EUROPEAN COMMISSION

Strasbourg, 6.7.2021

SWD(2021) 181 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT REPORT

Accompanying the document

Proposal for a
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on European green bonds

{COM(2021) 391 final} - {SEC(2021) 390 final} - {SWD(2021) 182 final}

Table of contents

1.Introduction: Political, economic and legal context

1.1.Political context

1.2.Market context

1.3.Legal context

1.4.Analytical context

2.Problem definition

2.1.What are the problems?

2.2.Consequences

2.3.Wider consequences

2.4.What are the problem drivers?

2.5.How will the problem evolve?

3.Why should the EU act?

3.1.Legal basis

3.2.Subsidiarity: Necessity of EU action

3.3.Subsidiarity: Added value of EU action

4.Objectives: What is to be achieved?

4.1.General objectives

4.2.Specific objectives

5.What are the available policy options and how do they compare?

5.1.What is the baseline from which options are assessed?

5.2.Description of the policy options

5.3.Policy Dimension 1: Scope of application for green bond issuers (and core requirements of the EU GBS)

5.4.Policy dimension 2: Regulatory treatment of external reviewers of EU GBS-aligned green bonds

5.5.Policy dimension 3: Flexibility for sovereign issuers

5.6.Options discarded at an early stage

6.Preferred option

6.1.Policy dimension 1: scope of application

6.2.Regulatory treatment of external reviewers of EU GBS-aligned green bonds

6.3.The extent of flexibility for sovereign users of the EU GBS

6.4.Alignment with objectives

6.5.Analysis of the expected take-up of standard

7.How will actual impacts be monitored and evaluated?

Annex 1: Procedural information

1.Lead DG, Decide Planning/CWP references

2.Organisation and timing

3.Consultation of the RSB

4.Evidence, sources and quality

Annex 2: Stakeholder consultations and selected interviews

1.Targeted Consultation on the EU Green Bond Standard

2.Online consultation on the renewed sustainable finance strategy

Annex 3: Who is affected and how?

1.Practical implications of the initiative

2.Summary of costs and benefits

Annex 4: Market Context and controversies

Annex 5: Market developments

Annex 6: Costs and benefits of issuing green bonds

Annex 7: Standards and definitions of green

Annex 8: EU Taxonomy – coverage and related disclosure obligations

1.What is the Taxonomy?

3.What does the EU Taxonomy cover?

4.Studies on Taxonomy alignment and coverage

5.Case study: energy intensive industry and hard-to-abate manufacturing sectors

Annex 9: External review

Annex 10: Sovereign bonds

1.Market situation

2.Potential flexibility

3.Summary of responses to questionnaire on sovereign green bonds

4.Analysis: Comparison of key EU Sovereign green bonds and the EU Green Bond Standard

5.Case study: Luxembourg’s Sustainability bond framework

Annex 11: ESG Disclosure obligations

Annex 12: Legal basis

1.Legal basis

2.Subsidiarity: Necessity of EU action

3.Subsidiarity: Added value of EU action

Annex 13: Options discarded at an early stage

Annex 14: EU Green Bond Standard as recommended by TEG

Annex 15: Project green bonds to support the green transition and the EU Green Deal

Annex 16: Summary of responses to stakeholder questions on Social bonds

Glossary

1.Introduction: Political, economic and legal context

This impact assessment concerns a proposed initiative to establish an official EU standard for green bonds based on the EU Taxonomy for sustainable finance, and to establish a regime for registering and supervising companies acting as external reviewers for green bonds aligned with this standard.

1.1.Political context 

This initiative is part of the European Commission’s 2021 Work Programme and is one of the actions proposed by the European Commission to implement the European Green Deal . 1 In their December 2020 Conclusions , the European Council mentioned that “the EU should promote the development of common, global standards for green finance”, and invited the Commission to “put forward a legislative proposal for an EU green bond standard by June 2021 at the latest.” 

To transition to a climate neutral economy and reach the EU’s environmental sustainability objectives, significant investment is required across all sectors of the economy. The achievement of the EU’s current 2030 climate and energy targets would require in the period 2021-30 energy system investments (excluding transport) of EUR 336 billion per annum (in constant prices of 2015), equivalent to 2.3% of GDP. 2

The bond market can facilitate green transition investments and thereby help reach the EU’s environmental targets. Bonds are already one of the main instruments used for financing fixed assets in sectors related to energy and resource efficiency. In addition, several industry-led initiatives and guidance documents exist for the purpose of issuing so called ‘green bonds’.

This green bond market has seen vigorous growth in the number and volume of green bonds issued, both in the EU and globally. Despite this trend, green bonds remain a fraction of the overall bond market, representing about 3 to 3.5 % of overall bond issuance in 2019 3 . Further growth in the market for high quality green bonds could be a source of significant green investment, thereby helping to meet the investment gap of the European Green Deal.

The EU is a global leader in green bonds, with 48% of the around EUR 253 billion of global green bond issuances in 2020 denominated in euro 4 . Providing a trusted regulated environment that supports the issuance and creation of green bonds would also promote the international role of the euro, and help to achieve the goal of developing EU financial markets into a new ‘green finance’ hub.

The Commission committed to developing an EU Green Bond Standard (EU GBS) in its Action Plan Financing Sustainable Growth adopted in March 2018. As a first step, the Commission asked the Technical Expert Group on Sustainable Finance (TEG) to produce a report on an EU GBS. The TEG published its interim report in March 2019, followed by a call for feedback period. The final report with a draft EU Green Bond Standard was published in June 2019, and the TEG also published a usability guide for the draft standard in March 2020.

1.2.Market context 5  

Green bonds are a relatively new form of debt instrument that provide investors with additional commitments and transparency on the green use of proceeds. In the typical “use of proceeds” model, issuers commit to spend the money raised or an equivalent amount on environmentally sustainable investments. This information is usually contained in separate stand-alone documents, not within the bond’s prospectus or other legal documentation (bond covenants etc). Under existing market practices and regulations, green bonds are legally no different from conventional bonds 6 .

The use of proceeds model enables a wide-range of approaches, including securitisation bonds, revenue bonds, project bonds, covered bonds, and other debt instruments.

The success of green bonds can be traced back to growing demand for green financial assets from investors, especially institutional investors such as insurance companies, pension funds, and investment funds. These assets allow them to meet their self-set targets for the green proportion of their investment portfolios.

As evidenced by the recent growth of the green bond market, some issuers have been willing to absorb the additional administrative costs associated with the greater transparency and credibility requirements for investors. For issuers, issuing a green bond offers a strategic marketing opportunity to showcase their green commitment and ambition to existing or new investors, possibly as part of the broader corporate or institutional green transition 7 . This allows issuers to enlarge and diversify their investor base, as new dedicated green and socially responsible investors enter the market and drive demand for these types of bonds. 

Alongside the signalling effect, green bond issuance also provides issuers with an opportunity to improve their procedures for handling and acting on sustainability-related information, such as climate-related risks. In this way, issuers may use green bonds as an organisational opportunity to boost their adaptability to the changing environmental and regulatory context, thereby improving their future competitiveness and profitability through a first-mover advantage, or allowing public organisations to better respond to the demands of their stakeholders.

Analysis of the current market for green bonds in the EU and world-wide indicates that the market is growing rapidly. In the EU27, the number of green bonds issued has been growing by about 47.2%, while the volume has been growing by about 50.9% per year between 2015 and 2020. This growth is driven by inter alia the following factors:

-Increasing need to finance investments that help to mitigate the risk of climate change

-Increasing demand from institutional investors and their clients to hold green financial assets, for example to hedge against the risk of stranded assets and make a positive impact against climate change.

-Intensifying competition among financial market participants to offer such green financial products (such as green investment funds) to investors.

-An overall legislative and political environment favouring transparency on the sustainability of investments (including requirements for financial market participants to disclose the alignment of their investments with the EU Taxonomy Regulation 8 ).

