNSH and minimum
safeguards as a source of subjectivity and ambiguity, with a room for interpretation.
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Respondents offer various suggestions to overcome the abovementioned difficulties: allowing
some flexibility in terms of compliance with DNSH and minimum safeguards criteria, using
national and EU legislation as a basis, and developing equivalence between those criteria and
existing international standards.
Respondents generally also voice concerns related to lack of data. Not all issuers seem to
have access to the information needed to prove compliance at present. Although the problem
of lack of data could be solved over time, respondents express their concern about the costs
of collecting the information needed, especially for third country issuers and SMEs.
The banking sector is particularly worried by this lack of data. Banks are not able to easily
check DNSH at a project/loan level mainly because projects are owned by their customers
and is difficult for financial companies to gain access to that level of detail.
Lastly, a minority of the respondents refers to difficulties in complying with DNSH and MS
criteria for issuers from non-EU countries because DNSH principles are mainly based on EU
regulations and because not every country complies with ILO Declaration on Fundamental
Principles and Rights at Work.
Q9) Research and Development (R&D) plays a crucial role in the transition to a
more sustainable economy, and the proposed EU GBS by the TEG explicitly includes
such expenditure as eligible use of proceeds. Do you think the EU GBS should
provide further guidance on these types of activities, to either solve specific issues
with green R&D or further boost investment in green R&D?
Responses to this question are fairly divided. Among those who answered and considered the
issue relevant, opposite views regarding the question whether R&D area should be further
clarified or is sufficiently clear are similarly represented. Comparatively smaller share of
respondents are of the view that the proposed EU GBS by the TEG should be changed to
boost R&D.
Responses mostly offer considerations of the specific features of R&D activities (outcome
uncertainty, long term profile), and few substantive changes are proposed even in the (b)
responses group.
All of the respondents are aware of the relevance of R&D for contributing to the
environmental objectives and highlight the necessity of further clarification/classification to
benefit market participants. Some of the suggestions ask for a new R&D category with own
criteria under the Taxonomy, while others prefer to treat R&D activities within the respective
green activities as an eligible expenditure, and provide additional information to investors,
preventing greenwashing at the same time.
Other responses propose the creation of robust impact and allocation reporting and
verification for R&D activities (there is no prevailing view whether this should be mandatory
or voluntary).
Only a few of the responses address more tangible and direct measures, like providing tax
relief to investors and issuers regarding R&D activities, or requiring a minimum percentage
of proceeds to be allocated to R&D activities or allowing the entirety of proceeds to be
allocated in R&D activities.
Overall, there is such disparity in the suggestions offered that none of them are widely
shared.
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Q10)
Should specific changes be made to the TEG’s proposed standard to ensure that
green bonds lead to more new green investments?
A large number of respondents across all categories agreed with the content of the standard as
proposed by the TEG and stated that no specific changes are necessary at least for the time
being. The proposed standard promotes comparability and high quality of disclosures for
investors. They are overall satisfied with the standard as it stands, which will be sufficient to
drive the standardization, transparency and simplification of the green bond market in EU and
steer capital flows towards green investments.
Next to that, some respondents underlined that possible future changes to the standard could
only be made after the standard has been used in practice for a certain period of time. In
addition, there is also enough flexibility to incorporate dynamic developments. Any possible
revision of the standard in the future should take into account the practical experience gained
by market participants as well as the developments of relevant legislation, as e.g. the EU
Taxonomy Regulation.
However, a majority of respondents was also of the opinion that specific changes should be
made to the TEG’s proposed standard. It was stressed that the
EU GBS should not be a static
document, but should be flexible enough to adapt to any new market developments. The areas
for suggested changes are as follows:
Some respondents underlined the need for more flexibility than the current taxonomy allows,
e.g. in the case of financing renovations of buildings.
There was a clear call for putting in place comprehensive grandfathering rules for eligible
green projects/assets (project level or/and portfolio level).
Regarding the scope of this initiative, some participants favoured a broader approach and see
the need for a broader approach that would also address transition bonds or sustainability-
linked bonds. The aspect of refinancing and green loans should also be taken into account.
Some respondents called for additional requirements for the impact reporting. Some further
guidance/ details on how to measure the impacts would be needed.
Many respondents highlighted the need for a defined limited look-back or re-financing period
in the green bond framework to push new green investments (additionality). There was the
request that both capex and opex should have a limited look-back period. There were several
calls for a maximum look-back period of one year. E.g. projects that are more than 10 years
old should not qualify under the framework, because these bonds would not contribute
anything new/additional to the green transition.
Q11) The EU Taxonomy technical screening criteria will be periodically reviewed.
This may cause a change in the status of issued green bonds if the projects or assets
that they finance are no longer eligible under the recalibrated taxonomy. In your
opinion, should an EU Green Bond maintain its status for the entire term to maturity
regardless of the newly adapted taxonomy criteria?
The overwhelming majority of respondents across all categories, issuers and investors, agreed
that an EU Green Bond should maintain its status for the entire term to maturity regardless of
newly adapted EU taxonomy criteria. This means that green at issuance should be green for
the entire term to maturity of the bond. According to these respondents, a strong
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grandfathering regime is needed, as this would provide legal certainty and avoid confusion in
the market once a bond is issued. Clarity, certainty and predictability are crucial for issuers
and investors when making investments. Any changes to the status of the green bond before
maturity would have consequences in terms of investors’ appetite for these products
and
prices. Furthermore, additional reviewing would increase the costs and make the whole
process more burdensome. It could also cause strong volatility in the price. Some respondents
even stated that it would generally not be possible to adapt already launched projects to the
newly recalibrated criteria of the EU taxonomy.
On the contrary, only a very few respondents were of the opinion that there should not be any
grandfathering at all, if the updated EU Taxonomy technical screening criteria are no longer
met. In this case, the EU Green Bond should lose its status. It was also suggested that a non-
compliant green bond could then also be labelled differently.
However, a minority of respondents was also of the opinion that in the case of adapted EU
taxonomy criteria an EU Green Bond should not maintain its status, but some kind of
grandfathering would be necessary. A grandfathering period would provide the possibility for
issuers to adapt the activities to the revised EU taxonomy. Some respondents underlined that
a limited grandfathering period would also avoid greenwashing. In this context, most
respondents favored a maximum amount of 5 years for grandfathering. Few respondents
suggested a maximum amount of 3 years as well as 10 years. Only one respondent was in
favor of a maximum of 20 years. However, few respondents also chose a “different approach
all together”. Among those, some explained that is depends on the financed asset or protect.
Grandfathering criteria should not be quantified in years, but rather on a combination of the
duration of the project and the extent of projected environmental improvements. An
alternative could also be a grace period allowing for realignment with new taxonomy
standards.
Q12) Stakeholders have noted that the issuance process for a green bond is often
more costly than for a corresponding plain vanilla bond. Which elements of issuing
green bonds do you believe lead to extra costs, if any?
The respondents find that verification, reporting, and additional planning and preparation are
all factors of the EU GBS that will lead to extra costs.
Most respondents indicate that the extra costs are somewhere between moderate and high for
all three factors, although additional planning and preparation (including the identification of
green assets) is considered as the costliest of the three, while verification and reporting are
roughly tied as the two least costly. Some respondents also mentioned other costs, such as IT
costs or communication costs.
Many respondents also mention that smaller issuers will have more difficulties absorbing
these costs, as they will represent a larger fraction of their bond (thereby affecting the cost
benefit calculation of green bonds for smaller issuers). The costs are also typically higher for
first time issuers. There are also differences in ongoing costs, as conventional bonds require
almost no surveillance after issuance and allocation, whereas green bond needs roughly 20%
more of human capital at issuance.
Concerning the overall additional cost impact, the estimates vary. Some think the additional
costs will not be significant, while others do. For example, one investment bank does not see
the additional costs as a concern, while some stock exchanges do.
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Q13) In your view, how would the costs of an official standard as proposed by the
TEG compare to existing market standards?
Although opinions vary, the average view seems to be that there may be a small cost increase
for EU GBS users compared to other green bond standards (in particular those who use GBP
without CBI or without following market best practice otherwise), but this cost increase
should normally not be large or particularly dissuasive (although for smaller issuers, this
might be a concern). It should be noted that several respondents from the financial sector
were of the view that the EU GBS would reduce costs for issuers, thanks to standardisation,
consolidation, and more competition among external reviewers. One respondent welcomed
that the proposed GBS allows for incorporation of multiple projects into a green bond
framework as well as for allocation and impact reporting to be done at portfolio level for
multiple projects. However, others indicated that costs of the EU GBS would be significantly
higher than for ICMA GBPs. Many respondents also indicated that a lot would depend on the
future regime for verifiers (e.g. under ESMA).
Many pointed to the additional cost from screening proceeds against the EU Taxonomy as the
main factor of increased costs. Some mentioned in particular the need to carry out due
diligence according to the DNSH criteria as a major cost factor, not least due to the need to
change internal processes. There was broad agreement that use of the Taxonomy would raise
costs. However, some respondents pointed out that parallel disclosure requirements under the
Sustainable Finance Disclosure Regulation and the Taxonomy Regulation itself means that
these higher costs would have to be absorbed anyway, independently of the EU GBS, and this
widespread adoption of the Taxonomy would also facilitate the screening process according
to its criteria.
The second most widely mentioned source of additional costs for the EU GBS was the need
for a verification of the green bond framework and post-issuance verification of the
allocation, compared to just a second party opinion being required for the ICMA GBPs. One
issuer mentioned that they had received a first proposal for an external verification that was
more than double the cost of a normal verification (i.e. a second party opinion). However, not
all respondents agreed that the review requirements for the EU GBS would raise costs
compared to current standards, given that many existing green bonds already make use of
post-issuance verification. Several respondents noted that, in terms of structure, the external
review requirements of the EU GBS as proposed by the TEG are pretty much in line with
best market practice of GBP and therefore no material additional costs are expected. Others
noted that the standardisation of verification requirements would improve clarity and reduce
the ability of verifiers to differentiate their offers based on content, which could have a
stabilising effect on prices, in particular for those seeking high quality verification. On the
verifier side, one company active in this sphere noted that the need to verify against the
requirements of the Taxonomy would require more data.
Q14) Do you believe that specific financial or alternative incentives are necessary to
support the uptake of EU green bonds (green bonds following the EU GBS), and at
which level should such incentives be applied (issuer and/or investor)?
For each of the four types of incentives asked about in this question, the average respondent
answered that that this incentive would have somewhere between “a certain impact” and
“rather high impact”, with regards to supporting the uptake of the EU green bond standard.
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Ranking of the options from most to least popular:
1.
2.
3.
4.
Other incentives or alternative incentives for issuers.
Other financial incentives or alternative incentives for investors.
Public guarantee schemes provided at EU level, as e.g. Invest EU”
Alleviations from prudential requirements received the least positive response.
Considerations in favour of incentives
Increase the internal rate of return for
projects that are eligible for refinancing by
a green bond.
Offset additional costs compared to vanilla
bonds, but have additional costs.
Bolstering uptake of standard by SMEs
Compensating issuers, who are required to
take on the entire (financial) workload of
issuing green bonds.
Singapore already offers targeted and
time-limited (until 2023) compensation for
issuers to alleviate the heightened GBS
documentation requirements, as it is.
Help create some momentum behind the
GBS, and create gravity towards entire
asset class.
Considerations against incentives
Promoting the use of the green bond standard
should not be confused with the aim of
promoting green investment and growth. Green
projects can be financed by many different
means, and care needs to be taken before
promoting the use of a specific financial
instrument such as green bonds. Incentives
should be at the level of climate policy, not
directly related to a financial instrument.
The GB market has been a very dynamic market
without any incentives.
Subsidies could lead to market distortions.
Alleviations from prudential requirements could
have the potential to disrupt the risk-based
approach of prudential framework and thereby
undermine the credibility of these bonds.
The net benefit of the EU GBS will be positive,
so no incentives are needed.
Q15) Do you foresee any issues for public sector issuers in following the Standard as
proposed by the TEG?
The majority of respondents, mostly coming from the private sector, did not foresee any
issues for public sector issuers in following the Standard as put forward by the TEG. Many
respondents highlighted that there should be a level playing field between private and public
issuers of green bonds. It was also put forward that representatives coming from the public
sector have been closely involved in the development of the EU taxonomy and the EU Green
Bond Standard so far. Next to that it was mentioned that the purpose of the EU GBS is to be
globally relevant and accessible to issuers located in the EU as well as to issuers located
outside the EU.
However, at the same time, a significant minority with many respondents from the public
sector/ authorities stressed that there are some issues for public sector issuers, including
sovereign green bond issuers, following the TEG’s standard. The respondents put forward the
following issues:
Many respondents mentioned challenges with respect to the EU taxonomy. There are
difficulties in assessing the EU taxonomy alignment of environmental policy related public
expenditures or the requirements to make representations on DNSH. Moreover, the
availability of data to demonstrate EU taxonomy compliance might be problematic.
Furthermore, the one-size fits all approach adopted by EU taxonomy screening criteria may
prove discouraging to countries of smaller size due to liquidity problems in issuance, lack of
natural resources and other issues inherent to smaller, particularly very small public issuers.
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Further work would be needed in order to take into account the special nature of public
expenditures.
Next to that, some respondents underlined the issue of “additionality” that may be difficult
for public issuers, such as sovereigns, and should not be required. A direct allocation of funds
to green projects is not possible, as public issuers normally take a backward looking
approach. Impact reporting could often not be done for 100 % of assets, because projects are
not established directly for the bond and thus not designed in a way that guarantees to collect
data. Thus, data for impact reporting would often not be available. More flexibility on the
format of the impact report would therefore be needed.
Concerning the area of verification, it was suggested that in case of a sovereign bond the
allocation report should not necessarily be verified by an external third party. It should
possible that the allocation report could be provided by an internal auditor of/ an agent
specializing in auditing the State’s accounts.
Moreover, a potential governance issue was mentioned with respect to possible penalties. If a
national body is in charge of supervising the green bond standard and applying penalties for
any breaches by the issuing public entity, this may lead to difficulties.
Q16) Do you consider that green bonds considerably increase the overall funding
available to or improve the cost of financing for green projects or assets?
A majority of respondents across all sectors confirmed that green bonds increase the overall
funding available to or improve the cost of financing for green projects or assets.
Regarding the increase of the overall funding, many respondents were of the opinion that
green bonds help issuers to identify, select and channelize funding to green projects and
consequently assist in increasing the funding to green projects/assets. The green bond market
has considerably increased the number of investment portfolios and the level of dedicated
investment for the financing of green projects and assets. It was highlighted that green bonds
are generally oversubscribed, which was explained with market driven dynamics. It was also
mentioned that the issuance of green bonds could play a decisive role in the companies
funding strategy that could considerably increase the overall funding available. Such a
strategy change may come when the issuance of green debt redirects flows towards greener
assets. However, at the same time it was also stressed that the availability of green funding is
not always an issue, but a lack of eligible projects could be a limiting factor.
When looking at the EU GBS, it was stated that the EU GBS could have a great potential to
channel funding, making it easier for issuers to finance them. It is vital that the EU GBS
could give due consideration to market dynamics in its design in order to achieve its full
potential. It would further enhance investor confidence in this asset class.
When looking at financing costs, it was stated that green bonds are an efficient way for
investors to steer money to sustainable projects. An increasing demand may reduce funding
costs for issuers and make issuance and investments into green more attractive. It was also
mentioned that for “dark green” investments the financing costs have considerably improved.
Currently, as there is a limited supply of green bonds, a “greenium” would be visible and the
costs of issuing a green bond would be lower than issuing a normal bond. For the future,
some respondents were of the opinion that the costs of financing green projects would
definitely improve, as the market would grow and there would be more competition regarding
investors' appetite.
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On the contrary, a relevant minority took a negative approach. Some respondents were of the
opinion that greens bonds would not considerably increase the overall funding or improve
financing costs for green projects or assets. There is no real evidence that green bonds would
lead to any additional green investment, especially since they are associated with an increase
in certain costs in comparison to plain vanilla bonds. Given the lack of financial advantage, it
would not be obvious. Furthermore, as current markets provide sufficient liquidity due to the
general low interest rate environment, it would not be clear whether green bonds have an
impact at all. Nevertheless, this may change in the long run, when small improvements may
gradually lower the financing costs for issuers, essentially resulting in better costs of
financing green projects. In this context, the issue of (financial) incentives was raised, which
could encourage to access further financing via green bonds.
Finally, few respondents underlined that it would be too early and very difficult to confirm or
assess at this state, whether green bonds would increase the overall funding available or
improve the cost of financing for green projects or assets. A possible price difference may
evolve only over time, as the interest in the green market seems to be growing.
Questions 17, 18, and 19 of the targeted consultation on the EU GBS asked about social
bonds. The summary of the responses can be found in Annex 16.
2. O
NLINE CONSULTATION ON THE RENEWED SUSTAINABLE FINANCE STRATEGY
On 11 December 2019, the European Commission adopted its Communication on a European
Green Deal (EGD), which significantly increases the EU’s climate action and environmental
policy ambitions. The EGD announced a Renewed Sustainable Finance Strategy to help
channel private capital towards sustainable investments. The aim of the public consultation
was to collect views and opinions of interested parties in order to inform the development of
the renewed strategy. The
online consultation
was open from 8 April until 15 July 2020 and
consisted of 102 questions addressing subjects of interest in the area of sustainable finance.
A total of 648 organisations and persons provided a response to the questionnaire. The largest
groups of respondents came from business associations (23%), financial companies/ business
organisations (14%) and other companies/ business organisations (12%). Other groups with a
significant number of responses include NGOs/ Civil Society (11%), EU citizens (22%) and
public authorities (7%).
The following section will present the responses to some of the questions that are the most
relevant for the initiative on the establishment of an EU Green Bond Standard.
64
Overview of responses to selected questions
Q22 asked stakeholders if they agreed that verifiers of EU Green Bonds should be
subject to some form of accreditation or authorisation and supervision, as
recommended by the TEG.
64
For questions 25, 26, 30, and 31, percentages of the coloured bars indicate the share of responding
stakeholders for that question (see “n” number in Figure caption). The grey bar indicates the percentage of blank
responses compared to total survey respondents (n=648).
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74% of the responding stakeholders agreed that EU Green Bond (green bonds using the EU
GBS) verifiers should be subject to accreditation or authorisation and supervision at a
European level. A smaller proportion of stakeholders thought this should be achieved at a
national level (7%). Overall, only 3% of stakeholders disagreed with the TEG
recommendation. A slightly larger proportion of responding stakeholders indicated that they
do not know or have no opinion (16%).
Figure 2 - Should verifiers of EU Green Bonds be subject to some form of accreditation or
authorisation and supervision? (n=402)
Q23 asked stakeholders if any action the Commission takes on verifiers of EU Green
Bonds should be linked to any potential future action to regulate the market for third-
party service providers on sustainability data, ratings, and research.
Most stakeholders responded that any actions taken by the Commission on verifiers of EU
Green Bonds should be linked to future potential actions on market regulation for third-party
service providers on sustainability data, ratings, and research (46%). 35% of stakeholders
indicated that they do not know, and smaller proportion disagreed (13%). 18% of business
associations, 22% of financial companies/ business organisations and 17% of other
companies/business organisations made up the majority of those that provided a “No”
response. However, 47% of business associations, and 54% of NGOs/ Civil Society indicated
that they either do not know or have no opinion.
Figure 3 - Should any actions the Commission takes on verifiers of EU Green Bonds be linked to any
potential future action to regulate the market? (n=374)
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Q24 asked stakeholders if they envisage any issues for non-European issuers to follow
the proposed standard by the Technical Expert Group (TEG).
The responses by stakeholders were largely mixed, however, single largest group indicated
that they envisage issues for non-European issuers to follow the standards of the TEG (34%).
25% of responding stakeholders indicated that they do not envisage issues. Many of the
stakeholder types were further split among the different options, with few cases where
stakeholder types generally favoured one option. 59% of financial companies/ business
organisations responded that they envisage issues.
Figure 4 - Can stakeholders envisage any issues for non-European issuers to follow the proposed
standard by the TEG (n=365)
Q25 asked stakeholders if they agree that requiring the disclosure of specific
information on green bonds in the prospectus would improve the consistency and
comparability of information for such instruments and help fight greenwashing.
Most stakeholders responded that they either agreed (27%) or strongly agreed (28%) that
requiring the disclosure of specific information on green bonds in the prospectus would
improve the consistency and comparability of information. 64% of academics, 71% of
consumer organisations, 58% of NGOs/ civil society stakeholders and 80% of trade unions
strongly agreed with this statement, while the largest proportion of public authorities
responded that they agree with this statement (47%). Business associations and companies
were largely split across the various options following the general data trends in the Figure
below.
Figure 5 - Would requiring the disclosure of specific information on green bonds in the prospectus
would improve the consistency and comparability of information for such instruments and help fight
greenwashing? (n=383)
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Q30 asked stakeholders whether the EU should develop standards for different types of
sustainability-linked bonds or loans.
A substantial minority of stakeholders either agreed (26%) or strongly agreed (20%) that the
EU should develop standards for different types of sustainability-linked bonds or loans. In
comparison, 12% of stakeholders disagreed and 6% strongly disagreed with this. NGO/ civil
society stakeholders (44%) and trade unions (75%) were the stakeholders that had the largest
shares of their group strongly agreeing. Public authorities’ responses were
spread across the
options with most stakeholders indicating that they are neutral (39%) or agreeing (30%).
Figure 6 - Should the EU develop standards for different types of sustainability-linked bonds or
loans? (n=388)
Q70 asked stakeholders if the EU Taxonomy, as it is currently set out in the TEG report
on Sustainable Finance, is suitable for use by the public sector, in order to classify and
report on green expenditures.
Overall, most stakeholders agreed that the EU Taxonomy as it is currently set out is suitable
for the public sector (56%). Of those that agreed, half indicated that while they agree that the
Taxonomy is suitable as it is currently set out, it is only partially so (29% of all responses).
27% of stakeholders did not know or had no opinion. The smallest share of responses
indicated that stakeholders do not agree that the Taxonomy as it is currently set out is suitable
for the public sector (16%).
The stakeholders that had the highest proportion of stakeholders
selecting “Yes” included
academics (43%), consumer organisations (67%), NGOs/ Civil Society (45%), and “other”
(43%). Public authorities (21%) and other companies/ business organisations (34%) had the
highest relative shares of responses stating “No”.
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Figure 7 - Is the EU Taxonomy suitable for the public sector for classifying and reporting green
expenditure? (n=334)
Q73 asked stakeholders if public issuers should be expected to make use of a future EU
Green Bond Standard for their green bond issuances.
The majority of stakeholders responded that public issuers should be expected to use the EU
GBS for green bond issuances (69%), with a minority share saying they should not (8%).
23% of stakeholders responded that they do not know/ have no opinion.
Figure 8 - Should public issuers be expected to make use of a future EU Green Bond Standard for
their green bond issuances? (n=316)
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Annex 3: Who is affected and how?
1.
P
RACTICAL IMPLICATIONS OF THE INITIATIVE
The proposed voluntary standard in conjunction with a light supervisory approach ensures
that the objectives are reached in the most cost-effective manner. At the same time, it avoids
disruptive impacts on existing green bond markets which can continue to operate freely. This
facilitates the creation of a competitive market environment which allows investor demand to
drive future issuances rather than regulatory requirements. The limited flexibility provided
for sovereign green bond issuers under the standard, simplifies sovereign issuance while also
safeguarding the integrity of the taxonomy classification system (harmonised definition of
green) and increased transparency.
The initiative will require limited investments both by ESMA as well as external reviewers
that decide to opt-in. On the side of ESMA, there will be one-off costs in the form of
additional labour resources, training as well as IT setup costs. Newly hired staff would
equally lead to increased on-going costs. Training and IT may also give rise to on-going costs
but are expected to be minimal after initial setup.
External reviewers will equally face costs if they want to comply with the standard.
Supervisory fees should be kept to a minimum for the time being given the market size and
revenues. Reviewers will however face other direct compliance and legal advisory costs as
well as organisational costs to meet all requirements. The extent of these costs will strongly
depend on factors such as the type of service currently offered, ancillary activities and entity
size. Some market actors are also already complying with other regulatory frameworks. This
may decrease the one-off costs if certain organisational requirements are met already.
Issuers will still be able to issue green bonds under different market standards. Similarly to
external reviewers, they can avoid costs if they do not opt-in. The costs of using the standard
arise mainly due to cost that are passed on from external reviewers as well as costs relating to
the application of the taxonomy. The application of the taxonomy will however also be
required under other initiatives (e.g. NFRD) meaning that parts of these costs are incurred
already. The standard will provide clear advantages in terms of trust which may translate into
offsetting pricing advantages and thus provide incentives for issuers to use it. Likewise,
issuers may want to demonstrate a stronger green commitment by issuing under the standard.
The positive reputation effects are not directly measurable but may easily outpace any costs
disadvantages over existing market approaches.
Investors will be provided with a green bond segment which ensures a high degree of market
integrity, transparency and comparability. Likewise. It provides for a common definition of
green thereby increasing comparability and trust. The initiative will provide increased choice
to investors and will benefit especially the most committed green investors which value a
stricter green definition. These investors can clearly set themselves apart from the rest of the
market by focusing their bond investments on EU GBS. Depending on the success of the
standard, investors may even start to fully converge on it driving issuance in the same
direction. Although it is impossible to estimate this benefit quantitatively, the increased
transparency under the standard will ultimately allow a more efficient allocation of capital in
the green investment market.
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2.
S
UMMARY OF COSTS AND BENEFITS
I. Overview of Benefits (total for all provisions)
–
Preferred Option
Description
Amount
Direct benefits
Comments
Avoidance of duplicative Estimated total saving of 1.75 - 3.5 million Some issuers currently engage with
external review costs
Euro per year
65
multiple
external
reviewers
for
additional assurance. This will not be
Depends strongly on number of issuances, necessary under the new framework as
rate of duplication and individual review trust in external reviews is increased.
costs incurred
Reduction of search costs No estimate available
and additional research
costs incurred by green
investors
Green investors will be able to clearly
distinguish EU GBS from other green
bonds. The basis in the taxonomy
ensures a clear definition of green.
Investors will require less time to and
effort to ensure that respective bonds are
in line with their investment objectives.
The standard demands an increased
amount of information over other
market practices (given the basis in the
taxonomy)
and
ensures
more
standardised and higher quality external
review procedures. This reduces the risk
of greenwashing and related price
deterioration (if revealed)
Many issuers will already incur the cost
to their assets against the taxonomy
given, for example, requirements in the
NFRD. This assessment will reduce the
cost of issuance of EU GBS as part of
the ‘green assessment’ has already been
carried out.
Increased trust and assurances as to the
greenness of the bond should help drive
additional demand over other green
bonds. This would imply pricing
advantages and reduce the costs of
financing for issuers
Assuming that the benefits outstrip
costs, at least in the longer run, the
standard will help to increase
investments in green projects and assets
by lowering their financing costs. This
will reduce the negative externalities of
issuers with wider benefits for the
Reduced exposure to risks No estimate available
of green washing
Reduced issuance costs No estimate available
given common taxonomy
Indirect benefits
Increased
pricing In a low single basis point range for
advantage over other investment grade bonds.
market practice for issuers
This effect depends strongly on investor
behaviour and the acceptance and trust in the
taxonomy as well as the standard itself.
Increased
high-quality No estimate available
green investments
Depends on investor and issuer behaviour
65
This assumes a duplication rate of 10-20% and is based on an average external review costs of 40 000 Euro
and 2020 issuance figures
79
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environment and society.
(1) Estimates are relative to the baseline for the preferred option as a whole (i.e. the impact of individual
actions/obligations of the preferred option are aggregated together); (2) Please indicate which stakeholder group is the
main recipient of the benefit in the comment section;(3) For reductions in regulatory costs, please describe details as to how
the saving arises (e.g. reductions in compliance costs, administrative costs, regulatory charges, enforcement costs, etc.; see
section 6 of the attached guidance).
II. Overview of costs
–
Preferred option
Citizens/Consum Businesses
ers
One-
off
Establishing a
framework for
external
reviewers
Recurre One-off
nt
Recurrent
Ongoing
Supervision:
EUR 500 to
EUR 2,000 per
year.
Organisational
costs
(additional
staffing, ICT,
record keeping,
documenting
processes and
procedures):
1 to 1.5 FTE for
compliance
activity.
Dependent on
salary(EUR
50,000
–
EUR
90,000).
Administrations
One-off
Supervisory
ICT
Developmen
t:
EUR
50,000
to
EUR
150,000
Recurrent
<0.3 FTE per
entity.
Dependent
on
salary
scale
(between EUR
75,000 and EUR
95,000 per FTE
per year).
Ongoing
Supervisory ICT
maintenance:
1-2
FTE
approximately
for full database
development and
ongoing
maintenance.
Dependent
on
salary
scale
(between EUR
75,000 and EUR
95,000 per FTE
per year).
No
cost Cost of dealing
impact
with
potential
market
complaints
Costs associated
with
potential
lawsuits
(1) Estimates to be provided with respect to the baseline; (2) costs are provided for each identifiable action/obligation of the
preferred option otherwise for all retained options when no preferred option is specified; (3) If relevant and available,
please present information on costs according to the standard typology of costs (compliance costs, regulatory charges,
hassle costs, administrative costs, enforcement costs, indirect costs; see section 6 of the attached guidance).
Direct
costs
No cost No cost Initial
impact impact Application Fee:
EUR 1,500 to
EUR 5,000
Organisational
costs (additional
staffing,
ICT,
record keeping,
documenting
processes
and
procedures):
EUR 10,000 to
EUR 150,000
Indirect No cost No cost Cost
of No cost impact
costs
impact impact advertising new
regulatory status
80
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Calculation of overall costs for external reviewers under EU GBS regime over a hypothetical 4-
year period.
NB: These costs are calculated from the point of view of a small entity which does not already have
any of the administrative capacity that would be required. For a larger entity, organisational costs may
be lower than the lower estimate calculated below.
