Policy and Regulation

Independent reviews key to green bonds, says EU research author

Plans for a gold standard for green bonds should be backed up with powers to sanction and sue greenwashers, according to European University Institute's Nikolai Badenhoop, the author of a study commissioned by the European Parliament.


European authorities need to toughen up the regulation of green bonds to avoid the risk of greenwashing, according to an academic study submitted to the European Parliament.

The EU Green Bond Standard is intended to set a gold standard for green bonds across the bloc and ensure that such instruments are aligned with the EU taxonomy for sustainability. But a study from Nikolai Badenhoop, Max Weber Fellow at the European University Institute – commissioned by the European Parliament’s committee for economic and monetary affairs – has called for tougher rules that give regulators the power to sanction issuers whose green bonds are not properly aligned.

The study also calls for a provision in the regulation to enable investors to sue for damages against issuers who fail to meet the required standard. Report author Nikolai Badenhoop, who delivered the study to the European Parliament last month, said he hoped it offered ways for "the green bond standard [to have] more bite and to have stronger enforcement mechanisms”.

Supervision thin on the ground

The current proposals for the EUGBS involve three layers of supervision. The first requires issuers who wish to meet the green bond standard to obtain a review by a third party, which must find that the bonds are aligned with the EU environmental taxonomy. The second is the powers of member states’ financial regulators, known in EU terminology as national competent authorities. These NCAs, however, are required only to ensure that issuers provide accurate and full disclosure of the independent reviews.

The third prong of the supervision is the European Securities and Markets Authority, which licenses the independent reviews and would have the power to remove those licences.

The study states: “Strikingly, substantive compliance with the taxonomy requirements is left entirely to private reviewers and not subject to additional public enforcement. This supervisory weakness necessarily weakens the enforcement mechanism, because NCAs are neither required nor allowed to sanction issuers that do not comply with the taxonomy requirements. Under the proposals, substantive non-compliance by an issuer can only result in a negative opinion of an external reviewer.”

Speaking to Sustainability Views, Badenhoop said: “It's not that there is an entire lack of supervision over the taxonomy alignment, but it is a very thin layer.”

He said the regulation of the independent reviewers as proposed would be like that of credit rating agencies, so while their overall standards would be monitored, there would be no assessment or liability for each specific review they carry out.

Nicola Stopps, chief executive of consultancy Simply Sustainable, said the EUGBS was welcome but agreed the independent reviewers were the critical link in the current proposals.

“As we have witnessed, greenwashing is a huge threat to progress and innovation – but the proposed regulation offers a robust framework that requires disclosure and an external review to ensure each investment is doing what it has committed to,” she said. “I would expect the external reviewers to be completely impartial and unable to be influenced by any external source. The credibility of a significant initiative in this space can be called into question if the regulation is led by the wrong people.”

Proposals to add more teeth

The study proposes two measures to firm up supervision. The first would be to make alignment with the taxonomy an explicit requirement, meaning NCAs could remove the green bond label in the event an issue was found not to comply.

Second, it suggests the regulations should make it explicit that issuing green bonds that are found not to align with the taxonomy should face civil liability. This would allow investors to seek compensation if they find they have bought ‘green bonds’ that turned out not to comply with the EU taxonomy.

As well as raising concerns over the rigour of supervisions, the study also calls for greater clarity in the classification of transition bonds – instruments that do not meet full alignment, but that are funding activities being phased out or are providing a bridge to fully sustainable activities. 

It also raises the question over whether private and sovereign bonds can be supervised in the same way. While recognising that the standard should be the same for both private and sovereign issuance, it points out that NCAs are ultimately under the control of their sovereign state, and that the proposals should include measures to ensure supervision of sovereign bonds is truly impartial.

This article has been amended on May 17 to reflect the fact that the study is not directly related to the European University Institute, to modify a direct quotation and to remove the mention of the European Council, which is not relevant to this story.


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