The European Union should introduce rules for institutional investors, pushing them to disclose their green bond holdings, according to initial recommendations by its Technical Expert Group on sustainable finance (TEG), which also suggests that investors should design their green bond strategies to align with a new EU Standard.
The TEG is calling for feedback on its interim report, which “provides a rationale for action” on creating an EU green bond standard (GBS) and “explains how such a standard should be developed and implemented in Europe”.
The standard should be voluntary, it says, with the European Commission adopting a ‘recommendation’ rather than a mandatory legal framework to promote the standard.
However, there should be legislation to create a “centralised accreditation regime for external green bond verifiers” – in other words, a mechanism to license and monitor second-opinion providers operating in the EU.
The report suggests this process could be run by the European Securities and Markets Authority (ESMA). To enable a transition, a market-based, voluntary “Accreditation Committee” should be set up in collaboration with the Commission, the report claims.
After three years, the Commission should conduct a review of the “take up and impact” of an EU green bond standard, and at that point consider further action.
On the investor side, the report says institutions should support a green bond standard by using it to underpin their green bond strategies, and “communicate their commitment and their expectations actively to green bond issuers as well as to underwriters”.
The TEG is also planning to recommend that the Commission introduces “an ambitious ‘comply or explain’ type regime for periodic disclosure of EU Green Bond holdings by institutional investors such as asset managers, pension funds and insurance undertakings”.It added that “underwriters are also encouraged to disclose the portion of GBS underwritten versus other green bonds”.
Other ways the market could be promoted would be for the European Central Bank to “express and implement a preference for EU Green Bonds when purchasing green bonds,” says the report. At the end of last year, RI reported that European central banks had become major buyers of green bonds.
A centralised accreditation regime for external green bond verifiers
To make green bonds more linked up to the broader Investment Plan for Europe (otherwise known as the Juncker Plan), the TEG suggests that institutions involved in that strategy should develop credit enhancement guarantees and other incentives to support the growth of the green bond market. Member state sovereigns and sub-sovereigns should also be issuing green bonds under the new EU standard in future, it pointed out, and the Commission could look at setting up a grant scheme – as can already be seen in Japan and Korea – to cover the additional costs of issuing labelled green notes.
The findings are likely to spark controversy in the market, with many players worried about whether an EU standard would rein in the growing green bond market, and result in some outstanding green bonds being ineligible under the new criteria, increasing risk for existing issuers and investors.
The consultation is open for one month. The TEG will present its final recommendations, across all four of its focus areas (benchmarking, disclosure, taxonomy and green bond standards) at the end of June.
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