What does the EU Green Bond Standard mean? How will it benefit capital market actors?
In this blog series, “EU Sustainable Finance Explained”, we analyse forthcoming EU regulations and identify the key takeaways. Part III of the blog concerns the Green Bond Standard, whereas Part II explained the Taxonomy and Part I provided an overview of the European Commission’s sustainable finance initiatives.
The mandate of the EU Technical Expert Group on Sustainable Finance (EU TEG) has been extended until the end of 2019 to allow sufficient time to finalise all tasks. At the core of their work is the taxonomy, a classification system indicating which economic activities are to be designated as green. The taxonomy will also be used by another two legislative proposals, and by soft regulation including the EU Green Bond Standard (EU GBS).
The EU GBS can be regarded as a valuable tool supporting the EU’s sustainable finance policy objectives and with the potential to become the leading standard in the green bond markets. As it will be an official European and international standard representing the best practices in reporting and verifying sustainability matters, and in improving comparability, it should increase the flow of finance to green and sustainable projects. It is also expected to clarify the definition of what is green and to throw light on the varying quality and extent of external reviews.
EU GBS affords issuers an opportunity to launch taxonomy-aligned green bonds at a potentially lower cost of capital. For investors, the standard affords an opportunity to make investments in green bonds that are credible and easier to report on.
What does the EU Green Bond Standard signify?
It is important to recognise that it is a voluntary standard that issuers can choose to follow when issuing green bonds. In adopting it, issuers can adhere to the EU Green Bond Framework, a protocol that confirms the voluntary alignment of the green bonds issued under the EU GBS. Under the framework, issuers must explain how their strategy aligns with the EU’s environmental objectives, and must provide details on the most important aspects of their use of proceeds, the processes they employ, and their reporting on green bonds. In addition to this obligatory list, issuers should also consider how they can robustly demonstrate the alignment of their strategy with the EU’s environmental objectives – climate change mitigation, climate change adaptation, the sustainable use and protection of water and marine resources, the transition to a circular economy, recycling, waste prevention, pollution prevention & control, and the protection of healthy ecosystems. If you plan to issue a green bond by using the EU Green Bond Standard, make sure that you first embed the relevant environmental and social objectives in your strategy.
The expectation is that the EU GBS will increase investors’ interest in this asset class, thus expanding the green bond market. The EU GBS will also provide an opportunity to launch more robust green bonds, as it is stricter than other standards. For investors and financiers this is great news, because the taxonomy-aligned green bonds will certainly support them in reaching their Environmental, Social and Governance (ESG) related targets, and will give input for their ESG reporting. It is unfortunate, but true, that investors and financiers often lack compelling data in their fixed income portfolios.
How will it benefit capital market actors?
The EU Green Bond Standard has some characteristics that distinguish it from its counterparts in the market. The first is that it makes use of a taxonomy that clarifies, for the issuer, how the proceeds should be used and reported on, while providing investors with more numerical reports on taxonomy-related issues, which will substantially alleviate their increased reporting requirements.
Given that the credibility of ESG data is a common challenge in the market, the EU Green Bond Standard is a welcome development. Both pre- and post-issuance verifications are mandatory, which will make it easier for investors and financiers to rely on the information and to report on it. Verification of impact reporting is also recommended, but is not mandatory. It can be expected that this will increase the credibility of green bonds for investors and will alleviate reputational risk. As verification needs to be made by an accredited verifier, this further enhances its credibility.
To sum up, for the issuer, the EU GBS provides a clearly defined protocol for issuing green bonds. Although this may cause extra work, it is more than likely to enhance the issuer’s reputation, while significantly improving the reporting given to investors. For investors, this is a great opportunity for taxonomy-aligned investments and good quality ESG-reporting.
Tomas Otterström, Global Head of Sustainable Finance, KPMG
+46 70 914 36 08 or firstname.lastname@example.org