Cost
Initial application fee
Organisational costs
Ongoing supervision
Organisation costs
Assumptions:
-
-
-
-
-
One-off costs are distributed over four years
4 external reviewers will register as EU GBS reviewers
160 EU GBS-aligned bonds are issued per year
External reviewer split the market equally (i.e. each would have about 40 EU GBS-related clients per
year).
External reviewers pass on all the additional costs, but only to issuers of EU GBS-aligned green bonds.
Cost
Total one-off costs
Total recurrent costs
Average yearly costs per external reviewer
66
Additional costs per client
67
Lower estimate
11,500
50,500
53,375
1,334
Higher estimate
155,000
92,500
131,250
3,281
Type of cost
One-off
One-off
Recurrent
Recurrent
Lower estimate
1,500
10,000
500
50,000
Higher estimate
5,000
150,000
2,500
90,000
The result of the analysis is that additional costs per client are likely to be in the range of EUR 1,334 to
EUR 3,281. For larger entities with significant organisational capacity, the costs may be lower.
Overview over current external review market
The current market participants belong to four categories (see more in Annex 7 on external reviewers):
a.
Credit Rating Agencies:
Moody’s, S&P Global Ratings, Fitch, as well as more recently
Beyond Ratings
68
;
b.
Non-financial rating agencies and sustainability consultancies
specialised in second party
opinions: Vigéo-Eiris
(recently acquired by Moody’s), Sustainalytics, ISS-oekom
and the
research organisation CICERO;
c.
Big-four audit firms
providing mostly post-issuance
verification or “assurance” services:
Deloitte, KPMG, PwC, EY;
d.
Global technical inspection and certification bodies:
e.g. DNV-GL, Bureau Veritas, TÜV,
etc.
66
67
= 1/4 Total one-off costs + total recurrent costs
= Average yearly costs per external reviewer /40
68
ESMA has registered Beyond Ratings SAS as Credit Rating Agency in March 2019. Beyond Ratings was
acquired by London Stock Exchange Group in June 2019.
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The majority of external reviewers are currently not under any form of financial regulation.
However, the entities active in this market are not homogenous. It is the final category (d) for
which the imposition of a regulatory and supervisory regime would most probably require
new resources to comply with the regime.
The basis for this being that (a) already have a compliance structure in place to deal with
global regulatory requirements of credit ratings (b) are large multi-national firms with
significant internal support structures to meet wider compliance and fiduciary responsibilities
(c) are already subject to national regulatory oversight for the provision of audit services and
provide consultancy services to firms on regulatory compliance and should therefore be in a
position to adapt to new regulatory requirements for EU GBS reporting.
For (d), a regulatory and supervisory regime would bring new costs and expertise
requirements which may not be already in-house.
From ESMA’s experience of supervising
smaller CRAs, which could be considered comparable in terms of revenues and scope of
activities to the activity of Green Bond external review, and in particular the class of entity
under (d), the following may be required in terms of compliance personnel.
Resources can typically involve 1 to 1.5 FTE for compliance, with up to an additional 1 FTE
spread across internal audit, risk management, internal review and information security.
However, it is also possible for the smallest entities to have 1 FTE for compliance, with and
additional ~.5FTE spread across the other internal control functions. There may also be ICT
development costs required to meet any record keeping and security requirements.
According to research conducted by CBI in 2018, the external review market was dominated
by a group of mainly European service providers currently holding more than 90% of the
market with six specific providers account for almost 75% of the market
–
CICERO,
Sustainalytics, Vigeo Eiris, EY, ISS-oekom and DNV GL.
69
As the table below shows, these
entities already have significant scale which will mitigate the impact of any additional
compliance burden.
Predominant external reviewers
CICERO
Sustainalytics
Vigeo Eiris
EY
ISS-oekom
DNV GL
Headcount
80
600
300
250,000
2,000
12,000
69
CICERO: “Milestones 2018. A practitioner's perspective on the Green Bond Market”, 2018 (Link)
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Annex 4: Market Context and controversies
Use of proceeds
In the use of proceeds model, which dominates green bond markets, the issuer commits to
earmark the use of proceeds for (specific) green projects. This market has been characterized
by a strong focus on climate change mitigation. According to research by the Joint Research
Center
70
, 585 of around 1000 analysed bonds supported mitigation. 318 pursued mixed
environmental objectives, while only 83 pursued dedicated other environmental objectives, of
which only eight pursued adaptation. The non-climate space sees a focus on circular
economy, although the market has also seen innovation recently with the first ‘blue bonds’
issued by Seychelles and the World Bank in October 2018
71
, and recently even a ‘Rhino
bond’ aimed at protecting biodiversity.
72
Since the agreement on and adoption of the Taxonomy Regulation, the market has begun to
see an increasing amount of references to the Taxonomy in the use-of-proceeds
documentation of green bonds (known as the “green bond framework”). For more
information, see annex 7.
Controversies relating to use of proceeds green bonds
While the premise of use of proceeds is a good one, there have been certain criticisms and
controversies. This section sets out the main types of controversies affecting use of proceed
green bonds on the market today.
1)
Controversy regarding use of proceeds:
The first is when the underlying project intended to be funded by the proceeds of the bond
has fallen short of investor expectations, despite being in line with market standards, such as
the ICMA Green Bond Principles. In this case, the controversy relates to the use of proceeds
itself. Some examples include:
Repsol
-
Repsol’s green bond (2017, EUR 500m) was left out of the main green bond
indexes and rejected by some investors on secondary markets, despite being compliant
with ICMA’s green bond principles,
and having received a second party opinion from an
external verifier
73
. The bond proceeds were used to fund energy-efficiency improvements
in a petroleum refinery plant (Link)
Mexico City Airport trust
- Mexico City Airport Trust issued USD 6 billion of green
bonds in 2016 and 2017 to finance a new energy-efficient airport, and the bond received
green ratings by Moody’s, S&P and Sustainalytics.
In 2018, a political decision was made
to discontinue the airport project, but some of the green bonds remain outstanding
74
. The
Fatica, S., Panzica, R.: “Green bonds and use of proceeds reporting”, JRC Technical Report, JRC117571.
The World Bank: “Seychelles
launches World’s first sovereign blue bond”,
2018
72
Srivastava, S. (CNBC): “New
’rhino bonds’ to allow investors to help with wildlife
conservation”,
2019
73
https://www.wsj.com/articles/green-bonds-need-the-right-filter-11593509402
74
Louise Bowman
–
ESG: green bonds have a chicken and egg problem (Euromoney,
19 June 2019)
70
71
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cancellation of the project did not lead to default of the bond, but it has since been
expelled from some ESG indices
75
.
Coal efficiency-
Green bonds have in certain instances been used to finance coal-
efficiency
projects,
for example in China.
2) Controversy regarding the profile of the green bond issuer
The second common type of controversy is where the sustainability of the green bond issuer
itself has been subject to criticism or controversy, and where this controversy has affected the
willingness of issuers to buy green bonds despite the sustainability of the underlying projects
to be funded by the green bond. Some examples include:
China Three Gorges Dam
- A USD 840 million green bond issue by the operator of
China’s Three Gorges Dam in 2018 caused
controversy, with accusations of
greenwashing, due to the Three Gorges Dam having been cited as a source of water
pollution and damage for its surrounding ecosystems
76
. This was despite the proceeds
being intended to be used for backing wind power projects in Europe. Despite the
controversy, the bond proved popular with investors.
Saudi Electricity Company,
a state-owned Saudi company, raised EUR 1.3 billion from a
green bond sale in 2020 to invest in the installation of smart meters across its grid, which
caused controversy among investors
77
.
The Australian state of Queensland
has issued green bonds which have been described
as “a clear greenwash” Ulf Erlandsson of the Anthropocene Fixed Income Institute, an
advocacy group. While the projects being funded by the bond are environmentally
friendly, such as to preserve the Great Barrier Reef, Erlandsson believed they cannot be
seen separately from the state’s expansionary coal policy.
This type of controversy has a significant effect on the green bond market as a whole, as it
limits the number of issuers that are able to operate in the green bond market, and forces
those green bond issuers that are susceptible to be criticised for their overall sustainability to
take additional steps when issuing green bonds, for example by an obtaining ESG rating for
their entire company or institution.
This controversy stems from a view that green bonds exist not just to fund a particular type of
project, but to fund a particular type of company. And this view is shared by many in the
investor community. In a report by NN Investment Partners (NN IP), a Dutch asset manager,
the company claims that “only around 85% of green bonds deserve the label”
78
. They base
this conclusion on the logic that the greenness of the bond is linked to the greenness of the
company.
NN IP finds that the remaining 15% of green bonds are issued by companies that may use the
proceeds for environment-friendly projects, but which are involved in activities that incur
Investors probe ESG credentials of bond sellers on
‘greenwashing’ fears (Financial
Times, 28 October 2020)
Environmental Bonds Stained By Greenwashing
–Nikkei
Asia, 3 March 2018
77
https://www.ft.com/content/f794162c-3e45-4078-a7be-2e34fea5dd37
78
https://www.nnip.com/en-INT/professional/insights/global-green-bond-market-set-to-hit-eur-2-trillion-in-
three-years-says-nn-ip
75
76
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negative impacts elsewhere. As an example, they mention a railway company that could
finance low-carbon transportation through green bonds, while still being heavily involved in
fossil fuel freight. NN IP conclude that investors need to closely scrutinise the credentials of
green bonds and their issuers.
In a 2019 article by Louise Bowman
79
, numerous banks and asset managers explain that they
require issuers to have obtained an ESG rating with a good score, in order to invest in a green
bond from this issuer. One theory that is put forward to explain the reticence of investors to
fund green bonds by companies with existing controversies is that the existing definitions of
green are not clear enough. In other words, because the definitions of green are not clear
enough, issuers can not reliably commit to use the proceeds on sufficiently green assets, and
investors use the profile of the company as a proxy for the greenness of the bond. Another
theory that is put forward in the article is that there are no clear and accepted paths for how a
green bond issuer can use the proceeds to improve its profile and become more sustainable.
Other types of sustainable bonds besides green
In addition to ‘use of proceeds’ green bonds, other types of sustainable bonds are also
growing in popularity among issuers, in particular since the beginning of the COVID-19
crisis in 2020.
Sustainability-linked bonds (SLBs):
There is a small but growing market segment for
target-linked, or sustainability-linked bonds, where the return of the bond is dependent on the
issuer achieving certain pre-determined quantitative sustainability targets, often in the form of
reaching certain Key Performance Indicators. If the target is not met, the investor is typically
compensated monetarily via a coupon step-up. SLBs are typically general purpose corporate
bonds, with no dedicated use of proceeds, although it is possible to combine the two
approaches into a “sustainability-linked green bond”. Due to the fact that the two formats are
not mutually exclusive, it is possible that we will see more such hybrids in the future,
although at the moment they are scarce.
Some issuers and investors see this target-based approach as a positive development, as it can
be a better fit for a number of issuers, notably in asset-light corporate sectors (such as
wholesale). It also involves less effort on the part of the issuer in terms of reporting and
transparency on use of proceeds, as well as less need for extensive external review. For
investors, the format is attractive as they are compensated in case the issuer does not reach its
targets. Others highlight the increased risk of greenwashing and criticize the fact that
investors receive far less sustainability-related information. It may also be seen as a way to
side-step questions on the definition of what is a green asset
–
i.e. the EU Taxonomy - which
has been a fundamental development in the market in the past year. For the moment, the
target-based approach is often seen as a complement to the use-of-proceeds approach.
As of December 2020, four corporates had issued SLBs: Enel, the Italian utilities company;
Suzano, the Brazilian pulp & paper company; Novartis, the Swiss pharmaceuticals company,
and Chanel, the French luxury goods company. The variety of sectors demonstrates the
versatility of SLBs. The asset manager Amundi evaluates the size of the SLB market at USD
79
Louise Bowman
–
ESG: green bonds have a chicken and egg problem (Euromoney,
19 June 2019)
85
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10 billion, compared to USD 950 billion for use of proceeds green bonds
80
. In June 2020, the
International Capital Markets Association published its first ever
principles for sustainability-
linked bonds.
Social bonds:
these are ‘use of proceeds’ bonds, whose proceeds are dedicated to promoting
positive social outcomes, such as the creation of affordable basic infrastructure, access to
essential services, housing, employment, and the general socioeconomic empowerment. In
2017, the International Capital Markets Association published its first ever
principles for
social bonds.
Sustainability bonds:
These bonds are a combination of green bonds and social bonds. In
other words, they are ‘use of proceeds’ bonds where the issuer dedicates proceeds to a
combination of green and social outcomes. In 2018, the International Capital Markets
Association published its first ever
guidelines for sustainability bonds.
Transition bonds:
While there are diverging opinions as to what constitutes a transition
bond, the idea for the moment is that these are bonds issued by companies that promise to
become greener but where the outcome may not yet be sufficiently green under existing green
bond market practices. By December 2019, however, only three such bonds had been issued
globally (BNP Paribas, 2019).
Figure 9 - Annual issuance of green, social, and sustainability bonds in USD billions (Source:
Environmental Finance, 25 September 2020)
De Fay et Crehalet (Amundi asset management insights blue paper) December 2020 -
“Sustainability-linked
bonds: nascent opportunities for ESG investing”
80
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Annex 5: Market developments
This annex presents the latest figures on the development of the green bond market. Unless
otherwise indicated, the figures in this annex are based on data from Climate Bonds Initiative
(CBI), retrieved on 11 January 2021. In these figures, “EU” refers to green bonds issued in
one of the EU’s 27 Member States, plus those green bonds issued by the European
Investment Bank, the Nordic Investment Bank, or the European Bank for Reconstruction and
Development.
The CBI database operates with a more restrictive definition of a green bond compared to
most comparable databases. To be considered for inclusion, bonds must have at least 95% use
of proceeds financing or refinancing green/environmental projects, and proceeds should be
broadly aligned with the
Climate Bonds Taxonomy
(so for example, bonds financing so-
called “clean coal” are excluded).
Growth of the market
Since the first green bond was issued by the European Investment Bank in 2007, the green
bond market has grown exponentially on the back of strong investor demand. While 2014
saw about EUR 28 bn in global issuance, 2019 reached around EUR 239 bn of annual
issuance. Although the issuance of green bonds decreased in the first half of 2020 due to the
COVID-19 pandemic, 2020 still beat 2019, with around EUR 520 bn in global issuance. The
total amount of green bonds issued over the period 2007-2020 is approximately EUR 936 bn.
EU
Yearly volume of GBs
issued (EUR millions)
€
600
€
€
€
€ ,
€ ,
€ ,
€ ,
€ ,
€
53,843
€ ,
€
,
€
,
€ 6, 6
50.9%
Number of
GBs issued
1
1
10
5
9
27
87
75
98
154
159
312
464
1,402
47.2%
World (including EU)
Yearly volume of GBs
issued (EUR millions)
€
€
€
€ ,
€
€ ,
€ ,
€ ,
€ ,
€ ,
€
,
€
,
€
,
€
,
€ 6,
49%
Number of
GBs issued
1
1
3
61
36
27
49
163
245
281
420
498
855
1129
3,269
37.3%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Grand Total
Average annual
growth (2015-2020)
Table 18 - Annual data on green bond issuance (EU and worldwide) (Source: CBI data)
81
81
-
-
-
-
Notes on methodology:
Figures are from own calculations based on data from Climate Bonds Initiative.
All green bond issues in CBI database (worldwide figures, including EU). Figures for number of green
bond issuers exclude 3778 bonds issued by one issuer, Fannie Mae.
Figures in EUR are obtained by multiplying USD figures by an average yearly exchange rate.
Average annual growth rates are obtained by taking the average yearly growth rate from 2015 to 2020.
87
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Volume issued (EUR millions)
€
140.000
€
120.000
€
100.000
€
80.000
€
60.000
€
40.000
€
20.000
€
-
2015
2016
2017
2018
2019
2020
EU
Rest of World
Figure 10 - Volume of green bonds issued in EUR (source: CBI data)
Number of green bonds issued
600
500
400
300
200
100
0
2015
2016
2017
2018
2019
2020
EU
Rest of World
Figure 11 - Number of green bonds issued (source: CBI data)
Projected future market growth
This section attempts to give a very approximate estimate of the expected size of the green
bond market in 2023.
Current growth in the green bond market is driven by inter alia the following factors:
-
-
-
Increased investment in climate change mitigating assets, such as low-carbon technology and
infrastructure
Increased demand from institutional investors and their clients for green investments, for
example to hedge against the risk of stranded assets and make a positive impact against
climate change.
The overall legislative and political environment, which favours transparency on the
sustainability of investments.
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These factors are likely to remain relevant for decades or more, as they are all linked to the
risk of climate change, which is an underlying driver that will be present for the foreseeable
future. For this reason, it is reasonable to assume that the green bond market is likely to
continue growing, potentially at or close to its current course.
Should the current average annual growth (from 2015 to 2020) continue in the next three
years, yearly green bond issuance in 2023 would stand at approximately EUR 430 billion in
the EU, and EUR 830 billion worldwide. Using a similar projection, the number of green
bonds issued per year is estimated to be about 1470 in the EU and about 2900 worldwide.
It is impossible to project the market share of the future EU GBS. However, by making
assumptions about this market share, one can arrive at different estimates of the number of
EU GBS-aligned green bonds that may be issued in 2023. If for example the EU GBS should
manage to capture 30% of the future EU green bond market, and none of the global market,
this would represent about 440 EU GBS-aligned green bonds, or about EUR 130 billion in
volume, based on the projections in this annex on overall green bond market size. These
figures (for potential EU GBS issuance in 2023) are similar in size to the overall EU green
bond issuance in 2019 or 2020, all standards included, which is illustrative of the current
rapid growth of this market, and the potential situation should this growth continue.
Legal status of green bond
Green bonds are legally often general corporate purpose bonds, where issuers make a
commitment to spend an equivalent amount as that raised on green assets. The proceeds
technically go to the treasury however, and as such finance the entire balance sheet of the
company. For this reason, the credit risk of the green bond is not related to the green projects,
but to the credit risk of the entire issuer.
Other types of green bonds also exist, including project bonds, which are commonly used to
finance sustainable infrastructure projects. In the case of project bonds, the risk is directly
related with the asset being financed and how this asset is operated. Table 19 below provides
more information on the types of green bonds.
Type
Proceeds raised by bond
sale are
"Use of Proceeds" Earmarked for green
Bond
projects
"Use of Proceeds" Earmarked for or refinances
Revenue Bond or green projects
ABS
Project Bond
Ring-fenced for the specific
underlying green project(s)
Securitisation
Refinance portfolios of
(ABS) Bond
green projects or proceeds
are earmarked for green
projects
Covered Bond
Earmarked for eligible
projects included in the
covered pool
Loan
Earmarked for eligible
projects or secured on
eligible assets
Debt recourse
Recourse to the issuer: same credit rating applies as
issuer's other bonds
Revenue streams from the issuers though fees, taxes
etc are collateral for the debt
Recourse is only to the project's assets and balance
sheet
Recourse is to a group of projects that have been
grouped together (e.g. solar leases or green
mortgages)
Recourse to the issuer and, if the issuer is unable to
repay the bond, to the covered pool
Full recourse to the borrower(s) in the case of
unsecured loans. Recourse to the collateral in the
case of secured loans, but may also feature limited
recourse to the borrower(s).
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Type
Other debt
instruments
Proceeds raised by bond
sale are
Earmarked for eligible
projects
Debt recourse
Table 19- Types of green bonds (source: CBI)
Currencies
In 2018, euro-denominated issuance represented 38% of the annual market by volume,
overtaking the US dollar (46% in 2017). Euro-dominated issuance continued to increase its
relative position, taking 42% of the total market in 2019, and 48% in 2020.
% of yearly global issuance
2015
2016
2017
2018
2019
2020
EUR
34%
25%
36%
38%
42%
48%
Other Currencies
66%
75%
64%
62%
58%
52%
Table 20 - Share of the euro in yearly global green bond issuance volume (source: CBI data)
Share of global bonds issued in EUR
80%
70%
60%
50%
40%
30%
20%
10%
0%
2015
2016
2017
2018
2019
2020
EUR
OTHER
Figure 12 - Share of the euro in yearly global green bond issuance (source: CBI data)
Green bond issuers
Analysis of the current market for green bonds in the EU and world-wide indicates that the
market is growing rapidly. In Europe, the number of issuers entering the green bond market
for the first time every year grew by
30% yearly
on average between 2015 and 2020.
New issuers
2015
2016
2017
2018
2019
EU
22
25
39
44
64
Rest of
world
54
77
118
180
239
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2020
77
282
Table 21 - First time green bond issuers (source: CBI data)
Once an issuer has entered the market, published a green bond framework, and issued their
first green bond, they may reissue up to several times a year using the same framework.
According to Climate Bonds Initiative, 56% of bond volume for 2019 was made up of issuers
who issued several times during 2019 alone, with a significant number of issuers (79) issuing
twice a year, and 53 issuers issuing more frequently than that.
Frequency (# of deals in 2019)
2
3
4
5-9
10 or more
TOTAL
Number of issuers
79
18
14
16
5
132
Share of total 2019 volume
15.8 %
8.4 %
4.1 %
15.4 %
12.3 %
56 %
Table 22 - Frequency of green bond issue per issuer (source: CBI)
Regional breakdown:
Europe (52% in 2020) is the largest overall green bond market. In terms of individual
countries, however, the US is the largest green bond market, not least due to large amounts of
green mortgage-backed securities issued by Fannie Mae. China is the second largest green
bond market. In 2020, the Asia-Pacific regions had the third largest volume after Europe.
2020 regional green bond issuance
Supranationals
5%
Africa
0%
N America
23%
LAC
3%
Asia-Pacific
17%
Europe
52%
Figure 13
–
2020 Regional green bond issuance (Source: CBI data)
Types of issuers
While there are all kinds of issuers, the market has historically been led by public sector
issuers and financial corporates. As Figure 17 shows, more than half of the market comes
from public-related issuers, such as national and local governments, and development banks.
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Financial corporates also play a strong role, as many banks issued green bonds. Recently,
non-financial corporate issuance has been rising as well.
Figure 14 - Green bonds per type of issuer (CBI)
Sectors
Both financial and non-financial corporate issuances have mostly revolved around either
housing or electricity production (60% of market in 2019). While these are important sectors
in the transition to a more sustainable economy, it also means that many industrial sectors
have so far not yet issued green bonds.
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Annex 6: Costs and benefits of issuing green bonds
This annex analyses the potential costs and potential benefits faced by issuers of green bonds,
to support the analysis in section 7
–
preferred option. This annex does not specifically cover
the costs and benefits of issuing under the EU GBS, but for green bond issuance in general.
Issuing a green bond requires additional work in terms of administrative effort and costs
compared with a conventional bond. According to the TEG, such internal costs represent the
main share of overall issuance costs. These costs relate to:
staff and training needs related to the creation of a green bond program,
the management and monitoring of the use of green bond proceeds,
monitoring the environmental impact of the green projects,
carrying out of reporting towards bond investors after issuance.
In addition, there are costs for external review/verifiers (roughly EUR 20.000 - 40.000 per
issuance based on stakeholder input).
When a profit-maximising corporation issues a green bond, it can be assumed that:
-
-
The net benefit (benefits-costs) of issuing a green bond for the issuer is positive.
The net benefit for the issuer is higher than the net benefit of issuing a conventional (non-
green) bond.
Unless these two conditions are true, it is likely that the issuer would rather issue a
conventional bond or use other sources of finance.
1) Costs of issuing green bonds compared with conventional bonds:
During interviews with stakeholders, there was broad agreement that the issuance of green
bonds is more costly than a regular bond, as it requires more work in terms of gathering and
presenting the relevant information. However, in the CBI Treasurer survey
82
, just under half
of respondents (48%) agreed that the cost of funding green bonds was similar to that of
vanilla equivalents, while 42% considered the costs to be lower.
One issuer responding to the targeted consultation indicated that the total additional costs of
issuing a green bond (for verification, translation, communication etc, but not including
internal costs) range from € 40,000 – €60,000 annually. According
to the figures of one large
investment bank responding to the targeted consultation, for green bonds issued according to
the ICMA Green Bond Principles, additional costs for green bonds (over conventional bonds)
linked to verification are around €20,000. For reporting, the costs vary between €5,000 and
€10,000, while for planning and preparation, there are additional labour costs due to the need
for a dedicated person that collects data (at least part time at certain times within the year).
Other respondents gave more extreme numerical estimates on the overall cost of green bond
issuance, corresponding to € 100,000 and € 200,000.
One stakeholder indicated that most issuers cover the internal costs from existing resources.
Another stakeholder indicated that the additional costs are fairly limited when viewed in the
context of the scale of the big investment projects, e.g. when issuing a
€
500 million bond.
82
CBI: “Green bond treasury survey”, 2020 (Link)
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Finally, a stakeholder mentioned that digitalization (e.g. digital impact reporting, databases
shared between clients and investors) could be a solution for reducing the costs for
sustainable finance products.
Many respondents to the targeted consultation also mention that smaller issuers may have
more difficulty absorbing these costs, as they will represent a larger fixed cost fraction of
their bond (thereby affecting the cost benefit calculation of green bonds for smaller issuers).
The costs are also typically higher for first time issuers.
The costs of issuing a green bond can be categorised as follows:
1.2)
Internal resources
This relates to the staff and IT systems required to put in place the procedures that allow for
the issuance of a green bond (as part of a green bond programme), but also to the reporting
requirements after issuance, which are sometimes seen as cumbersome.
This is especially needed for setting up the framework, implementing the selection process,
tracking the proceeds/projects and an enhanced/changed investor relation work. The
preparation of an impact report involves the monitoring and collection of data, which requires
additional staff for data analysis and reporting requirements.
There are also differences in ongoing costs, as conventional bonds require almost no
surveillance after issuance and allocation, whereas green bond needs roughly 20% more of
human capital at issuance.
1.3)
Uncertainty and delays
Setting-up a green bond requires more time, i. a. more internal coordination among different
department but also external coordination. For many issuers, green bonds are a new
instrument they need to familiarise themselves with.
1.4)
External review:
The issuance of a green bond entails a second opinion/verification. Green bonds require
recurrent impact reporting and potentially verification of the impact report and/or allocation
of proceeds.
The TEG estimated that the costs for second-party opinions and/or external
verification was roughly in the range of EUR 20,000 to 40,000.
Further estimates from
stakeholder interviews and targeted consultations confirmed this. (see table below)
Stakeholder interviews
Targeted consultation
typical
second
For SPO: In the range of
Cost
of
Second
A
Party
Opinion/
opinion/verifications costs around
18.000 to 30.000
external Verification
€ 15.000 per issuance.
“A first proposal of an external
TEG:
Approximately Further stakeholders mentioned a verification was more than
in the range of EUR
range of roughly of € 20.000 to €
double the cost of a normal
20,000 to 40,000.
35.000.
verification (SPO)”
These costs do not correlate with
“Likely
that
external
the amount of the bond.
verification under EU GBS will
be more costly than the current
SPOs, as more work will be
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Cost
of
annual
The annual review costs are
review of allocation
around € 5.000 to € 10.000.
report
- around 20 000
Cost
of
overall
- 25.000 to 30.000
verification
- 7.000 to 45.000
Table 23 - Costs of external review
required to assess compliance
with the Taxonomy Thresholds
and the DNSH”
2) Benefits of issuing green bonds compared with conventional bonds
During interviews with stakeholders, the following potential benefits for issuers of issuing
green bonds were identified:
-
-
-
-
-
-
Increased investor demand, more diversified set of investors, opportunities to attract overseas
investors (for emerging markets) and opportunities to advance individual sustainability
objectives/business models;
An improved reputation on sustainability in the market: communication of commitment to
national/regional/global targets and a capacity building exercise in dialogue with investors
that increases the understanding for more ambitious longer-term sustainability strategies;
In some cases a price “green premium” –
small consistent price benefit for issuing green
bonds;
More consistency as green bond investors tend to be more stable;
Very strong internal learning process for an entity and after first issuance of a green bond
entities are in a better place to understand the green process and issuance as well as broader
sustainability issues and manage future environmental risks;
An enhanced coordination among different departments within the company may have a
positive effect on the corporate culture.
Given the growing amount of green bonds that are issued, it can be assumed that in some
cases these benefits outweigh the existing costs of issuing green bonds, making green bond
issuance a net beneficial activity.
More information on the benefits of green bond issuance:
-
Communication and signalling.
Issuing a green bond is a way to signal to investors a strong
focus on environmental issues. This, in turn, can lead to an overall lower funding curve as
investors become convinced that the company is transition to a more sustainable business
model.
A diversification
of the issuer’s investor base.
According to a study by the Harvard
Business review (2018)
83
, green issuers attract long-term investors with an increase of 21%
(the share of long-term investors increases from 7.1% to 8.6%). This in turn, makes green
bonds less volatile.
Higher demand for green bonds,
which provides benefits during the execution, and which
may be evidenced by lower new issue premiums. For example, according to Climate Bond
Flammer, C. (Harvard Business Review):
“Green Bonds benefit companies, investors, and the planet”, 2018
(Link)
83
-
-
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Initiative, 62% of green bonds in 2018 achieved a higher oversubscription and spread
compression than their vanilla equivalents after 28 days. According to Agliardi and Agliardi
(2019)
84
, the rising environmental awareness among investors contributes to increased
demand for green bonds and to oversubscriptions.
Green bond premium (greenium)
While green bonds entail additional costs for issuers, there is growing evidence that issuers of
green bonds are to some extent directly compensated for those costs through a pricing
advantage on primary markets (i.e. issuers receive a higher market price when they sell the
bond). This is referred to as a green bond premium (or even “greenium”). Such a green bond
premium would imply that investors accept a lower yield on the bond due to its green
characteristics.
Causes
Legally, green bonds are no different from regular bonds: although the issuer promises to
spend the raised amount on the projects as outlined in the green bond framework, the use of
proceeds are technically for general corporate purposes and therefore finance the entire
balance sheet of a company. Green bonds rank pari-passu with bonds with the same rank and
issuer. The green bond holder does not own any additional right on the underlying projects
and is subject to the same market dynamics. This means that the credit risk and market risk of
green bonds are similar to regular bonds. A green premium for the issuer is therefore
somewhat of a market anomaly.
