Developments in green bonds: On 21 December 2024 the EU Green Bond Regulation starts to apply

On 20 December 2023 the EU Green Bond Regulation entered into force, following its publication in the EU's Official Journal on 30 November 2023. It will start applying 12 months after its entry into force, i.e. on 21 December 2024. 

The Regulation sets out requirements for issuers of bonds that wish to refer to their environmentally sustainable bonds as ‘European Green Bonds’ or ‘EuGB’. Save for some limited exceptions, this label is only available for bonds for which a prospectus has been published in accordance with the Prospectus Regulation.

The Regulation aims to promote sustainable finance in the EU and international financial markets for sustainable growth and the transition to a climate-neutral, resource-efficient economy in the EU. The idea behind the Regulation is to set a new standard to improve consistency and comparability in the green bond markets. By adhering to the standards of the Regulation, issuers can demonstrate that the projects funded with the proceeds of EU green bonds are aligned with the EU taxonomy. This reduces risks of greenwashing, which is expected to benefit investors and their confidence in green investments. 

EU Green Bonds 

The Regulation will set a gold standard for how companies and public authorities can use green bonds to raise funds on capital markets in order to finance ambitious large-scale investments, while meeting rigourous sustainability requirements and protecting investors. The EU Green Bond standard is also intended for use as a benchmark for the creation of similar standards outside the EU.

Legal framework

Key requirements under the EU Green Bonds Regulation include:

• Taxonomy-alignment: All the funds raised by EU Green Bonds should be allocated to projects that are aligned with the EU Taxonomy Regulation, provided that the sectors concerned are already covered by it. For those sectors not yet covered by the EU Taxonomy Regulation and for certain very specific activities, there will be a flexibility pocket of 15%. The fact that the projects must be aligned with the EU Taxonomy Regulation, rather than being aligned with the issuer’s own green bond framework or on the basis of the ICMA Green Bond Principles, raises concerns where interpretation and gap issues with respect to the Taxonomy Regulation remain. Also, the level of detail and specificity in the Taxonomy Regulation will reduce the eligibility of green projects that would otherwise be capable of being financed through green bonds. This is expected to slow growth and development of the green bond markets;
• Transparency: Full transparency is required on how the bond proceeds are allocated through detailed reporting requirements, including disclosure in the applicable prospectus and disclosure in the form of a pre-issuance European Green Bond factsheet and post-issuance allocation and impact reports. The EU Green Bonds Regulation also includes voluntary disclosure requirements for other environmentally sustainable bonds and sustainability-linked bonds issued in the EU;
• External review: All European green bonds are subject to pre-issuance and post-issuance review by an external reviewer to ensure compliance with the Regulation and taxonomy alignment of the funded projects, provided that external review of the mandatory impact reports remains optional. This is not a recommendation as is the case under the ICMA Green Bond Principles, but rather a requirement; and
• Supervision by the European Securities Markets Authority (ESMA) of reviewers: External reviewers providing services to issuers of European green bonds must be registered with and supervised by the ESMA. This will ensure the quality of their services and the reliability of their reviews to protect investors and ensure market integrity. 

In short, a green bond can receive the EU Green Bond label if it meets the criteria of the EU Green Bonds Regulation, which strongly relies on the Taxonomy Regulation. An EU Green Bond designation is voluntary, and co-exists with, for example, the ICMA Green Bond Principles and other international sustainable finance initiatives.

Greenwashing risks

Since the Regulation also provides for voluntary disclosure requirements for environmentally sustainable bonds and sustainability-linked bonds that are not intended to qualify as EU Green Bonds, adhering to such requirements is expected to reduce the risk of greenwashing. 

In addition, risk of greenwashing is avoided or at least limited, as all proceeds of EU Green Bonds will need to be invested in economic activities that are 100% aligned with the EU taxonomy for environmentally sustainable activities, if the relevant sectors are included by the EU taxonomy. Where the relevant sectors are not yet covered by the EU taxonomy and for certain very specific activities, there will be a flexibility pocket of 15%.

Please contact the Stibbe Financial Markets team if you have any questions regarding the EU financial markets in general, including green, social or sustainability bonds or sustainability-linked bonds and loans.