New EU Regulation: “A new age for Green Bonds”
On 20 December 2023, the European Regulation on European Green Bonds (the EuGB Regulation) entered into force. The EuGB Regulation will apply from 21 December 2024, representing a new age for Green Bonds in the EU. The EuGB Regulation promotes the EU’s objective for a climate-neutral economy by supporting the financing of sustainable activities and increasing investors’ protection against greenwashing.
Greenwashing is the deceptive practice of making misleading claims about a company’s environmental benefits or purpose. Pursuant to the EuGB Regulation, issuers seeking the European Green Bond (the EuGB) label have to satisfy specific requirements related to the use of proceeds and adhere to the standards for reporting and disclosure.
The use of proceeds
Pursuant to the EuGB Regulation, the proceeds of the EuGBs have to be allocated in full in sustainable activities that meet the taxonomy criteria set out in the EU Regulation 2020/85 (the EU Taxonomy Regulation). An economic activity is considered sustainable only if it aligns with the criteria of the EU Taxonomy Regulation. It must contribute substantially to an environmental objective, not significantly harm any environmental objective, be carried out in accordance with certain minimum safeguards and conform to the technical screening criteria set forth by the European Commission. Exceptionally, for the sectors that are not included in the EU Taxonomy Regulation, the EuGB Regulation permits the allocation of up to 15% of the proceeds to activities that don’t comply with the above technical screening criteria.
Disclosure requirements
The EuGB label can only be used for securities that fall within the scope of Regulation 2017/1129 (the Prospectus Regulation) and comply with its criteria. Moreover, issuers of EuGBs must comply with certain transparency and disclosure requirements before and after the issuance of the bonds.
Before issuing an EuGB, issuers should provide the EuGB factsheet and the CapEx plan, if applicable. The EuGB factsheet, which contains important information regarding the use and environmental impact of the EuGB proceeds, and compliance with certain reporting requirements, must receive a pre-issuance positive opinion from an external reviewer. Moreover, where the use of proceeds pertains to an economic activity that meets the taxonomy criteria, the issuer has to publish a CapEx plan. An external reviewer has to assess the CapEx plan, which includes a deadline by which the expenditure funded by the EuGB would satisfy the taxonomy criteria.
Following the issuance of an EuGB, issuers must prepare an Allocation Report for every 12-month period until the proceeds of the EuGB are fully allocated or, where relevant, the CapEx plan is completed, confirming that the funds have been used in accordance with the EuGB Regulation. Also, after the full allocation of the proceeds of an EuGB and at least once during the lifetime of the bond, issuers have to produce an Impact Report on the environmental impact of the use of the bond’s proceeds.
Additional disclosure requirements are found in the case of securitisation. In this case, the prospectus also has to include a statement that the EuGB is a securitisation bond, and that the originator is responsible for satisfying the commitments undertaken in the prospectus related to the use of proceeds.
Finally, the EuGB Regulation provides optional disclosure obligations for environmentally sustainable bonds and sustainability-linked bonds, which are not intended to meet the criteria of EuGBs.
Conclusion
The EuGB Regulation will play a crucial role in facilitating the implementation of the European green deal, since it enhances investment in environmentally sustainable activities. Though the enhanced transparency rules reduce the risks of greenwashing with respect to EuGB labelled products, it still remains rather unclear if these risks are effectively decreased for environmentally sustainable bonds and sustainability-linked bonds, which do not qualify as EuGB.
