EU Approves World's First Standard to Define Green Bonds, Boosting Sustainable Finance

In a groundbreaking move, the European Union (EU) has approved the adoption of a new voluntary standard for the use of a "European Green Bond" label, marking it as the world's first of its kind. This regulation, adopted with an overwhelming majority of 418 votes in favor, 79 against, and 72 abstentions, establishes uniform standards for issuers seeking to designate their bonds as 'European green bonds' or 'EuGB,' offering clarity and credibility in the burgeoning green finance sector.

The EU's new standards aim to provide investors with a reliable framework for directing their investments toward sustainable technologies and businesses, boosting confidence in the green finance market. Additionally, companies issuing these bonds will benefit from increased investor interest, enhancing their capacity to raise funds for eco-friendly initiatives and further supporting the EU's journey towards climate neutrality.

These standards closely align with the EU's taxonomy framework, which defines environmentally sustainable economic activities. This alignment ensures that green bonds meet rigorous criteria, contributing to the EU's sustainable finance goals.

Enhanced Transparency and Disclosure Requirements

Companies opting for these standards and the EuGB label must adhere to stringent disclosure requirements. They are obligated to provide comprehensive information about how the proceeds from the green bonds will be utilized and demonstrate how these investments align with the overall sustainability plans of the company. This emphasizes the importance of a broader green transition for these companies.

The disclosure requirements, presented in "template formats," can also be used by companies issuing bonds that may not fully comply with all EuGB standards but still wish to convey their green commitments to investors.

The new regulation establishes a registration system and supervisory framework for external reviewers tasked with assessing whether issuers adhere to the established standards for European green bonds. These external reviewers must also transparently disclose any actual or potential conflicts of interest they might face.

Flexibility in Allocation of Funds

In line with the EU's Taxonomy Regulation, companies issuing European Green Bonds must ensure that at least 85% of the bond's raised funds are allocated to economic activities that align with environmental sustainability. The remaining 15% can be allocated to other economic activities, provided that issuers clearly explain how these investments contribute to sustainability objectives.

Paul Tang, the rapporteur for the legislation, commented on the landmark decision, saying, "Businesses want to make the green transition. And the European Green Bond gives them the best tool yet to help them finance this shift. It provides a transparent and trustworthy tool to drive a company's transition plan."

Tang added, "Today's vote is the starting shot for business to get serious about their green bond issuances. Investors are eager to invest in European Green Bonds, and from today onwards, businesses can start developing them. This way, European Green Bonds can boost Europe's transition to a sustainable economy."

Growing Green Bond Market

The green bond market has witnessed remarkable growth since 2007, with annual green bond issuances exceeding half a trillion USD for the first time in 2021, reflecting a 75% increase compared to the previous year. Europe has emerged as the dominant region for green bond issuance, accounting for 51% of the global volume in 2020. Green bonds now make up approximately 3-3.5% of the total bond issuance globally, underscoring the increasing importance of sustainable finance.

The EU's adoption of these standards for European Green Bonds represents a significant milestone in advancing sustainable finance and reinforcing the EU's commitment to fostering a greener, more sustainable economy.