Bond issuers may be able to apply the EU’s Green Bond Standard as early as the beginning of next year, Nordea’s Aila Aho told an EU conference on sustainable finance.
In addition to her executive adviser, sustainability role at the Scandinavian bank, Aho is also a member of the Technical Expert Group on Sustainable Finance (Teg) and rapporteur of the EU Green Bond Standard subgroup.
She explained that the timing is, however, dependent on a public consultation and the implementation of an interim registration solution.
The EU’s Green Bond Standard aims to support the robust growth of the green bond market to accelerate the flow of capital towards the EU’s environmental objectives.
Issuance of green bonds reached approximately €255bn in 2019 and is expected to grow to about €323bn in 2020, the final Teg report on the green bond standard said.
Highlighting the importance of the standard, Sean Kidney, Teg member and chief executive and co-founder of the Climate Bonds Initiative, told Expert Investor that it will become the “governing guidebook for EU issuance”.
The EU Green Bond Standard, as proposed by the Teg, is a voluntary scheme and has been built on best practice in the market, such as the Green Bond Principles (GBP), developed by the International Capital Market Association (Icma).
Brenda Kramer, Teg member and senior advisor responsible investment at PGGM, commented: “The additional value of an EU Green Bond Standard is definitely the taxonomy.
“You know that it delivers to these [environmental] goals.”
The standard links the ‘use-of-proceeds’ of bonds with the EU’s taxonomy, which defines screening criteria for environmentally sustainable economic activities, which can substantially contribute to environmental goals, such as climate change mitigation or adaptation.
Activities eligible for the use-of-proceeds will need to meet the thresholds as defined by the taxonomy.
Verification is key
Aho explained that “verification is at the core of the green bond standard”.
Its aims is to promote the integrity, credibility, harmonisation and efficiency of the green bond market, as well as investor confidence, the Teg report wrote.
Jochen Krimphoff, Teg member and deputy director sustainable finance at the World Wide Fund for Nature (WWF) France, explained that the Teg registered differences in the application of verifiable standards, as well as concerns of potential conflict of interests of verifiers.
To this end, the Teg suggests that the EU’s supervisory authority, the European Securities and Markets Authority (Esma), should oversee the verification of green bonds.
“[Esma] has signalled that they stand ready to deliver on that mandate,” Krimphoff said.
Interim registration scheme
The Commission also plans to release a Renewed Sustainable Finance Strategy, to be presented in the third quarter of 2020, and will hold a public consultation on its strategy from mid-March.
“Part of the consultation will be dedicated to a possible legislative initiative on an EU Green Bond Standard,” the Teg wrote in its final report on the standard.
Aho said the Commission would need “a couple of years” for the legislative undertaking.
To accelerate the timeline, the Teg has proposed a voluntary, market-based registration scheme for verifiers of EU green bonds for the interim period.
This could pull the launch date for the green bond scheme forward to beginning of next year.
Nicolas Pfaff, Teg member and managing director market practice and regulatory policy at Icma, told the audience of the congress: “We are in the hands of the Commission. They decide whether we should go ahead [with the interim solution].”
Ahead of this date, Kidney recommended that investors ensure they “understand the taxonomy”, as it is “essentially a ‘procurement plan for the Paris Agreement’”.
Pre-defined investment plans
For each of its defined environmental objectives, the taxonomy regulation recognises two types of activities that are taxonomy-aligned:
- Economic activities that make a substantial contribution based on their own performance: for example, an economic activity being performed in a way that is environmentally sustainable.
- Enabling activities: economic activities that, by provision of their products or services, enable a substantial contribution to be made in other activities. For example, an economic activity that manufactures a component that improves the environmental performance of another activity.
In its final taxonomy report, the Teg also included the possibility for companies to use ‘improvement measures’ (capex and, if relevant, opex) to finance their sustainable economic activities.
Aho explained that the improvement measures open up the possibility for another financing mechanism, even if the screening criteria are not met as of today.
The measures allow issuers to qualify for the EU Green Bond Standard, as long as they meet the activity threshold for an environmental activity over a defined time period (recommended to up to five years), as outlined in a “pre-defined investment plan”.
Kidney explained to Expert Investor that the measures have been added in the final report “because we need to improve things – underlying the whole taxonomy is a theme of renovating our economy to make it climate and future-ready”.