EU’s biggest green bond issuer aligns with new taxonomy as experts warn it could inflate issuance costs

The European Investment Bank (EIB), Europe’s biggest issuer of green bonds, has sold its first labelled notes of 2019, revising its documentation to align with the EU’s new green taxonomy.

The bank issued a €500m, 23-year Climate Awareness Bond (CAB) at the tail end of last week, pricing at 59.9 basis points over the July 2042 Bund. The lion’s share (59%) of the notes were snapped up by pension and insurance companies, with the remainder taken by fund managers (30%) and banks (11%). Geographically, buyers in France (33%) and Scandinavia (30%) dominated the trade, followed by Germany (16%) and the Netherlands (8%).

Danish asset owner ATP was a buyer, with Senior Portfolio Manager Lars Dreier Kristensen praising the deal for being the result of cooperation between the EIB and the European Commission on the taxonomy and related green-bond standard (GBS). The EIB is on the Technical Expert Group that is developing technical guidance for the Commission on a number of is proposals o sustainable finance.

The EIB’s decision to align this deal with the EU taxonomy, months before it stands any chance of entering into legislation, will add weight to a proposal which has proved controversial so far.

Two tight votes last month resulted in the European Parliament eventually reaching its official position on the taxonomy legislative proposal, but Council is still in discussions, meaning there is no time to complete political negotiations within this legislature. In addition, the technical guidelines being developed by the TEG are not yet finished.“This transaction marks the start of the EIB’s sustainability funding in 2019, and establishes a direct link between debt capital markets and the ongoing development of a coherent classification of sustainable development,” said Eila Kreivi, Head of Debt Capital Markets at the EIB.

According to data from Climate Bonds Initiative, the EIB is the second largest issuer of green bonds in the world, after US mortgage heavyweight Fannie Mae.

But there are major concerns about the impact of the EU’s efforts on the green bond market, by some other long-standing market participants.

In a new feedback document, Norway-based Cicero – one of the biggest providers of external reviews for green bonds – warned that creating requirements for green bonds to align with the taxonomy “could increase our costs by as much as 50% or more over our current levels”.

The taxonomy is expected to form the basis of a new EU Green Bond Standard, but Cicero concluded that “determining compliance with the GBS based on the underlying draft taxonomy will increase the cost of external reviews” – thus making green bonds more expensive to issue.

“In addition to reviewing a green bond against our own Shades of Green methodology, we would need to also check for compliance with the taxonomy.” It is difficult to predict the effort required, Cicero concedes, but “interpreting from the current draft taxonomy, we estimate this would mean additional hours/days of work for each sector above and beyond our current methodology”.