According to Ben Slimane et al (2020), demand for sustainable investments is increasing
faster than supply, which is still relatively limited, creating a potential mismatch of supply
and demand that can trigger scarcities and thus larger premia. According to Agliardi and
Agliardi (2019), the rising environmental awareness among investors contributes to increased
demand for green bonds and to oversubscriptions. In Zerbib (2019), the difference in pricing
is attributed largely to investors’ environmental preferences, rather than to risk. As those
preferences manifest themselves in growing demand for green bonds, in particular from
institutional investors who wish to have green bonds in their portfolios to attract clients and
boost the green credentials of their funds or products, it is possible that the green bond
premium will continue to grow.
Size of the green bond premium
It is not always straightforward to identify a green bond premium, as the price of the same
bond without the green bond label is not known (i.e. it is a counter-factual). However, reports
from stakeholders and studies seem to indicate that the green bond premium exists and is in
fact growing in line with rising market demand for green bonds.
In May and June 2020, stakeholder outreach pointed to the existence of a small but consistent
price benefit for issuing green bonds, consisting of a few basis points. According to one
prominent investment bank interviewed in September 2020, outstanding green bonds at the
time held a pricing advantage of 3-5 bps to plain vanilla bonds.
According to another stakeholder, representing a major European bank interviewed in
January 2021, the average green bond premium has been increasing over time, to the point
84
Agliardi, E., Agliardi, R:
“Financing environmentally-sustainable projects with green bonds”, 2019
(Link)
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where it became a regular occurrence in the market. The growth in the green bond premium
over time is also observed in the market for US municipal green bonds, Karpf and Mandel
(2018).
The green bond premium is also present for sovereign issuers: in a study published by CBI in
2021
85
based on feedback from sovereign treasurers, France, the Netherlands and Germany
reported that their green bond issuances had benefited from a green bond premium.
Studies
The average premium ranges between two (Zerbib 2019) and eighteen basis points (Gianfrate
and Peri 2019).
Kapraun and Scheins (2019) examine both primary and secondary market effects and find
that green bonds listed on the London and Luxembourg secondary markets with a dedicated
green bond segment are traded on average 7 bps lower.
Ben Slimane et al find (2020) use two methods to estimate green bond premia, and find
significant premia of respectively 4.7 bps and 2.2 bps.
In a meta-study by MacAskill et al (2020) that examined 15 separate studies on green bond
premia on primary and secondary markets, only the analysis focused on secondary markets
yielded conclusive results, with spreads there mostly focused between 1 and 9 basis points.
Determinants of the green bond premium
Green bond premia vary significantly around the average levels indicated in the previous
section. Some of the key determinants for variation include:
Sector and geographic region:
According to stakeholders, the size of green bond premia
correlates with the supply of green bonds for a given sector or geographic area (lower supply
of green bonds leads to more important green bond premia). For example, one stakeholder
estimates the average green bond premia in the energy and utilities sector at around 5-10 bps.
In the automobile sector, however, premia are higher. Ben Slimane et al (2020) report that,
according to Bloomberg, the €1 billion 10-year
green bond issued by the automaker Daimler
AG priced more than 13 basis points tighter than its conventional spread curve. Likewise,
Volkswagen AG sold eight-year and 12-year
green benchmarks with a volume of €2 billion,
15.4 and 13.6 basis points lower in yield versus the rest of its bonds. Green bond premia for
bonds from central and eastern Europe, where green bonds are less frequent and hence could
be more in demand, are currently at between 5-30 basis points.
Issuer heterogeneity:
the size or existence of the premium depends crucially on the type of
issuer. (Fatica, Panzica and Rancan, 2021) finds a green bond premium for green bonds that
are issued by supranational institutions and non-financial corporates, but no price difference
for green bonds issued by financial institutions, all other factors equal. One possible reason
behind such heterogeneity is that financial institutions are less clearly able to signal their
environmental attitudes, as bond funding is arguably used to finance green loans. The same
85
Climate Bonds Initiative:
Sovereign green, social, and sustainability Bond Survey
(2021)
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study also finds that repeat issuers display an additional premium, potentially motivated by
the build-up of a reputation on the green market and better ability on the part of investors to
screen borrowers.
Importance of external review:
the literature also suggests that the price premium critically
depends on external verification. Fatica et al. (2021) looked at the primary bond market
worldwide and found that certified green bonds benefit from larger premia compared to self-
labelled green bonds. This could be because external review acts as a signalling device for
bonds with strong climate- or environmental benefits, which means they are able to sell at a
premium even compared to other green bonds if those do not have external review. Similarly,
Bachelet et al. (2019) find that green bonds of private issuers have a higher borrowing costs
compared to non-green bonds unless they have third-party verification.
Alignment with strong standards:
MacAskill et al (2020) find that the systematic rules and
standardisation that accompany strong GB governance reduce informational asymmetries,
which helps to overcome investors’ doubts on the ‘greenness’ of a particular green bond, both
at issuance and reporting of ongoing performance. These findings confirm that investors are
willing to pay a premium for investments that offer clear ESG-related reporting on fund
proceeds, by up to 15 bps on secondary markets (Hyun et al., 2019; Baker et al., 2018).
Studies on the green bond premium:
Serena Fatica, Roberto Panzica, and Michael Rancan. 2021. The Pricing of Green Bonds:
Are Financial Institutions Special? Journal of Financial Stability, 54,
doi.org/10.1016/j.jfs.2021.100873
Hachenberg, Britta, and Dirk Schiereck.
2018. “Are Green Bonds Priced Differently
from Conventional Bonds?” Journal of Asset Management 19 (6): 371–383.
doi:10.1057/s41260-018-0088-5.
Zerbib, Olivier David. 2019. “The Effect of Pro-Environmental
Preferences on Bond
Prices: Evidence from Green Bonds.” Journal of Banking & Finance 98 (January): 39–
60. doi:10.1016/j.jbankfin.2018.10.012.
Gianfrate, Gianfranco, and Mattia Peri. 2019.
“The Green Advantage: Exploring the
Convenience of Issuing Green Bonds.” Journal of
Cleaner Production 219 (May): 127–
135. doi:10.1016/j.jclepro.2019.02.022.
Forsbacka, Kristina, and Gregor Vulturius.
2019. “A Legal Analysis of Terms and
Conditions for Green Bonds.” Europarättslig Tidsskrift 3: 379–442.
Agliardi, Elettra and Agliardi, Rossella.
2019: “Financing
environmentally-sustainable
projects with green bonds”
Mohamed Ben Slimane, Dany Da Fonseca, Vibek Mahtani, 2020. Amundi green bond
premium
–
working paper 102-2020
–
December 2020
– “Facts
and fantasies about the
Green Bond Premium”
MacAskill et al, October 2020
Is there a greenium in the green bond market? Systematic
literature review revealing premium determinants.
(Journal of Cleaner Production)
Karpf et Mandel (2018)
The changing value of the ‘green’ label on the US municipal
bond market
Kapraun et Scheins (2019)
Which bonds trade at a green bond premium?
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Annex 7: Standards and definitions of green
The green bond market has considerably progressed the debate on what is green by
facilitating the emergence of both market-based and regulatory definitions of green eligibility
and their transparent comparison
86
. This section provides an overview over existing green
bond standards and taxonomies for the definition of green, in order to enable a comparison of
their span and enable further analysis. The main standards and taxonomies covered in this
annex include:
1)
2)
3)
4)
5)
6)
ICMA’s Green Bond Principles
Climate Bonds Initiative: Climate Bonds taxonomy and eligibility criteria
France:
Climate and Energy Transition Label Taxonomy
(recently
renamed “Greenfin”)
China Green Bond Endorsed Project Catalogue
Other standards and definitions of green
The
Draft/Concept EU Green Bond Standard as proposed by the TEG
The
EU Taxonomy for sustainable finance
is covered in annex 7.
In Europe, the two most common standards are ICMA’s green bond principles (GBP) and the
Climate Bonds Standard (operated by the Climate Bonds Initiative, CBI), which also
manages the Climate Bonds Taxonomy. The former, the GBPs, covers nearly the entire
market, and focuses on process-related recommendations as well as high-level categories for
eligible sectors.
The latter, CBI’s standard and taxonomy, comes with stricter requirements for eligible
projects (since it is also a Taxonomy) and is consequently used by fewer issuers. In their own
assessment, CBI estimates that, out of USD 212 billion in value of green bonds issued in the
first ten months of 2020, green bonds worth USD 163 billion were aligned with the Climate
Bonds Taxonomy. Of these, green bonds worth USD 49.5 million requested and obtained the
CBI certification.
Following the publication of the Commission’s Action Plan on sustainable finance in March
2018, the Commission set up the Technical Expert Group on Sustainable Finance (TEG). One
of its tasks was to draft a proposal for an EU Green Bond Standard. The TEG its report on the
EU GBS in June 2019, followed by a usability guide in March 2020. On this basis, some
issuers have already begun to make use of the standard, despite it not yet being officially
adopted by the EU (see box 1).
Some Member States have developed labels of green financial products which also include
taxonomies. One notable example is France, whose Greenfin label (old name: TEEC) is
based on the CBI Taxonomy. Although the label itself is typically used for funds, the
underlying criteria have strong indirect implications for green bonds. For example, France’s
sovereign green bond was aligned with the Greenfin standard. International actors have also
developed their own taxonomies/bond
standards, including the People’s Bank of China Green
Bond Catalogue.
For a detailed analysis: China Green Finance Committee and EIB, “The need for a common language in
Green Finance”, 2017 (Link)
86
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In feedback from a 2018 public consultation on institutional investor’s and asset manager’s
duties regarding sustainability, stakeholders indicated that there are too many standards
without a single, commonly-accepted framework.
Although these standards and taxonomies were primarily developed for use in the green bond
market, they are also currently used as the basis for several existing national eco-labelling
initiatives.
For example, the TEEC Label (France) and the FNG Siegel (Germany) are based on the CBI
taxonomy. The Nordic Swan Ecolabel is based on ICMA's Green Bond Principle. And the
Luxflag Climate Finance Label (Luxemburg) is based on the MDB/IDFC taxonomy (see
Table 24 - Other definitions and standards relating to green bondsTable 24). On the other
hand, the Austrian Ecolabel only specifies exclusion criteria but does not stipulate the use of
a specific taxonomy.
In each case, the taxonomies have been adjusted to reflect national priorities, as well as
having been narrowed down or made more granular for certain sectors. Using the French case
as an example, the taxonomy used for the TEEC label is based on that of the CBI, with a few
amendments to take account of the considerations of the stakeholders consulted and national
public policy guidelines. Among others, certain activities that appear in the CBI taxonomy
have been excluded from the TEEC label taxonomy, or, in some cases, descriptions of certain
activities appearing in the CBI taxonomy have been specified in the French example.
Next to the market-based standards, some regions and countries have developed or are
developing standards or guidelines for green bond issuances. Several jurisdictions, including
China, India, Morocco, as well as the ASEAN countries, have green bonds regulations issued
by financial services authorities. Several other jurisdictions, including Chile, Mexico, and
South Africa, have listing requirements. In some cases, the requirements are part of a
voluntary standard. The requirements usually revolve around disclosure and reporting issues,
and they often build on the Green Bond Principles. Most of them contain use of proceeds
requirements or guidance, although they are often high-level, building on the green project
categories from the Green Bond Principles. Almost all of them have some form of mandatory
external review.
The International Capital Markets Association’s Green Bond Principles (GBP)
Developed in 2010 and annually reviewed by the Green Bonds Working Group through the
coordination of the International Capital Markets Association, the GBP explicitly recognise
broad categories of eligibility for green projects that contribute to several environmental
objectives, including:
-
climate change mitigation and adaptation,
-
natural resource conservation,
-
biodiversity conservation, and
-
pollution prevention and control.
Use of proceeds
Recommended to include proceeds in legal documentation
Financing or refinancing of eligible green expenditures.
Disclosure of proportion of proceeds used for refinancing:
Recommended
High level categories for eligible projects
Eligibility criteria
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Social safeguards:
Communicate clearly to investors the “process
applied to
identify and manage potentially material
environmental and social risks”
Reporting
External
requirements
Review
Impact monitoring and reporting recommended wherever possible
Recommended. External review may be partial, covering only certain aspects of
an issuer’s green bond or associated Green
Bond Framework or full, assessing
alignment with all four core components of the GBP
87
Publication of external verification recommended
Not addressed in GBPs
Accreditation of external
reviewers/ verifiers
Climate Bonds Initiative: Climate Bonds taxonomy and eligibility criteria
Dimension
of
green
finance
Context
The Climate Bonds taxonomy and sector-specific eligibility criteria are meant to support
issuance of / investment in
green / climate-aligned bonds.
The
Climate Bonds Initiative
(CBI) supports the growth of worldwide green bond markets
through the development and certification of standards, knowledge creation and networking. As
part of its Climate Bonds Standard & Certification Scheme, it coordinates the development and
constant refining of a taxonomy and sector-specific
eligibility criteria for ‘low carbon and
climate resilient’ investments.
First released in 2013, the taxonomy is developed and continuously updated by the CBI team.
The eligibility criteria are prepared by Technical Working Groups, made up of scientists,
engineers and technical specialists, with support from expert advisory committees. Draft criteria
are presented to Industry Working Groups before being released for public comment. Finally,
criteria are presented to the Climate Bonds Standard Board for approval.
The Certification Scheme allows investors, governments and other stakeholders to prioritise
‘low carbon and climate resilient’ investments. Specifically, this includes projects or assets that
directly contribute to:
Developing low carbon industries, technologies and practices that mitigate greenhouse gas
(GHG) emissions consistent with avoiding dangerous climate change
Essential adaptation to the consequences of climate change
The
Climate Bonds Taxonomy
identifies 8 sectors that can be eligible for green and climate
bonds: energy; buildings; industry; waste, pollution control and sequestration; transport;
information technology and communication (ITC); agriculture & forestry; adaptation. For each
sector, specific
inclusions, exclusions
and investment areas for which
more work
has to be
done are defined. Further explanations and restrictions are added for most areas to support
selection of eligible investments. (Figure 15)
The investment areas that are specifically marked as “excluded” in the taxonomy are: nuclear
power, fossil fuels (incl. fossil fuel efficiency and energy savings related to fossil fuel extraction,
transport, power generation; rail transport of fossil fuels), landfill and waste incineration without
gas/energy capture, timber harvesting, and agriculture on peat land.
In order to become certified under the Climate Bonds Standards V2.1 green bonds have to
comply with additional eligibility criteria.
These are currently
88
available for
-
Energy (solar; wind; geothermal; bioenergy, marine renewables)
-
Low carbon transport (private, public, rail freight, cross-cutting)
-
Water infrastructure
87
Conceptual
definition
Taxonomy /
sectoral
focus
(Inclusion /
exclusion)
Criteria
The four components of the Green Bond Principles are: (1) Use of proceeds; (2) Process for project evaluation
and selection; (3) Management of proceeds; and (4) Reporting.
88
Latest available version is from January 2020.
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-
-
-
Low carbon buildings
Land use and marine resources (forestry, ecosystem protection and restoration)
Waste management and pollution control
Criteria are under development in the sectors of
-
Water-borne transport
-
hydro-power
-
energy storage, transmission, distribution,
-
agriculture.
Eligibility criteria are yet to be developed in inter alia the following sectors:
-
Carbon capture and storage
-
fisheries and aquaculture, supply chain asset management for land use
-
Industry, including energy-intensive manufacturing
-
IT and communication technology
The Climate Bonds taxonomy is part of the Climate Bonds Standard & Certification Scheme. In
order to become certified, issuers have to comply with a range of pre- and post-issuance
requirements, which are largely aligned with the Green Bond Principles.
Pre-Issuance
Certification: Assessment and certification of the bond issuer’s internal
processes, including its selection process for projects & assets, internal tracking of proceeds,
and the allocation system for funds.
Post-Issuance Certification: Assessment and certification of the bond, which must be
undertaken after the allocation of bond proceeds is underway, and includes assurance from
the Verifier that the issuer and the bond conform with all of the Post-Issuance Requirements
of the Climate Bonds Standard. An issuer may also choose to voluntarily repeat the post-
issuance certification process on a periodic basis.
Globally, 57 Climate Bonds were certified by September 2017.
The Climate Bonds taxonomy is rather detailed and allows fast identification of (in)eligible
investment areas. The different sector-specific eligibility criteria, in turn, require more in-depth
scrutiny. The criteria are structured differently for each sector which can be particularly
challenging for issuers whose bond projects fall into different green categories.
Benefits for issuers, according to CBI:
More diverse investor base: certification signals the low-carbon integrity of the bond and is
important for investors looking for climate related investments. Most issuers of Certified
Climate Bonds find that the range of investors interested in their bond is much broader.
Easier-to-find: certification allows potential investors to quickly find a credible green /
climate bond on Bloomberg and via other providers of market information.
Enhanced reputation: certification allows an issuer to associate its organisation with efforts
to scale up financial flows for delivering the low-carbon economy and securing prosperity
for future generations.
Lower cost: issuers pay less for certification than for a second opinion, and investors avoid
the cost of environmental due diligence.
Policy
implications
/
EU
relevance
The taxonomy and eligibility criteria have been/are being developed with stakeholders from the
EU and beyond. They should thus support bond issuers across different countries.
Product
/
process
standards
Investor
implications
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Figure 15 - Sector breakdown of Climate Bonds Taxonomy
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France: Energy and Ecological Transition for the Climate (TEEC) Label
Dimension
of green
finance
Context
The label aims to specifically identify
investment funds
(equity funds, green bond funds,
infrastructure funds and private equity) that contribute to the energy and ecological transition.
In 2014, the French government announced its intention to create an
Energy and Ecological
Transition for Climate (TEEC) label
and an SRI label. These labels aim to help investors
comply with legal requirements to demonstrate the alignment of their portfolio to national and
international targets (as specified in the Law N° 2015-992 on Energy Transition for Green
Growth, adopted in 2015). The TEEC label was developed by a working group with
representatives of important stakeholder groups, on behalf of the then French Ministry of the
Environment, Energy and Marine Affairs. The first version of the “Criteria Guidelines” was
published in 2015.
The criteria guidelines specify the following:
Eligibility criteria for candidate funds (eligible funds, funds’ assets, special cases)
Label criteria “Pillar I
-
Fund’s objectives and methodology for the selection of assets […]”
Label criteria “Pillar II –
Consideration of ESG Criteria in the construction and life of the
portfolio”
Label criteria “Pillar III – Highlighting positive impacts on energy and ecological transition”
Appendix 1 - Definition of activities falling within the scope of the energy and ecological
transition
Appendix 2 - Strict and partial exclusions
Appendix 3 - Portfolio allocation thresholds between the various allocation categories
Appendix 4 - Information to be submitted regarding environmental impact measurements
Appendix 5 - Requirements for the use of derivative instruments within an TEEC-certified
fund
Appendix 6
–
List of documents to submit
The taxonomy (provided in Appendix I of the Criteria Guidelines) lists 8 eligible sectors (energy,
building, industry, waste management/pollution control, transport, ICT, agriculture & forestry,
adaptation). For each sector, further “areas” (e.g. solar energy), “specific categories and activities”
(e.g. “PV solar electricity”) and descriptions
are provided.
The taxonomy is the same as that of the CBI with some changes and further specifications:
Certain activities listed in the CBI taxonomy have been excluded (fuel efficient vehicles,
broadband);
The descriptions of certain activities appearing in the CBI taxonomy have been specified;
Certain activities considered by the CBI taxonomy as requiring additional work, which are
therefore not currently eligible, have been deemed eligible by the EETC taxonomy;
A “Services” category has
been added to the "Energy", "Buildings" and "Industry" sectors.
The exclusion criteria (provided in Appendix II of the Criteria Guidelines) are as follows:
Strict exclusion: Companies having activities pertaining to:
The exploration-production and exploitation of fossil fuels;
The entire nuclear sector, namely the following activities: uranium extraction, uranium
concentration, refining, conversion and enrichment, the production of nuclear fuel structures,
construction and use of nuclear reactors, treatment of spent nuclear fuel, nuclear
decommissioning and radioactive waste management.
Partial exclusion:
Service companies and companies involved in the distribution / transportation and the
production of equipment and services are excluded, in so far as 33% [inclusive] or more of
their turnover comes from clients from the strictly excluded sectors (as defined above).
Companies making 33% [inclusive] or more of their turnover from one of the following
activities are excluded: Storage and landfill centres without GHG capture; Incineration
without energy recovery; Energy efficiency for non-renewable energy sources and energy
savings linked to optimising the extraction, transportation and production of electricity from
fossil fuels; Logging, unless managed in a sustainable fashion as defined in appendix 1, and
peatland agriculture.
Taxonomy
/ sectoral
focus
(Inclusion
/
exclusion)
Criteria
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China Green Finance Committee: China Green Bond Endorsed Project Catalogue
89
Dimension
of
green finance
Context
The China Green Bond Endorsed Project Catalogue (“Catalogue”) identifies projects that
are eligible for (re)financing through
green bonds
falling under the regulation of the
People’s Bank of China.
The Central Committee of the CPC and the State Council in September 2015 issued the
Integrated Reform Plan for Promoting Ecological Progress which, for the first time, clearly
stated to initiate the top-level design for the national green financial system, including
through the green bond market.
Against this background, the
Green Finance Committee
of China Society of Finance and
Banking put forward the Green Bond Endorsed Project Catalogue (2015 Edition). The
catalogue aims to provide an explicit guideline for green investment projects. The
Committee commissioned CECEP Consulting Co., Ltd. and the Research Centre of
Climate and Energy Finance of Central University of Finance and Economics to prepare
the Catalogue and undertake relevant research work.
In addition to challenges from climate change, China is facing other issues such as severe
environmental pollution, aggravated resource constraints and deteriorated ecological
degradation. Environmental benefits are thus framed to comprise GHG emission reduction,
pollution reduction, resource conservation, ecological protection, etc.
The Catalogue lists
six Level-1 categories
of projects with marked environmental benefits
(Energy Saving; Pollution Prevention and Control; Resource Conservation and Recycling;
Clean Transportation; Clean Energy; Ecological Protection and Climate Change Adaption),
31 Level-2 categories
as well as a large number of
Level-III categories,
with detailed
explanations and defining criteria as well as links to the national industries classification
codes.
For some categories it is specified which existing sectoral benchmarks and guidelines the
technology or activity has to comply with (e.g. as defined in national standard of energy
consumption allowance for unit product, Evaluation Standard for Green Building, standard
of Chinese organic products, etc.).
For Solar Photovoltaic (PV) Power Generation, specific thresholds are defined regarding
conversion efficiency and decay rate.
In 2016 China’s green bonds volume aligned with China’s green definitions (but not
necessarily with international green definitions, e.g. as determined by the Green Bond
Principles) made up USD 36bn or 39% of the global volume.
Conceptual
definition
Taxonomy
sectoral focus
/
(Inclusion
exclusion)
Criteria
/
Investor
implications
Other definitions and standards relating to green bonds
Labels,
certification
schemes
Guideline /
policy
LuxFLAG Green Bond
Label
ASEAN Green Bond
Standards
Taxonomy
(referring to
GBP)
Taxonomy,
process
standard
Taxonomy
Process
standard
Relatively unspecific, taxonomy referring to GBP
Based on the international Green Bond Principles and
in line with the Climate Bonds Taxonomy. Eligible
projects are defined by the GBP’s broad categories
with the addition of specifically excluding fossil fuel
power generation projects.
Identifies investments aligned with the Sustainable
Development Goals (SDGs). The SDI consist of a
broad list of activities consistent with the SDG goals
and sub-goals and a decision tree to assess in a simple
way whether an investment is aligned or not.
A common approach to track finance towards climate
Guideline /
policy
Guideline /
89
Sustainable
Development
Investments
(Developed by Dutch
asset manager PGGM
and APG)
The
Multilateral
Taxonomy
CBI: “Green Bond Endorsed Project Catalogue (Draft for consultation)”, 2020 (Link)
CBI: “Roadmap for China: Green bond guidelines for the next stage of market growth”, 2016 (link)
CBI: “China Green Bond Market 2016”, 2017 (link)
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policy
Development
Banks
(MDBs)
and
the
International
Development Finance
Club (IDFC): Common
Principles for Climate
Mitigation
Finance
Tacking
Guideline /
policy
Guideline /
policy
Guideline /
policy
Guideline /
policy
Guideline /
policy
Guideline /
policy
Index
Rating
Rating
Rating
Morocco Green Bond
guidelines
US
Energy
Conservation
/
Renewable
Energy
Bonds
EIB Climate Action
Bonds
Nordic
Investment
Bank
Working group of
eleven
International
Financial Institutions
GBP Impact Reporting
Working Group
Bloomberg
Barclays
MSCI Global Green
Bond Index
Cicero Shades of Green
S&P Green Evaluation
Moody’s Green Bond
Assessment
Taxonomy
Taxonomy
change mitigation and adaptation which can offer some
guidance, especially to lending institutions, around
which loans can be considered green. Eligible
activities include:
1. Renewable energy
2. Lower-carbon and efficient energy generation
3. Energy efficiency
4. Agriculture, forestry and land-use
5. Non-energy GHG reductions
6. Waste and wastewater
7. Transport
8. Low-carbon technologies
9. Cross-cutting issues (e.g. policy support and
financing instruments)
Very broad taxonomy with exemplary character
Very narrow focus on energy
Taxonomy
Taxonomy
Impact
metrics
Impact
metrics
Taxonomy
Assessment
methodology
Assessment
methodology
Assessment
methodology
Based on MDB-IDFC, so no need for extra assessment
Early taxonomy, with focus on emission reductions
(beyond CO2)
Four impact indicators defined for RE and EE
Three core indicators for sustainable water and
wastewater management, other sustainability indicators
Very open and short list of eligible environmental
categories
Assesses the expected environmental effectiveness /
impact of the bond issue (How forward looking is it?)
Assesses the expected environmental effectiveness /
impact of the bond issue (What are key environmental
impacts?)
Assesses the expected environmental effectiveness /
impact of the bond issue (How well does the issuer
follow the GBP?)
Table 24 - Other definitions and standards relating to green bonds
90
The TEG’s concept for an EU Green Bond
Standard
Use of proceeds
Required to include proceeds in legal documentation.
Financing or refinancing of eligible green expenditures. Specific requirements,
related to capital/operating expenditures and look-back periods.
Disclosure of proportion of proceeds used for refinancing:
Required
Economic activities shall be aligned with
EU Taxonomy:
1. Substantial contribution to one out of six environmental objectives
2. Ensure that economic activities do-no-significant harm to any of the EU
Taxonomy’s six Environmental Objectives
3. Comply with sector-specific technical screening criteria, including principles,
metrics and related thresholds on sectors that are deemed environmentally
Eligibility criteria (1):
90
Some parts of
this table are based on EU study: “Defining “green” in the context of green finance”, 2017
(Link)
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4.
sustainable.
Ensure compliance with minimum
social safeguards
represented by the
principles and rights set out in the eight fundamental conventions identified in
the ILO’s declaration on Fundamental Rights and Principles at Work.
Reporting
External
requirements
Review
Accreditation of
external reviewers/
verifiers
Green Bond Framework (GBF) is required.
Impact monitoring and reporting required
Required.
Verification of the Green Bond Framework and the Final Allocation Report by an
accredited verifier to confirm conformity with the EU-GBS.
Publication of external verification
required
A centralised scheme of accredited verifiers, to be operated by ESMA.
To be preceded by a voluntary interim registration scheme for an estimated
transition period of up to 3 years.
Box 1: Examples of issuers
making use of the TEG’s concept for the EU GBS (extracts from Green Bond
Frameworks)
Public sector:
Grand Duché du Luxembourg:
"The eligibility criteria of green categories comply, when applicable, with
the recommendation of the Technical Expert Group (TEG) final report on the EU Taxonomy (the “EU
Taxonomy”) published in March 202011 or any updated version, on a best effort basis."
CAFFIL:
"SFIL Group strives to align this Green Bond Framework with future updates to the Green Bond
Principles and both the EU classification system (the so-called
“taxonomy”) and the EU Green Bond
standard3 currently under discussion at the European Commission, on best effort basis, since both those
documents are still subject to ongoing discussions and evolutions."
Landwirtschaftliche Rentenbank:
" Rentenbank acknowledges that the EU Taxonomy and the EU Green
Bond Standard are yet to be finalised, but has already elected
–
on a best efforts basis
–
to align its Green
Bond framework with the objective of climate change mitigation."
Non-financial corporates
Volvo:
"The Company has also taken into account, on a best effort basis, the recommendations of the
Technical Expert Group (TEG) final report on the EU Taxonomy (the “EU Taxonomy”) published in
March 2020 in establishing the definition of the Eligibility Criteria."
Daimler:
"It is Daimler’s intention to follow the best practices, in relation to Green
Bonds and Loans, as the
market standards develop and as the EU classification of environmentally sustainable economic activities
(the Taxonomy) and the EU Green Bond Standard enter into force.
VW:
"On a best efforts basis, VW will review and update the content of the Green Finance Framework and
managing any future updates of this document to reflect relevant changes in the Group's corporate strategy,
technology and market developments (e.g. the introduction of the EU GBS)."
Financial corporates:
Deutsche Bank:
"In formulating the Framework care was also taken to reflect the latest reports on the
European Union Green Bond Standard (EU GBS) and the European taxonomy for sustainable activities (EU
Taxonomy), prepared by the Technical Expert Group on Sustainable Finance established by the European
Commission."
Unipol:
"Unipol is fully committed to meet stakeholders’ expectations on investors’ role to support
sustainable development, as defined in EU “Action Plan: Financing Sustainable Growth”. Therefore,
criteria established by Regulation (EU) 2020/852 on the establishment of a framework to facilitate
sustainable investment (“Taxonomy Regulation”) have been considered in the definition of Eligibility
Criteria."
Sparebank:
"The Eligibility Criteria used to earmark Eligible Green Assets for SR-Bank’s
green bond are
set out below. Such Eligibility Criteria comply with the recommendation of the Technical Expert Group
(TEG) report on the EU Taxonomy published at the end of June 2019, which establishes a system to
classify environmentally sustainable activities by setting out metrics and thresholds."