These factors are all linked to the growing awareness about the need to tackle the risk of climate change, and are therefore likely to remain relevant factors in the long run. For this reason, it is reasonable to assume that the green bond market is likely to continue growing, potentially at or close to its current course. Based on projections in annex 5, this would mean that yearly EU green bond issuance in 2023 9 could reach EUR 430 billion, spread out over roughly 1350 green bond issuances.

The development of standards 10

Along with the growth of the green bond market, market players have cooperated to standardise practices and develop guidelines for green bond issuance. Such so-called standards benefit both issuers and investors:

1.For issuers, a widely accepted standard conveys investors’ expectations and thus reduces the need for specialised advisory services to issue a green bond that would be accepted as green by investors. It increases the credibility of the issuer’s sustainability commitments and mitigates the potential reputational risk of accusations of ‘greenwashing’.

2.For investors, it provides increased certainty that their investments are being used to deliver real environmental objectives without having to conduct their own extensive due diligence.

Currently, the most commonly-used market standard is the Green Bond Principles (GBPs), which are process-based guidelines maintained by the International Capital Market Association, or ICMA . To align with this standard, a green bond’s proceeds should finance assets and projects with positive environmental impacts. The standard sets out a clear process for the selection of projects and the allocation and tracking of funds, although it lacks a clear definition of green economic activities. Bond issuers should also report on the use of proceeds including, if possible, information on the environmental impact of the projects. In addition, the GBPs recommend obtaining a third party external review.

Other standards are also widely used, including the more prescriptive Climate Bond Standard, developed by the Climate Bonds Initiative (CBI). The CBI standard sets the same basic requirements as the ICMA standard, which means that any bond compatible with the former should normally also be compatible with the latter. However, unlike the GBPs, the CBI includes a taxonomy with screening criteria to define green economic activities, and the requirement for green bonds to be certified by approved external reviewers. About a quarter of green bonds issued in 2020 were certified according to the CBI standard. Table 1 below compares ICMA’s Green Bond Principles and CBI’s Climate Bonds Standard. More details are available in annex 7. 

Table 1 - ICMA GBP and CBI standard

External review 11

The development of these new standards has been accompanied by the growing use of external review to provide assurance to investors. It is common market practice for green bonds issuers to contract a third party to review the green bond documentation, either prior to bond issuance (to check alignment of the bond framework against the respective standard) or post-issuance (to check alignment of the projects funded by the bond against eligibility criteria). This is recommended under the ICMA GBPs and required under the CBI standard. External review is sometimes referred to as “verification”, for example in the TEG’s draft EU GBS.

According to the TEG report, external reviews have become common market practice in the EU green bond market. Research conducted by the Luxembourg Stock Exchange indicated that more than 85% of issuers use some form of pre-issuance review and of this grouping, 98% were in the form of an external review.

1.3.Legal context 12

This section sets out the main relevant legislation.

Rather than being a self-standing initiative, the EU Green Bond Standard is part of a bigger puzzle, namely the EU’s actions on sustainable finance as set out by the 2018 Sustainable Finance Action Plan . As that plan is increasingly coming into fruition, with the adoption of several initiatives and the development of related Level 2 Delegated Acts advancing rapidly, the EU Green Bond Standard would emerge into an environment that is already – to a certain extent - prepared for it. At the same time, the Commission has been working on the development of the Renewed Sustainable Finance Strategy.

The main legislative initiative that would impact on an EU GBS initiative is the Taxonomy Regulation 13 , which was adopted by co-legislators in 2020. It sets out a classification of economic activities as environmentally sustainable, while complying with minimum social safeguards 14 . This framework can be used as a benchmark to classify whether an economic activity and, by extension, assets or projects are green. In turn, it is intended to facilitate the assessment of the greenness of related equity and debt. The Taxonomy Regulation mainly influences the future EU Green Bond Standard initiative in two ways:

First, under the Taxonomy Regulation article 4, the EU must apply the criteria of the Taxonomy when setting out any standards for green corporate bonds. 15 For this legal reason, any future EU Green Bond Standard must use the same definition of environmental sustainability as set by the Taxonomy Regulation as far as corporate issuers are concerned. For sovereign issuers, this requirement does not apply the same way. 16  

Second, as part of the Taxonomy Regulation’s Article 8, financial and non-financial undertakings falling under the scope of the Non-Financial Reporting Directive (NFRD)  17  will be required to disclose, as of 31 December 2021, the extent to which their activities substantially contribute to the EU environmental objectives as defined by the Taxonomy Regulation (henceforth: Taxonomy-aligned). Concretely, they will have to calculate and disclose the extent to which their activities are Taxonomy-aligned, including the percentage of their capital expenditure (CapEx), operating expenditure (OpEx), and revenue associated with such activities. Consequently, such companies will have adjusted their internal processes to be able to track and account for the respective Taxonomy-aligned financial flows.

Furthermore, on 21 April 2021 the Commission adopted a proposal to review the NFRD, which currently imposes reporting requirements on large public interest entities with more than 500 employees. It is expected that this review will expand the scope of companies falling under the NFRD from 11 700 to close to 50 000 companies. The Commission also proposed that companies subject to the NFRD should be required to obtain limited assurance on their non-financial reporting. This would substantially increase the availability of information on the share of Taxonomy-aligned assets of EU companies, and should help facilitate and reduce the costs of issuing Taxonomy-aligned green bonds.

Another relevant development is the entry into application, as of March 2021, of the Sustainable Finance Disclosure Regulation (SFDR) 18 , which governs how financial market participants (including asset managers and financial advisers) should disclose sustainability information towards end investors and asset owners. Under this Regulation, financial market participants will also be required to report on the share of Taxonomy-alignment of the assets in which they invest, including potentially, green bonds.

The European Commission is also currently working on establishing criteria for a new EU Ecolabel for Financial Products 19 . It will apply to retail financial products, such as equity funds and bond funds, and it will be legislated using an extension of the EU-ecolabel Regulation. This means the EU Ecolabel for financial products would rely on an existing “brand”, which already benefits from a certain consumer recognition. While financial instruments such as bonds and equity will not be directly eligible for the EU Ecolabel, as they are financial instruments and not retail financial products, they will qualify indirectly, as part of bond or equity fund portfolios.

The Commission aims to create a coherent approach to sustainable financial products based on increased transparency and the use of the EU Taxonomy. It is expected that the definition of green in the criteria for the new EU Ecolabel for financial products will be based on the EU Taxonomy, and that EU GBS bonds would be eligible for EU Ecolabel bond fund portfolios. This could incentivise investment in bonds aligned with the future EU GBS.

In conclusion, the EU Green Bond Standard is one of several interlinked initiatives that aim to incentivise (in the case of the EU GBS) or require (in the case of the Taxonomy, reviewed NFRD, and SFDR) the disclosure of Taxonomy aligned green assets by corporations in the EU. For this reason, the impact of the EU GBS initiative should be considered in the context of the aforementioned initiatives.

The Delegated Acts setting out the technical screening criteria for the “Substantial Contribution” and “Do No Significant Harm” conditions for the two environmental objectives of climate mitigation and climate adaptation was adopted in June 2021 and will enter into force by the end of 2021 subject to a 6-month scrutiny period by co-legislators. The entry into force of the delegated acts covering the other four environmental objectives of the Taxonomy should follow 12 months later. For this reason, it is expected that at least the climate-related part of the Taxonomy would be in place before the EU GBS enters into force, and potentially all six environmental objectives of the Taxonomy.

1.4.Analytical context

This impact assessment aims at providing an unbiased, comprehensive and evidence-based assessment of the trade-offs implied by the potential policy options. Significant efforts have been undertaken to support the analysis. In addition to the evaluation of the stakeholder consultations and the work of the TEG, market data was collected from external databases to map the green bonds market with a view to informing the regulatory response. Further cost data and cost estimates were collected from stakeholders and supervisors directly.

