EU’s Green Bonds Will Avoid Bloc’s Own ‘Gold Standard’ Rules

(Bloomberg) — The European Union’s flagship green bond program won’t abide by the bloc’s new rules for environmentally-friendly debt.

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The bloc started selling such securities in 2021, before the voluntary European Green Bond Standard was finalized, to fund projects through to 2026. Due to the fixed nature of that timeframe and the fact that bond sales are already underway, its original green framework will be applied for the entirety of the issuance, the European Commission told Bloomberg.

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It’s a blow for proponents of the EU label, which lawmakers touted as a “gold standard” that would help stamp out greenwashing in the burgeoning market. Yet the stringent criteria, such as alignment with the bloc’s rulebook for environmentally-friendly activities, is deterring bond issuers currently abiding to industry guidelines.

“The EU has a strong responsibility to lead by example,” said Kevin Leung, a sustainable finance analyst at the Institute for Energy Economics and Financial Analysis. Failing to align with its own rules “risks slowing the standard’s uptake and failing to rebut any criticism against the EU taxonomy’s usability.”

The EU’s decision, which will ensure consistency with its prior sales, is also significant as the bloc has emerged as a major player in the ESG debt market. The EU said in November that it has sold more than €65 billion ($67 billion) of its so-called NextGenerationEU green bonds, putting it on track to becoming the largest issuer in the world.

The new EU standards only became available to borrowers last month, though no bond issuers tracked by Bloomberg have used them so far. While the rules are voluntary, alignment is necessary if issuers want to market their debt as a “European green bond.”

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They require at least 85% of bond proceeds to be aligned with the EU’s green taxonomy, effectively a list of environmentally-friendly activities. All of the projects must also abide by a “do no significant harm” condition, and must be certified by a designated EU green bond reviewer supervised by the European Securities and Markets Authority.

By contrast, the EU’s current green bond framework is based off guidelines from the International Capital Market Association. Even so, it aligns with the EUGBS in key features such as allocation and impact reporting, management of proceeds, and external validation of reporting, the European Commission said.

The EU also voluntarily reports on the alignment of its bonds with the taxonomy. As of the beginning of August, around 63% of the total pool of NextGenerationEU Green Bond eligible expenditure is assessed as being “fully or substantially aligned” with the taxonomy. A further 34% is “partially aligned.”

Other institutions within the EU may yet adopt the standard. The European Investment Bank, which issued the first green bond in 2007, has committed to “gradual alignment.” However, member states of the EU such as Germany have said they have no immediate plans to abide by the rules.

“The high cost of compliance with the voluntary European Green Bonds standard, and the limited universe of taxonomy-aligned investments to which it can be applied, might discourage issuers from making full use of the standard,” European Central Bank officials wrote in a paper this month. 

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