Key Takeaways:
Issuers can choose to adopt the new European Green Bond label to showcase robust management of transition risks and opportunities.
Investors can turn to the European Green Bond Standard (EUGBS) for improved transparency and creditability, thereby incentivising flows to support ample climate investment needs.
The EUGBS may address most limitations of existing market-led guidance, but follow-up measures should be implemented to support uptake.
Concerns around usability have arisen as the European Union exhibits low preparedness to align its NextGenerationEU green bond proceeds with the EUGBS.
19 February 2024 (IEEFA) | The recently adopted European Green Bond Standard (EUGBS) promises to boost investor confidence and support the long-term growth of the green bond market, an asset class that has become an essential source of funding for the net-zero transition.
A new report from the Institute for Energy Economics and Financial Analysis (IEEFA) finds that the voluntary regulation represents a step in the right direction to tackle greenwashing, while improved transparency will foster more comparable and comprehensive information.
The standard may also address the limitations of existing market-led guidance and require more standardised disclosure around how project pipelines are consistent with an issuer’s environmental sustainability strategy.
After being adopted by European Union (EU) lawmakers in October 2023, the EUGBS will start applying in late 2024 when issued bonds may voluntarily use the label “European Green Bond” or “EuGB”.
Its introduction comes as Europe consolidates its position as the driving force of the green bond market, accounting for more than half of issuance globally. The share of green bonds in the global bond market remains small, indicating large growth potential.
“With ample projects needed for the net-zero transition, the EUGBS and its role in improving credibility will give issuers potential long-term benefits, thereby underpinning long-term green bond supply,” said Kevin Leung, author of the report and a sustainable finance analyst at IEEFA. “Issuers can build a track record of EuGB-labelled bond issuances to reflect lower transition risks through four pillars: commitments, capital expenditure pipelines, green asset delivery and governance.”
Despite its potential to contribute to sustainable growth of the green bond market, the EUGBS has its limitations. It falls short by lacking guidance on standardised impact reporting, making it more challenging for investors to measure and compare environmental impacts.
In addition, a loose allocation timeline for proceeds may let unallocated proceeds accumulate and become difficult to track. This could lower investor confidence in realising timely environmental impacts, particularly for bonds with a distant maturity date.
The report calls for follow-up measures—such as revisions of the relevant EU sustainable finance regime and the launch of a comparable impact reporting framework—to support the uptake of EuGB labels versus other self-claimed labels.
The European Commission has committed to raise up to €250 billion of green bonds to fund part of the NextGenerationEU coronavirus recovery package, positioning the EU as the world’s largest green bond issuer.
The report suggests that the European Commission should—through its issuance—set best practices and communicate with a high level of granularity on each regulatory requirement. This would help issuers to close any knowledge gaps, lowering obstacles to adopting the EuGB label. However, the latest allocated proceeds show low levels of alignment with the EUGBS, raising useability concerns.
“High demands from investors raise the EU’s obligation to align all its issuance with the EUGBS,” said Leung. “The bloc has not made a clear promise for a gradual alignment as the European Investment Bank has; this does not help promote uptake.”
Read the report: https://ieefa.org/resources/will-europes-new-standard-help-or-hinder-green-bond-market-growth
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