A key limitation of the analysis pertains to the extent to which the current green bond market aligns with the technical criteria under the Taxonomy Regulation. Given the current supervisory reporting and public disclosure frameworks, the availability of relevant data and information is sporadic and lacks necessary depth to carry out a data-driven analysis. Information was however collected in the form of stakeholder feedback.

It should be noted that an assessment of the taxonomy criteria is not material to the available policy choices under this initiative. Co-legislators have already taken such choice in the form of adopted primary legislation. As mentioned above, the legal drafting of the Taxonomy Regulation rules out a Commission initiative on green bonds which stands disassociated from the taxonomy-based criteria 20 . Only the taxonomy criteria may be used to define an ‘environmentally sustainable economic activity’. The choice to deviate from this definition is excluded given the objective to define and standardise bonds which finance environmentally sustainable activities. As such, there is no policy option that would require a further assessment of the usability of the taxonomy criteria (excluding for sovereign bonds 21 ). A broader market assessment based on the available data is provided in the impact assessment supporting the Delegated Regulation on the Taxonomy.

In view of these constraints on the initiative, the collective evidence stemming from the different methodological approaches overall can be considered to be sufficiently sound as a basis for the impact assessment.

Two factors limit the amount of quantitative analysis included in the present report, namely (1) the difficulties with using existing data to estimate the effect of a currently inexistent framework, and (2) the intangible nature of certain benefits of green bond issuance, such as the green bond premium, or a reputational boost.

Despite these hindrances, this analysis takes a quantitative approach to cost benefit assessment where possible. Annex 3 sets out a quantitative estimate of the costs of registration and supervision by ESMA for external reviewers, as well as a related estimate of the cost for issuers of making use of external review services under the proposed EU GBS. Annex 6 includes estimated ranges for the green bond premium, although the data on the size of this premium is inconclusive. At the same time, other reported benefits of green bond issuance, such as a reputational boost for the issuer, could not be quantified, and little relevant literature was found no this topic. For these reasons, the cost-benefit assessment in section 6, which brings together all these elements, is mostly qualitative.

2.Problem definition

2.1.What are the problems?

The current impact assessment considers the functioning and interplay of two closely interlinked markets: the market for green bonds (in particular high quality green bonds) and the market for external review services, used to give investors assurance about the alignment of their green bond to existing market standards. This section will identify the main problems affecting the two markets in scope, and their consequences. It will then consider the underlying problem drivers.

2.1.1.For investors: Costly/difficult to identify high quality green bonds

The green bond market suffers from a moral hazard problem that reduces trust in the market and drives up costs for investors (and issuers). The problem can be summarised as follows: once an investor has bought a “use of proceed” green bond, it relies on the issuer to follow up on the green commitments made, usually in terms of investing bond proceeds in certain activities. From the issuer side, green bond issuance can be profitable, for instance due to reputational gains or potential price benefits from issuing green debt 22 . But the real costs associated with following up on green commitments create an incentive for the issuer to shirk on the commitments made to investors once the bond has been issued. If so, investors will be the main losers, as the bonds they hold will no longer be green. For these reasons, investors may worry about the greenness of the bond and want to verify the bond’s greenness ex ante.

However, investors currently face significant constraints to (i) determine the positive environmental impact of a bond, and (ii) compare different green bonds. Despite the existence of several commonly used market standards, which to a certain degree overlap and can be used conjunctively, the green bond market does not sufficiently enable investors to identify high quality green bonds.

In particular, definitions of green projects vary or are inexistent. For example, the dominant market standard (ICMA’s Green Bond Principles) relies on high-level principles for eligible green projects, not detailed criteria. As for the more prescriptive CBI standard, its privately maintained definitions omit many potential sectors of green economic activities.

Also, the quality and role of external review varies widely. ICMA GBPs has no clear and formalised mechanism to guarantee the quality and integrity of the external review process, for example through registration and supervision of external reviewers of green bonds. As for the CBI standard, it includes certification but lacks a rigorous mechanism for supervising the conduct of those external reviewers.

Because of this lack of standardised definitions of green projects, lack of standardised transparency requirements, and the varying quality of external review, investors may need to expend time and resources on assessing and double-checking information published by existing green bonds issuers.

While this situation is already problematic today, two trends further aggravate the moral hazard problem, which could accentuate the issue in the future:

1)As explained in Annex 6, demand for green bonds is increasing, which may have the effect of driving up green bond premia, and thereby increase the incentive for issuers to issue green bonds.

2)As explained in Annex 8, the green bond market is increasingly expanding into sectors where it is more difficult agree on what is sustainable, such as manufacturing. 

While sovereigns also are confronted with controversies around green bonds, and in particular the need to better define green proceeds, the risk to investors is less acute, as sovereigns generally have a transparent approach to use of proceeds, and benefit from high levels of trust in the green bond market, as evidenced by green bond premia for sovereigns, which are relatively high 23 .

2.1.2.For issuers: Additional costs for issuing a green bond (due to market fragmentation)

Issuing a green bond already requires additional cost for issuers, for example in terms of reporting, external review, and internal reorganisation and training. However, the moral hazard problem referred to in 2.1.1 means that issuers are under increasing pressure to demonstrate the greenness of their bonds. The diversity of market practices in the green bond market (both with regards to definitions of green, and the market for external review) means that issuers may need to incur additional costs in order to enhance the credibility of their green issuance:

·In the case of corporate green bond issuers, investors frequently require issuers to obtain an ESG rating for their company. This is in principle an unnecessary cost, since the green bond itself and the underlying projects are usually already reviewed by an external reviewer.

·Issuers, and in particular first-time issuers, may need to spend significant resources deciding which standard to make use of, due to the diversity of market practices.

·The lack of a common definition of green and of a green bond means that issuers may need to spend additional resources, e.g. on additional advisory services, to demonstrate the green credentials of their bond, even after the requirements of the chosen standard has been met.

2.1.3.For issuers: Uncertainty around green assets, potential reputational risks

There is overall uncertainty on the type of economic activities that can be considered green, due to a lack of international agreement on such definitions. This has helped to cause some issuers to experience reputational damage as stakeholders questioned the greenness of their bond 24 .

Collected feedback shows that the fear of adverse publicity because a deal is deemed “insufficiently green” has prevented some issuers from tapping the market 25 . This is particularly the case in economic sectors that are very important for the transition to a low carbon economy, but where the identification of green assets and projects is not straightforward due to a lack of carbon neutral and/or otherwise fully sustainable alternative production process and technology, such as steel or cement industries.

So far, these sectors have seen relatively limited green bond issuance 26 .

Figure 1: Problem tree

2.2.Consequences

2.2.1.Potential future market disruption from greenwashing

As the current market for green bonds is based on voluntary market standards with minimal government intervention, it mainly relies on trust among investors and issuers. While controversies relating to alleged greenwashing of the bond itself or the underlying projects are relatively rare, a more frequent criticism relates to the sustainability credentials of the green bond itself. However, with continued fast market growth and in the absence of regulatory intervention, the risk of major controversies regarding greenwashing, insufficient environmental impact of a bond, or issues linked to a bond not complying with minimum social standards, for example, will only increase. 27 But as the market grows, and as the problems identified in section 2.1 become more acute, the risk of such incidents and their potential impact on the functioning of the whole of the green bond market increase.

In addition, while issuers might communicate their green promises for the use of proceeds in their marketing and standard related documents, such information is not systematically included in the contractual and regulatory documents for the bond transaction, which can make it difficult for investors to hold issuers to account for honouring their green commitments.

The combination of these factors may lead to situations where investors are given a false sense of the sustainability impact of the funded project or asset. In effect, the sustainability impact may fall short of investor’s initial expectations. If this should occur, investors could risk financial losses, as they may have to sell their bonds because they no longer comply with investment guidance or criteria, particularly in the case of institutional investors.

Any such incident could disrupt the current green bond market by creating reputational problems for the whole sustainable investment market, reducing the trust of investors on which this market relies, and further increasing costs for issuers. 

