European Green Bonds

Introduction

Regulation (EU) 2023/2631, commonly known as the European Green Bonds (EuGB) Regulation, establishes a voluntary high-quality standard for green bonds within the European Union. It aims to create a 'gold standard' to enhance transparency, comparability, and credibility in the sustainable finance market. By setting uniform requirements for issuers wishing to use the prestigious ‘European Green Bond’ or ‘EuGB’ designation, the regulation seeks to combat greenwashing and channel capital flows towards environmentally sustainable investments.

The EuGB Regulation is a key component of the EU's Sustainable Finance Action Plan and is closely linked to other major pieces of legislation. Its core requirement—the allocation of proceeds to environmentally sustainable economic activities—is directly tied to the criteria set out in the EU Taxonomy Regulation (Regulation (EU) 2020/852). Additionally, it references the Prospectus Regulation (EU) 2017/1129 for disclosure requirements and the Securitisation Regulation (EU) 2017/2402 for specific rules on green securitisations. The regulation also establishes a robust registration and supervision framework for external reviewers under the European Securities and Markets Authority (ESMA), adding a layer of assurance to the standard.

Beyond the mandatory framework for EuGBs, the regulation provides optional disclosure templates for bonds marketed as environmentally sustainable and for sustainability-linked bonds, aiming to foster greater standardisation and transparency across the broader sustainable bond market.

Main Goal

The primary goal of the EuGB Regulation is to facilitate the financing of sustainable investments by establishing a clear, stringent, and credible standard for green bonds. Its key objectives are:

• Standardisation: To create uniform requirements for bonds labelled as 'European Green Bonds', making them easier for investors to understand and compare.
• Credibility and Integrity: To prevent greenwashing by ensuring that bond proceeds are allocated to projects that are verifiably aligned with the EU Taxonomy.
• Market Growth: To support the scaling up of the sustainable finance market by boosting investor confidence and directing private capital towards the green transition.
• Supervision: To establish a centralised registration and supervision system for external reviewers of EuGBs, ensuring their quality and independence.

Who It Applies To

The regulation applies to several key actors in the financial markets:

• Issuers: Any entity (financial, non-financial, sovereign, or securitisation vehicle) that voluntarily chooses to issue bonds using the ‘European Green Bond’ or ‘EuGB’ designation.
• External Reviewers: Entities providing assessment services for European Green Bonds must register with and be supervised by ESMA.
• Issuers of other sustainable bonds: Issuers of bonds marketed as environmentally sustainable and sustainability-linked bonds may voluntarily use the disclosure templates provided in the regulation to improve their transparency.

Key Dates

• Date of Document: November 22, 2023
• Entry into Force: December 20, 2023 (for specific enabling articles)
• Date of Application: December 21, 2024. Most provisions of the regulation become applicable from this date.
• External Reviewer Transition Period: External reviewers can provide services under a transitional regime from December 21, 2024, to June 21, 2026, by notifying ESMA. After this date, full registration is mandatory.
• ESAP Reporting: Starting January 10, 2030, issuers must submit required disclosures to the European Single Access Point (ESAP).
• Future Reviews: The Commission is mandated to publish a report on the need to regulate sustainability-linked bonds by December 21, 2026, and to review the application of the entire EuGB Regulation by December 21, 2028.

Exemptions

• Synthetic Securitisations: Bonds issued for the purpose of synthetic securitisation are explicitly not eligible to use the EuGB designation (Article 17).
• Fossil Fuels in Securitisations: Securitised exposures financing the exploration, mining, extraction, production, and trade of fossil fuels are excluded (Article 18). An exception exists for financing electricity or heat/cool generation from fossil fuels if the activity meets the 'do no significant harm' (DNSH) criteria under the EU Taxonomy.
• State Auditors: State auditors, when reviewing bonds issued by sovereigns, are exempt from the registration and supervision requirements applicable to other external reviewers (Article 22).
• Supervision of Sovereigns: While sovereign issuers must comply with the EuGB requirements to use the label, national competent authorities are not mandated to supervise their compliance (Article 44).

