Green bond issuers will have some flexibility around EU taxonomy alignment in the event of changes to taxonomy criteria, according to a leaked text setting out details of the EU’s green bond standard.
The European Parliament and Council of member states in late February reached a provisional agreement on the EU green bond standard, but the full text of the agreement had not yet been written.
A draft text, seen by Responsible Investor, provides clarity on so-called grandfathering rules which had prompted some concern from analysts.
Under the rules, issuers will have to ensure that in the event of changes to technical screening criteria under the EU taxonomy, unallocated proceeds and “proceeds covered by a CapEx plan that have not yet met the taxonomy requirements” will have to be aligned to the amended criteria within seven years.
When a provisional agreement was announced, it remained unclear whether issuers would have to reallocate already allocated proceeds or ensure that already funded projects aligned with new criteria. Barclays analysts warned previously that this could deter issuers from coming to market with long-dated bonds.
The text confirms other details from the provisional agreement, including the voluntary nature of the standard, a 15 percent “flexibility bucket” for allocation to areas not covered by taxonomy criteria and a supervisory framework for external reviewers, including those from third countries.
A spokesperson for the European Commission said it would not comment on leaks and would not be drawn on when the final text will be published.
The text appears to be in wide circulation in the market, with references made to the final agreement by speakers in a panel discussion on Wednesday hosted by the Association for Financial Markets in Europe (AFME).
Several market participants said they remain concerned about the uptake of the EU green bond standard, despite some improvements compared with previous drafts.
Speaking on the AFME panel, Jarek Olszowka, head of sustainable finance at Nomura, said he was pessimistic on uptake based on discussions with issuers.
While agreeing that the final version was an improvement on previous drafts and had addressed some concerns, Olszowka said that until the taxonomy is usable for issuers, “it’s very hard to have a functioning EU green bond standard”.
A number of now-dropped additions to the standards, which have been under development and debate for almost seven years, proved controversial among market participants.
Olszowka pointed to discussions around whether the standard should be made mandatory for issuers, whether they should be forced to disclose transition plans, and the introduction of civil liability in the case of misallocation of proceeds as areas of improvement.
The standard is a step in the right direction, he continued, but there remains a question mark over who will actually be able to use it. He added that, after six years, the standard was a “slight disappointment”.
This was echoed by ABN AMRO’s global head of sustainable markets, Joop Hessels, who forecast a “relatively small” uptake as long as problems remain.
While there will be a big uptake in categories such as renewables, with utility issuers finding it relatively easy to align to the taxonomy, other categories of issuer “will probably be taken out” of the market due to extensive technical screening criteria or Do No Significant Harm criteria which they find it difficult to comply with, he said.
John Ploeg, co-head of ESG research for fixed income at PGIM, agreed that questions remain around the uptake, but added that the standard could help improve both the quality and credibility of green bonds.
“If you have an issuer that’s issuing a green bond to fund an activity that would normally be covered by the taxonomy and they don’t use the standard, it would offer an opportunity to ask them why not,” he said. “I think it increases the discussion in engagements.”