2.2.2.Not enough high quality green bonds issued compared to market demand

In their June 2019 report, the TEG found that there was a fundamental problem of lack of supply in the market for green bonds, as evidenced by the frequent oversubscription of green bond auctions or sales. In 2019, demand for green bonds outstripped supply by more than 5 to 1, compared to a ratio of 3 to 1 for conventional bonds. 28 This means that the green bond market is not exploiting its full potential for growth.

Green bond issuance is conditional on the existence (or creation) of a corresponding amount of green investments on the issuer’s balance sheet. For this reason, the lack of eligible investment is the main limiting factor for green bond issuance. This factor is out of the scope of this impact assessment.

However, the problems for issuers identified in 2.1 also play a part in limiting supply. The problem of uncertainty around green assets and potential reputational risks serves to dissuade potential green bond issuers. At the same time, the additional costs for issuing a green bond due to market fragmentation contribute to reducing the net benefits of green bonds, and therefore indirectly reducing issuance.

2.3.Wider consequences

2.3.1.Risk that not enough investment is channeled towards projects with substantial climate and environmental impact

The market for high quality green bonds is important for channelling funding into the type of fixed investments needed to reach the EU’s climate targets. However, despite the overall situation of growth, the problems and consequences identified in 2.1 and 2.2 constitute market barriers that could trap the market in an inefficient equilibrium 29 and hinder future market development. 30  

If not enough high quality green bonds are issued to respond to market demand, there is a risk that substantial funding is instead diverted to activities and projects that – while they may have environmental benefits – are not substantially contributing to the EU climate and environmental objectives.

In order to fund climate mitigation, climate adaptation, and wider environmentally sustainable purposes, the market for high quality green bonds therefore needs to be supported to reach its maximum potential.

2.4.What are the problem drivers? 

The problem drivers can be divided into those affecting the market for external reviewers, and those affecting the market for green bond issuance.

2.4.1.External review market: Heterogeneity, lack of transparency, and potential issues relating to conflicts of interest in the external review market

The external review (see Annex 9) is usually carried out by third parties, according to procedures which are specific to each reviewer, and which have emerged organically alongside the development of various market standards. For this reason, there is also a considerable amount of diversity in market practices and in the quality of services provided. In turn, this diversity obstructs market transparency and hinders the market from functioning effectively and from delivering high quality external review services that serve the interests of issuers and investors alike.

To give only a few examples of market diversity:

-External reviews may include a consideration of the ESG rating of the issuer, or not.

-They may rely on the project categories of ICMA’s Green Bond Principles, or more prescriptive definitions of green projects.

-They may be valid for several transactions or concern specifically the pre-issuance or post-issuance stage of the bond.

-There is also a wide variety of actors: non-financial rating agencies specialising in second party opinions, big-four audit firms providing mostly post-issuance verification, credit rating agencies, and global technical inspection and certification bodies are all active in the external review market.

In its report, the TEG also highlighted a number of challenges in this sector, including variable quality of assessments, potential lack of independence or management of potential and actual conflicts of interest and the handling of potentially price sensitive information.

This situation can lead to information asymmetries and a reduction in overall trust in the green bond market and the integrity of the credentials of specific bonds. The range of differing approaches by entities with varying levels of expertise in environmental matters can create uncertainty for issuers and investors on the actual value, quality and impact of external reviews. It can also lead to duplication and increased costs. In Deschryver and de Mariz (2020) 31 , investors note the lack of a consistent certification system, in comparison with credit ratings in the conventional bond market.

In addition, given the lack of a common classification system and criteria, some issuers in fact engage with multiple reviewers in order to attain a higher degree of certainty and investor confidence. Another common practice is for issuers to obtain ESG ratings in addition to the external review, as many investors associate the greenness of the bond with the greenness of the company itself. This gives rise to additional costs that would potentially not arise if these issuers could instead more fully rely on the opinion of the external reviewer.

In January 2021 the Commission published an extensive study on the market for Sustainability-Related Ratings, Data and Research 32 , which overlaps to some extent with the market for external review services. The study noted that while efforts to develop common voluntary standards for sustainability-related product and service providers have been undertaken, none have been firmly established across the market. The study also highlighted the increasing array of sustainability-related product and service providers operating in this growing market, which emphasises the need for greater transparency across the industry in terms of methodologies, disclosures and how research providers assess the performance of green assets and investments.

Amid increasing demand, more financial data and research providers and credit ratings providers are entering the sustainability-related products and services market, which is leading to increased merger and acquisition activity as those traditional players to expand their service offerings by buying up specialised sustainability-related providers.

The high level of industry consolidation identified in the study also highlights the potential for conflicts of interest to emerge, particularly associated with providers both evaluating companies and offering paid advisory services. Concerns have been raised about potential conflicts of interest and quality control issues: at present, there is no legal framework in place for minimum operational requirements and safeguards, nor for registration or authorisation and supervision of external reviewers, as the industry has developed organically without regulatory support.

A report by Bloomberg Law 33 indicates that most external reviewers are not subject to any stand-alone independence requirements and in some cases, reviewers and their affiliates also provide advisory services to potential green bond issuers, which may raise independence issues. The report highlighted that the conclusion or opinion provided by external reviewers can vary depending on the provider in particular, and on differing definitions of what constitutes a ‘green’ investment, particularly the difference between ‘dark’ and ‘light’ green.

External reviewers fulfil an important role in bridging the gap between analysing potentially complex green projects and assessing them against the requirements of the EU Taxonomy and assisting investors with making suitably informed investment decisions. It is therefore important that potential conflicts of interest are managed and averted, ensuring an appropriate level of market transparency. The absence of a supervisory framework for external reviewers with minimum standards to ensure the quality and objectivity of their reviews combined with a lack of transparency regarding their activities could lead to the misallocation of investments or even greenwashing, which would damage investor confidence in the EU GBS market and undermine the future development of the EU GBS market.

The situation is less urgent in the case of sovereign issuers, who frequently make use of state auditors instead of external reviewers. These state auditors typically have legally guaranteed independence, and there does not appear to have been any controversies regarding their performance of the external review tasks.

More information available in Annex 9 on external review.

2.4.2.Green bond market: Imperfect information due to a lack of clear and harmonised definitions of green projects and green bonds.

The market for green bonds is hampered by the lack of clear and comprehensive definitions of a green economic activities to guide green bond issuance, and of a common yet prescriptive standard for green bond issuance.

The most commonly used standard, ICMA’s Green Bond Principles, is market-developed, mostly principles-based and does not refer to a specific taxonomy of eligible green projects. The more ambitious CBI standard includes a market-based Taxonomy, but it only covers climate-related matters, leaving out important sectors for further emission reductions, or areas where it is more difficult to agree on the definition of green, such as high emission manufacturing 34 .

The creation of the EU Taxonomy is an attempt to address this situation, by providing comprehensive and granular definitions of how various economic activities can qualify as environmentally sustainable (more information in Annex 8 – the Taxonomy). The EU Taxonomy will be freely available for existing standards to make use of, if they wish.

However, in order to make use of the detailed definitions of the Taxonomy in the “use of proceeds” space, and ensure that investors can have proper trust that the strict criteria are complied with, it is necessary to have a standardised system of verification with qualified and experienced entities checking that the relevant Taxonomy-criteria have been met.

As explained in 2.4.1, the current practices around external review do not currently meet this requirement, and so far there are no indications that existing market-based standards intend to impose a more stringent oversight over external reviewers. It is also not clear whether it would be feasible for market based standards to operate a rigorous system of monitoring of external reviewers. For this reason, it is unlikely that market-based standards will be able to credibly enforce Taxonomy-alignment of standards within an acceptable timeframe.

