The EU has drawn up a set of requirements to combat “greenwashing” within the bond market, step one in the direction of regulatory oversight for a fast-growing asset class that has up to now largely ruled itself.
The deal reached late on Tuesday night time between the European Fee, parliament and member states might finally result in a pointy discount within the quantity of debt allowed to hold a sustainable label, say analysts.
Issuance of green bonds, a category of debt whose proceeds are earmarked for climate-friendly spending, has mushroomed lately — notably within the EU — as buyers clamour for belongings that align with their environmental targets. However the speedy progress has sparked requires elevated regulation and a standard normal, to clamp down on greenwashing, the place soiled industries increase money to fund a small a part of their actions with out altering their total environmental influence.
Solely a “minority” of the $500bn of inexperienced bonds issued final yr would qualify for the brand new voluntary label, Paul Tang, a leftwing Dutch MEP who led the parliament’s efforts to achieve a compromise, informed the Monetary Instances.
“I see inexperienced bonds issued for airports in Mexico, it’s precisely what we don’t wish to have,” he mentioned. “With a transparent system for disclosures, any inexperienced bonds not utilizing this technique will most likely be checked out with growing suspicion,” he added in a written assertion.
Mairead McGuinness, the EU’s monetary providers commissioner, described the framework as “a brand new gold normal out there to these corporations that wish to be on the forefront of the sustainability transition.”
A spokesperson for the European parliament described the deal as “a brand new normal to combat greenwashing within the bond markets”.
To be labelled “inexperienced” underneath the brand new guidelines, 85 per cent of the funds raised by the issuance have to be allotted to actions that align with the EU’s taxonomy, which defines sustainable investments throughout the bloc.
Issuers may also must disclose how these actions will assist the corporate’s overarching local weather transition plans.
The requirements are a part of a wider push by the EU to counter greenwashing. The bloc’s three monetary regulators launched a joint name for proof on greenwashing in November in a bid to crack down on inflated advertising claims. The European Fee will present further legal proposals governing client merchandise this month.
Some buyers concern that compliance with the brand new guidelines will shrink the universe of securities out there to inexperienced bond funds to a tiny proportion of the general market. The taxonomy is seen by many as an unwieldy and complicated listing discredited by its inclusion of certain gas and nuclear-related investments.
Lower than 3 per cent of worldwide financial exercise is aligned with the taxonomy, based on a report final October by the EU’s Platform on Sustainable Finance.
David Ballegeer, a companion targeted on sustainable debt on the UK regulation agency Linklaters, described the taxonomy as a “straitjacket” that may be tough for issuers to adjust to in its present kind. However the EU’s inexperienced bond label can be simpler to acquire from 2026, he mentioned, when all listed corporations and different massive corporations should begin publishing their share of taxonomy-aligned actions and investments.
EU international locations had pushed for extra flexibility on alignment with the taxonomy, Tang mentioned. The deal on inexperienced bonds reached on Tuesday should nonetheless be authorised by member states’ ministers and the European parliament.
Sean Kidney, head of the non-profit Local weather Bonds Initiative, mentioned he welcomed the brand new guidelines, but in addition warned that only a few bonds would qualify for the brand new label till the EU clarifies its classification of what’s inexperienced. The taxonomy was “Eurocentric and slender” and “not match for function in the meanwhile”, he mentioned. “No matter we do, we’ve to make certain we construct on the success [of green bonds] and don’t kill the goose that laid the golden egg,” he added.
Within the absence of regulation, index suppliers have up to now relied on screening by teams such because the CBI to resolve what to incorporate in inexperienced bond indices. Final yr the CBI drew consideration to issuances it didn’t take into account to have optimistic environmental and social influence, together with a two-part $1.6bn issuance by the US utility firm Consolidated Edison, which deliberate to make use of among the money to put money into gasoline meters.
Different jurisdictions have already sought to make clear guidelines of engagement round inexperienced debt. China’s central financial institution backed the publication of voluntary requirements for inexperienced bonds final yr, stipulating that all the proceeds raised ought to go in the direction of initiatives outlined as inexperienced in both its personal or international taxonomies.