Rabobank:
"The eligible projects are aligned with EU Environmental Objective"
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Annex 8: EU Taxonomy
–
coverage and related disclosure
obligations
1.
W
HAT IS THE
T
AXONOMY
?
Regulation (EU) 2020/852,
or the Taxonomy Regulation, establishes criteria for determining
whether an economic activity qualifies as environmentally sustainable in the EU. This can
then be used to classify or ‘rate’ the greenness of companies, and in turn of assess the
greenness of their equity and bonds.
The Taxonomy Regulation is centred on six environmental objectives:
1. climate change mitigation
2. climate change adaptation
3. sustainable use and protection of water and marine resources
4. transition to a circular economy
5. pollution prevention and control
6. protection and restoration of biodiversity and ecosystems
The Taxonomy Regulation establishes the framework for the EU taxonomy by setting out
four overarching conditions that an economic activity has to meet in order to qualify as
environmentally sustainable:
(i) it contributes substantially to one or more of the six environmental objectives set out in
the Taxonomy Regulation;
(ii) it does not significantly harm any of the other environmental objectives;
(iii) it is carried out in compliance with minimum (social) safeguards set out in the Taxonomy
Regulation
91
; and
(iv) it complies with technical screening criteria that are established through delegated acts.
The technical screening criteria specify the conditions under which an economic activity
meets criteria (i) and (ii).
For the climate mitigation objective, the taxonomy Regulation recognises three layers of
green activities that can contribute to this objective:
1)
Low-carbon activities:
The first layer is activities that are already low carbon, such
as renewable energy.
2)
Enabling activities:
The second layer is activities that enable emission reduction in
other activities, and that in themselves are environmentally sustainable. For example:
manufacturing of components essential for renewable energy production
3)
Transitional activities:
The third layer includes activities that are consistent with EU
and international environmental goals but for which there are no technologically and
economically feasible low-carbon alternatives
91
Article 18 of the Taxonomy Regulation specifies: the OECD Guidelines for Multinational Enterprises and UN
Guiding Principles on Business and Human Rights, including the declaration on Fundamental Principles and
Rights at Work of the International Labour Organisation (ILO), the eight fundamental conventions of the ILO
and the International Bill of Human Rights.
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3.
W
HAT DOES THE
EU T
AXONOMY COVER
?
The Taxonomy uses the Statistical Classification of Economic Activities in the European
Community, commonly referred to as NACE, and its codes, as the basis for the activity-
specific technical screening criteria. In order to decide for which activities to develop
screening criteria, all economic activities were considered on the basis of their own profile as
for polluting emissions or ability to reduce emissions stemming from other economic sectors.
If an economic activity is included (“taxonomy-eligible”) at a given point in time, it means
that this activity has been assessed by technical experts and it was found that the activity can
make a substantial contribution to one or more environmental objectives under the Taxonomy
Regulation. Consequently, it appears in the delegated act and receives technical screening
criteria. In order to be considered environmentally sustainable or “taxonomy-aligned”,
however, these criteria need to be met by an economic operator. It is important to note that if
an activity is not included, it does not mean it is unsustainable. The activity could be only
marginally contributing, or simply not been assessed yet. The ultimate goal of the taxonomy
is to assess the whole spectrum of economic activities.
It is important to note that the EU taxonomy only classifies economic activities; it does not
include, classify or rate companies. Companies may have some activities that comply with
the taxonomy and others that do not. While the taxonomy is a binary tool for activities,
(either an activity is in, or it is out), it is not binary for companies. Companies can take steps
to increase their share of taxonomy-aligned activities and thus use the taxonomy as a tool for
the transition.
The following table indicates the sectors covered by the TEG’s Taxonomy Report, and their
respective emissions
92
:
NACE macro-sector code
(Scope
Tonnes
(2018)
1)
Covered
CO2e
by
TEG
D - Electricity, gas, steam and air conditioning supply
C
–
Manufacturing
H - Transportation and storage
A - Agriculture, forestry and fishing
E - Water supply; sewerage, waste management
and remediation activities
B - Mining and quarrying
G - Wholesale and retail trade; repair of motor
vehicles and motorcycles
F
–
Construction
Q - Human health and social work activities
O - Public administration and defence;
compulsory social security
N - Administrative and support service activities
I - Accommodation and food service activities
P
–
Education
M - Professional, scientific and technical activities
92
Taxonomy
report?
1,021,327,916.14
Fully
836,131,368.27
Partially
543,990,599.69
Partially
526,387,217.14
Fully
161,962,114.37
Fully
81,201,552.02
79,399,182.95
64,791,686.40
32,512,530.55
29,297,099.74
21,424,859.33
17,333,105.86
17,273,274.20
17,056,511.88
Partially
No
Partially
No
No
No
No
No
Partially
EU Taxonomy report, Technical Annex, p. 13
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K - Financial and insurance activities
S - Other service activities
J - Information and communication
R - Arts, entertainment and recreation
L - Real estate activities
T - Activities of households as employers; undifferentiated goods-
and services-producing activities of households for own use
U - Activities of extraterritorial organisations and bodies
Table 25 - Sectoral coverage of TEG's Taxonomy report
10,837,435.09
9,816,300.62
8,780,514.69
8,298,587.66
5,726,208.34
234,573.70
26.68
No
No
Fully
No
Partially
No
No
4.
S
TUDIES ON
T
AXONOMY ALIGNMENT AND COVERAGE
As Taxonomy-related disclosures are not yet in place, and the Delegated Acts of the
Taxonomy Regulation are not yet adopted, the precise coverage of taxonomy-aligned
activities in today’s financial markets cannot be determined at this stage with
sufficient
reliability. Nevertheless, this sub-section aims to illustrate potential coverage and alignment
with the EU taxonomy based on the limited number of existing studies that try to
approximate it. The few studies that exist are mostly only available on a commercial basis,
e.g. with a certain data subscription, also these were made available to Commission services.
The studies covered differ in many ways, including methodology, scope, assumptions made,
and types of funds or markets analysed. An important distinction between these studies is the
level of assessment with regards to EU taxonomy - some studies assess potential EU
taxonomy-alignment (i.e. what share of activities would likely meet the technical screening
criteria), while other limit the assessment to taxonomy eligibility (i.e. mapping what
companies operate in some of the NACE activities from the TEG report
[7]
).
The following studies of Taxonomy-alignment are covered in this section:
1. Adelphi and ISS ESG,
European Sustainable Finance Survey,
(2020)
2.
Ecolabel study “Testing
draft EU Ecolabel Criteria on Existing UCITS Equity Fund”
(2020)
3. Study by Nordea (2020)
4. Study by MSCI (2020)
5.
Study by Goldman Sachs “Mapping stocks to the Taxonomy” (2020)
6. EY:
A Green Covid-19 Recovery and Resilience Plan for Europe
(Sep 2020)
A few important caveats apply to these six studies and their results:
The studies covered in this section focus on revenue, whereas the EU GBS will require
Taxonomy-alignment of assets and expenditure, in particular capital expenditure. For this
reason the studies do not give an answer to the question of potential Taxonomy-alignment
of use of proceeds for bond issuers. However, to the extent that the greenness of the
[7]
This can be done either based on their primary NACE code, which is less precise, or on NACE codes
associated with their different business segments for which financial data exist.
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revenue of a company reflects the greenness of its assets, the studies provide an indication
of the potential for EU GBS issuance.
93
Studies are from 2020 or earlier. However the EU GBS is only expected to be adopted in
2022. Consequently it seems reasonable to assume that in the years leading up to the
adoption of the EU GBS the share of Taxonomy-aligned assets of many EU companies
would increase, due to technological trends, market trends, and legislative requirements.
One caveat, often noted in the studies, concerns the lack of consistent data on potential
Taxonomy-alignment from companies and financial product providers, and the
consequent need to make several assumptions, something that the Taxonomy Regulation
aims to address by ensuring more consistent data along the investment chain.
While these studies typically estimate the share of Taxonomy-alignmed revenue to total
revenue, they offer few insights into whether the resulting figures are due to the criteria of
the Taxonomy itself, or the simple lack of green revenue in the economy overall. For this
reason, the more interesting metric for our purposes would may be have been the share of
Taxonomy-aligned revenue as a share of green revenue, not total revenue.
The studies:
1.
Adelphi and ISS ESG (2020)
In a
taxonomy mapping carried out by Adelphi and ISS ESG
94
and commissioned by the
German ministry of the environment, the consultants analysed public data on 75 European
companies companies listed on three main European indices (EURO STOXX 50, DAX 30
and CAC 40). The study found that approximately 22% of their total revenue concerns
activities listed in the Taxonomy, as proposed by the TEG.
The study stands out in looking at compliance also with DNSH-criteria. While almost 20% of
Taxonomy-eligible revenues across the indices were identified and 3-5% of total revenues
meet substantial contribution criteria (approximately one fifth of the eligible revenues), less
than half of this was found to comply with DNSH-criteria. Overall, the study estimates
between 1.2% and 2.1% of total revenue across the indices to be fully Taxonomy-aligned (or
between 4.6% and 10.6% of Taxonomy-relevant revenue).
The study only considered the two climate-related objectives of the Taxonomy, and did not
include certain companies such as banks. Other than that, the authors explained that the low
results were primarily due to a high-carbon economy and a lack of data and reporting from
companies.
2. Ecolabel study
A recently published study
95
commissioned by the European Commission ‘Testing
draft EU
Ecolabel Criteria on Existing UCITS Equity Funds’
tested potential EU taxonomy-related
thresholds for equity funds to inform the design of an EU Ecolabel for financial products. The
93
Due to the more forward-looking nature of capital expenditure (as it usually reflects the future economic
activities of the company, for example in the case of an investment in production capacity), one could argue that
the share of Taxonomy-aligned economic activities reflected by capital expenditure is likely to be overall higher
for many bond issuers than the respective share as reflected by revenue.
94
Adelphi and ISS ESG: “European Sustainable Finance Survey”, 2020 (Link)
95
Available at:
https://ec.europa.eu/info/publications/200626-study-eu-ecolabel-criteria-ucits_en
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study worked with a sample of 101 ‘green’ UCITS equity funds domiciled in the EU 27
Member States. Half of these were labelled under one of the existing national labels and the
other half was not labelled.
The study clustered the share of green revenue of the 1831 unique companies the funds were
invested in, into the following five categories:
activity is not covered by Taxonomy,
activity is per se and unconditionally taxonomy compliant,
activity is evaluated against a GHG intensity,
activity is evaluated against another numeric threshold, and
activity is evaluated against qualitative criteria.
The findings at company level showed that 52.7% of the activities in the primary and
secondary segments of the companies were not covered under substantial contribution to
climate change mitigation in the final TEG report on EU taxonomy, followed by 21.3% of
activities covered by EU taxonomy (either as green without a need to meet any threshold, or
with quantitative or qualitative criteria) and 13.7% being left in ambiguous mapping due to
data restrictions
96
.
Limitations:
Only climate change mitigation was considered in this study.
DNSH criteria and social safeguards were not addressed (only substantial contribution)
Only UCITS equity funds were investigated, although the EU Ecolabel targets a wider
scope of retail financial products;
Entire Sample (101 funds)
Category
Revenue-weighted % of activities
13.7
0: Ambiguous Mapping
52.7
1: No Taxonomy exposure
7.4
2: Per se Green
1.9
3: GHG intensities
2.9
4: Numeric
15.0
5: Qualitative
97
5.4
Energy Production
0.1
No firm data obtained
Data restrictions
1.0
Cash / Currencies
Total
100
Table 26 - Clustering of Revenue segments (source: Climate & Company)
Typically as some activities captured in other industrial classification systems (notably Standard Industrial
Classification) could not be clearly associated with a single NACE activity or due to lack of adequate revenue
data.
97
Energy production is listed separately since several activities fall under NACE code 35.11 (i.e. “ambiguous
mapping”). Nonetheless, an evaluation of energy production
activities with the proposed methodology described
in section 4.3 is possible.
96
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3. Nordea
Nordea also made its own assessment in March 2020 of potential EU Taxonomy-alignment in
Nordic equity markets based on the interim TEG report. The assessment was done on a
sample of 257 listed Nordic companies (in Sweden, Finland, Denmark, and Norway) and
focused on checking both taxonomy eligibility (associating companies with relevant NACE
codes) as well as testing substantial contribution to climate change mitigation
98
. Unlike most
other studies, DNSH criteria were checked, although mostly on a qualitative basis due to data
unavailability and nature of the criteria. The assessment was largely based on public
information
99
(e.g.
annual and sustainability reports, companies’ websites, product listings,
technical specification of products) with limited verification with the companies.
Overall, this study estimated that:
around 60% of companies in the sample are in scope of the EU Taxonomy,
around 30% of companies in the sample have some potentially taxonomy-aligned revenues
6.5% of revenues of the companies in the sample are potentially Taxonomy-aligned.
Renewable energy and real estate and construction companies have the highest share of
potentially Taxonomy-aligned revenues according to the study.
35%
30%
25%
20%
15%
10%
5%
0%
Figure 16 - Estimated share of potentially aligned activities in different sectors based on Nordea
report. Source: Nordea, 2020
4. MSCI assessment
MSCI’s assessment combined an assessment of Taxonomy eligibility with an approximation
for meeting DNSH criteria and minimum social standards. The study nevertheless did not test
whether substantial contribution criteria are met, hence the results are hard to compare with
the other studies at our disposal. MSCI used revenue estimation from MSCI Sustainable
Impact Metrics and used their data on controversial events and business involvement data
98
The assessment of substantial contribution to climate change adaptation was limited to several activities such
as insurance products, infrastructure, IT companies.
99
Information considered in the assessment mostly came from 2018 accounts.
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from MSCI ESG Controversies and MSCI Business Involvement Screening Research as a
proxy for meeting DNSH criteria.
Using this approach, MSCI estimated that 27% of the constituents of the MSCI ACWI
Investable Market Index (with approximately 9000 companies) had some degree of
involvement in activities listed in the TEG report while avoiding major controversies. Of this
group, 15% generated at least 5% of their revenue from activities likely to address one or
more of the six environmental objectives of the EU Taxonomy and were not involved in
controversial practices that could indicate breach of the Taxonomy’s minimum social
safeguards and DNSH criteria.
The chart below shows the results across of 2,425 issuers with potentially EU Taxonomy
eligible revenues. As figure 34 shows, the number of companies per sector with such
activities is relatively high for at least five sectors
–
ranging from industrials to information
technology and real estate. While the final conclusion would depend on company size, this is
likely to allow construction of well-diversified portfolios focused on EU taxonomy
alignment.
Figure 17 - Issuers by potentially aligned revenue share (MSCI, 2020)
Figure 18 - Number of relevant companies per sector within MSCI ACWI IMI Index (MSCI, 2020)
5. Goldman Sachs study Mapping stocks to the Taxonomy (2020)
A June 2020 study by Goldman Sachs screened large and mid-cap global companies in the
MSCI ACWI index and found that around 1200, or 41%, have at least some revenue (more
than 5%) that is potentially eligible under the Taxonomy. 957 companies were found to have
more than 50% potentially eligible revenue, while 602 companies were found to have 100%
potentially eligible revenue.
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High rates of potential eligibility are notably seen in Japan and the rest of Asia, due to the
broad potential application of the Taxonomy to industrial companies, and notably the
manufacture of low carbon technologies (see exhibit-tables from the study below). The study
highlights however that actual rates of Taxonomy-alignment will be far lower, once
compliance with the technical screening criteria and social safeguards are checked.
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Ecolabel study
(Climate
company et al., 2020)
Scope
&
Nordea
(March 2020, not
publically available)
Nordic equities (sample of 257
companies)
MSCI
(2019, not publically
available)
Global equities and green
bonds (Assessment was made
based on MSCI ACWI IMI
index
(around
9000
constituents).
Equity: NACE codes + DNSH
and minimum social criteria
based on proxies (not actual
criteria)
Level
of
Taxonomy-
relevant
assessment
Main results
on Taxonomy
eligibility
Sa ple of g ee UCITS e uity
funds domiciled in the EU (101
funds, of which 51 are
currently labelled, with 1831
investee companies)
NACE codes + SC criteria of the
underlying companies (climate
mitigation only)
Goldman Sachs
(June
2020, not publically
available)
Medium and large-cap
equities from MSCI ACWI
index (~2900 companies)
Adelphi and ISS ESG
European Sustainable
Finance Survey (2020).
75 companies on three main EU equity
indices
NACE codes + SC criteria +
limited DNSH assessment
checking NACE
only (eligibility)
codes
NACE + SC + DNSH criteria (climate
mitigation and adaptation)
~30% of companies had
some eligible revenues
~60% of companies in the
sample were in scope of
the EU Taxonomy
~11% of total net assets
invested in companies with
least
% fo
g ee
economic activities based on
SC criteria;
~6.5% of potentially
taxonomy-aligned
revenues;
Equity:
~ 9% of MSCI ACWI
IMI
constituents
likely
involved in eligible activities
and meet DNSH;
Green bonds:
~17% of
Bloomberg Barclays MSCI
Green Bond Index (by market
value)
NACE activity mapping +
proxy for DNSH and minimum
social criteria compliance
41%, of global companies
in MSCI ACWI index
(26% of market cap),
have revenue exposure
(>5%) that is potentially
Taxonomy-eligible.
Between 1.2% and 2.1% of total revenue
across the indices estimated to be fully
Taxonomy-aligned (or between 4.6% and
10.6% of Taxonomy-relevant revenue).
Main results
on Taxonomy
alignment
Other
important
findings and
caveats
Many holdings could not be
clearly categorised in the draft
Ecolabel pockets due to
significant data issues and
ambiguous mapping between
classification systems
Substantial
contribution
assessed ased o No dea’s
estimation using available
information;
limited
verification of the results with
companies
Companies
with
Taxonomy-eligible share
>5% tend to be smaller
on average
While revenue shares signal a low level of
potential alignment today, the study found
that 94.7% of the companies analysed
invest in climate change mitigation, but
that data for checking for Taxonomy-
compliance based on capital expenditure
(CapEx) and/or operational expenditure
(OpEx) was not possible.
Table 27 - High-level comparison of studies on Taxonomy alignment and eligibility
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6. EY study: A Green Covid-19 Recovery and Resilience Plan for Europe
In a
report released in September 2020,
the consultancy EY analysed five sectors (energy,
transport, buildings, industry, and land use) to identify shovel-ready projects with the
potential to create social, environmental, and economic value over the next two years. The
analysis was carried
out identifying suitable investments in the context of the EU’s Next
Generation EU recovery effort, but it also shows the vast potential for Taxonomy-aligned
green investments.
In their summary report, EY identify over 1000 such projects across the EU27, which are
developed and only need a last push (which could be additional financing, or overcoming
other barriers) to be realised. Together, these projects represent an aggregate investment of
€200 billion, distributed evenly in all EU27 countries. However,
EY estimates that this list of
1000 projects only captures about 10% of green projects currently under development,
meaning that the potential is much larger. According to EY, the entire EU pipeline of green
projects could be as high as €1 trillion.
EY
used the TEG’s final report and technical annex on the Taxonomy from March 2020 to
evaluate the climate benefits of the projects. Accordingly, EY applied a “rigorous use” of the
taxonomy to differentiate projects into two groups, with one group being those aligned with
EU taxonomy and having a clear climate benefit, while the other group being those projects
with clear environmental benefits but for which EY could not check compliance with EU
taxonomy using available information.
As can be seen from the examples
below, EY identified over € 20.6 billion worth of projects
falling into the first category (Taxonomy aligned), spread over several sectors. This figure
should be interpreted as a lower bound, as the total share or number of projects clearly
identified by EY to be Taxonomy-aligned as part of their study is not known.
MS
Cy-
EL
EE
FI
DE
EL
EI
SK
ES
SE
Project Developer
EuroAsiainterconnector
Limited
Tuuletraal
Valorem
EcofinConceptGmbH
Energy sector
Investment
Project Description
€ 2,5 Bn
Euro asia Interconnector, Israel -Greece
–Cyprus
-Stage I
€
553
Mn
Tuuletraal Offshore Wind Power Project (380MW)
€
300
Mn
Viiatti onshore wind power project (250-300MW)
€
98
Mn
70 MWp floating solar system on an open-cast lake (formerly used for
brown coal mining)
Power Transmission Operator
€ 1 Bn
Interconnection Athens
–Crete
(IPTO or ADMIE)
CodlingWind Park Ltd
€
1,962
Bn
The 1,100MW Codling Wind Park is an offshore wind farm located
16.7km off the coast of Ireland
Energy Development GmbH
€
12
Mn
Development of PV power plants in Slovakia, revitalization of brown
fields and former mining areas
Iberdrola
€
Mn
590 MWpsolar PV project located in Cáceres
Skanska Sweden & Gothenburg
€
Mn
Skanska TES is a thermal seasonal energy storage solution that can
Energy
balance energy systems in a city or district
MS
BU
HR
CZ
Project Developer
Sofia municipality
iCat d.o.o.
City of Hradec Kralove
Transportation sector
Investment Project Description
€
50
Mn
Acquisition of e-buses
€
5
Mn
SolarCat-self-sustaining solar passenger ship
€
26
Mn
Replacement of fleet of buses by electro buses
117
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FR
DE
HU
IT
PL
SK
ES
SE
FM Logistics
Munich City
NKM MobilitásKft.
Comunedi Milano
Cracow Municipality / ZIKIT
Region BanskaBystrica
Iberdrola
KatlaAero
€
20
Mn
€
€
€
€
€
€
€
700
Mn
70
Mn
1,5 Bn
110
Mn
40
Mn
150
Mn
9
Mn
H2HUB project is aimed at the production of green hydrogen from on-site
solar PV panels in order to fuel trucks and heavy-duty vehicles
Munich U-Bahn Line 5 Extension Project, Laimer Platz - Pasing, Bayern
Development of an alternative charging station network
Acquisition of new electric buses to replace diesel fleet
. k fast t a li e etwee Czyży y a d Mist zejowi e, i the ity of
CraCow
Modernization of public transportation, 100 electric buses
Deployment infrastructure for electric vehicle recharging
Developing drone network for electrical air distribution.
MS
CZ
FR
DE
HU
IT
NL
PL
SK
ES
SE
Project Developer
City of Prague
Eiffage
KMLS GmbH
Buildings sector
Investment Project Description
€
Mn
Accelerated reduction of energy intensity of Prague buildings
New process developed by research facilities at EiffageRoute, represents a
€
Mn
low carbon innovation on two level.
Replacement of gas consumption from heating and processes in Siemens
€
Mn
facilities Germany to electricity from renewable sources
Mn
Mn
Mn
Mn
Mn
Boosting energy performance of residential buildings in Budapest
EnergieSprongis a project for public buildings in Milan which will use
"disruptive" and "market ready" industrialized building deep
renovatonpackages
Resilioproject -Resilience nEtworkof Smart Innovative cLImate-
adapativerOoftops
Retrofit and extension of the district heating (DH) network in the city of
Lublin
The Municipality of the
€
City of Budapest
Comune di Milano
City of Amsterdam
€
€
Lubelskie
przedsiebiorstwo
€
eneretyk icieplnej SA
Čie oh o ská želez i a,
€
n.o.
Inditex
Skanska Sweden AB
€
€
Construction of the electrified narrow gauge line to the tourist center
Chopok-south.
Construction of a new building in Inditex headquarters, with the highest
Mn
standards in terms of energy efficiency and performance
Mn
Build a climate neutral office building producing energy
MS
AT
BE
FR
DE
IT
IT
NL
PL
PO
SE
Project Developer
Verbund
Calix limited
H2V Product
Meyer Burger
Hydro2Power SRL
Enel Green Power and partners
Port of Rotterdam, Energie
Beheer Nederland B.V. (EBN)
andN.V. Nederlandse Gasunie
LG Chem Wroclaw Energy SP
ZOO
Iberdrola
LKAB, SSAB, Vattenfall
Investment
€
Mn
€
€
€
€
Mn
Mn
Mn
1
Mn
€
403
Mn
€
50
Mn
€
1 Bn
Sector: Industry
Project Description
Demonstration of a 6MW electrolysis power plant to produce steel
LEILAC (Low Emissions Intensity Lime And Cement) will pilot a
breakthrough technology that has the potential to ena
le oth Eu ope’s
cement and lime industries to reduce their emissions
Green hydrogen production plant on land in the industrial zone of Port-
Jérôme
Build-up of a GW scale European solar PV cell and module
manufacturing plant in Germany
Creating a new generation of effective hydrogen storage devices at low
pressure, safe and very efficient and easy absorption and desorption
profiles
Italian Photovoltaic Giga Factory
Rotterdam CCUS project Porthos
EV battery Gigafactory
€4,8
Bn
Sines Green Hydrogen Plant (1GW electrolysis)
€
1,7
Bn
Develop and commercialise a fossil free value chain for steel production.
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MS
HR
DE
IT
NL
PL
ES
Land use sector
Project Developer
Investment Project Description
Agrivi Agriculture sustainable practices based on the deployment of
Agrivid.o.o.
€
300,000 Farm Management Software (FMS), which factors in a carbon emission
calculator
A pioneering facade design with vertical greenery improving
City of Munich
Confd
microclimate
Innovative afforestation project in urban context, with the final aim of
Comune di Milano
€
2 Bn
planting 3 million trees within the Metropolitan City of Milan by 2030
Cooperative development and management of at least 200 hectares
Stichting
Voedselbosbouw
€
Mn
new natural areas consisting of food forests in the province of North-
Nederland
Braban
Regio al y Za ząd Gospoda ki
€
10
Mn
Restoration of ecological continuity of flowing surface waters
Wodnej w Krakowie
Madrid City Council, Ferrovial,
Green infrastructure and health co-benefits of urban greening in the city
Universidad Politécnica de
€
15
Mn
of Madrid.
Madrid
Overall results
Results diverge, but generally suggest relatively low levels of alignment today across the
chosen samples. Considering the Nordea and adelphi studies as the most comparable in their
scope to EU capital markets, it is realistic to expect that the percentage of taxonomy-aligned
activities would likely be in lower single digit number (probably below 5%) for companies in
the EU today. There is a however a notable degree of uncertainty around these results, as
availability of data for assessing EU taxonomy alignment is still limited at this stage.
Notably, the study by adelphi, which looked at potential Taxonomy-alignment in the revenues
of 75 European companies listed on three main European indices (EURO STOXX 50, DAX
30 and CAC 40), found levels of alignment between 1.2% and 2.1% of total revenue across
the indices. Meanwhile, the study by Nordea, which looked at Nordic equity markets, found
~6.5% of potentially taxonomy-aligned revenues in their sample, using a more limited
estimation of DNSH criteria. It is worth noting that the potential alignment seems to be
heavily influenced by the application of DNSH criteria.
As noted previously, it is important to keep in mind that the studies listed here focus on
revenue, whereas the EU GBS will require use of proceeds to be dedicated to Taxonomy-
aligned assets and expenditure, and in particular capital expenditure. This means that use of
the EU GBS will depend not just on the Taxonomy-alignment of existing assets, but also on
the potential for future Taxonomy-aligned capital expenditure. In this respect, the study by
EY, where
a group of consultants identified over €200 of shovel-
ready green investment
projects across the EU, is an interesting indication. While the study does not give a
comprehensive overview of the potential for Taxonomy-aligned investments in Europe, it
does give an indication of the sheer scale of green and Taxonomy-aligned potentially in the
pipeline, and which could be funded using EU GBS bonds.
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5.
C
ASE STUDY
:
ENERGY INTENSIVE INDUSTRY AND HARD
-
TO
-
ABATE MANUFACTURING
SECTORS
The following section will focus
on the Taxonomy’s coverage of certain industries where the
potential for reducing emissions is very high, but which are not covered by any of the existing
market-based Taxonomies. It will further argue that the EU Green Bond Standard, thanks to
its link with the EU Taxonomy, can help companies in this sector enter the green bond
market, thereby helping them raise the necessary funds for emission reducing investment.
As indicated in Table 25, the manufacturing sector overall is the second largest contributor to
Europe’s CO2e emissions, and this is in large part due to the sectors of cement, aluminium,
steel and iron, chemicals, fertiliser, and plastics. Although in most cases, carrying out these
activities in a climate-neutral way is technologically difficult or costly, the fact remains that in
most cases there is no carbon-neutral alternative to replace these activities. For this reason,
setting these industries on a pathway to climate neutrality remains an important part of
reaching the Paris agreement targets.
Under the Taxonomy Regulation, such activities may qualify as “transitional”, under the
following criteria:
1. The activity must have no technologically and economically feasible low-carbon
alternative.
2. The activity must support the transition to a climate-neutral economy consistent with a
pathway to limit the temperature increase to 1,5 C above pre- industrial levels.
3. The activity must have greenhouse gas emission levels that correspond to the best
performance in the sector or industry, while not hampering the development and
deployment of low-carbon alternatives; and not leading to a lock-in of carbon-intensive
assets, considering the economic lifetime of those assets.
The Taxonomy Delegated Acts will set out the screening criteria for each of the relevant
technologies to be considered such a transitional activity.
The existence of such activities in the Taxonomy is relevant for the EU GBS, because energy-
intensive industry is one of the sectors which have seen the least issuance of green bonds. As
can be seen from Figure 19 below, only a few percent at most of green bonds have come from
the industry sector. According to Climate Bonds Initiative
100
, the reason that green finance for
high-emitting activities has so far been limited is arguably due to a lack of provision of robust
eligibility criteria - not because they are a priori incompatible with the green bond market or
by extension a green label. In general, transition goals, pathways, metrics and indicators have
been established for transitional activities relating to buildings (construction and retrofits) and
to land-based transport (manufacture and operation of road vehicles, trains and associated
infrastructure), but have been much less frequently addressed for aviation, shipping and heavy
industry.