This situation of imperfect information poses problems for both issuers and investors, in particular those with high sustainability-related ambitions. Without a clear definition of green, environmentally ambitious issuers are lacking a clear and reliable way to signal this to investors. As for investors, who are increasingly on the lookout for green debt instruments to add to their portfolios 35 , their search is complicated by the fact that there is no commonly accepted definition of a green bond, in particular on the more environmentally ambitious segment of the market.

2.5.How will the problem evolve?

Without EU action regarding green bonds, the most likely outcome would be the continued development of differing market-based standards for green bonds or new legislative initiatives at national level. For more information, see section 5.1 – what is the baseline?

The TEG has pointed to the large range of approaches in the field of external review as a potential source of problems, creating uncertainties for issuers and investors on the actual value, quality and impact of the external reviews. Concerns have been also raised about potential conflicts and quality control issues in this market. Without a legal framework in place, the market cannot provide for the registration and supervision of external review on its own, and thus most of these issues would likely remain unaddressed.

Because of the expected strong growth of the green bond market, the vulnerabilities that exist within the current market-based system are likely to grow, which may amplify the risk of a potential high impact or high visibility occurrence of greenwashing. Such an incident could potentially create reputational problems for the whole green bond market, thereby reducing the trust of investors on which this market relies, and increasing costs for issuers.

3.Why should the EU act?

3.1.Legal basis

The legal basis for this initiative is Article 114 of the Treaty on the Functioning of the European Union (TFEU), which confers to the European institutions the competence to lay down appropriate provisions that have as their objective the establishment and functioning of the internal market.

Taking into account the criteria set out in the Vodafone case (C-58/08) Article 114 TFEU allows the EU to take measures not only to eliminate existing obstacles to the exercise of the fundamental freedoms, but also to prevent the likely emergence of such obstacles in the future. This also includes those obstacles that make it difficult for market participants, such as issuers of green bonds or investors, to take full advantage of the benefits of the internal market.

Although other national legislation exists stipulating a framework for green bond issuance (e.g. in China), no EU Member State has yet legislated to establish an official green bond standard at national level. The current EU market for green bonds is therefore entirely based around market-defined standards and practices, with assurance to investors provided by companies acting as external reviewers. These market-based standards set out high-level process-based guidelines or recommendations, but as outlined in Section 2, the underlying definitions of green projects are insufficiently standardised, rigorous, and comprehensive. For this reason, various practices co-exist, which make it costly for investors to identify genuine green bonds.

In light of the continued growth of the green bond market and its role in funding the type of fixed investments needed to reach the goals of the Paris agreement, it is likely that some Member States would consider creating a standard at national level, or establishing national guidelines.

Such national standards would likely seek to address the same problems that the proposed EU GBS initiative aims to address, but the results may be divergence across EU Member States. There are already examples of Member States operating with diverging frameworks in their issuance of sovereign green bonds, or in the area of labels for environmentally sustainable financial products. For this reason, it is likely that disparities between national laws would emerge that obstruct the fundamental freedoms and undermine a European level playing field. Therefore there is an identifiable need for a harmonized green bond standard to be applied across the EU.

3.2.Subsidiarity: Necessity of EU action 36

For now, Member States seem to refrain from establishing national legislation, which is likely linked to the widespread expectation that the Commission will act in this area, as announced in the 2018 Sustainable Finance Action Plan. In consultation feedback, many EU Member States have been calling for a harmonized green bond standard at EU level. However, in the absence of such a harmonised standard, it is predictable that Member States would bring forward their own legislation in the area of green bonds.

Without EU action regarding green bonds, the most likely outcome would be the continued development of market-based standards for green bonds or new legislative initiatives at national level. Such uncoordinated actions at national level may lead to a proliferation of diverging green bond standards, which would fragment the green bond market in the EU and potentially hamper cross-border investment flows. The EU GBS would ensure a level playing field and reduce the potential scope for disparities across the EU while supporting the attainment of the EU’s sustainable finance policy objectives. It also has the potential to become a leading global standard for green bonds. An intervention at the EU level is more likely to successfully define consistent requirements for the internal market and thereby prevent market distortions. Therefore, a legislative measure (based on Article 114 TFEU) would further improve the functioning of the Single Market.

3.3.Subsidiarity: Added value of EU action

In a similar way to the bond market, the green bond is an inherently international market made up of issuers, typically larger companies, seeking out a broad and diverse population of investors, and investors seeking out the highest possible liquidity and frequently trading debt on cross-border secondary markets. For this reason, national legislation to tackle the failures identified in the green bond market would have the potential effect of fragmenting a market which is inherently international.

The market for external reviewers of green bonds is also a cross-border market. In order to preserve a level playing field for the companies providing external review services, any legislation setting up a regime for the registration and supervision of these entities should also be at EU level. Finally, given the many interactions between a potential initiative for an EU Green Bond Standard, and other relevant EU-level legislation, such as the Taxonomy Regulation, an EU instrument appears to be more suitable. A possible intervention at EU level therefore complies with the principle of subsidiarity as set out in Article 5 of the TFEU.

For a detailed analysis of the legal basis, see Annex 12. 

4.Objectives: What is to be achieved?

This initiative is a direct response to vocal requests from green bond investors and issuers alike for a credible and high-quality standard for Taxonomy-aligned green bonds, as expressed for example in the targeted consultation on the EU GBS. According to this feedback, such an initiative should standardise and develop the market for green bonds and set the global standard for the application of the EU Taxonomy in green bond markets, so that green bonds become a genuine tool for the EU to transition towards climate neutrality. Building on this feedback, this section sets out the main objectives for this initiative.

4.1.General objectives

The general objective is to better exploit the potential of the single market to contribute to meeting the EU’s climate and environmental objectives, in accordance with Article 2(1)c of the Paris Agreement, by

-facilitating further development of the market for high quality green bonds, while

-minimising disruption to existing green bond markets, and

-attracting sovereign issuers to the framework while catering to their specificities

This would be achieved by establishing a standard (or similar) for high quality green bond issuance that would:

-Improve the ability of investors to identify and trust high quality green bonds

-Facilitate the issuance of high quality green bonds, by:

-reducing costs from market fragmentation

-clarifying green definitions and reducing the reputational risk for issuers from sectors that are not sufficiently covered by existing market-based taxonomies

-include some flexibility for sovereigns issuers.

4.2.Specific objectives

There are two specific objectives, which relate to the two problem drivers identified in section 2.4.

4.2.1.The EU GBS should clarify and harmonise definitions of green projects and green bonds

By aligning green bonds with the EU Taxonomy, this initiative should contribute to clarifying green definitions on the bond market. This should help investors in the process of identifying high quality green bonds, comparing them against each other, and mitigating against the risk of greenwashing. It should also help issuers in the process of issuing green bonds and identifying green economic activities on their balance sheets.

4.2.2.The EU GBS should harmonise outcomes, improve transparency, and address potential conflicts of interest for external reviewers

External review is a well-established market practice and a core part of almost any green bond issuance, irrespective of the type of issuer or the standard followed. However, as detailed in 2.2, a wide-range of market practices and actors co-exist in a limited space. This initiative will aim to strengthen external review for the high quality EU green bonds, and improve its quality, usefulness, and trustworthiness for investors, by harmonising outcomes, addressing conflicts of interest, and improving transparency and oversight over the overall process.

For the EU GBS itself, the requirements for external reviewers are intended to provide an additional level of assurance to issuers and investors that those external reviewers that are registered have implemented effective policies and procedures to ensure the quality, independence and overall integrity of their assessments. This will make the EU GBS distinct from other green bond standards in the market and support the intention to establish the EU GBS as the gold standard for green bonds.

Table 2: Problems and objectives

5.What are the available policy options and how do they compare?

5.1.What is the baseline from which options are assessed?

