European Green Bonds: Proposed regulatory tightening aims to curb greenwashing

A required transition plan for issuers of EuGBs and sustainability-linked bonds

Another big change in scope is the inclusion of sustainability-linked bonds in the proposal. Sustainability-linked bonds with environmental objectives will be subject to the same minimum disclosure requirement as the above. Additionally, issuers of both EuGBs and sustainability-linked bonds, that are subject to CSRD (the Corporate Sustainability Reporting Directive), will need to provide audited transition plans for carbon emission reductions in line with the Paris Agreement. This would mean that smaller companies that fall outside the scope of CSRD, would not have to provide a transition plan. The format and extent of transition plans is currently unclear and will be defined by regulatory technical standards.

No changes to grandfathering announced yet

Grandfathering refers to the adoption of updated versions of the EU Taxonomy after a bond has been issued. The grandfathering period was widely disputed in the consultation period, ranging from zero to ten years. The latest publications contained no updates about changes to the grandfathering period, which increases the likelihood it will remain at the previously communicated five years. This means that in the event of changes to the Taxonomy, issuers could issue EuGBs under the pre-existing version for five more years. According to the most recent draft, already allocated bond proceeds would not have to be reallocated in case of changes. Nevertheless, any change to the grandfathering requirement necessitates increased transparency on expected or upcoming changes to the technical screening criteria from the EU.

Increased supervision and repercussions for non-compliance

To strengthen adherence to the requirements, increasing supervision could provide investors with possible legal recourse should issuers not comply with the regulation of European Green Bonds, leading to a depreciation of the bond. Competent national authorities (e.g. financial supervisors) would also have the authority to prevent certain issuers from entering the market if they do not, either on a single occasion or repeatedly, follow the transparency requirements. This of course requires local supervisors to have sufficient competencies and resources to actually monitor the market properly.

Nordea's reflection on the developments and potential implications

The availability of data and increasing transparency on reporting of environmental impacts and risks is a key cornerstone in the further development of the sustainable finance market. Specifically investors are demanding a growing number of data points from companies. As such, investors and other market players are likely to support the ambition for further disclosure requirements, and in particular reporting on Taxonomy-alignment of green bonds. In the most positive of cases, this will help harmonise the data available in the market, which will ultimately enable the aggregated measurement of positive impacts generated through investments. Recent investor feedback signals that a price difference between EuGBs and other GBs might not be seen in the near future, as investors are prioritising proprietary sustainability analysis over the Taxonomy.

Additional reporting requirements, such as the mandatory transition plans for sustainability-linked bonds, can be an important step to increase credibility of the format. However, they could pose an additional hurdle to sustainable financing, particularly for smaller issuers, which often face the conundrum of whether to focus on actual sustainability efforts or just reporting thereof.

The latest proposal also suggests that the current definition of Green Asset Ratio (GAR) be amended to be able to label sovereign debt as green and hence include it in financial institutions' GAR calculations. This would increase the incentive for sovereigns to issue EuGBs. To avoid raising the reporting burden to unsustainable levels, legislators should aim to align the different EU regulations, such as the CSRD, SFDR, EU Taxonomy and Green Bond Standard.

Lastly, the voluntary nature of the regulation is essential to ensure that the European Green Bond Standard remains the highest standard in the market, while still allowing some issuers, such as those not yet covered by the Taxonomy, to access sustainable capital.