In particular, none of the existing taxonomies or standards set out criteria for how high-
emitting industry (including cement, aluminium, iron and steel, and hydrogen) can transition
100
CBI: “Financing Credible Transitions”, 2020 (Link)
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and thereby qualify for green bond issuance
101
. The most commonly used market-based
Taxonomy, the Climate Bonds Taxonomy, provides guidance for the industry sector but does
not set out any detailed criteria for the sector (see annex 6). As for ICMA’s GBPs, they
identify eligible use of proceeds categories, which could potentially include high-emitting
industry, but the standard doe not set out any screening criteria or equivalent for these
categories.
Figure 19 - Global green bond issuance broken down by sector (source: Climate Bonds Initiative)
In their 2019 report on the EU Green Bond Standard, the TEG finds that the risk of
reputational risk may be holding back some companies from issuing green bonds, in particular
in transitional sectors where the identification of green assets and
projects is not straightforward. As the report explains, “issuers
Energy intensive industry and
will only proceed with green bonds if they do not create additional
hard-to-abate manufacturing
sectors include:
risks or liabilities compared to the alternatives. In a limited number
-
Cement
of cases, issuers have experienced reputational issues from
-
Aluminium
negative market comments from media, NGOs, shareholders, etc.
-
Iron and steel
As a result, the fear of such adverse publicity for example because
-
Chemicals
a deal is deemed
“insufficiently green” has prevented some issuers
-
Fertiliser
102
from tapping the market.”
-
plastics
A fear often cited by stakeholders is that investors would challenge the greenness of bonds
issued by such corporates based on their overall corporate activities rather than focusing on
the asset or project financed as per the use-of-proceeds approach. In addition, the issuer of a
green bond could come under criticism should the proceeds of the bond finance an activity
with questionable social practices that do not meet minimum social safeguards.
101
According to the OECD, none of the existing taxonomies (the CBI Taxonomy, as well as definitions of green
economic activities employed by China, Japan, France, or the Netherlands) include criteria for these
manufacturing activities. Source: OECD:
Developing Sustainable Finance Definitions and
Taxonomies (2020)
102
For example:
https://www.bloomberg.com/news/articles/2016-03-07/bond-market-asking-what-is-green-
curbs-climate-friendly-debt
and
https://www.climate2020.org.uk/wp-content/uploads/2016/09/BRIGHTWELL-
CLIMATE2020.pdf
.
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The fact that the Taxonomy sets out clear criteria for the definition of green in traditionally
hard-to-abate sectors may therefore be a game-changer for these sectors, in terms of their
ability to issue green bonds. According to the
TEG’s draft Taxonomy, investments in the
energy-intensive and hard-to-abate manufacturing sectors can be considered taxonomy-
aligned if they are new investment in a production facility or process that meets the technical
screening criteria, or if they consist of mitigation measures that are incorporated into a single
investment plan within a determined time frame (5 or 10 years) that outlines how each of the
measures in combination with others will in combination enable the activity to meet the
threshold defined below actions. In other words, companies operating in these industries
should be able to issue EU GBS-aligned green bonds for their investments to become greener,
provided that they plan to fulfil the Taxonomy criteria within a certain time-frame.
How were the criteria specified?
In order to set most of the criteria for these manufacturing activities, the TEG made use of the
2021-2026 benchmarks of the Emissions Trading Scheme Directive. The criteria focus on
reducing the GHG emissions caused by manufacturing activities up to the levels of
performance achieved by best performers. For this reason, the limit for GHG emissions was
set according to the average value of the top 10% performing installations, based on the data
collected in the context of establishing the EU Emissions Trading System (EU ETS) industrial
benchmark for the period of 2021-2026. For each company, the emissions should be
calculated in accordance with the methodology for setting the benchmarks set out in the ETS
Directive.
103
Provided that the Taxonomy retains this relationship with the ETS Directive in the future,
these specific limits would normally remain until 2026. The benchmarks are periodically
updated approximately every 5 years, meaning that the thresholds that refer to them will not
be static over time but automatically continue to represent the performance of the 10% best
performing plants.
Calculating the criteria using the EU ETS methodology has several advantages:
-
The five-year cycle should give companies predictability and a sufficient timespan to plan
the necessary investments and issue the corresponding green bonds, should they wish to
do so.
The predictable pace of updates should allow companies some possibility to foresee future
changes to the criteria and thereby plan ahead, also beyond the next five years.
The methodology is robust and already established in Europe: EU ETS benchmarks are
the most robust benchmarks available and the data calculated according to the boundaries
set are readily available for all installations within the EU that are part of the EU ETS
scheme.
The limits are set based on actual rather than theoretical criteria and performances.
-
-
-
In addition, since the EU ETS benchmarks do not consider the full lifecycle of a process or
product, the TEG has in some cases added criteria linked to recycling or improvement in
upstream emissions.
Table 28 presents the relevant sectors, gives information on the size of their potential
contribution to reducing overall GHG emissions, lists the criteria for substantial contribution
103
EU: “Directive 2018/410”, 2018 (Link)
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to the climate mitigation objective in the draft Delegated Acts of the Taxonomy , and explains
how
such
emission
reductions
may
be
obtained
for
each
sector.
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Manufacture
Cement and
cement
clinker
Aluminium
Contribution
The manufacturing of cement is associated with
significant CO2 emissions.
The manufacturing of aluminium is a highly energy
intensive process.
Criteria for Taxonomy-alignment
GHG limits reflect top 10%
installations.
of
current
Primary aluminium: GHG limits reflect top 10%
of current installations based on combined direct
and indirect emissions.
Secondary aluminium: complies automatically.
GHG limits reflect top 10% of current
installations, or at least 90% of iron content in
final product sourced from scrap steel.
Iron and Steel
Other
inorganic
basic
chemicals
Other organic
basic
chemicals
Fertilizers
and nitrogen
compounds
The manufacturing processes of carbon black and
soda ash together account for approximately 4.9% of
the GHG emissions from the chemical sector.
The manufacturing process of chlorine is extremely
energy-intensive, accounting for 17% of total
electricity use of the European chemical and
petrochemical industry.
The manufacturing of high value chemicals,
aromatics, ethylene chloride, vinyl chloride,
ethylbenzene, styrene, ethylene oxide, mono
ethylene glycol and methanol accounts for more than
35% of the emissions from the chemical sector.
The manufacturing of ammonia and nitric acid is
highly
carbon-intensive,
accounting
for
approximately 23% of emissions coming from the
chemical sector.
Plastics production has been sharply growing over
the last years and emissions from the plastics sector
are expected to increase, not only because
consumption - and therefore manufacturing - is
expected to increase but also because plastics release
CO2 when incinerated.
Carbon black and soda ash: GHG limits reflect
top 10% of current installations.
Chlorine: Electricity consumption for electrolysis
and chlorine treatment is equal or lower than 2.45
MWh per tonne of chlorine. Average life-cycle
GHG emissions lower than 100g CO
2
e/kWh.
GHG limits reflect top 10% of current
installations.
OR: when produced from renewable feedstock,
life-cycle GHG emissions are lower than those of
the equivalent fossil fuel-based chemical.
GHG limits set at top 10% of current installations
(based on ETS data).
How GHG emission reductions can be obtained
Minimising process emissions through energy efficiency
improvements and switching to alternative fuels, reducing the
clinker to cement ratio and using alternative clinkers and binder.
Emissions from manufacturing aluminium are primarily related to
the use of electricity, which contributes to over 50% of the
production costs. Consequently, there is a strong incentive for the
aluminium industry to improve energy efficiency. All aluminium
recycling is eligible due to significantly lower emissions.
The level of performance achieved by best performing plants is
considered to make a substantial contribution to climate change
mitigation. Furthermore, secondary production of steel (i.e. using
scrap steel) is considered eligible due to significantly lower
emissions than primary steel production.
Reducing the emissions from the manufacturing of carbon black
and soda ash and improving energy efficiency and switching to
low carbon electricity in the manufacturing of chlorine can
positively contribute to the climate change mitigation objective.
Manufacture
of plastics in
primary form
Fully manufactured by mechanical recycling,
fully manufactured by chemical recycling, or
derived from renewable feedstock. In the latter
two cases, life-cycle GHG emissions must be
lower than for fossil-fuel based equivalent.
Minimizing process emissions and promoting the manufacturing
of organic chemicals with renewable feedstock can contribute to
the mitigation objective. Reducing the emissions from the
manufacturing process of organic chemicals can therefore
positively contribute to the mitigation objective.
The ammonia sector is expected to substantially contribute to
GHG emissions reduction, notably by using hydrogen produced
from electrolysis. During the manufacturing of nitric acid, the
main type of GHG generated is nitrous oxide and by applying the
available technologies it is possible to reduce emissions by more
than 80%.
Plastic manufacturing is only eligible when at least 90% of the
final plastic is not used for single use consumer products and is
recycled.
Table 28 - Technical Screening Criteria for selected manufacturing activities under the EU Taxonomy
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Annex 9: External review
Transparency is an important element of any green investment to enable investors to make
better informed decisions about the sustainability impact of their investment decisions.
Providing accurate information on the environmental performance of their investments allows
prospective investors to more efficiently compare different assets and mitigates against the
risk of green washing.
In order to boost investor confidence in the environmental data provided, green bond issuers
started to engage with third parties that provide independent third-party services and advice
regarding their ESG impact. External review is a commonly used umbrella term that covers
this wide range of third-party services such as environmental consultancy, provision of a
second opinion on a green financial instrument’s alignment with a particular standard or
audits on the use of proceeds through post-issuance and impact reporting.
External reviews have become common market practice in the EU green bond market.
104
Independent third parties guarantee that the proceeds are used to finance green projects.
Research conducted by the Luxembourg Stock Exchange (LuxSE)
105
for the TEG indicated
that more than 85% of issuers use some form of pre-issuance review (also referred to as
‘validation’ in ISO standards to confirm that requirements for a specific intended use are
fulfilled), out of which almost all take the form of external reviews (98%).
Recent research by the Climate Bond Initiative (CBI) has also found that post-issuance
external reviews and reporting are positively correlated. An issuer’s commitment to post-
issuance external reviews seems to go hand-in-hand with post-issuance reporting
106
and post-
issuance disclosure provides further transparency, ensures accountability and underpins the
credibility of green bonds. This in its turn provides reassurance to investors and supports their
involvement in the market.
Another analysis conducted by Natixis
107
of 97 global issuer and reporting profiles showed
that 64% of issuers had provided some sort of third-party opinion and impact measurements
were included in the scope of the external verification for 27%. Most of these post-issuance
verification statements (85%) were deemed to meet (or exceed) related professional standards
for the auditing profession (i.e., IFAC/ISAE 3000).
A report by Baker McKenzie
108
highlighted key issues impacting on the integrity of the
market and undermining investor trust, including a lack of contractual protections for
investors or ‘greenwashing’, the
quality and transparency of reporting metrics and issuer
confusion and fatigue. External reviewers can play an important role in mitigating these
issues by providing reassurance to investors and guidance to issuers on the green
characteristics of their investments.
The TEG highlighted a number of challenges in this sector in its report including variable
quality of reporting, potential lack of independence or management of potential and actual
conflicts of interest and the handling of potentially price sensitive information. The TEG
Natixis Green Bonds 3:0, January 2017.
Luxembourg Green Exchange: “Report on the analysis of green bond external reviews and reporting –
European Issuers”, draft paper prepared for EC TEG, 11 September
2018 (unpublished)
106
CBI: “Post-issuance reporting in the green bond market”, 2019 (Link)
107
Natixis Green Bonds 4.0, January 2018
108
Baker
McKenzie, ‘Critical
challenges facing the green bond market’
105
104
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recommended the establishment of an external reviewer framework to help address these
challenges. The TEG also noted the important role of external reviewers in reducing
informational asymmetries and mitigating the risk of greenwashing.
What do external reviewers do?
In its Guidelines for External Reviews
109
, ICMA describes four main categories of external
review services:
1) a
second party opinion
(‘SPO’) is an assessment of the issuer’s Green, Social and
Sustainability Bond issuance, framework or programme with the relevant Principles
with alignment assessed against all of the core components of the selected framework.
A second party opinion can also include an assessment of the issuer’s overarching
objectives, strategy, policy and/or processes relating to environmental and/or social
sustainability and an evaluation of the environmental and/or social features of the
types of Projects intended for the Use of Proceeds.
2) verification
the provision of an independent assessment of an
issuers’ compliance
against a designated set of criteria, typically related to business processes and/or ESG
criteria. Verification can focus on alignment with internal or external standard or
claims made by the issuer. Evaluation of the environmentally or socially sustainable
features of underlying assets can also be termed verification. Assurance or attestation
regrading an issuer’s internal tracking method for use of proceeds, allocation of funds
from ESG Bond proceeds, statement of environmental and or social impact or
alignment with reporting requirements may also be defined as verification.
3) certification
is when an issuer seeks to have its ESG Bond or associated framework
or Use of Proceeds certified against a recognised external ESG standard or label. A
standard or label defines specific criteria and alignment with these criteria is normally
tested by qualified, accredited third parties, which may verify consistency with the
certification criteria. A common type of certification in the green bond market is the
CBI certification, which checks alignment with the Climate Bonds Standard to ensure
that it is consistent with the goals of the Paris Climate Agreement to limit warming to
under 2 degrees.
110
4) ESG Bond Scoring/Rating
is when an issuer has its ESG bond or associated
framework or a key feature such as Use of Proceeds evaluated or assessed by
qualified third parties such as specialised research providers or rating agencies
according to an established scoring or rating methodology. The assessment may
include a focus on environmental and/or social performance data, relative to a
specified benchmark such as a 2-degree climate change scenario. Such a scoring or
rating is distinct from credit ratings.
Another way of categorising the types of review is according to its timing with regards to the
bond issuance event. According to this system, the two main types of external review are pre-
issuance and post-issuance.
Pre-issuance review
covers SPOs (as explained above), third
party assurance (similar to an SPO but performed by an accounting or audit firm), green bond
rating (similar to an SPO but performed by a rating agency), or pre-issuance verification,
109
110
ICMA: “Guidelines for green, social and sustainability bonds external reviews”, 2018 (Link)
CBI: “Certification under the Climate Bonds Standard”, 2020 (Link)
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which is necessary to be certified according to the Climate Bonds standard.
Post-issuance
review
covers second- or third-party review of allocation reports, review of impact reports,
and post-issuance verification, which is an assurance against the climate bonds standard.
Recent research by CBI shows a changing profile of external reviews in 2020, with Second
Party Opinions (SPO) clearly gaining share. They accounted for 83% of issuance in H1 2020
versus 60% in 2019
–
itself a relatively high share
–
as they become the norm in a market that
increasingly ‘demands’ some form of external review.
Figure 20 - SPO at highest share yet
111
Type of review What it covers
Service providers
Examples
Third party
Assurance reports state
Accounting / audit firms KPMG Assurance Report
Assurance
whether the green issuance
commissioned by IDBI
is aligned with a reputable
Bank
international framework,
Deloitte’s Assurance Report
such as the Green Bond
commissioned by CGN
Principles (GBP) or Green
Loan Principles (GLP)
Second Party
SPOs provide an assessment Environmental Social
DNV GL
Opinion (SPO)
of the issuer’s green bond
Governance (ESG) service SPO commissioned by Arise
framework, analysing the providers (such as Oekom, AB
“greenness” of eligible
Sustainalytics, Vigeo
Sustainalytics’ SPO
projects/assets. Some also Eiris, DNV GL) and
commissioned by the
provide a sustainability
scientific experts (such as Development Bank of Japan
"rating", giving a qualitative CICERO, CECEP
Kestrel Verifier's
indication of aspects of the Consulting). Other
SPO commissioned by the
issuer's framework and
environmental consultants Sacramento Municipal
Utility District ("SMUD")
planned allocation of
and assessment
proceeds
organisations.
111
CBI: “Sustainable debt – global state of the market H1 2020”, 2020 (Link)
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Green Bond
Rating
Pre-issuance
verification of
the Climate
Bonds
Certification
according to
the Climate
Bonds Standard
Moody’s Green Bond
Rating assigned to Banco
Nacional de Costa Rica’s
USD500m green bond
S&P’s Green Evaluation
assigned to Province of La
Rioja’s USD200m green
bond
Confirms that the use of
Verifiers approved by the Oekom (now known as ISS
proceeds adhere to the
Climate Bonds Standard
ESG) ’s independent
Climate Bonds Standard and and Certification Scheme verification statement of
sector specific criteria (e.g.
ABN Amro’s EUR500m
green bond
Low Carbon Transport)
A number of rating agencies Rating agencies such as
assess the bond’s alignment Moody’s, S&P Global
with the Green Bond
Ratings, JCRA,
Principles and the integrity R&I, RAM Holdings
of its green credentials
First Environment’s
independent verification
statement of Los Angeles
County MTA’s USD471m
green bond
Table 29: Examples of pre-issuance review (source: Climate Bonds Initiative)
Type of review
What it covers
Service providers
Second party or third Assurance of allocation of Audit firms, ESG
party assurance report proceeds to eligible green research service
projects.
providers (Oekom,
Sustainalytics) and
scientific experts
Impact reporting
Reporting that seeks to Issuer, Audit firms,
quantify the climate or
ESG research service
environmental impact of a providers (Oekom,
project/asset numerically Sustainalytics) and
scientific experts
Examples
DNV GL 2018 Assurance
report for NAB’s
AUD300m 2014 green
bond
HSBC’s green bond report
Iberdola’s
Sustainability
Report 2016 and
PWC’s
independent Assurance
report (pg. 266)
Berlin Hyp Green Bonds
Impact Report (June 2016)
Post-issuance
Assurance against the
Verifiers approved by
EY’s post-issuance
verification of the
Climate Bonds Standard, the Climate Bonds
report
for Westpac’s
Climate Bonds
including the allocation of Standard and
AUD500m 2016 green
Certification according proceeds to eligible green Certification Scheme bond
to the Climate Bonds projects and types of
KPMG’s post-issuance
Standard
green projects
report
for Axis Bank’s
USD500m 2016 green bond
Table 30: Examples of post-issuance review (source: Climate Bonds Initiative)
Current Market Makeup:
Research suggests that external reviews can help reduce informational asymmetries for
market participants. For issuers to have a green bond voluntarily verified by an external
reviewer has become common practice with the relevant reports typically made available to
investors before or at the time of issuance. Guidance on voluntary verification has been
issued by ICMA (Guidelines for External Reviews) as well as CBI (Assurance Framework)
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which both allow for the certification of green bonds with their respective standard. Yet,
harmonisation of concepts and definitions of what is ‘green’ are also important prerequisites
for mainstreaming green financing.
Currently the voluntary external review market is divided between four types of
organisations:
1)
Non-financial rating agencies and sustainability consultancies
specialised in second
party opinions: Vigéo-Eiris
(recently acquired by Moody’s),
Sustainalytics, ISS-oekom
and the research organisation CICERO;
2)
Big-four audit firms
providing mostly post-issuance
verification or “assurance” services:
Deloitte, KPMG, PwC, EY;
3)
Credit Rating Agencies:
Moody’s, S&P Global Ratings, Fitch, as well as more
recently
Beyond Ratings
112
; and,
4)
Global technical inspection and certification bodies:
e.g. DNV-GL, Bureau Veritas,
TÜV, etc.
According to research conducted by CBI in 2018, the external review market was dominated
by a group of mainly European service providers currently holding more than 90% of the
market and six specific providers account for almost 75% of the market
–
CICERO,
Sustainalytics, Vigeo Eiris, EY, ISS-oekom and DNV GL.
113
(see Figure 21).
Figure 21 - Breakdown of green bond issuance in Europe according to external reviewer (EUR bn)
112
ESMA has registered Beyond Ratings SAS as Credit Rating Agency in March 2019. Beyond Ratings was
acquired by London Stock Exchange Group in June 2019.
113
CICERO: “Milestones 2018. A practitioner's perspective on the Green Bond Market”, 2018 (Link)
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The tables below
114
list the current pool of external review service providers in Europe and
maps their relationship with existing accreditation, approval and/or supervisory regimes in
areas related to the green bond external review market that could be used as a model/template
for the accreditation of verifiers. The top 5 players in the external review market in Europe in
2017 (according to CBI data) are highlighted in bold.
114
From
June 2019 TEG report
Annex 5, p. 72-73
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Table 31 - External review service providers in Europe. Source: TEG report on an EU GBS (June
2019)
TEG Report:
According to the TEG, while post-issuance external reviews can be perceived as costly and of
variable quality or added value to the issuer and/or investor, they can also strengthen the
credibility of information published by the issuer, protect the integrity of the market and
reduce the risk of green washing.
The TEG report also highlighted a number of other issues regarding existing market
practices:
a)
b)
c)
d)
e)
f)
g)
h)
Relatively high(er) transaction costs for issuers (if not offset by a pricing advantage);
Potential lack of independence in perceived or actual conflicts of interest;
Limited disclosure of environmental performance criteria;
Time consuming and resource intensive process to develop robust sector-specific
criteria for certification schemes;
Ambitious certification standards might make it difficult to promote adoption;
Post-issuance assurance statements do not systematically cover the environmental
impacts of the projects funded by the bond;
Post-issuance verification might result in requalification of the green bonds and there
is a risk for investors that their investments are no longer deemed green; and,
Post-issuance verification can give rise to confidential price sensitive information that
must be managed with due consideration.
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TEG Recommendation:
The TEG recommended the EU GBS incorporate an external review component to encourage
standardisation of the process to determine alignment with the EU GBS and to accredit
external reviewers under ESMA’s supervision. This is intended to promote the development
of the European green bond market by improving the quality and standardisation of the
review process for the EU GBS while ensuring a level playing field across the Union.
Under this regime, external reviewers would be subject to registration/authorization including
requirements covering (i) professional codes of conduct related to business ethics, conflicts of
interest and independence; (ii) professional minimum qualifications and quality assurance
and control; and (iii) standardised procedures for external reviews.
By requiring the issuing of a second opinion and post-issuance reporting by an independent
third party, the EU Green Bond Standard (EU-GBS) aligns with best market practices and
provides assurance to both issuers and investors that their investments are aligned with the
EU Taxonomy, in particular assessing investments’ compliance with the Do No Significant
Harm (DNSH) criteria.
Third Country Reviewers:
Prudential concerns, in particular in terms of investor protection and market integrity, yield to
consider certain conditions for third country reviewers seeking to offer external review
services for any future EU GBS regime.
The EU GBS will establish a new standard of excellence for green bonds, with a requirement
for pre- and post issuance review by an independent external reviewer. While section 5.4
addresses the regulatory treatment of such reviewers, it is nonetheless clear it would be
important for both market integrity and investor protection to ensure that external reviewers
are sufficiently qualified, objective and reliable when providing their services. For this
reason, any registration requirement for such reviewers would form an integral part of
securing the market’s trust and facilitating
the usability of such a standard. Both issuers and
investors would rely on such an independent evaluation of the bond’s alignment with the EU
Taxonomy to price and invest in these bonds.
In the event an external reviewer engages in misconduct and the relevant bonds lose their EU
GBS status, not only would investor trust in the EU GBS be undermined, investors could
incur financial losses as they may be forced to sell the bonds because they are no longer
considered green investments. This could also endanger overall market integrity if a number
of bond issuances were impacted with potential implications for the broader green bond
market. The diversion of capital from legitimate green investments would also reduce the
effectiveness of the EU’s policy interventions
to support the achievement of its goals under
the European Green Deal.
The considerations above hold true whether the reviewer is based in the EU or in a third
country. For this reason, any regime for external reviewers from third countries would need
to ensure that the supervisor of these entities (which in the EU will be ESMA) can effectively
fulfil their supervisory role with respect to those third country entities, in particular to ensure
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that the external reviewers conduct themselves in a way that does not damage market
integrity and confidence in the EU GBS or negatively impacts on the interests of investors in
EU GBS bonds. The importance of this requirement will increase proportionately with the
size of the market, as the impact of a hit to market integrity will increase with the extent of
usage of the EU GBS.
While the majority of existing external reviewers are based in the EU or the European
Economic Area, provision should be made in the proposed framework to facilitate third
country reviewers that wish to assess compliance with the EU GBS. Existing EU frameworks
contain a number of third country mechanisms such as recognition or endorsement.
At the same time, it is important to ensure that ESMA can effectively fulfil its supervisory
role with respect to third country entities, in particular to ensure that the external reviewers
conduct themselves in a way that does not damage market integrity and confidence in the EU
GBS or negatively impacts on the interests of investors in EU GBS bonds. The importance of
this requirement will increase proportionately with the size of the market, as the impact of a
hit to market integrity will increase with the extent of usage of the EU GBS.
Allowing a third country reviewer to designate a legal representative in the Union or allowing
an EU based external reviewer to endorse the work of the third country reviewer are viable
options that could be implemented in the proposed regulation while still maintaining the
effectiveness of ESMA’s supervisory function
and an adequate degree of investor protection.
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Annex 10: Sovereign bonds
1.
M
ARKET SITUATION
Sovereign green bond issuance in the EU started in December 2016 with the issuance by
Poland of an inaugural green bond to the value of €750 million. This
was followed by
France’s issue of a €7 billion green bond in January 2017, and since then many other
countries have followed suit, in Europe and worldwide. To date, 10 EU Member States have
issued sovereign green or sustainability bonds, including Belgium, Netherlands, Ireland,
Germany, Sweden, Lithuania, Luxembourg, Hungary, as well as France and Poland.
Figure 22- Sovereign green bond issuance (source: OECD)
Worldwide, according to the OECD, 16 sovereigns have now issued green bonds to finance
green projects in governments’ budgets, exceeding USD 80 billion. Euro area issuers account
around 75% of the total issuance. Amid the COVID-19 pandemic, sovereign green-bond
issuers have kept the issuance momentum in 2020 with several re-openings and a few
inaugural issuances, including Germany and Sweden.
Despite its rapid growth, the size of the sovereign green bond market is quite small compared
to traditional bonds. For example, in the OECD area, sovereign green bonds account for only
0.1% of all government debt securities
115
. However, the sovereign green bond market can be
expected to keep growing over the longer horizon, as an increasing number of governments
assess green bond issuance as a valuable tool.
Why do sovereigns issue green bonds?
A sovereign may decide to issue a green bond for a range of reasons:
115
OECD: “Sovereign Borrowing Outlook for OECD Countries”, 2020 (Link)
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Display leadership on climate change and sustainability.
Signal commitment to sustainable, low-carbon growth strategies, which will have a
positive impact on the private sector investment case for green sectors.
Support the local sustainable finance ecosystem.
Fund climate-related investments at a cheaper cost
116
Encourage collaboration between different departments in government (traditionally
treasury and sustainability), and improve government tracking of climate-related and
sustainable expenditure, to support a long-term low-carbon growth strategy.
The specificities of sovereign green bonds
The process of issuing a sovereign green bond is similar to that of issuing a conventional
green bond. However, there are some additional steps, given the more complex organisational
nature of governments, the type of expenditures they can entail, and their debt’s benchmark
role in domestic capital markets.
While the green bond market to date has largely focused on financing tangible green assets,
such as wind farms, low-carbon buildings and railways through direct expenditures,
sovereign green bonds have introduced indirect expenditures, such as subsidies and
operational expenditures, into
the mix. For example, Poland’s green bond framework
includes expenditures in the form of “budget allocation” (for example for excise tax
exemption for renewable energy) and subsidies for all eligible sectors. The French green
bond has for the large part gone to financing operational and subsidy and tax-related
expenditures connected to the six eligible categories identified (see section 5 of this annex for
more detail).
Intangible assets, such as research and innovation, also appear more frequently in sovereign
bonds. These may be areas of investment that the private sector is less willing to undertake or
they may include public goods, such as research and data collection.
In addition, the following specificities of Sovereign green bond issuers, which might affect
their use of the EU GBS, have been mentioned by stakeholders:
Lack of project level overview of impacts:
It may be difficult for a sovereign to state
with certainty that all items funded are aligned with the Taxonomy, in particular the Do
No Significant Harm (DNSH) criterion. Sovereigns typically fund grant schemes, and are
not always in the supply chain for individual projects. Energy efficiency grants which are
distributed to firms in many different industries were mentioned as a potential example.
A preference for state auditors:
public issuers may prefer to use existing state agencies
specialised in government accounts rather than external third parties for the review of the
allocation of bond proceeds.
Legal restrictions on committing unspent proceeds:
In some cases, a forward-looking
approach to the allocation of green funds is not possible. This could be for example if the
For example, Belgium reported that they achieved a 2.5 basis point discount compared to regular sovereign
bonds at similar maturities, resulting in annual savings of €1.125 million.
According to media reports, the
French green sovereign bond due in June 2039 priced at 13 basis points over the 1.25% May 2036 French
sovereign bond. CBI: “Sovereign Green Bonds Briefing”, 2018 (Link)
116
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Green Bond Framework of a sovereign issuer cannot commit a Parliament or pre-empt
the final decision on the allocation of state funds.
Problems for smaller countries:
issuing EU GBS-aligned green bonds separately from
conventional bonds may result in reduced average issue size, and thereby reduced
liquidity for sovereign bonds, which contributes to higher costs of funding for the
sovereign.
This means that two types of flexibility may be relevant for Member States wishing to apply
the EU GBS: flexibility linked to the EU Taxonomy (i.e. on use of proceeds) and flexibility
linked to other requirements. These two will now be discussed in this order.
2.
P
OTENTIAL FLEXIBILITY
The EU GBS as proposed by the TEG requires use of proceeds to be 100% aligned with the
EU Taxonomy. Member States that responded to the targeted consultation on the EU Green
Bond Standard, either through their finance ministries or DMOs, were in general supportive
of the core components of the EU GBS as proposed by the TEG, and especially to alignment
with the Taxonomy, which they see as the main strength of the standard. At the same time, a
number of Member States agreed that a small amount of flexibility could be given to deviate
from the criterion of Taxonomy alignment for 100% of use of proceeds.
Although the EU is not legally allowed to deviate from the Taxonomy Regulation when
setting out standards for green bonds issued by corporates
117
, this restriction does not apply in
the case of Sovereign issuers. Accordingly, there is legal scope for affording a degree of
flexibility around the definition of eligible green proceeds in the case of potential sovereign
issuers of EU GBS green bonds. Several approaches are possible:
1) The TEG approach: applying the Taxonomy by relying on its fundamental principles
One potential approach would have been to follow the TEG, which proposed to rely on the
fundamental principles of the Taxonomy Regulation to verify that investments align with the
Taxonomy, instead of the Technical Screening Criteria, in certain cases. But in practice this
approach would have had certain paradoxical outcomes. Given that sovereigns and corporates
often ultimately fund the same economic activities, flexibility in the application of the
Taxonomy could lead to inconsistencies.