Under the baseline, there would be no Commission action in the green bond market, whether in the form of legislation or guidance. This would maintain the status quo in the market, with most green bond issuers relying on existing market-based principles and guidance 37 . The principle characteristics of the baseline scenario are:

·Continued market growth along or slightly below current trajectories. 2015-2020 saw an impressive average annual growth of 46% in terms of green bonds issued, and also 46% in terms of volume 38 . It is expected that the green bond market will continue to grow along or slightly below these trajectories. The main factors driving this trend are an enhanced awareness for sustainability factors of downstream consumers, increasing market demand for green bonds, and a reinforced sustainability focus in many Member State and EU policies.

·Growth of external review market, but no legal framework in place for the registration and supervision of external reviewers. The assessment of green bonds by an external reviewer will likely remain the market norm, and hence this market will grow in line with market needs. However, the differing approaches of the range of entities in this field will continue to be a potential source of problems, creating uncertainties for issuers and investors on the added value, quality and impact of the external reviews. Issues relating to potential conflicts of interest and quality control would not be addressed and the EU GBS would therefore have to rely on existing market processes and external reviewers.

·No dominant classification system to determine the greenness of projects and assets, and continued use of partial and high-level taxonomies. While the Taxonomy Regulation for climate mitigation and climate adaptation will enter into force in 2021, the Commission would not take any action to promote it as part of an official green bond standard. While existing market-based guidance provides broad ‘green criteria’, they generally lack specificity and granularity for more detailed assessments. Some issuers also prefer to refer to their own taxonomies, rather than using the CBI Taxonomy. This indicates that the market is unable to converge around a single standard classification system that is at the same time comprehensive and granular.

·Continued uncertainty for investors and issuers on the definition of green. This in turn generates inefficiencies in terms of search costs, increased risk exposure for investors and, depending on the applied market practice, higher issuing costs. On the one hand, issuers will continue to face reputational risks in cases where there is doubt over the greenness of assets or projects. This is particularly a concern for non-traditional green issuers which generate revenue mainly from carbon intensive activities. In effect, their green bond issuance levels are likely to remain very low with potential negative impacts on their ability to transition.

On the other hand, investors would lack clarity and transparency on the greenness of investments. Since there is no common classification system in place, each bond and its corresponding activities need to be assessed individually to determine whether it meets the individual investor’s understanding and expectations of ‘green’, thus driving search costs.

It can be expected that there will be some uptake of ‘taxonomy aligned’ bonds (i.e. making use of the EU taxonomy) even without EU intervention. It is expected that market standards would allow the use of the EU Taxonomy as one of several definitions of green. However, the issues set out in terms of consistency, comparability and certainty would still largely persist. The market would also remain heavily fragmented due to possible different understandings of the taxonomy criteria. As there would not be any means of enforcement, issuers could claim taxonomy-alignment without facing supervisory repercussions. This may in fact lower transparency and confidence in the market and negatively affect the wider uptake of the taxonomy criteria as a benchmark. It is unclear whether the CBI Taxonomy would converge or diverge from the EU Taxonomy.

·Amplified risk of high visibility or high impact market controversy. Seen against the expected growth of the green bond market, the vulnerabilities that exist within the current market-based system may amplify the risk of a potential high impact or high visibility occurrence of greenwashing. Such an incident could potentially create reputational problems for the whole green bond market, thereby reducing the trust of investors on which this market relies, and increasing costs for issuers.

·Potential national action: There is also the potential that Member States may develop their own legal regimes for green bonds, potentially based on discrepant Taxonomies. We have seen a similar development in the case of labels for green investment funds (see section 3 – legal basis). The fact that Member States are not actively pursuing such plans at this moment is likely due to the Commission’s ongoing work on the EU GBS. Should the Commission abandon these efforts, it is likely that Member States would seek to compensate with national initiatives, given the growing importance of sustainable finance for the financial industry and for low-carbon investments.

5.2.Description of the policy options

This impact assessment focuses in particular on the three key policy dimensions set out below. The three dimensions are related, but the policy choices do not depend on each other across policy dimensions.

1)Scope of application for green bond issuers (and core requirements of EU GBS)

·Option 1: EU GBS alignment voluntary for all green bond issuers

·Option 2: EU GBS alignment mandatory for non-sovereign EU green bond issuers, following transition-period

2)Regulatory treatment of external reviewers of EU GBS-aligned bonds

·Option 1: Registration and limited supervisory oversight

·Option 2: Authorisation and supervision with more stringent requirements

3)The extent of flexibility for sovereign users of the EU GBS

·Option 1: No flexibility compared to corporate issuers

·Option 2: Flexibility regarding non-Taxonomy-related requirements.

·Option 3: Flexibility regarding non-Taxonomy- and Taxonomy-related requirements

Each policy option is described and also assessed below. The potential willingness of green bond issuers to make use of the proposed standard, based on the preferred policy choices across all policy dimensions, is assessed in section 6: Preferred option.

5.3.Policy Dimension 1: Scope of application for green bond issuers (and core requirements of the EU GBS)

The current section will assess the extent to which the EU GBS should apply to current and future green bond issuers, and the core requirements of the standard.

In the 2018 Sustainable Finance Action Plan, the Commission tasked the Technical Expert Group on Sustainable Finance (TEG) with drawing up a report on an EU Green Bond Standard, based on current market best practices. In line with this mission, the TEG proposed the standard that is summarised in table 2 below (full standard is available in Annex 14).

Table 3 – TEG’s proposal for an EU GBS 39

Alignment with market best practices

The final set of requirements of the EU GBS itself that are being examined in this impact assessment are based on the draft standard proposed by the TEG, which in turn is based on (or similar to) market best practices, including best practice within the existing standards such as the ICMA GBPs and the CBI standard 40 (for example where an existing standard does not require but recommends certain practices):

owith regards to reporting, these include the publication of a green bond framework, of allocation reports, and impact reports 41 .

oWith regards to external review, these include external review of the green bond framework and the final allocation report.

oWith regards to eligible green projects, these include the “use of proceeds” approach. This model enables a wide-range of approaches, including securitisation bonds, revenue bonds, project bonds, covered bonds, and other debt instruments.

Allocation and impact reports

Building on a practice established in the CBI standard, the EU GBS would require issuers to publish yearly allocation reports detailing the use of green bond proceeds, and providing evidence on the Taxonomy-alignment of the projects funded by their bonds. These allocation reports are what enable external reviewers and investors to check the issuer’s progress and hold the issuer to account for fulfilling its sustainability commitment. In line with market best practice, the EU GBS will require issuers to have their allocation report reviewed by an external reviewer after a certain amount of time.

As is also common market practice, the impact report is the issuer’s review of the environmental impact of the bond once all the proceeds have been allocated. This allows investors to quantify and compare the environmental impact of their investment, and mitigates against the risk of “greenwashing”. For transparency reasons, both reports would be publicly made available to ensure full transparency.

Feedback from stakeholders

By following established market practice, the EU GBS would avoid needlessly changing well-established practices regarding the format, frequency, and type of reporting. It would also avoid needlessly disrupting the market for external review. The alignment with market best practices is also justified based on the desire to position the EU GBS as the foremost standard in terms of transparency and environmental credibility. Finally, the alignment with existing market best practice was preferred by a large majority of respondents to the targeted consultation on the EU GBS, who also agreed with all the main requirements of the EU GBS as proposed by the TEG.

In particular, investors argued that the core requirements of the EU GBS would respond to their needs for clarity, consistency, comparability, transparency and assurance that the financed projects are aligned with the EU Taxonomy. A majority of issuers and financial service-providers also agreed with the proposed requirements, arguing that the EU GBS could help to standardise, clarify, and create a genuine market for high quality green bonds. However, some respondents worried that the requirements would be difficult to meet for SMEs wishing to issue green bonds, especially with regards to reporting and external review.

Table 3 below provides a summary of the consultation feedback on this issue.

Table 4 – Feedback from targeted consultation on the EU GBS

For the reasons set out above, it is recommended that the core elements of the EU GBS should be aligned with market best practice.

