The EuGB Regulation – a new standard for issuers of European green bonds

For years, European institutions have recognised the need for increased regulatory measures to define the rules for green bond financing of energy transition projects. This is driven by the need to shift the European economy towards a more sustainable and low-carbon model. This approach is in line with the objectives and principles of the EU taxonomy. European businesses are increasingly embracing principles derived from the ESG framework and the EU taxonomy to enhance their environmental credentials.

These efforts have most recently culminated in the adoption by the European Parliament on 5 October 2023 of a regulation setting a standard for issuers of European green bonds (the “EuGB Regulation“). This is the first legislative initiative of its kind at European level to standardise the issuance of green bonds and eliminate undesirable practices in the market for financing environmentally friendly projects.

The objective – more green-friendly financing

Although green bond issuance is not necessarily the go-to method for businesses to finance energy transition projects, it is important to note that the market has been growing steadily and the adoption of the EuGB Regulation is expected to have a significant impact on the development of the green bond market in the EU and to boost investor interest. In particular, the introduction of new regulations governing the issuance of green bonds is expected to curtail greenwashing and contribute to the creation of a framework for the transparent supervision of such bond issues, so that the proceeds raised by issuers are only allocated to eligible green investments that genuinely contribute to environmental transformation and the achievement of a sustainable low-carbon economy, while respecting the principles derived from the EU taxonomy.

The direction of change

Compliance with the above objectives is to be ensured in particular through:

• Restricting the use of the “European Green Bond” (EuGB) designation solely to bonds issued in accordance with the EuGB Regulation;
• Imposing certain obligations on EuGB issuers such as:
  • the requirement to allocate 100% of the bond issue proceeds to purposes aligned with the principles set out in the EU taxonomy of sustainable development principles;
  • making disclosures to market participants through the publication of European green bond factsheets in accordance with the template set out in the EuGB Regulation. This is to demonstrate to potential investors how the proceeds of the EuGB issuance will be used and how they contribute to the environmental objectives set out in the EU taxonomy;
  • publishing annual reports on the allocation of the proceeds from EuGB issuances to eligible investments only, including in particular on the extent to which the funds raised contribute to the achievement of the indicators set out in the EU taxonomy, the revenue generated, and the capital and operating expenditure. The allocation report is intended to show, in particular, the nature and structure of the allocation of the issue proceeds in relation to objectives and activities consistent with the EU taxonomy;
  • ensuring that external reviewers examine whether the bond issue meets the criteria set out in the EuGB Regulation and thus whether the given bonds can be classified as European Green Bonds.
• Introducing a framework for the activities of external reviewers to ensure their independence and integrity in verifying the criteria for individual EuGB issues. One of the cornerstones is to have the activities of these entities regulated and supervised by the ESMA (including in particular by being required to register with the ESMA);
• Ensuring the supervisory competences of the relevant national authorities (the PFSA) over the issuance of European green bonds;
• Setting out the principles for the ESMA’s oversight of Member States, external reviewers and issuers in relation to EuGB issuances and the implementation of their respective obligations under the EuGB Regulation.

The EuGB Regulation will enter into force 12 months after its publication in the Official Journal of the European Union.