In particular, such flexibility could lead to the exact same economic activity being judged
differently based on the source of its funding. This could lead to unwanted outcomes, such as
allowing public actors to crowd out private actors by being able to offer Taxonomy-aligned
funding where the private sector is not. In order to avoid this inconsistency, it is not
recommended to give sovereigns the flexibility to interpret or apply the Taxonomy differently
to corporates.
2)
“Flexibility pocket” approach
Another potential approach is to allow Sovereign issuers to include as proceeds in their EU
GBS-aligned bond expenditure that has a positive environmental impact, but is not
Taxonomy aligned. Under such a “flexibility pocket” approach, the proceeds of the
117
Cf. Article 4 of the Taxonomy Regulation, see
discarded options
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sovereign EU GBS bond would be clearly divided into two parts: one part that would be
100% aligned with the criteria of Article 3 of the Taxonomy Regulation, and a second part
(the “pocket”) where there would be flexibility to diverge from the Taxonomy.
The size of this pocket would be capped, and subject to some minimum criteria: for example,
only economic activities not covered by existing Technical Screening Criteria under the EU
Taxonomy, for example because those criteria are not yet developed for a specific sector or a
specific environmental objective, would be eligible for the flexibility pocket. Furthermore,
economic activities would still need to (i) substantially contribute to one of the six
environmental objectives as set out in the Taxonomy Regulation, (ii) do no significant harm
to any of these objectives, and (iii) meet the minimum safeguards of the Taxonomy
Regulation.
The separation into two parts would facilitate the task for financial institutions holding these
bonds of disclosing Taxonomy-alignment under the Sustainable Finance Disclosures
Regulation.
118
Any use of flexibility would be accompanied by appropriate disclosures, to
ensure that investors are fully aware of its extent, and can discount the Taxonomy-alignment
of the bond accordingly.
Member States were consulted on the flexibility pocket approach using a targeted
questionnaire (see the next sub-section for full results).
Taxonomy-aligned
bond
part
of
the
Flexibility pocket
X percent
Share of the total
proceeds of the
100
minus
X percent
bond
Taxonomy Article 3:
-
Substantial
Contribution,
defined by TSCs.
Eligibility criteria
-
DNSH, as defined by TSCs
-
Minimum safeguards
(X = the size of the flexibility pocket)
as
More flexible criteria (see
proposals above)
Table 32 - Illustrative Model of use of proceeds of sovereign EU GBS-aligned green bond
Flexibility regarding reporting and review requirements
Taking into account the issues mentioned by sovereign respondents to the consultation,
potential flexibility for sovereign green bond issuers could also be possible with regards to
other aspects, such as the reporting and review requirements of the EU GBS.
In particular,
the following types of flexibility could be considered for sovereign issuers of EU GBS-
aligned green bonds:
118
Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on
sustainability‐ related disclosures in the financial services sector (Link)
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Allowing sovereign issuers to rely on internal state auditors instead of external third
parties for the review of the allocation of proceeds.
Allowing, if necessary, sovereign issuers and the reviewers of their EU GBS-aligned green
bonds to assess the alignment with the criteria of the Taxonomy Regulation based on the
terms and conditions of funding programmes, rather than at project level.
Exempting Sovereigns from some of the potential restrictions on the use of refinancing
(such as short look-back periods for eligible expenditure and potential bans or other
restrictions on refinancing).
3.
S
UMMARY OF RESPONSES TO QUESTIONNAIRE ON SOVEREIGN GREEN BONDS
Between 2/12 and 23/12 DG FISMA carried out a short consultation of members of the
Council’s Economic and Financial Committee (EFC) subgroup on European Sovereign Debt
Markets (ESDM) green bonds working group. The survey was also circulated to Members of
the Member States Expert Group on Sustainable Finance (MSEG), and respondents were
asked to coordinate their responses for each country.
The intention of the survey was to gauge the need and appetite for introducing flexibility
within the EU Green Bond Standard targeted specifically at sovereign issuers who wish to
make use of the Standard. Four types of flexibility were consulted about:
1. Flexibility around the use of proceeds: the questionnaire outline a proposal for a so-called
flexibility pocket which would allow MS issuers of EU GBS bonds to also include
Taxonomy non-aligned green expenditure in their use of proceeds, provided that certain
conditions were fulfilled, and within a limited percentage of total proceeds.
2. Flexibility to use state auditors instead of third party reviewers for external review of
allocation reports of the EU GBS proceeds.
3. Flexibility to assess (for the purposes of the EU GBS) the Taxonomy-alignment of
government funding programmes based on terms and conditions of the programmes
rather than the underlying projects.
4. Flexibility to operate with fewer restrictions on refinancing than in the corporate sector.
The consultation also asked Member States about their green bond issuance plans and their
estimates around the Taxonomy-alignment their previous and future green bonds issuance.
These responses should be interpreted in light of the fact that at the time of the consultation,
the delegated Acts for the Technical Screening Criteria of the Taxonomy for the climate
objectives were not yet adopted (i.e. their final form was not yet known), and the respective
delegated acts for the other four environmental objectives were not even available in draft
form yet.
The results should also be interpreted in light of the fact that while respondents were
answering questions about their actual or potential green bond issuance programmes in
December 2020, the estimated adoption date for a potential EU Green Bond Standard
initiative would be much later (potentially 2022, due to the need for co-legislators to reach an
agreement). It seems that not all respondents took this fact fully into account when providing
their responses.
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Respondents:
17 Member States responded to the consultation
119
, by providing feedback
either through their Ministries of Finance or through debt or financial agencies. In 7 cases,
Member States explicitly indicated that the Member State’s representatives in the Member
States Expert Group on Sustainable Finance had been consulted or were responsible for the
response.
Summary of answers:
Question 1: Have you issued or do you plan to issue green bonds?
Overall, a large majority of Member States were planning to issue or considering issuing
green bonds in the future:
Out of the 7 which had previously issued green bonds (NL, DE, LU, BE, FR, LT, IE), 4
were certain that they would reissue, 2 would potentially reissue by tapping their existing
framework, while 1 had no plans to reissue green bonds.
Among the 10 remaining respondents which had not yet issued green bonds, 2 were
actively preparing issuance, while 6 were considering issuing, and 2 stated they would not
issue green bonds.
Question 2: Were your previous green bond issuances Taxonomy-aligned? Will your
potential future green bonds be Taxonomy aligned?
A majority of green bonds issuers estimated that their bonds were potentially partially or fully
Taxonomy-aligned. Out of the 7 previous green bond issuers, 2 estimated that their green
bonds were potentially partially Taxonomy-aligned, 2 estimated that their green bonds were
almost or fully Taxonomy-aligned, while 2 respondents could not yet give an answer. Those
who could not yet answer cited the unfinalised status of the Taxonomy Delegated Acts and
the lack of time needed to perform the estimation (MS were only given about two weeks to
respond to the consultation, although additional time was given to those respondents who
asked for it). 1 previous issuer did not answer the question.
Summary of relevant responses to the survey:
MS having previously issued green bonds
green bonds were considered to be almost or fully Taxonomy-aligned
green bonds were considered to be potentially partially Taxonomy-aligned
could not yet give an answer
who did not answer the question
7 (100%)
2 (28%)
2 (28%)
2 (28%)
1 (14%)
A majority of future green bond issuers were aiming for Taxonomy alignment or indicated
that their bonds would be Taxonomy-aligned. Of the 9 respondents who gave an indication of
the Taxonomy-alignment of their future green bonds, 3 were considering Taxonomy-
alignment, 3 were aiming for Taxonomy-alignment, and 3 indicated that their green bonds
would be fully Taxonomy-aligned.
119
CY, NL, DE, DK, IT, ES, AT, LU, BE, FR, PT, LT, EE, IE, SI, RO, MT
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Summary of relevant responses to the survey:
MS answering the question of Taxonomy-alignment of their future green 9
bonds
(100%)
MS considering issuing Taxonomy-aligned green bonds
3 (33%)
MS aiming to issue Taxonomy-aligned green bonds
3 (33%)
MS indicating that their green bonds would be Taxonomy-aligned
3 (33%)
Question 3: Are there economic activities that you would wish to include in a green
bond which are not currently covered by the Taxonomy?
Respondents listed a number of economic activities which they believed were not covered by
the current draft Taxonomy Delegated Acts and should be included in these acts.
The most commonly cited activity was
basic research on the environment and
innovation,
with one MS specifying that they wanted subsidies to innovative companies
to be included in the Taxonomy. (3 respondents). For this activity, it is possible that the
three respondents were not aware that the most recent draft of the Taxonomy Delegated
Acts from the Commission (published in November 2020) includes research,
development, and innovation linked to the reduction of GHG emissions.
The two second most commonly cited activity (by 2 respondents each) were
flood
defences and climate finance.
The following activities were cited by 1 respondent each:
space technology for earth
observation, subsidies for public transport, fisheries, agricultural land, urban
greening, waste management facilities.
It is unclear to what extent these activities will
be covered, or not, by the Taxonomy Delegated Acts.
One respondents also mentioned that it is unclear to what extent
tax expenditures and
grants
will be covered.
1 respondent complained that in general,
SMEs
are insufficiently covered by the
Taxonomy Regulation. The respondent is interested in issuing small-sized green bonds to
help SMEs issue debt instruments.
Questions 4-6: Need for flexibility for sovereign users of the EU GBS? What do you
think of the idea of a flexibility pocket as explained in the consultation document?
Would you prefer an alternative approach?
MS that answered the question regarding the flexibility pocket
16 (100%)
MS in favour of flexibility pocket
4 (25%)
MS potentially in favour of the flexibility pocket
3 (19%)
MS not in favour of the flexibility pocket, but in favour of general flexibility 3 (19%)
for public and private sector
MS not in favour or sceptical to the flexibility pocket
6 (38%)
While questions 4 to 6 asked about the Flexibility pocket approach specifically, many
respondents also provided their views on other forms of flexibility, including forms of
flexibility that were not covered by the consultation questions for due to legal reasons (e.g.
flexibility which would also apply to private issuers) or a lack of practical feasibility (e.g.
allowing public and private actors to apply different technical Screening Criteria under the
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EU GBS). The summary below focuses on the responses given with regards to the flexibility
pocket itself.
The following arguments were given
in favour of the flexibility pocket:
-
-
-
-
-
-
The flexibility pocket could extend the Taxonomy by covering activities that enable those
in the Taxonomy, or those not yet included in the taxonomy, such as those linked to new
technologies.
Flexibility could simplify issuance.
Flexibility pockets are not desirable but seem necessary given that the Taxonomy criteria
are not published for all Green expenditure or may not be appropriate for sovereigns.
Some flexibility will be necessary if Taxonomy application to sovereigns is not clarified.
Activities that are Taxonomy aligned in principle but without TSCs should still be
covered, this is crucial with regards to principle of technological neutrality.
MS may not be able to fully implement the Taxonomy for reasons beyond its control.
The following arguments were given
against the flexibility pocket:
-
The flexibility pocket implies a risk of being negatively perceived by investors. Investors
may doubt whether the flexibility pocket is truly green, and may therefore delete the
flexibility pocket from their own green reporting or refrain from buying the bond
altogether. Alternatively, the ‘pocket’ approach could create a bifurcated market for
sovereign green bonds, with some being considered green and others ‘almost’ green,
which is not desirable.
Sovereigns should set the bar for the use of the green bond standard for other issuers to
follow. Favouritism towards Sovereigns could damage the credibility of the GBS.
It would reduce clarity over use of proceeds, and introduce more complexity.
It could undermine the legal certainty and transparency of the EU GBS. By damaging
these attributes of the EU GBS, which are two of its main intended benefits and key to
avoid greenwashing, the flexibility pocket would risk making the EU GBS an undesirable
standard and thereby reduce its take-up by markets.
The added value is small or non-existent, as issuers would likely seek to limit the size of
their flexibility pocket for signalling purposes.
Rather than have an extensive use of pockets it might be better for Sovereigns not to use
the voluntary standards until they are better aligned with sovereign issuance.
-
-
-
-
-
Question 7: Whether sovereigns should be given flexibility to rely on State auditors or
another state agency specialised in reviewing government accounts and public
expenditure when preparing their allocation report, instead of an independent third
party?
In favour:
MS were broadly in favour of such flexibility, as they deemed it important to
allow smaller sovereign issuers to cut costs and to use available national expertise, as State
auditors have good knowledge of state accounts, and as this is current practice among some
MS that have issued green bonds (e.g. NL). Among those in favour, a significant minority of
MS expressed the view that such flexibility should only be afforded under certain conditions,
such as making sure the state party has the required knowledge and skills, and that they
would have to be guaranteed independent.
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Against:
A small minority of MS were against such flexibility, arguing that the use of an
impartial third party expert is a healthy principal, and that there could be some bias in the
analysis by state auditors.
Question 8: Whether sovereigns should be allowed to demonstrate Taxonomy alignment
by assessing only the terms and conditions of a given programme or grant, rather than
the individual projects funded under those terms?
In favour:
Overall, there was a large majority in favour of allowing Member States to use the
terms and conditions of a funding or spending programme to demonstrate Taxonomy-
alignment for the purposes of eligible expenditure for the EU GBS, as opposed to project-by-
project information.
Respondents explained that if the terms and conditions of a given program were adequately
taxonomy aligned, then the grants or projects in the program would be as well, as States are
responsible for having their policy measures properly implemented. They also argued that a
certain degree of reliance on terms and conditions and existing audits and controls is
unavoidable, as the nature of sovereign expenditure activity is broad and is generally viewed
by the debt capital markets in that way. Among those who were in favour, about half argued
that Taxonomy-alignment on project-level should still be followed as a goal, and flexibility
should only be used when project-level info is not available and the terms and conditions are
well-developed.
Against:
Only a very small minority of MS were sceptical to such flexibility, citing a
reluctance to differentiate public and private sectors within the EU GBS.
Question 9: Whether sovereigns should be exempt from potential restrictions on
refinancing that would apply to corporate issuers? The question also asked for general
views on refinancing and look-back periods.
Member States answered this question in various ways, and often by giving their views on the
broader issue of how to deal with refinancing and look-back periods of assets or expenditure,
rather than expressing a view on the subject of specific flexibility for sovereign issuers.
MS were divided, or unsure, on the issue of whether flexibility was needed. This may be
because the question did not specify the type of rules that were foreseen for look-back
periods and refinancing, so MS did not know against what rules the hypothetical flexibility
would apply.
Overall, MS indicated that they were not in favour of a ban on refinancing, but believed there
should be a cap on the look-back period for operating expenditure to be eligible, and this
should be about 2-3 years.
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4.
A
NALYSIS
: C
OMPARISON
S
TANDARD
OF KEY
EU S
OVEREIGN
GREEN BONDS AND THE
EU G
REEN
B
OND
Overview of selection of EU Sovereign bonds issued so far
Member State
Poland
Issuance date and amount
1st issue €750M (Dec 2016) maturity 2021
2nd issue €1 bn (2018) maturity 2026
3rd issue €2 bn (Mar 2019) (two tranches
-
maturity 2029 and 2049)
1st issue €7 bn (Jan 2017).
Regular taps since creation to ensure the
same liquidity as for other OAT. In Feb
2020, the outstanding stands at €22,659
million.
1st issue €4.5 bn (Feb 2018) tenor: 15 years
1st issue
€ 5,985 million (May 2019)
2nd issue (reopening) € 1,370 million (Jan
2020)
1st issue € 3 bn (Oct 2018)
2nd issue € 2 bn (Oct 2019)
1
st
issue €1.5 bn (Sep 2020)
Standard
used
ICMA GBP
Additional standard used
France
ICMA GBP
TEEC/greenfin label, which
“inspired by” the CBI taxonomy
is
Belgium
Netherlands
Ireland
Germany
Luxembourg
ICMA GBP
ICMA GBP
ICMA GBP
ICMA GBP
ICMA GBP
CBI
Taxonomy
(obtained external certification of
bond’s alignment with CBI).
“designed
to be in compliance with
important elements of the EU GBS”.
-
TEG draft Taxonomy (“fully
aligned”)
- - EU Taxonomy (aligned
on
“best
effort
basis”).
-
Designed to comply with TEG’s EU
GBS.
The following table compares the key aspects of the sovereign green bonds issued so far with the
requirements of the EU Green Bond Standard, and assesses the gap.
MS green bonds
Eligible
expenditures
and screening
criteria (% of
eligible green
expenditures
indicated
when
available)
FR:
- Tax credits (33%), investment (7%), operating
expenditures (33%), and intervention expenditures
(27%).
Assets include tangible assets (real estate, land,
infrastructure) and intangible assets (systems and
organisation, applied research and innovation, scientific
knowledge).
- Can be directed at state agencies, local authorities,
companies, and households.
- Inter-ministerial working group selects eligible green
expenditures.
- TEEC label
120
has been used as a reference
Analysis and comparison with draft EU
GBS
Economic activities shall be aligned with
EU Taxonomy:
5.
Substantial contribution to one out
of six environmental objectives
Demonstrate that expenditure is
aligned with sector-specific technical
screening criteria for substantial
contribution, as set out in the
Taxonomy Delegated Regulation
121
.
6. Ensure that economic activities do-
no-significant harm to five other
environmental objectives
Demonstrate that expenditure does
NL:
not breach sector-specific screening
- Direct investment expenditures, subsidies, fiscal
criteria for Do-No-Significant-harm,
measures (tax credits), and selected opex.
The French “Transition Energetique et Ecologique pour le climat“ (TEEC) label from 2015 is inspired by ICMA’s Green Bond
Principles and the Climate Bond Taxonomy (Link)
121
These criteria represent at least 93.5% of direct climate based emissions.
120
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- For each category, eligible central government budget
as set out in the Taxonomy Delegated
articles are listed.
Regulation.
- Expenditure outside these articles can be eligible, 7.
Ensure compliance with minimum
provided that CBI taxonomy is met.
social safeguards
Ensure compliance with the principles
and rights set out in the eight
LU:
Detailed “eligibility criteria” in Appendix 1 of
fundamental conventions identified in
framework, which are aligned with EU Taxonomy
the ILO’s declaration on Fundamental
TSCs.
Rights and Principles at Work. EU
Member States have ratified these
conventions.
DE:
No screening criteria. An Inter-Ministerial Working
Group (IMWG) will select eligible green expenditures.
The question of specific flexibility with
respect to Taxonomy-alignment was
asked to MS in the context of the
PL:
- Budget allocations (including excise tax
questionnaire on sovereign bonds and the
exemptions), subsidies and projects.
EU GBS. See section 4.4 of this annex.
BE:
Investment expenditures (66%), operating
expenditures (26%) and tax expenditures (8%).
Financing and FR:
- Expenditures from the previous year, current year and
refinancing
potentially future years are included; the percentage of
allocation is disclosed.
- More than 50% should be related to current or future
budget.
Draft EU Green Bond Standard is
designed to allow financing or refinancing
of eligible green expenditures.
There would be specific requirements
related to capital/operating expenditures
and look-back periods.
NL:
Finance or refinance expenditures which contribute
to climate mitigation and/or adaptation. At least 50% of Most Member state green bond
frameworks impose stricter restrictions on
proceeds for current or future budget years.
refinancing than the draft EU Green Bond
LU:
Financing of eligible expenditure, and refinancing Standard.
of eligible expenditure with a 3-year look back period to
The question of specific flexibility with
avoid refinancing old assets.
respect to refinancing was asked to MS in
DE:
100% refinancing: An amount equal to yearly the context of the questionnaire on
proceeds will be fully allocated to the previous years’
sovereign bonds and the EU GBS. See
eligible expenditures. In any given year, green bonds section 4.4 of this annex.
can only be issued once sufficient amount of eligible
expenditure from the previous year is known.
PL:
Financing and re-financing of eligible
projects is allowed.
BE:
Proceeds can be used for expenditures in the
current budget, expenditures from the budget the year
preceding the green bond issuance/tap date, and
investments in green investment funds made maximum
2 years before the issuance/tap date.
FR:
Bond framework predates the Taxonomy
Alignment
Four objectives:
with
- climate adaptation
Taxonomy
-
climate
mitigation
and
protection
of
biodiversity
environmental
-
- Reduction of air/water/soil pollution
objectives
supported
NL:
Bond framework predates the Taxonomy
The question of specific flexibility with
respect to Taxonomy-alignment was
asked to MS in the context of the
questionnaire on sovereign bonds and the
EU GBS. See section 4.4 of this annex.
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Two objectives:
- Climate adaptation
- Climate mitigation
LU:
Complies “when applicable” with TEG’s
taxonomy, “or any updated version, on best effort
basis”. (see separate case study)
Sustainalytics assessed the compliance of the LU
sustainable bond framework with the EU Taxonomy:
- 19/23 categories of spending listed in the eligibility
criteria comply with applicable TSCs for “significant
contribution”
- 20 align or partially align with Do-No-Significant-
Harm TSCs.
DE:
Categories of eligible green expenditures are
mapped with the six environmental objectives of the
Taxonomy. “Designed to be in compliance with
important
elements
of
draft
EU
GBS”
PL:
IE:
BE:
focusing on climate change mitigation and
adaptation (96% of available eligible green
expenditures), natural resource protection (3%) and
biodiversity (1%).
Categories of FR:
1. buildings
eligible
expenditure &
2. Transport
3. Energy (incl. smart grid)
Technical
4. living resources (org. farming, biodiversity, env.
screening
protection)
criteria
5. Climate adaptation
6. Pollution & eco-efficiency (monitoring, research,
circular
econ.)
7. (Transversal)
NL:
1. Renewable energy (all spending to be in line with
CBI Taxonomy.)
2. Energy efficiency
3. Transport (rail)
4. Climate adaptation & Water management
LU:
1. Transport
2. Energy transition
3. Green buildings
4. Climate finance and R&D
5. Protecting the environment
6. Waste & wastewater management
The question of specific flexibility with
respect to Taxonomy-alignment was
asked to MS in the context of the
questionnaire on sovereign bonds and the
EU GBS. See section 4.4 of this annex.
DE:
1. Transport
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2. Energy and industry
3. International Cooperation
4. Research, innovation, and awareness-raising
5. Agriculture, forestry, biodiversity
PL:
1.
Renewable energy
2.
Clean transportation
3.
Sustainable agriculture operations
4.
Afforestation
5.
National parks
6.
Reclamation of heaps
BE:
1. Energy Efficiency
2. Clean Transportation
3. Renewable Energy (excluding hydro > 25MW)
4. Circular Economy
5. Living Resources and Land Use.
Allocation reporting :
The EU Green Bond Standard would
FR, NL, LU, DE, PL, IE, BE :
publish yearly likely require the publication of yearly
allocation
reports allocation reports, and at least one report
on environmental impact during the
IE’s allocation reports include details on the total
lifetime of the bond.
amount allocated to eligible green projects, the total
amount allocated per eligible green category and the This is already common practice for all
EU Member state green bonds.
remaining unallocated total amount.
NL’s allocation report contains an overview of the
Assessment: EU Member States would
allocation of the issued green bond to the main
be able to align with this requirement.
categories of eligible green expenditures, a breakdown
of allocated proceeds per main category of eligible
green expenditures, a breakdown of allocated proceeds
per type of expenditure, the amount of unallocated
proceeds.
Impact reporting:
FR:
Output report and ex-post reporting on
environmental impact, prepared by a Green Bond
Evaluation Council. The evaluation council issued two
reports: one is the evaluation of the credit tax for energy
transition and another on the subsidies granted to the
French waterway network.
NL:
Yearly impact report, starting in issuance year +1,
based on existing publicly available reporting of the
results and impact of eligible green expenditures,
including where feasible on specific results (ex: number
of projects) and environmental impact indicators (ex:
avoided CO2 emission) related to the green eligible
expenditures. Also provides information on climate
change related impact indicators for the NL (ex:
percentage of renewable energy production).
LU:
Impact report, with examples of metrics listed in
framework
DE:
Sectorial impact reporting (published at least once
Reporting
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in each bond lifetime).
PL:
Impact reporting is included in the allocation report
where possible.
IE:
Intends to publish impact report in summer 2020
BE:
Impact report published the year after issuance.
External
review
Second Party Opinion:
LU, PL, BE, and IE:
SPO by Sustainalytics
FR:
SPO and compliance review by Vigeo-Eiris
(checking
alignment
with
TEEC
label)
DE:
SPO by ISS ESG
NL:
SPO by Sustainalytics and Formal certification by
CBI
Review of allocation report
IE
and
NL
rely on independent internal auditor of the
State for the verification of the allocation of the use of
the proceeds.
FR:
Allocation report reviewed by internal auditor and
KPMG
NL:
Verification of conformity of allocation with CBI
taxonomy by Sustainalytics.
LU:
Yearly external review of allocation report
DE:
Yearly external review of allocation report
PL:
Moody’s to give an opinion of the allocation of
proceeds, the reporting, the organisational approach and
the environmental impact.
BE:
Independent audit firm to review annually the
allocation report.
The EU Green Bond Standard would
likely require that:
-
The alignment of green bonds with
EU GBS standard should be verified
by an external company.
-
The final allocation report should be
verified by external auditor.
-
External reviewers are registered.
Under the EU GBS, external review of the
impact report would not be required, but
recommended.
The system for registering external
reviewers does not yet exist. See Annex 8
for an assessment of this.
Most Member States already comply with
the two first requirements listed above in
their green bonds. However, there are
some exceptions:
NL and IE use their own internal auditor
instead of an external third party to
review the allocation report.
Review of impact report
Assessment: EU Member States would
FR:
“Green bond evaluation council” will evaluate
be able to align with this requirement.
impact reports (with Paris agreement as reference)
However there may be a need for some
flexibility with regards to the entities
that can review the allocation report,
by allowing Member States to use
internal state auditors for this purpose.
The question of specific flexibility with
respect to external review of the
allocation report was asked to MS in the
context of the questionnaire on sovereign
bonds and the EU GBS. See section 4.4 of
this annex.
FR:
Nuclear activities, armament, any expenditure The question of specific flexibility with
mainly related to fossil fuel.
respect to Taxonomy-alignment was
asked to MS in the context of the
NL:
Fossil fuel production, power generation, nuclear, questionnaire on sovereign bonds and the
EU GBS. See section 4.4 of this annex.
defence sector.
LU:
Nuclear
power
generation.
Production,
transportation, and power production from fossil fuels.
Weapons, strong alcohol, tobacco, gambling, other
illegal
Safeguards: Pre-existing social and env. safeguards in
national law
Exclusions
and
safeguards
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DE:
Armaments, defence, tobacco, alcohol, gambling. Fossil
fuels (including coal). Nuclear (production, transport,
storage,
power generation, …)
Already excluded from Federal budget: any expenditure
violating EU Charter of Fundamental Rights
PL:
Fossil fuel for power generation and transportation, rail
dedicated to transportation of fossil fuels, nuclear power
generation,
palm
oil
operations,
weapons/alcohol/gambling/adult entertainment, large
scale hydro projects (>20MW), transmission systems
where >25% of electricity transmitted is fossil-fuel
generated, use of biomass in cogeneration coal plants.
BE:
Nuclear, armament and any expenditure mainly
related to fossil fuel.
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5.
C
ASE STUDY
: L
UXEMBOURG
’
S
S
USTAINABILITY BOND FRAMEWORK
On 2 September 2020, Luxembourg published its Sustainability Bond Framework, Europe’s first for a
sovereign. A few days later it sold its first Sustainability Bond for €1.5 billion. The issue
of a
Sustainability bond, rather than a green bond, allows Luxembourg to combine green and eligible
socially beneficial expenditure as proceeds for the bond. The sovereign bond was aligned with
ICMA’s Sustainability bond principles.
Taxonomy alignment
Luxembourg also claims that its sustainability bond is fully in line with the recommendations of the
final report of the Technical Expert Group (TEG) on the EU Taxonomy, and states that the framework
has been designed to comply with the TEG’s draft European
Green Bonds Standard. As part of its
alignment with the Taxonomy, Luxembourg’s sustainability bond framework makes use of the
Taxonomy’s draft technical screening criteria developed by the TEG (which form the basis for the
final criteria adopted by the Commission). The framework also states that the bonds would comply
with the updated criteria, as they evolve from draft to final adoption, on a best effort basis.
In its annex 3, the bond framework lists the eligibility criteria for green expenditure, which cover the
following sectors: Construction, Energy, Transport, Waste, Water management, Climate finance and
R&D. Along the framework, Luxembourg published a report by external reviewer Sustainalytics that
assesses the eligibility criteria in Luxembourg’s
framework against the draft Taxonomy.
The results of the Taxonomy assessment for the framework were as follows:
-
On Substantial contribution to climate mitigation/adaptation:
Of the eligibility criteria
assessed for 23 different use of proceed categories, 19 were found to be in line with the EU
Taxonomy TSCs, whereas four could not be assessed as no corresponding TSCs exist (yet). No
categories were determined to be not aligned.
-
On Do No Significant Harm (DNSH) to the six environmental objectives:
Among 20
categories of spending where Sustainalytics was able to map directly to DNSH TSCs: 10 are
aligned and 10 partially aligned with the applicable DNSH criteria.
Minimum safeguards:
Sustainalytics also stated its opinion that the activities and projects to be
financed under the Framework will be carried out in alignment with the EU Taxonomy’s
Minimum Safeguards.
-
Categories that could not be assessed either cannot be mapped to NACE activities in the Taxonomy
and/or are designed primarily to advance an environmental objective for which TSCs do not exist yet
in the Taxonomy. For substantial contribution, these four were: (1) production and restoration of
terrestrial and inland freshwater ecosystems, biodiversity, habitats, and soil, (2) development of water
and wastewater management systems, (3) international climate finance, and (4) research, development
and innovation focusing on climate mitigation and adaptation. For DNSH, the category of waste and
wastewater management could be assessed, but not the three others.
For more information, see Table 33 below.
