The final adoption of the EU’s green bond standard by the European Council in late October brings to a close another chapter in attempts to bring regulated order to the ESG space.
The standard, which creates a voluntary label and disclosure regime for green bond issuers, is intended to improve a market that many allege is rife with greenwashing.
The core principle of the standard is that bonds wishing to claim the label of “EU Green Bond” must allocate at least 85 percent of proceeds to projects aligned with the EU taxonomy. There is an additional “flexibility pocket” for allocation to areas not yet covered by taxonomy standards.
Issuers using the standard will also need to disclose how their proceeds align with the transition plans of the company as a whole.
When the regulation is published in the official journal of the EU, issuers will have 12 months to prepare. However, some firms have already updated their frameworks in anticipation and come to the market with deals aligned to the draft regulation.
French utility EDF, for instance, updated its green bond framework in July last year to include references to the EU standard and taxonomy alignment of its planned projects.
The company has a particular interest in demonstrating taxonomy alignment as it is looking to fund nuclear activities – controversially included in the taxonomy at the last minute – with some of its green bonds, but other issuers have done the same.
Analysts working on dedicated green bond funds broadly welcome the regulation, especially as it will help with their own regulatory requirements.
Felipe Gordillo, a senior ESG analyst at Mirova, says the regulation will be helpful both in his own work and in making Mirova’s taxonomy and SFDR disclosures simpler.
“If I have an EU Green Bond and a green bond only aligned with ICMA standards, I will be more comfortable with the level of disclosures I get from the EU bond. That will help us as analysts assess those transactions,” he says.
“If we have a security in which at least 85 percent of the proceeds are aligned with the taxonomy, these bonds will contribute more to our own taxonomy alignment exercise for our fixed income portfolios than an ICMA green bond.”
Isobel Edwards, a member of Goldman Sachs Asset Management’s green, social and impact bonds team, says that the manager’s green bond funds are currently reporting their taxonomy alignment on an activity basis. Once the standard is up and running, however, there is an option to simplify disclosures by switching to reporting the share of EU Green Bonds instead.
Similarly, the funds do at present disclose the share of their green bonds not aligned with the standard as a voluntary Principal Adverse Impact indicator under SFDR, but Edwards says GSAM “could definitely look” at doing so in future.
“For me, the proof of success wouldn’t be about greeniums or volumes. It would be if some European countries print a sovereign EU Green Bond”
Felipe Gordillo, Mirova
This is echoed by Johannes Boehm, a senior ESG analyst at Germany’s Union Investment. The standard will “put a bit more flesh on the bone” in the market, he says, welcoming in particular standardisation of areas like allocation reporting.
The standard will help “to the extent that it will provide clarity about the greenness and sustainable credentials of certain issuances”, he adds.
That said, much remains unclear about take-up, volumes, and which issuers will use the standard.
The whole process “involves a great deal of crystal-ball gazing”, says Boehm. His best guess is that more widespread adoption will start in early 2025, and that the earliest adopters will likely be utilities or issuers in other sectors which can easily map their activities to the taxonomy.
Gordillo also says that, based on conversations with issuers, some firms would like to claim the trophy of issuing the first standard-aligned green bond.
At the other end of the spectrum are issuers without enough taxonomy-aligned green projects to warrant regular standard-aligned green bonds.
These firms have reportedly been asking investors whether they would prefer infrequent standard-aligned green bonds or more frequent green bonds aligned to the ICMA Green Bond Principles, where around 40 percent of proceeds are allocated to taxonomy-aligned projects.
Edwards says issuers have asked whether GSAM’s funds would exclude them for not using the EU standard. Her response is that they will buy both EU green bonds and bonds aligned to the ICMA principles – but, she adds, most green bond investors have moved beyond relying on labels of any kind.
“Most funds now are at the point where they don’t just take third parties’ word for it, they do their own extra checks. If a bond comes to the market meeting the ICMA Green Bond Principles, whether or not that gets entered into funds will depend on the proprietary methodology of each asset manager.”
The difference between the two standards, Edwards says, is just a question of how much information is delivered into the market. Even an EU green bond would not be an automatic inclusion in the GSAM green bonds funds, as the manager has other criteria including entity-level activity thresholds.
What is success?
While the goal of the EU green bond standard is to reduce greenwashing within the green bond market, it is unlikely to completely dominate the market. For starters, while the EU accounts for a significant portion of global issuance, there is no reason for issuers outside the region to pick up the standard.
ICMA has also previously warned that issues with the usability of the EU taxonomy may hinder uptake.
Union’s Boehm says the success of the GBS should be measured by what proportion of the market opts for the label rather than sticking with ICMA standards. By his measurement, a success would be a double-digit percentage of EU issuance using the label. He also hopes that a “halo effect” where non-EU green bond issuers pick up the voluntary disclosures or tighten their own standards might take place.
“Most funds now are at the point where they don’t just take third parties’ word for it, they do their own extra checks”
Isobel Edwards, Goldman Sachs Asset Management
GSAM’s Edwards does not expect widespread uptake. “I think the market will probably still look quite mixed in a few years’ time,” she says. “That doesn’t mean it’s not successful. It’s still a useful standard.”
Usage of the label by sovereign issuers will be an important benchmark as well. “When a sovereign prints a green bond they are leading the market by example,” says Gordillo. “So for me, the proof of success wouldn’t be about greeniums or volumes. It would be if some European countries print a sovereign EU Green Bond.”
Edwards says there will likely be at least some sovereign activity.
Sovereign and sub-sovereign entities tend to have lower alignment in their labelled bonds to the EU taxonomy than some corporates, so they are expected to have similarly low alignment under the EU GBS.
“Given this, probably we are going to see more corporate usage than sovereign,” says Edwards. “Some sovereigns that have already made efforts to align to the EU taxonomy in their labelled bonds may have an easier time meeting the criteria, so they could potentially be the ones who attempt to align with the label first.”
Unsurprisingly, the difficulty of conducting taxonomy assessments varies greatly with the complexity of the issuer.
Second-party opinion provider Shades of Green, which carried out the EDF SPO, offered taxonomy alignment assessments for a number of years before it was bought by S&P Global. The assessments are now integrated into S&P’s Global Ratings offering.
“If you have an SPO for a pureplay renewable company financing a new solar plant, it’s likely going to be fairly quick and the taxonomy alignment is unlikely to add a lot of work,” says Florence Devevey, managing director, EMEA for sustainable finance at S&P Global Ratings.
Financial institutions or sovereigns are more complex, she notes. “They tend to have a mix of green and social projects, and often quite a long list. Some of the projects might be common, others might be very niche. Some of them we will have seen many times, some of them we will never have seen.
“So we will typically spend more time on those SPOs, and the same goes with the taxonomy alignment.”
Individual project categories can also involve more work, adds Carina Waag, director for sustainable finance at S&P Global.
“There are some taxonomy activities like forestry activities or nuclear which have a lot more extensive criteria on the significant contribution and DNSH,” she says. “That has a big impact on the time we need to complete our EU taxonomy analysis versus other project categories with less extensive criteria.”
As well as potentially affecting their workload, the GBS will also mean that SPOs will have their activities covered by the regulation.
Both Boehm and Gordillo welcome regulation of the sector. Under the standard, providers of SPOs for EU Green Bonds must be registered and authorised by ESMA.
Gordillo says Mirova has seen a disparity in the quality of SPOs in the market. “You have different providers in the market and you don’t find the same quality across the SPO providers today,” he says.
Similarly, Boehm says the accreditation of SPO providers by ESMA will give more confidence to market participants.