Alignment with the EU Taxonomy

While being modelled on market best practice, the potential EU GBS would also go beyond existing standards by including a requirement to align bond proceeds with the Taxonomy. 42 As noted in section 1, this is a legal requirement for the EU GBS. In practical terms, this means that only those issuers with existing Taxonomy-aligned assets on their balance sheets, or plans to invest in new assets aligned with the EU Taxonomy, would be able to issue using the EU GBS.

Given that the Taxonomy sets out comprehensive and detailed criteria for the definition of projects that are green, some potential green bond issuers may struggle to meet this requirement. This means the standard would likely be more costly for the average green bond issuer to align with, compared to current market standards.

At the same time, the EU GBS would likely allow certain issuers to increase the benefits typically associated with green bond issuance, such as a reputational boost for the issuer, a diversification of the investor base, and a potential green bond premium, since these benefits typically increase with the level of ambition and green assurance of the bond.

For the reasons set out above, the issuers most likely to benefit from (and therefore employ) the EU GBS are those wishing to demonstrate a strong green commitment. The overall positive feedback from issuers to the targeted consultation indicates that there are many such issuers. A more detailed assessment of the impact of the link with the Taxonomy is carried out in section 6 – Preferred option.

Transitional sectors in the Taxonomy

Because the EU Taxonomy includes transitional sectors, such as manufacturing, proceeds from EU GBS could also be used to fund activities that are not low carbon. These sectors are included because there is a need to stimulate emission reductions even in those sectors where zero carbon is challenging or impossible to achieve today. At the same time, many of these sectors have significant potential for CO2 reduction.

However, this inclusion creates a theoretical risk of undermining the green credibility of the standard, in particular given the fact that the leading ambitious green bond standard on the market, CBI, does not include such activities in its Taxonomy. At the same time, this risk is mitigated by the strict conditions impose by the Taxonomy Regulation, as also explained in annex 8.5, on those activities that may be considered transitional.

In particular, in order to be considered transitional, activities must have greenhouse gas emissions that are substantially lower than the sector or industry average and they must not hamper the development and deployment of low-carbon alternatives or lead to a lock-in of assets incompatible with the objective of climate-neutrality.

For green bond market participants, the advantages of including such activities are clear: issuers in transitional sectors, which has been an underperforming sector for green bonds, will have clear EU-sanctioned definitions of green to underpin their green bond issuance, substantially reducing the reputational risk of issuing. This could allow issuers that are currently wary of issuing green bonds to join the market. For investors, the EU Taxonomy will provide clarity on what is considered best in class 43 , allowing those investors that wish to fund transitional activities to do so with more confidence in the greenness of their bond.

Grandfathering

The EU GBS proposal would envisage to allow issuers of existing green bonds to opt-in and designate their bond as an EU green bond, provided that all criteria for a new EU GBS bond are met. Green bonds that financed assets which do not meet the taxonomy criteria will not be able to carry the EU GBS designation. Deviating from this strict approach would undermine the increased transparency and consistency (in particular as concerns the green definition) that the standard aims to achieve.

As concerns grandfathering in the case of subsequent changes to the taxonomy, the proposal could stipulate that an EU green bond would retain this designation until it matures (= full grandfathering), even if a later amended version of the taxonomy would no longer classify the underlying asset or project as green. Options that would deviate from this approach have been excluded at an early stage (for more information, see Annex 13).

5.3.1.Policy options

For non-sovereign green bond issuers, such as Corporates, there are two alternatives:

1)Option 1: EU GBS alignment voluntary for green bond issuers in the EU

Under this option, issuers of green bonds would retain the freedom to decide whether to issue green bonds using the EU GBS or not. Should they choose to align with the EU GBS, they would have to meet all the requirements under the standard. Other market standards would still be available, and could potentially be used in combination with the EU GBS. For sovereign green bond issuers, this is the only alternative, since for legal reasons the standard cannot be made mandatory for these issuers.

2)Option 2: EU GBS alignment mandatory for non-sovereign green bond issuers in the EU, with transitional phase in:

The second option would be a mandatory standard for non-sovereign issuers, where all green bonds issued by such an issuer in the EU would need to make use of the EU GBS in order to be able to be called a green bond. The option of a mandatory standard also covering sovereign issuers was not assessed (see Annex 13). For corporate issuers, the mandatory alignment with the EU GBS would be phased in over a defined transitional period, with grandfathering of existing bonds to ensure that investors who have purchased green bonds in good faith are not penalised. After the transitional period, any green bonds that are issued without being aligned with the EU GBS would lose the right to label themselves as green bonds in the EU.

In addition, the policy option of “Flexibility for corporate issuers with regards to Taxonomy-alignment” was discarded at an early stage. Annex 13 describes the policy option in detail, as well as the reasons for discarding it at an early stage.

5.3.2.How do the policy options compare?

1)Option 1: EU GBS alignment voluntary for green bond issuers in the EU

PROs: This approach minimises the risk of holding back the market. It provides issuers of high quality green bonds with a dedicated standard to signal to investors their sustainability ambitions or achievements, without imposing it on those green bond issuers who are less ambitious. It would allow use of the standard to grow over time in line with market experience with the use of the taxonomy, and as legal requirements for Taxonomy-aligned disclosure gradually enter into force. Several respondents to the targeted consultation made the comment that it was important to keep the standard voluntary, and were worried that otherwise existing green bonds could lose their status as green. Depending on the development of the green bond market and the success and take-up of the EU GBS, its voluntary nature could be reviewed (and potentially changed to binding) after a certain amount of time.

CONs: Take-up of EU GBS may be limited at first, or permanently. The risk of green-washing and potential market disruption from a controversy could persist. The lack of transparency and confusion about the green credentials of those green bonds not making use of the EU GBS would continue. Financial flows labelled ‘green’ would only partially contribute to achieving the EU climate objectives.

Table 5: Impact of voluntary standard

2)Option 2: EU GBS alignment mandatory for green bond issuers in the EU, with transitional phase in:

PROs: The average quality of green bonds traded on EU markets would be higher. The clarity regarding green projects for all green bonds on the market would be higher. Investors would benefit from reduced cost of due-diligence. Financial flows labelled ‘green’ would strongly contribute to achieving the EU climate objectives as per the criteria in the Taxonomy Regulation.

CONs: There is a risk of constraining the market as the mandatory requirement is phased in. The Taxonomy remains untested in practice so it is difficult to assess the feasibility of using the EU GBS for current green bond issuers. There is a strong risk of issuance and trading moving to markets in third countries, especially as many issuers currently cannot comply with the Taxonomy at this stage. Only a very small group of respondents to the targeted consultation (3 out of 167) called for a mandatory standard.

Table 6: Impact of mandatory standard with phase-in

Comparison table:

The following table summarises the assessment of the options against those objectives which are relevant for the green bond market:

5.4.Policy dimension 2: Regulatory treatment of external reviewers of EU GBS-aligned green bonds 

This policy dimension assesses two potential options for the regulatory treatment of third parties providing external review services to issuers of EU GBS-aligned green bonds, in light of the issues identified as part of problem driver 2.4.1 45   

Stakeholder feedback to both the RSFS public consultation and the EU GBS targeted consultation indicated broad market support for an external reviewer regime 46 . In the RSFS public consultation, a significant majority (78.8% of 141 responses) supported the introduction of a certification and supervision regime for external reviewers administered at the EU level. At the same time, respondents highlighted the importance of proportionality in any new regime to ensure that smaller entities can continue to provide these services.

The introduction of a formalised regime for external reviewers would be a forward-looking and pre-emptive action. 47 . So far, there are no significant issues identified in the market for external review of green bonds, which in any case is still quite small, with annual revenue estimated between EUR 5 million and EUR 10 million. But the market for EU GBS bonds does not yet exist, so it is impossible to say for certain what issues may be encountered in the external review market for such EU GBS bonds.