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Table 33 - Alignment of eligibility criteria with draft EU Taxonomy (extract from Sustainalytics
report on Luxembourg’s Sustainability bond framework)
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Annex 11: ESG Disclosure obligations
This annex covers the existing and future disclosure and reporting requirements related to
sustainable activities, and in particular alignment with the EU Taxonomy, and which are
relevant for the EU GBS:
-
-
-
-
The Non-Financial Reporting Directive
The Ecolabel Regulation
The Sustainable Finance Disclosures Regulation
The EU Climate Benchmarks Regulation
Title
The Non-Financial Reporting Directive
Legislative or Legislative
non-
legislative?
In 2014 the EU agreed the Non-Financial Reporting Directive (Directive
Brief
description of
2014/95/EU), which amended the Accounting Directive (Directive 2013/34/EU).
policy
or
The Non-Financial Reporting Directive (NFRD) imposed new reporting
requirements on certain large companies. Companies under the scope of the
legislation
NFRD had to report according to its provisions for the first time in 2018, for
information covering financial year 2017. As required by the NFRD, in 2017 the
Commission published non-binding guidelines for companies under the scope of
the Directive. In 2019, the Commission published additional guidelines,
specifically on reporting climate-related information. If companies use reporting
frameworks, then they have to specify which frameworks they have used. The
NFRD does not, however, require the use of a reporting framework or standard.
The NFRD applies to large public interest entities with more than 500
employees.10 In practice this means that it applies to large EU companies with
securities listed in EU regulated markets, large banks (whether listed or not) and
large insurance companies (whether listed or not)
–
all provided they have more
than 500 employees. The NFRD exempts the subsidiaries of parent companies
from the reporting obligation, if the parent company itself reports the necessary
information on a consolidated basis. We estimate that approximately 11 700
companies are subject to the reporting requirements of the NFRD.
The NFRD identifies four non-financial
‘matters’: environment, social and
employee matters, human rights, and anti-corruption and anti-bribery. With
regard to those four matters, it requires companies to disclose information about
five business concepts: business model, policies (including due diligence
processes implemented), the outcome of those policies, risks and risk
management, and key performance indicators (KPIs) relevant to the business.12
Annex 8 provides illustrative examples of the kind of information that companies
could be expected to disclose under the NFRD.
Companies under the scope of the NFRD are required to disclose information “to
the extent necessary for an understanding of [their] development, performance,
position and impact of [their] activity.” The reference to “impact” represented a
significant innovation: it introduced a double materiality perspective, whereby
companies have to report information not only on how non-financial issues affect
the company (“outside-in” perspective), but also regarding the impact of the
company itself on society and the environment (“inside-out” perspective).
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The NFRD requires the auditor to check that the company has provided a non-
financial statement, but does not require the auditor to assure the content of the
information. However, Member States may require assurance on the content of
the information reported and three Member States (Italy, Spain and France) have
used this option.
Furthermore, on 21 April 2021 the Commission adopted a proposal to review the
NFRD, which currently imposes reporting requirements on large public interest
entities with more than 500 employees. It is expected that this review will expand
the scope of companies falling under the NFRD from 11 700 to close to 50 000
companies. The Commission also proposed that companies subject to the NFRD
should be required to obtain limited assurance on their non-financial reporting.
This would substantially increase the availability of information on the share of
Taxonomy-aligned assets of EU companies, and should help facilitate and reduce
the costs of issuing Taxonomy-aligned green bonds.
The future EU GBS will likely require full alignment of the use of proceeds of
Interaction
with the EU
the bond with the EU Taxonomy.
Green
Bond
Article 8 of the EU Taxonomy Regulation requires financial and non-financial
Standard
undertakings under the scope of the NFRD to include in their non-financial
statements or consolidated non-financial statements information on how and to
what extent their activities are associated with economic activities that qualify as
environmentally sustainable. Therefore, entities subject to the NFRD will be
required to disclose certain information on the way they operate and manage
social and environmental challenges.
Against this backdrop, issuers of future EU Green Bonds, which also fall under
the NFRD scope, would have to fulfil this disclosure requirement. However, the
TEG recommended in its usability guide that especially when entities are subject
to NFRD and they wish to issue an EU Green Bond, they should include their
overall EU Taxonomy alignment in the Green Bond Framework as well.
Finally, the information disclosed according to the NFRD will provide additional
information to investors, including green bond investors, allowing them to better
assess the overall non-financial performance of companies.
Title
Legislative
non-
legislative?
The SFDR was adopted by co-legislators in spring 2019 and was published on 9
Brief
description of
December in the Official Journal. It is already in force but will apply from 10
policy
or
March 2021. The SFDR aims to increase transparency towards end-investors and
thus their increased protection with respect to sustainability of investments
legislation
undertaken on their behalf by manufacturers of investment products. The SFDR
also includes rules for financial and insurance advisers.
The SFDR lays down rules for sustainability-related disclosures toward end-
investors, for both outside-in sustainability risks and inside-out adverse
sustainability impacts.
It does so in relation to:
the integration of sustainability risks by financial market participants and
Sustainable Finance Disclosure Regulation (Regulation EU 2019/2088 on
Sustainability-related disclosure in the financial services sector) (SFDR)
or
Legislative
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financial advisers in all investment processes,
financial products that pursue the objective of sustainable investment or have
environmental or social characteristics, and
adverse impacts on sustainability matters at entity and financial products levels,
i.e. whether financial market participants and financial advisers consider
negative externalities on environment and social justice of the investment
decisions/advice and, if so, how this is reflected at the product level.
These obligations have considerable behavioural implications.
In terms of legal technique, the SFDR is a directly applicable Regulation which
introduces additional disclosure requirements to the existing elements of relevant
sectoral legislations (AIFMD, UCITS, Solvency II, IORP II, national pension rules,
IDD and MiFID II), via a self-standing text (lex specialis) providing full
harmonization, cross-sectoral consistency and regulatory neutrality as well as
convergence by ESMA, EIOPA and EBA. Instead of amending all these existing
directives in identical way, the SFDR comes on “top” of existing
rules in order to
impose sustainability disclosure obligations. This way consistency and regulatory
neutrality across all relevant institutional investors' sectors is ensured.
Interaction
with the EU
Green
Bond
Standard
Under this Regulation, financial market participants will be required to report on
the share of Taxonomy-alignment of the assets in which they invest, including
potentially, green bonds. Investors may find that holding EU GBS-aligned bonds,
which would normally by definition be 100% Taxonomy-aligned, may simplify
this process, and contribute to increase their disclosed share of Taxonomy-aligned
assets.
Title
Regulation (EC) No 66/2010 of the European Parliament and of the Council
of 25 November 2009 on the EU Ecolabel
Legislative or
Legislative.
According to the EU Ecolabel Regulation, the criteria developed for products to
non-
be awarded the Ecolabel are adopted by a Commission Decision and have a
legislative?
limited validity in time (revision clause in the Commission Decision).
Established in 1992, the EU Ecolabel is a symbol of environmental excellence
Brief
description of
awarded to products and services that meet environmental standards throughout
policy
or
their life cycle and provides guidance to companies on environmental best
practices. Minimum social, ethical, governance safeguards are also considered.
legislation
In the 2018 Action Plan on Sustainable Finance, the Commission saw the
potential merit in the application of the EU Ecolabel Regulation to specific
financial products offered to retail investors, including Packaged Retail
Investment and Insurance Products (PRIIPs). The lack of labelled financial
products may in fact prevent investors from directly channelling their funds into
sustainable investments.
The objective of introducing the EU Ecolabel for financial products is to allow
retail investors concerned with the environmental impact of their investment to
rely upon a trusted and verified label to make informed investment decisions
while incentivising financial markets to develop more products with reduced or
positive environmental impacts. Thanks to the use of an existing framework, the
EU Ecolabel Regulation, it is possible to achieve a quick establishment of an EU
label for financial products and improve the currently confusing situation on the
different types of green products for end-investors, contributing in this way to
avoid "greenwashing".
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The EU Ecolabel Regulation:
defines the general principles and rules, the procedures for
developing/revising criteria, the labelling awarding mechanisms and
promotional activities;
requires Members States to designate competent bodies in charge of the
verification of the product’s compliance
with the EU Ecolabel criteria on a
regular basis;
foresees a governance structure around the work on developing EU Ecolabel
criteria for products and services. This includes setting up the EU
Ecolabelling Board (EUEB) that has an advisory role; the involvement of
stakeholders (NGOS, consumers organisations, ESAs, etc…) in criteria
development process via two rounds of consultations and ad-hoc stakeholders
meetings; the final vote on the criteria by the Regulatory Committee,
composed by Members States, and their adoption via a Commission
Decision.
The ongoing work on the EU Ecolabel for retail financial products is co-lead by
DG ENV and DG FISMA at political level. The Joint Research Centre (JRC)
provides the environmental, economic analysis and scientific support to develop
the criteria that financial products would have to fulfil in order to be awarded the
EU Ecolabel. The JRC has analysed scientific/academic research in order to
inform the philosophy and rationale for criteria structure and the comprehension
of what environmental impact means for financial products.
The strong link with the EU Taxonomy in the draft criterion 1 ensures that
investments are, to an important extent, made in economic activities that are
defined (by EU taxonomy) as being green. Along the same lines, a strong link
with the Green Bond Standard is also foreseen, ensuring that investments go, to a
large extent, into projects which are EU Green Bond Standards compliant.
Interaction
with the EU
Green
Bond
Standard
Title
Legislative
non-
legislative?
Regulation (EU) 2016/1011 as amended by Regulation (EU) 2019/2089 creates
Brief
description of
two new types of EU climate benchmarks (EU Climate Transition and EU Paris-
policy
or
aligned benchmarks) and requires benchmark administrators to disclose
Environmental, Social and Governance (ESG) information for those benchmarks
legislation
that pursue ESG objectives.
The minimum standards for the construction of the EU Climate Benchmarks and
the exact scope and content of the ESG disclosure requirements have been further
specified in the three delegated acts that were published in the Official Journal on
3 December 2020.
On the disclosure front, the delegated acts require benchmark administrators to
explain, using a set template, which ESG factors they have taken into account
EU Climate Benchmarks: Regulation (EU) 2016/1011 as amended by
Regulation (EU) 2019/2089 and the respective Delegated Regulations
or Legislative
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when designing their benchmark methodology. They shall also explain how those
factors are reflected in the key elements of that methodology, including for the
selection of underlying assets, weighting factors, metrics and proxies.
In addition, benchmark administrators shall explain in the benchmark statement,
using a standard template, how ESG factors are reflected in each benchmark or
family of benchmarks they provide and publish.
Finally, benchmark administrators shall disclose information on the alignment
with the objectives of the Paris Agreement.
The Delegated Regulations lay down a list of ESG factors to be disclosed by
Interaction
with the EU
benchmark administrators depending on the type of underlying assets concerned
Green
Bond
(e.g. equity, fixed income, sovereign). Information on the ESG factors should be
made at an aggregated weighted value of the benchmark, not for each individual
Standard
constituent (company). However, in order for benchmark administrators to be
able to disclose such information, they will have to source the information
directly from companies (e.g. via their annual reports) or to obtain this
information from external data providers.
In addition, in order to decide on the inclusion of companies in the two EU
Climate Benchmarks, benchmark administrators would need to have some
information on such as on their level of GHG emissions, or on whether a
percentage of their revenues is derived from fossil fuel activities.
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Annex 12: Legal basis
1.
L
EGAL BASIS
The legal basis for this initiative is Article 114 of the Treaty on the Functioning of the
European Union (TFEU), which confers to the European institutions the competence to lay
down appropriate provisions that have as their objective the establishment and functioning of
the internal market.
The policy options presented in section 5 would justify the use of Article 114 TFEU, as the
aim and content of the act would be to ensure the establishment and well-functioning of the
internal market. In particular, the adoption of an EU GBS would aim to ensure harmonised
requirements for an EU green bond that could be used across Member States by public and
private green bonds issuers.
Given the criteria set out in the Vodafone case (C-58/08), Article 114 TFEU allows the EU to
take measures not only to eliminate existing obstacles to the exercise of the fundamental
freedoms, but also to prevent the likely emergence of such obstacles in the future. This also
includes those obstacles that make it difficult for market participants, as issuers of green
bonds or investors, to take full advantage of the benefits of the internal market. Issuers of
green bonds within the EU may decide to align themselves with any number of market-
organised standards to aid investors in the identification and assessment of the bonds
greenness and other relevant attributes (see Annex 6).
These standards, being market-based, are based around high-level process-based guidelines
or recommendations. The most common standard, ICMA’s Green Bond Principles, does not
operate with a common definition of green, and recommends but does not require the use of
external review to confirm alignment with the standard or provide assurance to investors on
the green credentials. For this reason, it allows various practices to co-exist and does not
allow investors to sufficiently identify genuine green bonds. As set out in this impact
assessment, it may also facilitate an incident of real or perceived “green washing”.
Although other national legislation exists stipulating a framework for green bond issuance
(e.g. in China), no EU Member State has yet established an official green bond standard at
national level. The current EU market for green bonds is therefore entirely based around
market-defined standards and practices, which are used on a voluntary basis. Assurance to
investors is provided by companies acting as external reviewers, and issuers of green bonds
within the EU may decide to align themselves with any number of market-based standards to
aid investors in the identification and assessment of the bonds greenness and other relevant
attributes.
This means that a number of roles typically performed by regulation and public authorities
are carried out by private actors and through market-based standards. These market-based
standards set out high-level process-based guidelines or recommendations, which are
insufficiently standardised, insufficiently rigorous, and insufficiently complete to permit the
market for green bonds to grow according to its potential. For this reason, various practices
co-exist, which makes it costly for investors to identify genuine green bonds.
In light of the continued growth of the green bond market and its role in funding low-carbon
infrastructure projects, and given the shortcomings of existing standards and the broad span
that exists in market practices (even within a single standard such as the dominant ICMA
Green Bond Principles), it is likely that one or several Member States would be interested in
creating a standard at national level, or establish national guidelines.
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Such a standard would likely seek to address the same problems that the proposed EU GBS
initiative aims to address, but the results may be divergence across EU Member States. There
are already examples of Member States operating with significantly diverging frameworks in
their issuance of sovereign green bonds. For example, several Member States have already
issued sovereign green bonds, and although most have followed the ICMA Green Bond
Principles, some have also chosen to follow other secondary frameworks (e.g. CBI
certification for Netherlands, TEEC Label for France).
There are also numerous examples of diverging frameworks in the area of labels for green/
environmentally sustainable financial products (See Table 34 below). Already today, there
exist a number of voluntary labels for green/ environmentally sustainable funds at national
level, but they are diverse and fragmented in their scope, coverage, strategies as well as
mechanisms for assessing and mitigating environmental, social and governance factors. Due
to this, the use of such labels is largely fragmented among national/regional lines in the EU. It
is therefore not impossible that similar fragmentation may emerge with regards to green
bonds.
For this reason, it is likely that disparities between national laws would emerge that obstruct
the fundamental freedoms and undermine a European level playing field. Therefore there is
an identifiable need for a harmonized green bond standard to be applied across the EU-27.
However, as the green bond market is growing and given the shortcomings of existing
market-based standards, and the broad span that exists in practices even within a single
standard, it is very likely that a Member State may see fit, at some point, to create such a
standard at national level, or at the very least establish guidelines for green bond issuers.
Through feedback received in the targeted consultation on the EU GBS, many Member States
have been calling for a harmonized standard at EU level. Overall, against this background, it
is therefore likely that in the absence of a harmonized standard at EU level, Member States
will come forward with own legislation in the area of green bonds. Disparities between
national laws would then emerge that obstruct the fundamental freedoms and undermine a
European level playing field.
In addition, the absence of a non-harmonized standard on green bonds will also hamper the
proper functioning of the internal market in the context of sustainable investments. Article
3(3) of the Treaty on the European Union (TEU) stipulates:
‘The Union shall establish an
internal market. It shall work for the sustainable development of Europe [...] and a high level
of protection and improvement of the quality of the environment.”
Article 114 of the TFEU
gives the EU the legal basis to address the current fragmentation and lack of clarity, adding
that proposals that concern environmental protection and consumer protection have to take as
a base a high level of protection. Green bonds issued according to diverse standards by
private initiatives at national level do not offer a suitable and uniform basis to enhance the
issuance of and investments into green bonds as to further grow sustainable investments.
2.
S
UBSIDIARITY
: N
ECESSITY OF
EU
ACTION
According to the principle of subsidiarity, laid down in Article 5 of the TFEU, the EU should
act where it can provide better results than intervention at Member State level. In addition,
EU action should be limited to what is necessary in order to attain the objectives, and comply
with the principle of proportionality.
The current dominating green bond issuance framework, the ICMA Green Bond Principles,
was first published by a market-based initiative in 2014, and helped to standardise the process
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of issuing a green bond, and thereby facilitating the rise of the green bond market. However,
this standard does not refer to a set comprehensive and detailed definitions of green projects,
nor does it set out any requirements for the companies acting as external reviewers on the
green bond market.
As outlined in the problem definition (section 4 of this impact assessment), the EU market for
green bonds suffers from a lack of clear and comparable information on green projects, due to
a lack of common definitions of such projects. This makes it more difficult and therefore
costly for investors to identify green bonds with a genuinely positive environmental impact.
In order to address this issue, the present initiative will seek to establish a green bond
standard based on the classification of environmentally contributing activities set out in the
EU Taxonomy.
Given the international nature of the green bond market, coordinated action at EU level is
needed. Issuers and investors of financial products require common metrics and definitions to
determine which projects and activities are environmentally sustainable. These common
requirements will enhance market efficiency, investor confidence and facilitate increased
green bond issuance across the EU.
Without EU action regarding green bonds, the most likely outcome would be the continued
development of market-based standards for green bonds or new legislative initiatives at
national level, especially in a constantly growing green bond market. Such uncoordinated
actions at national level may lead to a proliferation of diverging green bond standards,
incentive schemes, and verification regimes, which would fragment the green bond market in
the EU and potentially hamper cross-border investment flows. Moreover, it could hinder
economies of scale, and making green bond issuance more costly and less lucrative. And it
could lead to increased “green-washing”, since market-based
standards might be
insufficiently rigorous and verifiable, which could potentially create reputational problems
for the whole green bond market.
Next to that, the problems this initiative aims to tackle is directly related with other initiatives
on sustainable finance at European level, such as the EU Regulation on a classification
system of economic activities (so-called
‘EU Taxonomy’) and the EU Regulation on
sustainability disclosures in the financial services sector. Furthermore, to address certain
regulatory barriers, e.g. regarding possible financial incentives that could be linked to the EU
GBS or the set-up of a centralised registration/supervision regime for verifiers at European
level with tasking ESMA as competent authority, it might be necessary to amend already
existing EU legislation.
The EU GBS will ensure a level playing field and reduce the potential scope for disparities
across the EU while supporting the attainment of the EU’s sustainable finance policy
objectives and has the potential to become a leading global standard for green bonds. Given
its focus on a robust framework for structuring and verifying investments, it will facilitate
increased financial flows to green projects while building issuer, investor and asset manager
confidence in the sector.
Responses to the call for feedback of the Technical Expert Group on Sustainable Finance as
well as to the targeted consultation on the EU GBS largely support an intervention at EU
level, when calling for setting up a harmonized green bond standard at EU level and a proper
registration/supervision process of verifiers coordinated by ESMA. This feedback clearly
indicates that legislative Action at EU level is appropriate to address the identified problems
(see section 2).
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Given the international nature of the green bond market, the objectives of this initiative can
be better achieved at EU level. Member States acting alone are not able to put in place such a
harmonized standard applicable across the EU. The comparability of EU Green Bonds, based
on the same green bond requirements and a proper verification process enables potential
investors to better compare EU Green Bonds across national borders and provides clarity to
relevant entities. Divergences in green bond standards erect additional barriers to a Single
Market in financial services and products and for the free movement of capital. It increases
costs and uncertainties for issuers and investors, who normally operate across borders. These
divergences represent an obstacle to the further cross-border development of the market and
to the establishment and smooth functioning of the Single Market.
Only an intervention at EU level can define consistent standard requirements for the internal
market and prevent market distortions. Therefore, if the impact assessment demonstrates that
action at EU level would produce greater benefits over costs compared with action only at
Member State level, the Commission will propose legislative measures (based on Article 114
TFEU) with the aim of further improving the functioning of the Single Market.
3.
S
UBSIDIARITY
: A
DDED VALUE OF
EU
ACTION
As part of the European Green Deal, the EU is committed to becoming climate neutral by
2050. Achieving this goal and the interim 2030 climate and energy targets requires significant
additional
public and private investment estimated at up to €260 billion per year. The
European Green Deal Investment Plan (EGDIP) forms the investment pillar of the Green
Deal. The EGDIP aims to mobilise capital funding for at least €1 trillion in sustainable
investments over the next decade while creating enabling frameworks that will facilitate
further sustainable investments including the establishment of an EU GBS.
Putting in place a harmonized standard for a green bond at EU level will contribute to the aim
of Article 3 of the TEU that explicitly refers to the internal market as well as the work for the
sustainable development of Europe. Further market integration is necessary to fully unlock
public and private investments in green and sustainable projects and to facilitate cross-border
sustainable investments. The EU GBS initiative will allow canalising capital flows to green
and sustainable projects and has the potential to promote economies of scale, thereby helping
the market to grow. Given the risk, that inaction will lead to market fragmentation and
consumer confusion, the EU GBS will provide for legal clarity, transparency and
comparability of EU Green Bonds across the EU. It would also significantly reduce the
complexity and the administrative burden, which bring clear benefits to issuers and investors
of green bonds.
Therefore, a common standard for green bonds that addresses the main barriers for green
bonds across the EU can be most efficiently achieved at EU level. To address (parts of)
certain problems it might be necessary to amend existing EU legislation. Action should
therefore be coordinated at EU level, as EU instruments appear to be more suitable. A
possible intervention at EU level therefore complies with the principle of subsidiarity as set
out in Article 5 of the TFEU.
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Table 34- Overview of labels for funds in Member States
122
GreenFin / TEEC label Luxflag Climate Finance FNG Label
(sustainable
Nordic Swan Ecolabel
125
(Energy and Ecological
Label
mutual funds)
124
Transition for Climate)
123
Member State
France
Luxembourg
Date of launch
01/12/2015
01/09/2016
Number
of
4 green bonds, 3 equity, 8 4 funds
labelled funds or
infrastructure
EUR 450 M
value
App. EUR 2 Md
Germany
01/05/2015
5 Environmental thematic
funds (equity and green bonds)
among. 40 applicants
Nordic countries
15/06/2017
13 ( EUR 3 Md) [All in equity:
8 focus on Sweden, 3 Global, 1
Frontier, 1 Energy]
Austrian
(sustainable
products)
Ecolabel Green Funds Scheme
financial
Netherlands
It was implemented in 1995
Since the implementation of
the program, more than
234,400
individuals
have
invested, more than EUR 6.8
billion
in
green
funds,
financing more than 5.000
projects.
N/A
Austria
Established in 1990
There are currently
more
than100 labelled financial
products
Time to audit an
4 to 6 weeks (depending on the 1 month
application
type of fund)
4 months
Secondary
&
tertiary None
None
legislation
Eligibility criteria
UCITS/AIFM (at least 50% An investment fund authorised UCITS funds
invested in Europe)
by a Member State or be
subject
to
supervision
equivalent to that in EU
Member States
Decision on the
A multi-stakeholder committee Luxflag in conjunction with a An
independent
expert
evolution of the
chaired by the French Ministry dedicated
multi-stakeholder committee
scheme
of Environment
industry working group led by
the
Association
of
Luxembourg Fund Industry
Institution
Accredited (by the National LuxFlag Board upon the GNG, the operational labelling
granting the label
Accreditation body COFRAC) recommendations
of
the body of FNG, advised by an
auditors
Eligibility Committee and independent expert committee,
LuxFlag secretariat
who review the audit results
Labelling costs
None
EUR 3,000 (once labelled)
EUR 3,000 (application)
Legal basis
About 30 hours over a 6-9
week period. (Can be much
longer depending on the fund
companies
eagerness
and
adaptability)
None
None
UCITS funds
Sustainable Funds/Investment
Certificates - Ethics-Ecology,
Thematic Funds /Investment
certificates
None
The Dutch "Green Fund" is not
a label but a tax scheme. In
green savings accounts, 70% of
deposits are invested in green
projects.
The
Nordic
Ecolabelling Government
sponsored: Government
sponsored
Board, an independent external Federal Ministry of Agriculture Ministries of the Environment,
organisation.
and Forestry, Environment and Finance and Agriculture.
Water Management
Nordic Swan Ecolabel
Federal Ministry of Agriculture Ministries of the Environment,
and Forestry, Environment and Finance and Agriculture.
Water Management
The annual royalties depend on N/A
the specific turnover of the
branch and/or product group of
the applying enterprise.
To generalize, an application
fee of 3,000 EUR and an
annual license fee of 0.0015%
of AUM in the fund. Please
follow link for all details
Table was drawn up by the Commission’s Joint Research Center in the context of the EU Ecolabel for Financial Products initiative.
French Ministry for Ecology and Inclusive
Transition: “Greenfin Label. Criteria Guidelines”, 2019 (Link)
124
FNG: “Label for Sustainable Investment Funds. Rules of Procedure”, 2020 (Link)
125
Nordic Swan Ecolabel (Link)
122
123
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GreenFin / TEEC label Luxflag Climate Finance FNG Label
(sustainable
Nordic Swan Ecolabel
125
(Energy and Ecological
Label
mutual funds)
124
Transition for Climate)
123
Member State
Audit costs
Labelling period
France
Depending on auditor
1 year (renewable)
Luxembourg
0
1 year (renewable)
Germany
Included into labelling costs
1 year (renewable)
Austrian
(sustainable
products)
Ecolabel Green Funds Scheme
financial
Netherlands
N/A
The
Government
checks
whether the project meets all
the conditions of the Green
Funds Scheme and, if so, it
issues a green certificated that
remains valid for ten years.
None
Nordic countries
Austria
See labelling costs
See labelling costs
Same as the criteria document. 1 year (renewable)
Current criteria are valid until
2020-06-30. The criteria are
updated every 3-5 years.
Annual
Based on ICMA's GBP.
None
Intermediate
verification
Green taxonomy
Compliance verification after None
six months
CBI based, however slightly Common
Principles
for CBI based
adjust to reflect national Climate Change Mitigation and
priorities
Adaptation and Adaptation
Finance Tracking ( IDFC
(International
Development
Finance Club)+MDBs)
Some of the fund's financial
management practises must be
transparent.
Investor's
documents must present the
environmental strategy of the
fund
Yes
Transparency
requirements
Control
monitoring
The applicant must publish full Signatory of the Eurosif
investment portfolio at least Transparency Code required
once a year. Additionally, it - FNG Matrix (a framework
must describe its Climate developed by FNG questioning
Finance
objectives the RI approach of the fund)
(environmental and financial) required
and be transparent towards - Impact reporting assessed by
investors in its portfolio the auditor (Points are granted
composition
and depending on the quality of the
documentation by providing KPIs reported)
categories
and/or
sub-
categories of its Climate
Finance investments
&
Control and Monitoring plan Compliance monitoring at six Included into the Label's rules An on-site visit is performed in
Guidelines.
months
of procedures and FAQs
connection with the application
1.Process of certifying a
and once a year during the
candidate investment fund
validity of the license. Sample
2.The methods for monitoring
checks are made on a regular
a certified fund
basis.
3.The management of any
observations made on the
Control and Monitoring Plan
The scheme does not stipulate The scheme does not stipulate
the use of specific external the use of a specific external
taxonomy.
taxonomy. It contains a
definition of green projects
providing a significant and
immediate
environmental
benefit.
Mandatory:
Information
on
the There are no reporting
Annual Fund sustainability sustainability
or obligations
report
ecological/social concept of
All holdings, updated quarterly Ecolabelled products should be
Point Score:
presented in line with the
Detailed
engagement European Sustainable and
information
Responsible
Investment
Voting records
Forum's Sustainability Fund
Transparency Guidelines.
The environmental and social
evaluation
of
companies,
public issuers and real estate is
carried out by funds or external
organisations.
Green projects are subject to
the
same
economic
examination by banks as non-
green projects.
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Annex 13: Options discarded at an early stage
The following describes each of these options in detail and the reasons for discarding them at
an early stage:
(1) Non-legislative measure: Commission Communication on an EU GBS
(2) Developing other standards and labels as part of a framework
(3) Tasking national competent authorities (NCAs) with managing a regime for external
reviewers
(4) Flexibility for corporate issuers with regards to Taxonomy-alignment
(5) Mandatory standard for sovereign green bond issuers in the EU
(6) Banning the refinancing of existing green assets and expenditure by EU GBS green bonds
(7) Options which may imply the loss of green status before the bond matures.
1. Non-legislative EU Green Bond Standard (e.g. Commission Communication or
Recommendation)
The Commission could take forward the EU GBS via a non-legislative measure, such as a
“Commission Communication” or a “Commission recommendation”,
based on the core
elements for an EU GBS proposed by the TEG. After a two-year period, the Commission
could then evaluate the market uptake of the EU GBS, and follow up with legislation if
needed. Such a standard would automatically be a voluntary standard, and there would not be
any registration and supervision regime for external reviewers, as this requires legislation.
A non-legislative approach allow the standard to be finalised more quickly, and it would
allow the Commission more flexibility in amending the standard. It would also avoid the
costs to the EU budget from drafting, negotiating, and implementing legislation, although
there would still be costs involved in drafting, adopting, and updating the non-legislative
standard.
As such a standard would not officially exist in legislation, it would not be enforceable, and
would need to be more principles-based. Compared to a legislative approach, it would
provide less legal certainty to investors, and it would not allow the attachment of potential
monetary or regulatory incentives.
Therefore, it would not address all barriers in the market, and could increase rather than
reduce fragmentation in the market. The added value compared to existing market standards
would be lower, which means there may be a risk of limited uptake, as issuers may prefer to
keep using market-based standards.
For these reasons this option is not recommended.
