EU green bonds won’t meet EU Green Bond Standard as Commission mulls ‘light touch’ reporting approach for €750bn recovery fund

EU green bonds look set to adopt Rio Markers

The EU won’t apply its own official standards to its mammoth green bond programme, and Member States won’t be required to disclose details of how they use ‘green’ proceeds from the EU’s flagship Coronavirus recovery fund, according to plans being considered by the European Commission (EC).

The EU plans to raise 30% of the €750bn Recovery and Resilience Fund (RRF) through green bonds, but it appears the Commission will not have the notes certified under its upcoming Green Bond Standard, known as the EU GBS. 

The EU GBS was one of four key initiatives under Europe’s 2018 Action Plan on Sustainable Finance and sought to reduce greenwashing by clarifying best practice for green bond issuers and offering a investors a trustworthy standard. It was the only one of the four initiatives not to be tabled as a legislative proposal at the time, because it was to be based on the taxonomy that was still in its infancy. 

Last year, however, it was confirmed that “the Commission will establish an EU Green Bond Standard” as part of the European Green Deal Investment Plan. The first pillars of the taxonomy – climate change adaptation and mitigation – are slated to be signed into law next month, making it possible for the EU GBS to be presented by the Commission in June. 

But documents seen by RI suggest that the EC does not intend to adopt those standards for its own green bonds, or adhere to recommendations from its Technical Expert Group on Sustainable Finance last year. 

“EU green bonds should either comply with existing green bond standards or the new EU Green Bond Standard, there should not be one set of rules for private investments and another for public spending” – Sirpa Pietikäinen

In its formal advice, that group said that “applying the provisions of the EU Taxonomy to define project eligibility regarding the EU GBS is the suitable way to ensure consistency between the project financed and the EU’s long-term environmental objectives”.

However, to decide which Member States are eligible for green bond financing under the RRF, the EC will assess national spending plans against its current ‘climate tagging’ methodology – known as the Rio Markers – instead of the taxonomy. The Rio Markers were first developed in 1998 and currently cover public financial flows into biodiversity, climate mitigation, climate adaptations and desertification. Their use has previously been criticised by the European Court of Auditors for inflating the positive climate impact of EU spending.

One Commission presentation document states that, in addition, “to the greatest extent possible… programme-based expenditure [should] align with EU taxonomy”.

Sources told RI that Member States had earlier threatened to withdraw support from forthcoming legislation establishing the EU’s green taxonomy if recovery financing was made subject to its rules.

The green bond programme will adhere to the Do No Significant Harm (DNSH) principle of the taxonomy, which prohibits projects from undermining any of Europe’s environmental objectives in order to achieve others. This requirement applies to all RRF spending plans, not just those financed by green bonds. However, the interpretation of DNSH for the RRF is notably less stringent than that laid out in the EU taxonomy. Under the RRF, gas-fired plants emitting less than 250g of CO2 emissions per KWh are eligible to receive funding on a case-by-case basis, as opposed to the taxonomy’s stated threshold of  100gCO2e/KWh, for example. 

It is anticipated that the EU’s green bond issuance will almost double the size of the market for the asset class. This will add significant liquidity to the market and provide investors more options for green diversification, analysts have said.

On reporting, meeting notes seen by RI spell out an alternative “light touch method” in which the EC will be responsible for tracking the aggregate climate-related expenditure reported by member states to ensure that it matches up to the total amount of financing raised by the green bonds. 

Member states will not be required to undertake additional use-of-proceeds reporting to provide more granular information to investors. 

The planned “light touch method” falls short of existing international standards such as the Green Bond Principles – seen as the de facto framework for green bonds – which requires issuers to report back to investors post-issuance on the specific activities being funded by bond proceeds.

EU lawmakers contacted by RI have criticised the proposals as being out of step with the bloc’s ambitious green finance agenda.

Paul Tang, the Labour Party MEP who oversaw the Sustainable Finance Disclosure Regulation as ‘rapporteur’, said: “The aim of the EU recovery fund is to help Member States move towards the sustainable economy of the future. This requires strict transparency measures, based on the work done on the EU taxonomy. Greenwashing the funds provided through European solidarity is unacceptable.”

This was echoed by Sirpa Pietikäinen, the former rapporteur for the EU taxonomy, who raised concerns that looser requirements for EU green bonds could undermine the credibility of the wider green bond market.

“EU green bonds should either comply with existing green bond standards or the new EU Green Bond Standard, there should not be one set of rules for private investments and another for public spending,” she said.

“These proposals are unsurprising given that some member states have been lobbying against applying the taxonomy to the RRF. However, it is still a shame that these member states are not more supportive of ambitious climate spending requirements which are in the best interest of their future citizens.”

Sebastien Godinot, an economist with WWF’s European office, suggested that the EC consider other alternatives until the adoption of the EU GBS.

“It would be very worrying if the RRF green bonds are not subject to any additional taxonomy reporting requirements. WWF has proposed a concrete transitory solution until the EU Green Bond Standard is in place: Sustainability-Linked Bonds, that commit a certain sustainability performance. This would be a much more robust and convincing approach.”

Member states are due to present their national recovery spending plans to the Commission for review by the end of April. The EC’s funding strategy and second-party opinion are also expected next month. Reporting expectations between Member States and Commission will be addressed in the bilateral financial agreements that follow in the summer, RI understands.