New European Green Bond Standards
Green Finance in Europe: An Overview of the Latest Standards
The mighty European Union has reached a historic agreement to define the standards for The European Green Bond (EuGB). The newly established “European Green Bond Standards” (GBS) signify a significant shift in how Green Bonds are viewed in the investment market. Rather than being isolated financial instruments, green bonds can now be directly linked to a company's overall green transition plan.
This marks a significant step towards creating a global framework for issuing green bonds, being the world’s first standards set on Green Bonds. Companies will now have the option to comply with the newly established European Green Bond Standards and implement sustainable practices across their operations. Nevertheless, if a company decides to market a green bond with the "European Green Bond Standard" label, it must disclose how it intends to utilize the funds and how the investments will support its energy transition goals.
The regulation will apply a little over a year after it is approved and published, giving companies time to prepare for the new requirements.
One key aspect of the European Green Bonds Standard is the use of horizontal taxonomy. This refers to the EU's classification system for environmentally-friendly economic activities, which was established under the Taxonomy Regulation. This legislation sets out criteria for determining which activities can be considered environmentally-friendly, creating a “common language for all actors in the financial system”. Until the taxonomy framework is fully up and running, companies can invest 15% of the proceeds from a green bond in activities that comply with the taxonomy requirements, but for which no criteria have yet been established.
It’s Voluntary?
This has been met with some criticism from those who feel that a voluntary system may not be enough to ensure that companies are fully committed to their green transition plans. Critics argue that without a mandatory system, some companies may still engage in greenwashing, which is the practice of exaggerating or misrepresenting the environmental benefits of a product or service.
However, it is worth noting that the voluntary nature of the standards is not necessarily a bad thing. Companies that choose to use the European GBS when marketing their green bonds will be required to disclose how the proceeds will be used and how the investments will contribute to their energy transition plans. This creates a system of accountability, where companies that fail to adhere to the standards will be looked at with negative sentiment and suspicion by investors and other stakeholders. Will Corporate Cancel Culture Prevail?
Moreover, the voluntary nature of the new standards also allows for greater flexibility and innovation in the market. Companies can choose to adopt the standards at their own pace, and those that do can be seen as leaders in their industry. This will ease some of the other external issues European firms are facing, such as energy uncertainties. Additionally, the standards may act as a catalyst for more companies to commit to their green transition plans, even if they are not yet ready to fully adopt the European Green Bond Standard.
Ultimately, while a mandatory system may provide more certainty and consistency, a voluntary system has its own benefits and may be the best way to ensure that companies are fully committed to their green transition plans. As the market for green bonds continues to grow and evolve (highlighted below), it will be interesting to see how the voluntary standards impact the behavior of companies and investors alike.
The Green Bond Market
One of the most innovative financial instruments to emerge from sustainability investing is the Green Bond. The concept behind Green Bonds is simple: investors purchase these bonds with the knowledge that the proceeds will be used to finance projects that have a positive impact on the environment, such as renewable energy, clean transportation, or sustainable agriculture. In this way, Green Bonds are a powerful tool for mobilizing private capital towards sustainable projects, while also providing investors with a way to align their investments with their values.
(Source: ClimateBonds.com)
In 2013, the market saw a turning point with the issuance of the first $1 billion USD green bond by the World Bank. This bond was issued to support environmental projects and renewable energy initiatives, and it sparked a renewed interest in green bonds among investors. The bond offered investors a chance to put their money into sustainable projects while still achieving a financial return, and this concept was well-received by the market.
Following the success of the World Bank's green bond, other institutions began to issue similar bonds, leading to an exponential rise in the market. Economic factors, such as increasing demand for sustainable investments and growing concern about climate change, played a significant role in this growth. In addition, governments around the world began to prioritize sustainability and the transition to a low-carbon economy, creating a favorable environment for green bonds. This was reflected in policies such as the Paris Agreement and the European Union's Sustainable Finance Action Plan, which helped to create a regulatory framework for green finance.
By the end of 2015, global issuances for green bonds had reached $100 billion USD, and the market continued to grow rapidly over the next few years. In 2020, the market hit a significant milestone with global issuances reaching $1 trillion USD, a testament to the increasing demand for sustainable investments.