EU green bond standard should be made mandatory says ECB

Stricter adoption should happen over time to avoid sell-off, suggests central bank

The EU’s proposed green bond standard should be made mandatory for new green bond issuances, the European Central Bank (ECB) has said. 

It is “important” that the standard become the prime standard within the EU, the ECB said in its response to a request from the European Parliament for its opinion on the proposal. This would in turn ensure that the EU green bond market was aligned with the taxonomy and mitigate greenwashing concerns, it continued. 

Under the proposed standard, which the European Commission plans to make voluntary, all proceeds raised from green bonds should be allocated to projects aligned with the EU’s green taxonomy. 

In its opinion, the ECB welcomed the proposal, and said that existing industry standards “rely on definitions of underlying green projects that are not sufficiently standardised, rigorous or comprehensive”, with the green bond standard helping to strengthen green bond credibility and reduce reputational risks for issuers and investors. 

The ECB cautioned against an immediate shift to a mandatory standard, warning that it might lead to divestment from non-aligned bonds and a drop in issuance, but said that it considered a commitment to making the standard mandatory for new bonds over a reasonable time period to be “necessary”. The Commission should report on this to the EU Parliament and Council by the end of 2023, and the expansion of the taxonomy to include transition financing would ensure that green investments which fall short of the substantial contribution thresholds included in the taxonomy are included, it continued. 

While the standard is not yet formally in place, a number of issuers have already claimed alignment with the taxonomy. At the end of October, Italian utility A2A said that its planned use of proceeds for a €500m green bond was fully taxonomy-aligned, and promised to report on the actual volume of taxonomy aligned expenditures in its allocation reporting, while Swedish property company Diös says it had updated its green bond framework to align with the taxonomy and standard and is holding investor calls for a potential new green bond today. 

Last year, UK natural gas company Cadent became the first private-sector issuer to claim to align a green bond with the taxonomy. In a second-party opinion, DNV GL concluded “that the selection criteria are aligned with the relevant thresholds described in the EU Sustainable Finance Taxonomy”. 

Notably, however, the EU’s own green bonds will not be aligned to the green bond standard, as the framework includes eligible investments which are not covered by the taxonomy. Climate Bonds Initiative CEO Sean Kidney described the move as “madness” when it was first reported by RI.