MEPs Greenlight New Standard in Battle Against Greenwashing in Bond Markets

These standardized guidelines will empower investors to confidently direct their funds toward more sustainable technologies and businesses, simultaneously providing assurance to bond-issuing companies that their bonds will attract environmentally conscious investors. In doing so, it is expected to generate increased interest in such financial products and contribute significantly to the European Union's progress towards achieving climate neutrality. Crucially, these standards are in alignment with the EU's taxonomy framework, which defines the environmentally sustainable economic activities endorsed by the European Union.

Transparency

Transparency is a key element of this regulation. Any company adopting these standards, and consequently the EuGB label for marketing a green bond, will be obliged to disclose substantial information about how the bond's proceeds will be utilized. Additionally, they must demonstrate how these investments contribute to the overall sustainability plans of the company. This requirement essentially encourages companies to actively participate in a broader green transition.The disclosure requirements, presented in "template formats," can also be employed by bond-issuing companies that may not yet fully adhere to all the rigorous EuGB standards but still wish to convey their commitment to environmentally responsible practices.

Flexibility

Until the EU's taxonomy framework is fully operational, issuers of European Green Bonds will be required to ensure that at least 85% of the funds raised by the bond are allocated to economic activities that align with the EU's Taxonomy Regulation. The remaining 15% can be allocated to other economic activities, if the issuer clearly explains how this investment will be used.

External reviewers

The regulation establishes a registration system and supervisory framework for external reviewers responsible for assessing whether European green bonds adhere to the established standards. It also mandates that any actual or potential conflicts of interest faced by these external reviewers be transparently identified, eliminated, or managed.

Next Steps

After years of debate and discussion, the European Green Bond Regulation was adopted by the European Parliament on October 5, 2023 and will become applicable after approval by the Council. Subsequently, the text will be published in the Official Journal of the European Union and will enter into force 20 days after the publication date. It will start applying 12 months after its entry into force.