Green bond proposals could hamper issuance, EU warned

Capital markets professionals warn that strict requirements for taxonomy alignment and disclosures could slow the rapid growth of the green bond market.

Proposed changes to the European green bond standard (EUGBS) could limit the growth of the green bond market in the short term, industry commentators have warned.

ECON, the European Parliament’s Economic and Monetary Affairs Committee, this week set out its view on further regulations for the rapidly growing green bond market. The EU is aiming to harmonise the regulatory framework for green bonds, for which there is currently no single standard.

ECON wants all green bonds issued in the EU to have verified plans in place to transition away from fossil fuels, as well as measures and processes ready to identify and limit negative impacts from the issuer’s activities.

Dutch MEP Paul Tang, who is leading the EUGBS discussions for ECON, said the proposed rules would “put European green bonds at the heart of companies’ transitions to a sustainable economy”.

Short-term issues

However, such a move could deter some issuers from bringing out new bonds, warned Tonia Plakhotniuk, vice president for climate and ESG capital markets at NatWest Markets.

“Incorporating the requirements to disclose issuer’s transition plans, audited by a third party, in the bond documentation would deter the issuance in the short- to medium-term,” she said. “Large issuers have started to develop their transition plans, and disclosure frameworks around such plans are only developing now.

“Auditors will also need to be comfortable to perform the audit of transition plans – for that they need to build capacity and ensure that audit standards would be fit for this purpose.”

Forcing issuers to bring this information into their factsheets for green bonds “would be premature”, Plakhotniuk added, and could see issuers opting instead for existing standards, such as the Climate Bonds Initiative or the International Capital Market Association.

Daniel Poolen, director of sustainable capital markets at Rabobank, agreed that the measures could hamper issuance in the short term. “A lot of companies are trying to get verified plans, through the Science Based Targets initiative for instance,” he said. “But getting verification takes time, as these organisations already have a backlog.”

Taxonomy troubles

The proposals, as outlined in a statement from the committee, would likely improve transparency, Poolen said. However, he added that they could have a “serious impact” on the green bond market. ECON has proposed that green bonds are aligned with the EU taxonomy. Given the continuing development of the taxonomy, there were limitations on the activities that could be covered by green bonds, he said.

“As the taxonomy is a living document, more activities will be added over time,” he said. “This means some companies, [which have] a clear positive impact on the EU environmental objectives but are not in the taxonomy yet, will have to wait until they can issue under the EUGBS, or even any green bond within the EU.”

Some issuers and investors were already aligning with the taxonomy well ahead of any finalised regulations, according to Isobel Edwards, green bonds investment analyst at NN Investment Partners.

“This isn’t required from issuers in the regulatory requirements, it is purely provided because issuers see that investors need to report on this and are trying to make the process easier on investors,” Edwards said. “So whether or not we have the EUGBS label, we feel that the market is heading in the right direction, even with just the taxonomy reporting requirements.”

What ECON wants

ECON’s proposals also include measures to make external reviewers of green bonds more independent, and limit conflicts of interest.

ECON has also proposed that countries on the EU’s greylist or blacklist for tax havens should be banned from issuing green bonds in the bloc, and regulators should be able to ban other issuers if they break green bond rules. 

Under the proposals, investors will be given legal recourse if issuers’ failure to comply with the rules leads to a fall in the bonds’ value. However, Plakhotniuk said that these measures “may be excessive at this stage” and could dissuade issuers from using the EUGBS.

She also added that the initial proposal – put forward by the European Commission in July last year – already provided for a “robust supervision framework” for pre-issuance reviews of green bonds.

“This should give confidence to investors that the funds received by the issuer go to taxonomy-aligned projects as required by the EUGBS,” she said.

Additionally, green bonds linked to nuclear energy or natural gas projects must have a prominent statement explaining this link in their required factsheets.

This reflects the controversy surrounding the inclusion of these industries in the taxonomy. However, Poolen said that while the requirement could “scare off” some investors, it would also attract investors that were seeking specific exposures.

Size of the market

ECON’s proposals will be put to the European Commission and the two parties will then debate the finalised regulations. 

Any changes stand to affect an area of the fixed income market that many feel could grow substantially in the next few years. NN Investment Partners reported earlier this year that the size of the global green bond market could hit $1tn this year, driven partly by EU regulations that encourage more investment into green projects.

PwC estimates that green, social and sustainability bond issuance in Europe could hit €1.6tn a year by 2026, up from €500bn in 2021. Last year’s figure represented an annual record, and accounted for 13.7 per cent of total bond issuance in Europe.

The article was amended on May 19 to clarify that Plakhotniuk thought that the proposed legal recourse would be counterproductive, not the additional measures to ensure external reviewers’ independence.