2. Developing other standards and labels as part of a framework
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As part of the work regarding the Renewed Sustainable Finance Strategy, the Commission
has consulted on the need for additional standards and labels, such as labels for Socially
Responsible Investment (SRI) funds, a standard for green loans and mortgages, and a social
impact bond standard.
Today,
target-linked sustainability bonds
are capturing a small but growing share of the
green bond market. While some market actors contest the level of comparability to a use-of-
proceeds green bond, they nonetheless present themselves as alternative vehicles for issuers.
The reputational effects, often the key reason for issuers to consider a green bond issuance,
are likely to be comparable. A dedicated EU standard for such bonds along the model of the
EU GBS could help to ensure that issuers who wish to pursue ambitious environmental
targets, for example by making use of the Taxonomy, would have a standard to rely on. It
would also help to standardise the market.
However, this option was discarded at an early stage due to the lack of development of this
segment of the market, and the difficulty of finding an exact method for linking the
Taxonomy to such bonds, which typically ignore the use of proceeds.
In the future, it is possible that the market would be ready for the development of yet more
EU standards, including for
social bonds
or
sustainability bonds.
This would depend on the
development of an EU Taxonomy for social bonds, which will be considered as part of the
work of the EU Platform for Sustainable Finance.
3. Tasking national competent authorities (NCAs) with managing the regime for external
reviewers
Both the stringent and lighter regimes could be implemented at either the Union or national
level. If implemented at the Union level, the competences would most naturally fit within the
scope of ESMA’s field of activities, given its current role authorising and supervising credit
rating agencies. In comparison, if implemented at the national level, it would require each
Member State to designate a National Competent Body to register and supervise external
reviewers. This could lead to divergences in national approaches, and ESMA would still
have to perform a coordination role to ensure harmonisation between the various national
frameworks. This approach would also lead to duplication of costs and competition for
qualified personnel, as each NCA would have to establish its own in-house registration and
supervision process.
As a result, it is recommended that ESMA is designated as the registration and supervision
body for external reviewers. This is the approach most likely to ensure a harmonised
approach across the EU, with a single access point for external reviewers seekingregistration
and a standardised application process and fee structure. Under this approach, only ESMA
would be required to build the necessary expertise and allocate resources, thus avoiding any
duplication of costs. Once registered by ESMA, it would also be easier for entities to
passport their services across the Union, as there would not be any additional national level
requirements to also comply with.
4. Flexibility for corporate issuers with regards to Taxonomy-alignment
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In its draft report on the EU GBS, the TEG advocated for the inclusion of a limited degree of
flexibility related to the specific technical screening criteria set out in the Taxonomy
Delegated Acts.
126
This was justified by the need to handle gaps in the gradual development
of the Taxonomy, with full application only foreseen by end 2021, and given the lack of
market experience in interpreting the requirements of the Taxonomy.
However, this flexibility poses a legal problem. The EU Taxonomy Regulation specifies that
the Union shall apply the EU Taxonomy when setting out the requirements for the marketing
of corporate bonds that are categorised as environmentally sustainable
127
. Given that the EU
GBS initiative will pursue, as its core objective, the aim of delineating the boundaries of what
shall constitute an ‘environmentally sustainable’ (or in other words “green”) bond, the EU
Taxonomy will need to be applied fully to determine the eligibility of the proceeds of the
bond issuance. This excludes the type of flexibility suggested by the TEG for corporate
bonds.
Other ways of giving potential flexibility to issuers also come with significant drawbacks. For
example, one alternative could have been to allow the proceeds of the bond to fund a
combination of green activities and non-green activities, by setting a threshold for the share
of non-green, However, this choice would have resulted in an EU GBS with a lower level of
ambition than current market standards, which tend to require 100% use of proceeds for
green activities. This would potentially put users of the EU GBS at a disadvantage.
5. Mandatory standard for sovereign green bond issuers in the EU
The option of making EU GBS alignment mandatory also for sovereign issuers of green
bonds in the EU (in addition to non-sovereigns) was not assessed, as the chosen legal basis
–
Article 114 TFEU
–
does not warrant such type of legislative action.
This is also reflected in the fact that the Taxonomy Regulation’s Article
4 only mentions
corporate
green bond issuers among those for whom an EU standard for green bonds should
be based on the Taxonomy, not
sovereigns.
6. Banning the re-financing by the EU GBS of existing green assets
One of the main criticisms in relation
to green bonds has been their lack of ‘additionality’.
This refers to the question of whether green bonds lead to new (i.e. additional) green
investments. In the current market, this need not be the case. Green bonds tend to finance
assets and this can include (re-)financing of assets that already exist, within reasonable look-
back periods (2-3 years maximum). For example, a bank could already be financing EUR
100m for the construction of a windmill, and only afterwards decide to issue a EUR 100m
green bond for this. No new green investments will have been created.
126
Specifically, the TEG proposed that in cases where either the technical screening criteria have not been
developed for a specific sector or environmental objective, or where the developed screening criteria are not
considered directly applicable due to the innovative nature, complexity and/or location of the green project, the
issuer should instead be allowed to rely on the fundamental principles of the Taxonomy Regulation to verify that
investments align with the Taxonomy, instead of the Technical Screening Criteria.
127
Article 4 of the EU Taxonomy Regulation: “Member
States and the Union shall apply the same criteria set
out in Article 3 to determine whether an economic activity qualifies as environmentally sustainable for the
purposes of any measure setting out requirements for financial market participants or issuers in respect of
financial products or corporate bonds that are made available as environmentally sustainable.
“
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However, the fact that a particular green bond is issued after the assets it (re)finances does
not necessarily imply that there is no causality, as the intention to issue a green bond in the
future can also be a motivating factor for embarking on a green project today. For example,
an issuer may decide to invest in a green project knowing that this investment may be
refinanced by a green bond in the future. The possibility to re-finance a green asset using a
green bond in the future, with the potential benefits that this brings to the issuer, may be an
incentive to invest in that green asset today.
It should also be noted that many sovereign issuers exclusively make use of refinancing, as
they cannot issue a green bond framework that pre-empts future spending.
For these reasons, the option of not allowing the refinancing of green proceeds using EU
GBS bonds has been discarded. However, it is recommended to impose limits to prevent
issuers from indefinitely refinancing the same expenditure, for example with time-limits to
prevent expenditure that predate the issuance by more than a certain number of years to be
used for new green bond issuance.
7. Options which may imply the loss of green status before the bond matures, in case the
Taxonomy criteria change
The idea of the overall sustainable finance project is to facilitate sustainable investments with
a broader view of achieving climate neutrality as soon as possible. In order to promote private
investments further, the risk-payoff of green assets need to be improved, either by improving
the expected payoff (incentives or disincentives for brown assets i.e. relative change) or by
lowering risks.
Investors in bond markets are largely hold-to-maturity investors and most bond markets
exhibit very slim liquidity on secondary markets. For green bonds, the investor base is largely
constituted of green institutional investors, many of which face direct fiduciary duties to align
their investments with their green objectives. This implies that such investors should also
divest out of assets that are not or are no longer considered green.
In the context of the green bonds initiative, this is an important consideration as concerns
potential future changes to the Taxonomy Regulation. If such changes would entail that a
previously green asset financed by a green bond, is no longer considered green, a significant
share of the investors in that bond may want to or may even be obliged to sell the bond at that
point. While there would likely be conventional buyers to step in, it would nonetheless lead
to a significant price impact given the sudden spike in selling interest. This would present a
significant risk to investors in an EU GBS unless grandfathering of the taxonomy criteria
until maturity of the bond is ensured.
Without grandfathering until maturity in the case of changes to the Taxonomy, investors
would face higher risk and would be willing to pay less for an EU GBS i.e. coupon rates for
issuers would be
higher / a possible ‘greenium’ over conventional bonds would be lower. It
would present an unnecessary hurdle to higher investments and thereby stands contrary to the
general objective.
Not granting such grandfathering rights would furthermore risk that issuers postpone EU
GBS issuance in anticipation of possible changes to the taxonomy. In effect, some green
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investments would occur only at a later stage implying a loss of positive environmental
impact during that time.
Given the current environmental trajectories, the ambition must be to facilitate green
investments as strongly and quickly as possible. While an asset may no longer be green at
some future point in time, according to the standards then, it will have still played a
significant role in mitigating climate change or adapting to it, as per the taxonomy. Debt
linked to the initial financing should therefore remain green until it matures. This limits risks
to investors and thereby maximises a possible green spread to conventional bonds. In effect,
investments are promoted more strongly and sooner in time.
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Annex 14: EU Green Bond Standard as recommended by TEG
1. Scope of the EU-GBS
The European Green Bond Standard (EU-GBS) is a voluntary standard proposed to issuers
that wish to align with leading best practices in the market. It is designed to be globally
relevant and accessible to issuers located in the EU as well as to issuers located outside the
EU. It builds on market best practices such as the Green Bond Principles (GBP).
2. Objective of the EU-GBS
The EU-GBS is intended to provide a framework of core components for EU Green Bonds,
thereby enhancing transparency, integrity, consistency and comparability of EU Green
Bonds. The ultimate objective is to increase the flow of finance to green and sustainable
projects.
3. Definition of an EU Green Bond
An EU Green Bond is any type of listed or unlisted bond or capital market debt instrument
issued by a European or international issuer that is aligned with the EU-GBS, and is therefore
meeting the following requirements:
1.
The issuer’s Green Bond Framework
shall confirm the alignment of the green bond
with the EU-GBS;
2. The proceeds shall be exclusively used to finance or re-finance in part of in full new
and/or existing ‘Green Projects’ as defined in section 4.1, as it shall be described in
the bond documentation; and
3. The alignment of the bond with the EU-GBS shall have been verified by an accredited
Verifier in accordance with section 4.4.
An issuer may only use the term ‘EU Green Bond’ if the above criteria are met. European and
international issuers may
decide to voluntarily requalify their existing green bonds as ‘EU
Green Bonds’ in the same manner and, for the avoidance of doubt, after verification by an
accredited Verifier.
It is important to note that EU Green Bonds are only fungible with green bonds issued as EU
Green Bonds or requalified as EU Green Bonds.
4. Core components of the EU-GBS
4.1 Green Projects
Proceeds from EU Green Bonds, or an amount equal to such proceeds, shall be allocated only
to finance or refinance Green Projects (‘Green Projects’) defined, subject to confirmation by
an accredited Verifier (see section 4.4), as
(a) contributing substantially to at least one of the Environmental Objectives as defined in
the EU Taxonomy Regulation
128
(‘the Environmental Objectives’), namely (i) climate
change mitigation, (ii) climate change adaptation, (iii) sustainable use and protection
of water and marine resources, (iv) transition to a circular economy, waste prevention
128
Proposal for a Regulation of the European Parliament and of the Council on the establishment of a framework
to facilitate sustainable investment, COM(2018) 353 final 2018/0178 (COD), 24 May 2018 (link)
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and recycling; (v) pollution prevention and control, and (vi) protection of healthy
ecosystems, while
(b) not significantly harming any of the other objectives, and
(c) complying with the minimum social safeguards represented by the principles and
rights set out in the eight fundamental conventions identified in the International
Labour Organisation’s declaration on Fundamental Rights and Principles at Work.
When the EU Taxonomy will be in force and where Technical Screening Criteria (i.e.,
principles, metrics, thresholds) have been developed in the EU Taxonomy for specific
environmental objectives and sectors, Green Projects shall align with these criteria allowing
however for specific cases where these may not be directly applicable as a result of factors
such as the innovative nature, the complexity, and/or the location of the Green Project(s). An
accredited Verifier shall either confirm alignment with the Technical Screening Criteria, or
alternatively in cases where no technical screening criteria have been developed or in the
above mentioned specific cases, that the projects nonetheless meet the requirements under the
EU Taxonomy framework i.e. that they (a) contribute substantially to at least one of the
Environmental Objectives (b) do not significantly harm any of the other objectives and (c)
comply with the minimum social safeguards.
The issuer shall provide a description of such Green Projects in their Green Bond Framework
(see section 4.2) and in the Green Bond legal documentation (for instance in the Prospectus
or in the Final Terms). The information provided in the legal documentation may be
summarised or may be limited to a reference to the Environmental Objectives and the GBF.
In case that the Green Projects are not identified at the date of issuance, the issuer shall
describe the type and sectors and/or environmental objectives of the potential Green Projects.
Green Projects can include:
Physical assets and financial assets such as loans. Green assets can be tangible or
intangible, and they can include the share of working capital that can reasonably be
attributed to their operation.
Any capital expenditure and selected operating expenditures such as maintenance
costs related to green assets that either increase the lifetime or the value of the assets,
and research and development costs. For the avoidance of doubt, operating costs such
as purchasing costs and leasing costs would not normally be eligible except in specific
and/or exceptional cases as may be identified in the EU Taxonomy and future related
guidance.
Relevant public investments and public subsidies for sovereigns and sub-sovereigns.
Green assets shall qualify without a specific look-back period provided that at the time of
issuance they follow the eligibility criteria listed above. Eligible green operating expenditures
shall qualify for refinancing with a maximum three [3] years look-back period before the
issuance year of the bond.
For the avoidance of doubt, a specific green asset or expenditure can only qualify as a Green
Project for direct financing by one or several dedicated green financing instruments (such as
bonds or loans) up to the combined equivalent of its full value. It is understood that green
financing instruments can be refinanced by other green financial products.
4.2 Green Bond Framework
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The issuer shall produce a Green Bond Framework (‘GBF’) which confirms the voluntary
alignment of the green bonds issued following this GBF with the EU-GBS and provides
details on all the key aspects of the proposed use of proceeds and on its green bond strategy
and processes. The draft standard foresees inclusion of the use of proceeds to be specified in
the legal documentation.
The issuer shall indicate the following elements in their GBF:
1. The Environmental Objectives of the EU Green Bond or EU Green Bond programme
and how the issuer’s strategy aligns with such objectives, as well as their rationale for
issuing;
2. The process by which the issuer determines how Green Projects align with the EU
Taxonomy and, if applicable, qualitative or quantitative technical screening criteria
with reference to section 4.1 and the support of an accredited Verifier. Issuers are also
encouraged to disclose any green standards or certifications referenced in project
selection;
3. A description of the Green Projects to be financed or refinanced by the EU Green
Bond. In case where the Green Projects are not identified at the date of issuance, the
issuer shall describe, where available, the type and sectors of the potential Green
Projects. Where confidentiality agreements, competitive considerations, or a large
number of underlying projects limit the amount of detail that can be made available,
information can be presented in generic terms or on an aggregated portfolio basis;
4.
The process for linking the issuer’s lending or investment operations for Green
Projects to the EU Green Bond issued. The issuer shall track the amount allocated to
Green Projects in an appropriate manner until such amount equals the net proceeds
and document the allocation through a formal internal process;
5. Information on the methodology and assumptions to be used for the calculation of key
impact metrics: (i) as described in the EU Taxonomy, where feasible; and (ii) any
other additional impact metrics that the issuer will define; and
6. A description of the Reporting (e.g. envisaged frequency, content, metrics).
For the avoidance of doubt, it is understood that subsequent changes to the Taxonomy will
not apply to outstanding EU Green Bonds (grandfathering). Conversely, new issues shall be
aligned with the most recent version of the Taxonomy and as relevant to their Green Projects.
The GBF shall be published on the issuer’s
website or any other communication channel
before or at the time of the issuance of an EU Green Bond and shall remain available until the
respective maturity of the EU Green Bond.
5 Allocation and Impact Reporting
Two types of reporting are required under the EU-GBS: Allocation Reporting and Impact
Reporting.
Allocation Reporting: Issuers shall report at least annually, until full allocation of the bond
proceeds to Green Projects and thereafter, in case of any material change in this allocation.
Verification is only required for the Final Allocation Report.
The Allocation Report shall include:
A statement of alignment with the EU-GBS;
A breakdown of allocated amounts to Green Projects at least on sector level, however
more detailed reporting is encouraged; and
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The geographical distribution of Green Projects (recommended on country level).
For the avoidance of doubt, the Final Allocation Report for an EU Green Bond to be
published upon full allocation shall comprise information on all allocated amounts to Green
Projects at least on sector level.
Impact Reporting: Issuers shall also report on impact of Green Projects at least once during
bond lifetime after full allocation of the bond proceeds to Green Projects and thereafter, in
case of material changes in this allocation.
The Impact Report shall include:
A description of the Green Projects;
The Environmental Objective pursued by the Green Projects;
A breakdown of Green Projects by the nature of what is being financed (assets, capital
expenditures, operating expenditures, etc.), the share of financing (i.e., the amount of
Green Projects financed after the bond issuance) and refinancing (i.e., the amount of
Green Projects financed before the bond issuance);
Information and, when possible metrics, about the projects’ environmental impacts,
which needs to be in line with the commitment and methodology described in the
Issuer’s GBF; and
If it hasn’t been already detailed in
the GBF, information on the methodology and
assumptions used to evaluate the Green Projects impacts.
Verification of the Impact Reporting is not mandatory, however issuers are encouraged to
have their Impact reporting reviewed by an independent third party.
Allocation Reporting and Impact Reporting can be either on a project-by-project level or on a
portfolio level, where confidentiality agreements, competitive considerations, or a large
number of underlying projects limit the amount of detail that can be made available.
For the avoidance of doubt, the Allocation Report as well as the Impact Report may cover
several bond issuances under the same Green Bond Framework. The issuer may also decide
to publish separate Impact Reports for separate project categories. Allocation and Impact
Reporting can be presented in a combined report or in separate reports. In case full allocation
and or impact is already determined upon issuance of a bond, issuers may choose to publish
one report comprising information on allocation and impact at issuance, for the avoidance of
doubt in case of material change of allocation, further reporting will be required.
Allocation Reporting and Impact Reporting shall be published on the issuer’s website or any
other communication channel. The Final Allocation Report and Impact Report published
upon full allocation shall remain available until maturity of such EU Green Bonds unless
replaced by further reports in case of material changes of allocation.
5.1 Verification
Issuers shall appoint an external reviewer to confirm:
before or at the time of issuance, through an initial Verification, the alignment of their
GBF with the EU-GBS, in accordance with section 4.1 (Green Projects) and 4.2
(Green Bond Framework); and
after full allocation of proceeds, through a Verification, the allocation of the proceeds
to green eligible projects in alignment with the Allocation Reporting as outlined in
section 4.3 of the EU-GBS.
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For the avoidance of doubt, an initial verification can be valid for several bonds issued under
a programme with the same GBF.
It is also understood that for transactions that are fully allocated at issuance (e.g. as in the
case of refinancing) the verification of the Allocation Reporting can be incorporated in the
initial Verification.
Verification(s), and any subsequent ones, shall be made publicly available on the issuer’s
website and through any other accessible communication channel as appropriate. The
verification of the GBF shall be made publicly available before or at the time of the issuance
of its EU Green Bond(s). Verification of the Final Allocation Report should be made publicly
available together with the publication of the Final Allocation Report, however at the latest
one year after the publication.
Verification provider(s) will be subject to accreditation including explicit requirements
related to (i) professional codes of conduct related to business ethics, conflicts of interest and
independence; (ii) professional minimum qualifications and quality assurance and control;
and (iii) standardised procedures for Verification.
Verification providers shall also disclose their relevant credentials and expertise and the
scope of the review conducted in the Verification report.
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Annex 15: Project green bonds to support the green transition
and the EU Green Deal
Investment in sustainable infrastructure, buildings and renewable energy and related green
bonds should be promoted as more common asset class in order to increase substantially the
liquidity and the amount of financing available to build sustainable infrastructure, buildings
and energy generation, and/or to make greener the existing ones. This will also boost the use
of the Taxonomy itself and promote the EU Green Bond standard, for investments compliant
with the provisions of the EU Taxonomy, while supporting the green transition and the
objectives of the EU Green Deal.
Project green bonds often cover sustainable investments (e.g. in infrastructure, buildings,
renewable energy) which are well within the scope of economic activities covered by the EU
Taxonomy. Sustainable infrastructure assets are “investable” and can be supported by green
bonds through a) corporate bonds that are used by companies to finance a range of
sustainable activities and where the yield and risk of the bond is linked to the balance sheet of
the underlying company. These bonds are likely to make up a large share of green bonds; b)
project green bonds, which are dedicated to the financing of specific sustainable
infrastructure assets, but are also suitable for supporting sustainable buildings and renewable
energy have additional advantages as compared with general corporate bonds, since the
proceeds are clearly related to the risk of the assets supported and the way it is operated.
Further, the due diligence, which applies to project green bonds, ensures that the criteria and
benchmarks set in the Taxonomy Delegated Act can be properly assessed and monitored.
The scale up of the project green bond market for sustainable infrastructure, buildings and
renewable energy can be promoted using public guarantee, such as the InvestEU, in particular
bonds credit enhancing and subordinated debt financing can enhance the use of green bonds
for green field infrastructure.
Investment
in infrastructure is considered as an “alternative investment” by institutional
investors, but remains a small fraction of their overall investment strategy. According to
Moody’s
129
, while the cumulative probability of default for other asset classes normally
increases over time, infrastructure debt normally stabilizes following an initial period.
Infrastructure debt performs like an investment grade security by year 10 in high-income
countries.
Commercial and promotional banks can provide substantial support to the infrastructure
sector. However, while the risk profile of infrastructure investment matches the requirements
of long-term investors, due diligence for such projects is complex and regulatory risks are
often high, which deters institutional investors to engage more with the sector. In some cases,
private investors also lack the expertise to implement due diligence of infrastructure projects
and prefer to invest in other financial assets, such as treasury bonds or shares, which are easy
to assess and more liquid.
More broadly, lack of strategic planning and poor project preparation, poor business cases
and barriers (state infrastructure ownership and lack of competition) also prevent investors
from further engaging in infrastructure financing.
129
Kelhoffer, K. (Moody’s Analytics): “Examining Infrastructure as an Asset Class”, 2020 (Link)
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In the last decade, the debate about infrastructure as an asset has been intense at European
and as well international level.
In particular the Regulation (EU) 2019/876
130
states that it is essential to lay down a
regulatory environment that is able to promote high quality infrastructure projects and reduce
risks for investors. The text does not include references to green infrastructure. However, it
states that the European Commission should review the provision on high quality
infrastructure projects in order to assess its impact on the volume of infrastructure
investments by institutions and the quality of investments having regard to Union’s objectives
to move towards a low-carbon, climate-resilient and circular economy; and its adequacy from
a prudential standpoint. The Commission should also consider whether the scope of those
provisions should be extended to infrastructure investments by corporates.
The G20 Infrastructure Working Group (IWG) also recognised the benefits of promoting
infrastructure as an asset class, seeking ways to improve the investment environment and
mobilise higher levels of investment through capital markets
131
. Along this, EIB and OECD
are promoting an Infrastructure Data Initiative (IDI), which promotes discussion and the
coordination of initiatives led by multi-lateral development banks and international
organisations, in cooperation with the private sector. The G20 Principles for Quality
Infrastructure Investment also emphasise that access to adequate information and data is an
enabling factor to support investment decision-making, project management and evaluation,
particularly when considering the infrastructure life-cycle and cost-benefit analysis.
130
Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending
Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own
funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures
to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation
(EU) No 648/2012 (Link)
131
G20/OECD: “Report on the collaboration with institutional investors and Asset Managers on infrastructure”,
2020 (Link)
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Annex 16: Summary of responses to stakeholder questions on
Social bonds
Question 17)
To what extent do you agree with the following statements?
a. Social bonds are an important instrument for financial markets to achieve
social objectives.
b. Social bonds targeting COVID19 are an important instrument for financial
markets in particular to help fund public and private response to the socio-
economic impacts of the pandemic.
c. Social bonds targeting COVID19 are mostly a marketing tool with limited
impact on funding public and private responses to the socio-economic impact of
the pandemic.
d. Social bonds in general are mostly a marketing tool with limited impact on
social objectives.
e. Social bonds in general require greater transparency and market integrity if
the market is to grow.
A large majority of respondents agreed or strongly agreed with the statement that social
bonds are an important financial instrument to achieve social objectives. From the few
stakeholders that disagreed some nevertheless noted that a social bond standard should be
developed (see Q.18). This may suggest that the aspect of ‘importance’ has been
understood differently across the respondents, for example in terms of social bonds’
current market share.
While a majority of respondents equally agreed that social bonds are important in the
context of financing Covid-response measures, there is a significantly higher fraction of
replies which noted a neutral or disagreeing opinion compared to sub-question (a).
However, there is no clear pattern
as to the type of stakeholders’ replies. Neutral or
disagreeing replies came from both banks and asset managers but also development
banks and other potential social bond issuers.
The replies to sub-questions (c) and (d) on the impact on funding and the contribution to
social objectives respectively were quite similar. Both questions saw a majority of
respondents disagreeing that social bonds are mostly a marketing tool and that they do
have a positive impact on funding social expenditures. On sub-question (c), the
percentage of stakeholders disagreeing was somewhat lower than for (d). Approximately
a third of respondents held a ‘neutral’ opinion on this statement. This indicates that some
stakeholders believe that social bonds may have been used (or were used more) as a
marketing tool in the context of Covid. Overall, however, the perception is that these
instruments carry a real benefit.
An overwhelming majority of respondents agreed with the statement in sub-question (e).
More than three-quarters of stakeholders held the opinion that social bonds do require a
greater transparency and market integrity for the market to grow. Interestingly, some
regulators as well as market operators held a neutral stance on this statement. This
suggests that, in their opinion, the current transparency and market integrity frameworks
are sufficient already. The statement did not specify transparency and market integrity
any further, so it may simply imply that these stakeholders believe that the existing
regulatory frameworks already cater to high standards. In addition, there may be
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concerns over further regulatory measures and concurrent administrative burdens that
may arise (see Q 18).
Question 18) The Commission is keen on supporting financial markets in meeting
social investment needs. Please select one option below and explain your choice:
a. The Commission should develop separate non-binding social bond guidance,
drawing on the lessons from the ongoing COVID19, to ensure adequate
transparency and integrity.
b. The Commission should develop an official EU Social Bond Standard,
targeting social objectives.
c. The Commission should develop an official “Sustainability Bond Standard”,
covering both environmental and social objectives.
d. Other Commission action is needed.
e. No Commission action is needed in terms of social bonds and COVID19.
The replies to this question were strongly spread out across the options and without any
patterns in terms of type of stakeholder replying. As noted by one respondent, the
suggested actions under (a), (b) and (c) are not exclusive. This means that there may be
some non-captured
overlap in the statistics of the stakeholders’ views. In terms of
statistics, option (b) saw the largest support with approximately a third of respondents
opting for it. The second favoured option was option (c). The other three options saw
very similar support rates each.
Regardless of the sub-option chosen, a comment that frequently arose was there is
currently no social taxonomy. Some respondents noted that it should be developed (and
could then be applied under a standard) while others stated that capturing social aspects
would be too complicated to fully regulate and should rather be addressed in the form of
guidance. There were also comments on both sides as to whether or not there should be
one overarching framework in form of a sustainability bond standard or keeping them
separate. One the former, it was noted that equal procedures and transparency applies in
both social and environmental areas. On the other hand, those in favour of separate
standards noted that the methodologies for both areas are very different and that target
investor bases for green bonds and social bonds differ significantly (return driven versus
pure impact investors).
As for the respondents opting for (a), some noted that guidance could be a first step
towards formulating a social taxonomy. Others stressed that it is too difficult to quantify
social aspects, at least in any form similar to the environmental taxonomy. In result, no
formal regulation should apply. In general, it was noted often that having official
guidance would help to further foster the social bond market, generate increased
transparency and create more awareness. At the same time, several stakeholders
highlighted that guidance would avoid over-burdening issuers with additional
bureaucracy.
As for comments under option (b), stakeholders often raised that social aspects are
equally important to environmental and should be addressed. Often statements referred to
the need for the Commission to develop a social taxonomy which could then form the
basis for a standard. It was however also suggested that an SDG-like framework would
actually make the UN the more logical actor to develop it. Positive aspects in terms of
transparency, comparability and market integrity were frequently given as reasons for an
official standard.
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The respondents supporting option (c) often noted that social and environmental aspects
should be addressed together. The taxonomy could achieve this but needs to be
developed to cater to the social area. Some put market size and increased liquidity
forward as reasons to combine both bond types. Others noted that a the use-of-proceeds
approach as applied for GBs today should actually move to a full corporate approach
with environmental and social objectives.
In terms of stakeholders replying option (d), there were no significant new ideas
presented. Those stakeholders that provided additional comments often noted the need
for increased flexibility in the market and the danger of overregulating small niche
markets. This was equally a comment made frequently by those opting for (e). Others
noted again the difficulty and extensive work required to define social objectives. It was
also stressed that the green taxonomy should be finalized first before undertaking similar
work on the social dimension. Another frequent statement, including by one regulator,
was that market based guidance and transparency in the market to date is sufficient
already.
Question 19) In your view, to what extent would financial incentives for issuing a
social bond help increase the issuance of such bonds?
An overwhelming majority of stakeholders agreed that incentives will increase issuance.
However, the views as to their effectiveness varied strongly with options 1, 2, and 3
being close to par. As pointed out by several stakeholders, incentives will of course
promote issuance; however, the market impact depends strongly on their type and extent.
Without these insights, no clear judgement can be made on their effectiveness.
In terms of additional comments, a majority of stakeholders argued for incentives with
some stating explicitly that issuance costs are higher compared to plain vanilla bonds. In
terms of possible incentives, taxation was the most frequently raised topic. Comments
ranged from capital gains tax for investors to tax relief for institutional investors. Public
awareness, issuance and public guarantees by supervisors concerning integrity of
standards were also often raised. Some respondents furthermore suggested guarantees
improving the risk profile of the issuer.
Several stakeholders equally cautioned against the use of incentives. This includes
multiple stakeholders, which saw incentives to increase issuance. A statement made by
some of these respondents was that demand is already high and no further incentive is
actually needed. Others noted that any incentives should avoid skewing the relative risk
of the underlying funding. Similarly, it was stated that prudential regulation should not
be used to stimulate certain market behaviour. Lastly, some respondents stressed that it
would be more efficient for the EU or Member States to target financial incentives
directly at the real economy, rather than at a financial instrument.
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