Green Bonds have a rapidly growing market; in 2019, $258,9 billion was being issued compared to $171,2 billion in 2018 by a wide range of countries and industries. As there are numerous issuers: the process, verification, and reporting system of the green bonds vary, and not all the information might be available for the investors that is a crucial factor in decision making. The European Commission published an Action Plan on Financing Sustainable Growth, including an EU Green Bond Standard (EU GBS), which will set best reporting and verification practices.
Are there other standards besides EU GBS?
It is important to provide guidelines to increase issuance in the market. Therefore, some countries like Japan or China and institutions collected and published them. However, the basics of these guidelines originate from the Green Bond Principles (GBP) by the International Capital Market Association. The GBP helps to launch credible Green Bonds, which assists investors in accessing necessary information in their evaluation process of the environmental impact. Also, the Climate Bonds Standard released by the Climate Bonds Initiative is frequently used in the market. Currently, the third version is out of it, which is in line with the EU GBS.
What does the EU Green Bond Standard do?
It is a voluntary standard that can be used by any market participant to assist investors by ensuring the availability of information. The standard has four key components:
- The alignment of the use-of-proceeds with the EU Taxonomy
- The content of a Green Bond Framework is to be produced by the issuer
- The required Allocation and Impact Reporting
- The requirements for external verification by an approved verifier
The Green Bond Framework summarizes all the components: where the issuer describe how the green bond will contribute to their environmental strategy, their commitment, how the project is aligned with EU Taxonomy, the financed or re-financed project itself, the proceeds allocation, how and what has to be reported and the verification approach.
What is the purpose of the EU Green Bond Standard?
Although the amount of Green Bonds is growing, they occupy a small share of the whole bond market. One of the EU GBS’s desired achievements is to allocate more capital into this sector by making the green bonds transparent and evaluable for investors.
Also, on the opposite side, it would allow companies to issue green bonds, not considering their main activity but meeting the requirements of the EU Taxonomy.
A Usability Guide was released in March 2020 but has not been put into practice yet. After further consultation on the establishment of EU GBS and the renewed sustainable finance strategy, the future decision will be released by the European Committee in Q4 2020.
On the Green Bond Market, transparency is a crucial factor for investors in decision making. The EU Green Bond Standard assists issuers in providing important and necessary information, which increases the reliability of green bonds, supports the green market’s growth and reduces the risk of greenwashing.
European Commission (2020). EU Green Bond Standard. Available at: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-green-bond-standard_en (Accessed: 15 November 2020).
Climate Bonds Initiative (2019). Climate Bonds Standard V3.0. Available at: https://www.climatebonds.net/climate-bonds-standard-v3 (Accessed: 22 November 2020).
European Commission (2020). Usability guide for the EU green bond standard. Available at: https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-green-bond-standard-usability-guide_en.pdf (Accessed: 15 November 2020).
European Commission (2019). TEG report on EU green bond standard. Available at: https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/190618-sustainable-finance-teg-report-green-bond-standard_en.pdf (Accessed: 15 November 2020).
International Capital Market Association (2018). Green Bond Principles. Available at: https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/Green-Bonds-Principles-June-2018-270520.pdf(Accessed: 15 November 2020).