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EU’s Gold Standard for Green Bonds to Create New Market Segment

(Bloomberg) -- The European Union’s long-awaited rules for green bonds took effect over the weekend, though the strict criteria mean only a limited pool of borrowers may adopt them for now.

The European Green Bond Standard is designed to help stamp out greenwashing in the burgeoning market for bonds that fund climate-friendly projects. Going forward, the EU says alignment with the rules is necessary if issuers want to market their debt as a “European green bond.”

It’s the bloc’s effort to provide a gold standard for a market that has a mishmash of industry guidelines and labels, led by the International Capital Market Association’s Green Bond Principles. The EUGBS remains voluntary as well, and bankers say it’s likely most debt issuers will refrain from meeting its more-stringent conditions in the coming year.

“The larger part of the market will keep using the ICMA green bond standard,” said Hans Biemans, head of sustainable markets at ING Groep NV. Issuers with large volumes of “relatively simple green assets” such as renewable energy utilities are the most likely to take it up, he said.

The rules became available to borrowers on Dec. 21 after being agreed by lawmakers in early 2023, following years of negotiations. The market is continuing to expand globally, defying a US pushback against ESG investing, with around $560 billion of green bonds issued this year alone.

Some of the key criteria of the EUGBS are that at least 85% of bond proceeds are aligned to the EU’s green taxonomy, a separate and overarching rule book for sustainability. All of the projects must abide by a “do no significant harm” condition, and must be certified by a designated EU green bond reviewer approved by the European Securities and Markets Authority.

While the extra work required may deter many, it’s possible the lure of potentially lower borrowing costs will convince those with enough eligible projects. Money managers may favor bonds adhering to the standard given their alignment with the taxonomy, as that could help to attract inflows from investors with sustainable mandates.

“It may be that EU sovereigns, supranationals and agencies, together with pure-play green companies, are the first” to use the label, wrote a team at law firm A&O Shearman. After that, it “may become increasingly popular as more issuers get used to the growing environment of sustainability reporting.”

Tammo Diemer, co-director of the German Finance Agency, said earlier this month that while it will “take up the suggestions of the taxonomy and increase transparency,” it has no intention to apply the green bond standard. Austrian Treasury Managing Director Markus Stix also said his country has no intention to issue EUGBS bonds next year, saying there remain questions about its compatibility with a national green framework.

That will leave market participants watching to see how many green bond issuers decide to align with it, and how their debt prices relative to peers.

“Large-scale corporates and financial institutions with eligible projects and assets in place could easily become the frontrunners of the EUGB label,” said Kevin Leung, a sustainable finance analyst at the Institute for Energy Economics and Financial Analysis. “The label will become a prominent subset of the green bond market.”

--With assistance from Kamil Kowalcze and Marton Eder.

©2024 Bloomberg L.P.