The new European Green Bond Regulation

Objectives of the Regulation

The regulation aims to provide issuers and investors of green bonds in Europe with guidance and confidence in the area of sustainable investments and to enable them to more easily recognise ‘greenwashing’. Furthermore, it aims to further minimise competitive distortions due to different assessment bases for green bonds and facilitate access to sustainable financing.

Key points of the Green Bond Regulation

EU Green Bonds

EU Green Bonds are bonds used to finance environmentally sustainable projects. To use the designation 'EU Green Bond', the issuers and originators of securitisation bonds must meet the requirements of the Green Bond Regulation. EU Green Bonds can be both listed and unlisted. Companies as well as EU and non-EU governments can market their bonds as EU Green Bonds provided that they meet the requirements of the regulation.

Strict requirements for issuers

Issuers who wish to label their bonds as EU Green Bonds must meet strict environmental sustainability criteria. These criteria are designed to ensure that the proceeds of the bonds are used for environmentally friendly and sustainable purposes or to support the transition of activities towards sustainability. The requirements also apply to originators who issue securitisation bonds. However, the above criteria do not apply without exception; rather, the regulation provides for a 15% flexibility margin for economic activities for which no technical assessment criteria exist at the time of bond issuance, but which comply with the 'do no significant harm' principle or are internationally promoted. The regulation also provides for grandfathering provisions.

With these provisions, the regulation ties in with the implementation of the EU's Sustainable Finance Action Plan and thus follows the Taxonomy Regulation and the Corporate Sustainability Reporting Directive (CSRD).

In addition, issuers and originators must implement new reporting formats that are to be validated by external auditors. These reports are intended to provide comprehensive information on the use of the funds and compliance with the sustainability criteria.

As with other types of bonds, issuers of EU Green Bonds must prepare a prospectus-compliant securities prospectus that is approved by the relevant supervisory authority – in Germany, this is the Federal Financial Supervisory Authority (BaFin). The prospectus is only one element of comprehensive reporting and transparency obligations. Before the issue, an information sheet on the taxonomy-compliant use of proceeds is also required. After the issue, allocation reports must be published annually to prove that the funds are being used properly. Finally, an impact report must be prepared to analyse the environmental impact once all the proceeds have been used. This report must be prepared and published by the issuer on a one-off basis once all the proceeds from the issue have been used.

Transparency and comparability

Standardised formats for the information sheet, the allocation reports, and the impact report, which are contained in the appendix to the regulation and are to be used by the issuers, should facilitate for investors to compare different emissions.

External auditors are to play a central role in increasing transparency. They must assess compliance with the criteria of the regulation in a pre-issuance audit and a post-issuance audit. The pre-issuance audit relates to the information sheet and the post-issuance audit to the issuer's allocation report. The audit reports must be published online together with the issuer's reports and submitted to the supervisory authorities. The impact report is exempt from the audit requirement but can be audited voluntarily. The European Securities and Markets Authority (ESMA) is currently specifying the framework for the auditors in a technical standard.

Role of the Supervisory Authorities

The introduction of the Green Bonds Regulation entails new responsibilities for supervisory authorities. In Germany, BaFin is taking on these tasks. It monitors compliance with the transparency and reporting requirements of issuers and originators. In particular it is also responsible for approving the securities prospectuses that issuers are required to prepare under the Prospectus Regulation (Regulation (EU) 2017/1129). BaFin can require issuers to correct reports or suspend offers in the event of non-compliance in reporting.

ESMA also plays a central role in monitoring issuers and ensuring compliance with the standards. To ensure the quality and independence of auditors, external auditors must register with ESMA. External auditors must have appropriate qualifications, sufficient professional experience, and be independent. ESMA monitors compliance with the qualification and quality standards of auditors. In the event of non-compliance, it can impose sanctions or withdraw the registration.

Challenges and opportunities

The Green Bond Regulation presents issuers with major bureaucratic challenges but offers them the opportunity to play a pioneering role in sustainable finance and to position themselves as trustworthy providers in the growing market for sustainable investments.

Conclusion

The Green Bond Regulation marks a further step towards sustainable finance. In particular, the standardised information and reporting requirements, as well as the external audit requirements and controls by BaFin and ESMA, are new.

The new rules are intended to create standards that support both investors and issuers in their ecological investment decisions. The clarity and transparency that is sought, particularly concerning the use of funds, is intended to justify investors' trust and ensure issuers' commitment to environmentally friendly projects. Regular reporting should ensure that defined sustainability targets are met.

However, the link between the EU taxonomy and the CSRD means that there is a risk that issuers will be deterred by the complex and highly bureaucratic regulations and that the objectives of the Green Bond Regulation will not be met.