Taxonomy usability issues ‘will limit uptake of EU Green Bond Standard’, says ICMA

The EU Green Bond Standard is unlikely to become mainstream unless usability issues with the taxonomy are solved, the International Capital Markets Association (ICMA) has warned.

The intervention by the industry body, which oversees the widely used voluntary Green Bond Principles, came after the European Council and European Parliament came to a preliminary agreement late on Tuesday evening.

The full text of the agreement is yet to be written, but the groups reached political consensus on a number of key points.

Under the agreement, companies issuing European green bonds will have to align the use of proceeds with the EU taxonomy, with issuers allowed to allocate up to 15 percent to non-aligned activities.

This “flexibility pocket” covers activities that are not covered by the regulation but contribute to environmental objectives, do no significant harm to objectives and are carried out in compliance with the minimum safeguards. This demonstration should be included in the factsheet and validated by an external reviewer.

Issuers will have to disclose information on use of proceeds, as well as how this feeds into a company’s wider transition plan, with disclosure templates available for voluntary use by issuers who do not qualify for the label. Voluntary disclosures have also been introduced for environmentally sustainable and sustainability-linked bonds.

Agreement was also reached on a registration system and supervisory framework for external reviewers, who will be required to identify, manage and disclose actual or potential conflicts of interest.

The agreement will have to be confirmed and adopted by both the council and parliament before it is finalised, and will come into force 12 months after that date.

Paul Tang, a Dutch MEP and the EU Parliament’s rapporteur, told Responsible Investor that the standard and voluntary disclosures “will help get the market into shape”.

“More transparency, spending linked to the ambitious EU taxonomy, truly independent external reviewers, and clarity on how green bonds contribute to a company’s transition plan,” he said. “This regulation will change the green bond market for the better.”

Tang predicted that, given the clear disclosure system, bonds that do not use it “will likely be looked at with increasing suspicion”.

This was echoed by French MEP Gilles Boyer, shadow rapporteur for liberal parliamentary grouping Renew Europe, who said he expected the standard to become “a global reference”.

Swedish finance minister Elisabeth Svantesson, whose government holds the rotating presidency of the European Council, said it would reduce risks posed by greenwashing and be useful to both issuers and investors.

Market concerns

By contrast, Nicholas Pfaff, head of sustainable finance at ICMA, told RI: “I don’t see the standard becoming mainstream unless we deal with a long list of taxonomy usability issues.”

While welcoming the conclusion of the process, Pfaff listed a series of concerns, including the fact the taxonomy “doesn’t work internationally”, that it doesn’t cover all areas, that there continue to be issues with availability and cost of data, and that the taxonomy is frequently qualitative.

“Is it going to be significant in the near term? I would argue it’s not, beyond the symbolic value, because the taxonomy usability issues aren’t fixed. This is a standard which is going to appeal to the European official sector and to a segment of the market which is pure play, particularly in renewables, and which is operating exclusively in the EU.”

This sentiment was echoed by the Association for Financial Markets in Europe (AFME). Oliver Moullin, managing director for sustainable finance at the AFME, said he welcomed that the agreement maintained the initial objective of establishing a voluntary, science-based gold standard, and that the establishment of the standard would help develop the market.

However, to maximise adoption, “it is important that work continues to enhance the usability of the taxonomy”, he said.

He added that usability would depend on the flexibility of taxonomy alignment, the treatment of green securitisation and grandfathering provisions, and that the AFME “looks forward” to seeing the details of the agreed-upon text.

Asked whether he thought the EU had achieved the promised “gold standard”, Pfaff said he was unconvinced.

“It’s an ambitious official standard which will not really be operational until we deal with the taxonomy usability challenges,” he said. “It’s going to be a good standard for a small part of the market today. There is some hope that, with for example three years to fix the usability issues, it could be of wider appeal.”

While the agreement does include standards for external reviewers of green bonds, Pfaff also said he thought that arguably “there should have been much more discussion around the role that external reviewers play, about their actions in mitigating greenwashing as well as a much broader discussion on possible regulation of their activities”.

“If there was a substantive topic that I would argue should take priority over designing a label, which beyond the requirement for taxonomy requirement is essentially the same as the Principles, it would have been regulation of external reviewers,” he added.

“Did we really need to have a seven-year debate on [the EU GBS]? I would say no.”