The European Commission has identified six key areas to raise its ambitions in the field of sustainable finance. One of them is sustainable finance. To this end, it has drafted a regulation to establish a European standard for green bonds (EUGBS).
This proposal will be a voluntary standard available to all issuers to help finance sustainable investments. Green bonds are already being used to attract financing in sectors such as energy production and distribution, resource efficiency in housing and low-carbon transport infrastructure.
There is considerable investor interest in these bonds. The potential is there to scale up the green bond market. The EUGBS will set a ‘gold standard’ for how companies and governments can use green bonds to raise funds on capital markets to finance investments. At the same time, strict sustainability requirements must be met and investors must be protected from greenwashing, the European Commission said in its explanatory statement.
Green bonds must comply with the EU taxonomy. With this, Brussels wants to prevent the risk of greenwashing. The new EUGBS are also open to issuers from outside the EU.
The funds raised by the bond must be fully allocated to projects that are aligned with the EU taxonomy. Full transparency is required on how the proceeds of the bonds are allocated through detailed reporting requirements.
All EU Green Bonds must be audited by an external evaluator to ensure compliance with the regulation and that the projects financed are aligned with the taxonomy.
External assessors providing services to issuers of EU green bonds must be registered with and supervised by the European Securities and Markets Authority (ESMA). This will ensure the quality and reliability of their services and ratings, protect investors and guarantee market integrity.
The regulation setting a standard for green bonds is part of a plan to further develop sustainable finance. First, the new sustainable finance strategy sets out several initiatives to tackle climate change and other environmental challenges while increasing investment - and the inclusiveness of small and medium-sized enterprises (SMEs) - in the EU’s transition to a sustainable economy.
The Commission also adopted on Tuesday a plan on how financial and non-financial companies should disclose information on how sustainable their activities are, based on Article 8 of the EU taxonomy.
The Commission will report on the implementation of the strategy by the end of 2023 and will actively support member states in their efforts towards sustainable finance.
It also requires non-financial companies to disclose the share of their turnover, capital and operational expenditure related to environmentally sustainable economic activities, as defined in the Taxonomy Regulation and the EU Delegated Act on Climate.
Financial institutions, mainly large banks, asset managers, investment firms and insurance/reinsurance companies, will have to disclose the share of environmentally sustainable economic activities in the total assets they finance or in which they invest.
EU action plan for financing the sustainable economy
1 - Extend the existing sustainable finance toolkit to facilitate access to transitional finance;
2 - Improve SME and consumer inclusiveness to access transition finance;
3 - Increase the resilience of the economic and financial system to sustainability risks
4 - Enhance the contribution of the financial sector to sustainability
5 - Ensure the integrity of the EU financial system
6 - Develop international initiatives and standards for sustainable finance and support EU partner countries.