Key Provisions

• Use of Proceeds: The cornerstone of the regulation is the requirement that 100% of the net proceeds from an EuGB must be allocated to economic activities that align with the EU Taxonomy requirements before the bond matures (Article 4).
• Flexibility Pocket: A significant provision allows issuers to allocate up to 15% of proceeds to economic activities that meet the substantial contribution, DNSH, and minimum safeguards criteria of the Taxonomy Regulation but for which Technical Screening Criteria (TSC) have not yet been established. This also applies to certain international support and development activities (Article 5).
• Grandfathering: If the TSC are amended after a bond is issued, issuers have a seven-year grace period to align any unallocated proceeds or proceeds under a CapEx plan with the amended criteria (Article 8).
• Transparency Framework: Issuers must publish three key documents using mandatory templates:
  • A European Green Bond Factsheet (Annex I) before issuance.
  • Annual European Green Bond Allocation Reports (Annex II) until proceeds are fully allocated.
  • A European Green Bond Impact Report (Annex III) at least once during the bond's lifetime after full allocation.
• External Review Regime: All key issuer disclosures are subject to independent verification. This includes a mandatory pre-issuance review with a positive opinion on the factsheet and a post-issuance review of the allocation report after full allocation. The impact report may be reviewed voluntarily (Articles 10, 11, 12).
• Supervision of Reviewers: Title IV establishes a comprehensive system for the registration, ongoing supervision, and enforcement of rules for external reviewers, conducted by ESMA.

Obligations & Requirements

For Issuers of European Green Bonds:

• Allocate Proceeds: Ensure 100% of net proceeds are allocated to Taxonomy-aligned economic activities, using either a gradual or portfolio approach.
• Publish a Prospectus: The prospectus must state that the bond is issued in accordance with the EuGB Regulation.
• Pre-Issuance Disclosures: Complete the EuGB Factsheet and obtain a positive pre-issuance review from a registered external reviewer.
• Post-Issuance Reporting: Prepare and publish annual Allocation Reports until proceeds are fully allocated and at least one Impact Report during the bond's lifetime.
• External Verification: Secure a post-issuance review of the allocation report upon full allocation (or for every allocation report under the portfolio approach).
• Website Publication: Publish all required documents (factsheet, reviews, reports, CapEx plans) on their website and notify ESMA and the relevant national competent authority.

For External Reviewers:

• Registration: Must apply for and obtain registration from ESMA before providing services.
• Compliance: Adhere to strict organisational, governance, conflict-of-interest, and methodology requirements.
• Conduct Reviews: Perform pre-issuance and post-issuance reviews in accordance with the regulation and using the elements outlined in Annex IV.
• Publication: Publish all issued reviews on their own website.

Affected Products, Actors, and Processes

• Products: Bonds seeking the ‘EuGB’ designation, including standard bonds and securitisation bonds. The regulation also provides voluntary templates for other bonds marketed as environmentally sustainable and sustainability-linked bonds.
• Actors: Bond issuers (corporations, financial institutions, sovereigns, public entities), investors, external reviewers, ESMA, and National Competent Authorities (NCAs).
• Processes: The entire lifecycle of a green bond, from pre-issuance structuring and documentation, through issuance and marketing, to post-issuance allocation tracking, reporting, and impact assessment.

Penalties

National Competent Authorities are required to be equipped with powers to impose administrative penalties that are effective, proportionate, and dissuasive for infringements by issuers. These measures, to be established by Member States by December 21, 2024, include:

• Public statements identifying the infringing party and the nature of the breach.
• Prohibition from issuing EuGBs for up to one year in cases of repeated and severe infringements.
• Maximum administrative fines for a legal person of at least €500,000 or 0.5% of the total annual turnover.
• Maximum administrative fines for a natural person of at least €50,000.

ESMA is also empowered to impose fines and periodic penalty payments directly on external reviewers for breaches of their obligations under the regulation.