EU green bond standard rapporteur defends recommendations amid market criticism

The EU’s green bond standard rapporteur has defended his proposed amendments to the planned regulation amid criticism from the market.

Speaking to RI, Paul Tang said that the key question was how to make the green bond standard a success. “There’s huge demand for these types of products, the market is rapidly developing, which may also increase the incentive to label something green even though it isn’t green. If you establish a standard, you want it to be credible, otherwise the standard doesn’t work.” 

Tang, an MEP for the Dutch Partij van de Arbeid, published his draft report in November last year, proposing that issuers should have net zero transition plans, comply with the “do no significant harm” principle, and factor in social impacts of their investments. His proposed amendments also exclude expenditure on nuclear and gas projects, and ask the EU Commission to evaluate making the standard mandatory from 2025, in line with the recommendations made by the European Central Bank.

While industry groups, issuers and investors broadly support the principle of the green bond standard, there are more mixed views on whether it should be made mandatory. The European Commission’s proposal is that the standard should be voluntary. 

A spokesperson for German development bank KfW – one of the largest green bond issuers in Europe – told RI that it had not yet decided whether to use the standard, preferring to wait until its final form was clear. KfW is “currently sceptical” when it comes to mandatory usage, the spokesperson continued.

“Both the real economy and the financial industry have to intensely grapple with the EU taxonomy that still is being worked on and they will have to develop their activities in alignment with the EU taxonomy. Furthermore, the green bond market is a global market that is currently developing dynamically. A mandatory application of the EU GBS would imply the obligatory application of the EU taxonomy which would be a huge challenge for all market participants. Right now, it would probably impede the dynamic development of this market segment”.

The International Capital Markets Association (ICMA), which currently produces widely used voluntary standards, warned that Tang’s proposals could discourage issuers due to the additional reporting burden.

“These amendments would lead to an unsustainable level of additional cost and liability for issuers, which would hinder the uptake of the label", it said.

The Association for Financial Markets in Europe concurred, saying that making the green bond standard mandatory “risks slowing down the flow of capital to support the decarbonisation objectives of the real economy”. 

Furthermore, a mandatory standard could lead to EU issuers being “constrained by a format which would only evolve at the pace that the legislative process will allow”.

Tang, however, said that enhanced transparency requirements – especially the transition plan – would help solve the problem of greenwashing, which he said was an issue in the European green bond market.

If a large oil company that is still involved in oil exploration decided to issue a green bond to finance sustainable energy, the question remains whether this is green or just a green tint in a brown company, which a published transition plan could help avoid, he explained.

While Andre Haag, Chief Financial Officer of Triodos, told RI that the Dutch bank was sympathetic to making the green bond standard mandatory, he cautioned against a mandatory standard which includes gas and nuclear. This follows a controversial draft delegated act issued by the Commission on New Year’s eve, suggesting nuclear and some natural gas is classified as green in the EU Taxonomy. 

“A blurry taxonomy including gas and nuclear energy does not increase levels of transparency on the financial markets, but will instead increase the risk of and facilitate new forms of greenwashing, like light frameworks for green bonds,” he said. “This would make it very difficult for global debt investors to distinguish between ‘greenwashed’ and real green bonds. A new [standard], based on this taxonomy framework, is not the contribution to more transparency we need, and should therefore not be mandatory”. 

The current amendments exclude gas and nuclear as eligible uses of proceeds for a European green bond. Tang said that their inclusion is “a severe threat” to the credibility of both the EU Taxonomy and the standard itself. The currently used voluntary green bond standards exclude gas and nuclear, he claimed, and many market participants have indicated they are not willing to accept them in green bonds. 

“If you want to establish a deep and liquid market, you shouldn’t start by confusing the market,” he said.

However, the status of nuclear in the green bond market is not entirely fixed. In November 2021, Canada’s Bruce Power raised C$500m (€348m) from a green bond dedicated to financing the life extension of its nuclear power stations. CICERO awarded the firm’s green finance framework its second highest rating of “medium green” and confirmed its alignment with the ICMA green bond principles in a second party opinion.

Not all investors are opposed to a mandatory standard. Archie Beeching, Head of Responsible Investment at $43bn debt investor Muzinich & Co and former Head of Fixed Income at the PRI, said it was a starting point to make the standard mandatory: “We need more standardisation, I think we do need at certain times a bit of a sledgehammer approach because we are […] in a crisis moment”.

While Beeching said that there may be frustrations for investors and issuers that fall foul of the standard, “we can’t let the perfect be the enemy of the good”. 

The EU Parliament will go through its amendment process for the green bond standard in February, followed by a vote of the EU Parliament’s Committee on Economic and Monetary Affairs. While this is happening, the Council will be developing its stance ahead of so-called ‘trilogue’ negotiations between the Council of Member states, Parliament and Commission. According to a briefing note from Linklaters, this could take 18 months or longer.