ESG-linked bonds should be excluded from the capital buffers used by banks to offset potential risks and losses, the European Banking Authority (EBA) has said.
The guidance was included in a report published today by the EBA, which updated the eligibility criteria for capital buffers under the EU’s Capital Requirements Regulation (CRR). It is believed to be the first time the regulator has opined on the topic in relation to ESG-linked bonds.
Unlike conventional bonds, the coupon of ESG-linked notes varies depending on whether the issuer achieves predefined sustainability or ESG objectives. The increasingly popular asset class is expected to grow sixfold to $60bn in 2021.
A key issue for Europe’s banking watchdog is the use of ‘step-up’ fees for issuers that miss sustainability targets for ESG-linked bonds, which it said “should not be allowed or encouraged”.
The EBA warned that the use of such fees could be regarded as “incentives to redeem…