In particular, the potential regime for external reviewers would aim to raise overall trust levels in the external review process and the protection of the integrity of the EU GBS. By raising the level of trust in the market, investors will be able to more easily identify green high quality green bonds, which will support the further development and growth of the market. Integrity is particularly important for the EU GBS, since it will cater to the higher quality segment of green bonds, thanks to its alignment with the EU Taxonomy and market best practice.

Imposing a framework on all external reviewers would undermine the voluntary approach being taken for the EU GBS which is intended to only be used by those market players that fully support its objectives and are willing to bear the additional cost or administrative burden to deliver meaningful and trustworthy green investments to the market.

In the same vein, the TEG recommended 48 the establishment of a regime to promote the development of the European green bond market by improving the quality and standardisation of the review process for the EU GBS, while ensuring a level playing field across the Union and meet the high demand from investors seeking quality green financial assets.

The framework should build upon the existing pool of service providers while ensuring a level-playing field for companies that have the relevant skills to provide external review services. The calibration of the framework’s requirements are key to ensuring that it does not act as a disincentive for firms to register or force smaller firms out of the market. It is also important to consider the resource requirements at supervisor level to minimise costs and resource demands to administer the new scheme.

In order to support the entry of smaller participants into the market, the framework must be proportionate in its requirements in order to reflect the nature and scale of activity. By including proportionality measures and limiting the framework’s requirements that would necessitate organizational changes and require additional financial resources, risks associated with insufficient competition can be avoided. Such risks include higher prices or other barriers to entry, and inadequate choice for smaller issuers.

As the market grows in size and importance or if specific issues arise regarding the conduct of external reviewers more generally, the framework could be reviewed and extended to encompass all external reviewers or could be incorporated into other potential Commission initiatives to improve supervision of entities in the green market more generally.

While the majority of existing external reviewers are based in the EU, provision could be made in the proposed framework to facilitate third country reviewers that wish to assess compliance with the EU GBS. Existing frameworks contain equivalence provisions or allow for certification or endorsement of third country entities 49 .

5.4.1.Policy options

With regard to a potential regulatory regime for external reviewers, the two main policy options are:

1)Registration and limited supervisory oversight and requirements: This option consists of tasking ESMA with registering external reviewers of the EU GBS, which would require a legislative instrument. Under this approach, external reviewers would be required to only register with ESMA with limited ongoing supervisory requirements.

2)Authorisation and supervision with more stringent requirements: This option consists of tasking ESMA with authorising and supervising external reviewers of the EU GBS, which would require a legislative instrument. This approach entails a more stringent framework for the authorisation and supervision of external reviewers.

In addition, the policy option of “tasking national competent authorities (NCAs) with managing a regime for external reviewers” was discarded at an early stage. Annex 13 describes the policy option in detail, as well as the reasons for discarding it at an early stage.

5.4.2.How do the policy options compare?

1)Option 1: ESMA registration with limited ongoing supervision

The framework for external reviewers of the EU GBS could set out requirements on their minimum professional conduct, transparency and registration and supervision. For example, external reviewers could be subject to requirements on professional ethics, good repute, objectivity, independence and conflicts of interest, and be required to demonstrate and maintain professional minimum qualifications, quality assurance and control and be required to follow specific procedures when carrying out verification activities, in particular whether bond proceeds have been used to finance Taxonomy aligned expenditures. In order to be registered, the external reviewer would need to demonstrate that it only charges non-discriminatory and cost-based fees to issuers and that its fees are not dependent on the results of its assessment activities.

The external reviewer would be required to ensure that the members of its management body have appropriate levels of qualification and expertise to fulfil its tasks and that they conduct their activities with integrity and good repute. The external reviewer should have proper operational safeguards and internal processes that enable it to assess the compliance of a green bond with the EU GBS requirements.

With regards to conflicts of interest, there could be specific requirements to ensure that the external reviewer and its employees are independent from the issuer and the verification is carried out objectively, independently and is not affected by any existing or potential conflicts of interest or business relationship. Potential or existing conflicts of interest that have been identified should be eliminated or mitigated and disclosed without delay. The reviewer would also be required to document its relevant policies and procedures in order to evaluate their effectiveness. The designated competent authority would be empowered to investigate and take enforcement action if necessary to ensure the integrity of the market and the EU GBS.

The approach for registration and supervision of external reviewers could be similar to that for third party verifying STS compliance 50 . This would allow for the registration of an external reviewer with a designated competent authority, in order to register them to assess the compliance of a green bond with the EU GBS and to carry out post-issuance verification of the use of proceeds. A current list of registered external reviewers and green bonds that have been issued with an SPO (Second Party Opinion) on their compliance with the EU GBS requirements could be provided on an official website maintained by ESMA.

PROs: This approach would have the benefit of a single registration process for external reviewers with a limited ongoing supervisory burden. The framework would be based on a set of proportionate requirements covering professional conduct and transparency of the external reviewer’s policies and procedures that the designated competent authority would assess an application against. These requirements would be proportionate to the current size of the external reviewers, the general market and the non-systemic nature of their activity. This approach would minimise the cost and resource implications for both external reviewers and the designated competent authority whilst increasing accountability and market transparency.

CONs: Under this option, external reviewers would not be subject to more stringent requirements covering their organisational structure and financial resources. This might create the risk that the external reviewer’s activity is of lower quality, which could lead to increased reputational risk for issuers and negatively impact the reputation of EU GBS bonds. Less intensive ongoing supervision would limit the ability of the designated competent authority to actively detect and intervene in the event of a failure to comply with the requirements of the framework by an external reviewer.

Table 8 - Impact of centralised registration by ESMA

2) Option 2: ESMA Authorisation with more stringent ongoing supervisory oversight and requirements:

Under this approach, external reviewers of the EU GBS would be required to submit significant information on their business plans, organisational and resourcing arrangements, governance structures, policies and procedures for ensuring compliance with the Regulation and their assessment methodologies. Once an application is deemed complete, the supervising body would then have to carry out a detailed analysis to ensure it meets the Regulation’s requirements before submitting a decision on authorisation to ESMA’s Board of Supervisors or the NCAs’ Board. A fee would be payable to submit the application and reviewers would be subject to ongoing supervisory fees depending on their size and turnover.

This approach would be similar to that taken in the Credit Rating Agency Regulation (EU) 462/2013 with stringent requirements imposed on external reviewers that wish to provide services to issuers of the EU GBS.

In this regard, it is important to note the key differences between CRAs and external reviewers – CRAs are systemically important entities relied upon by the market to issue independent ratings on the creditworthiness of a financial instrument. The determination of a rating is a complex and detailed process requiring forecasting and modelling of potential impacts of changes in market conditions or in the underlying assets. Credit ratings have significant implications for the pricing of an instrument.

In the case of credit ratings, there are requirements in the EU legislations (CRR, Solvency II) related to the use of credit ratings in the process of determination of the amount of regulatory capital. Credit ratings therefore have an impact on the type and amount of financial instruments that credit institutions and insurance undertakings need to hold for the regulatory purposes.

In contrast, external reviewers operate in a niche market for green bonds, and while their opinions are an important source of assurance for investors and issuers regarding the sustainability of their investments, the activity is non-systemic and has limited pricing impact on the final price of the bond.

PROs: This approach would have the benefit of a single authorisation process for external reviewers and harmonised supervision across the union. It could improve standardisation and quality of the external review process and transparency for issuers and investors about the activities of external reviewers.

CONs: ESMA or the designated national bodies will require additional resources to establish and administer this new process, and it will take time to complete the legislative process to grant the necessary powers to ESMA or the designated national bodies. A comprehensive framework would create significant additional costs for external reviewers and ESMA or the designated national bodies. A more stringent framework, similar to the Credit Rating Agency Regulation, is not proportionate given the size of the market and the non-systemic nature of their activities.

Table 9- Impact of centralised authorisation and supervision by ESMA

Comparison table

The following table summarises the assessment of the options against the objectives set out in section:

Costs under option 3 are based on the application of a regime based on the CRA Regulation. Option 2 is costed relative to this.

5.5.Policy dimension 3: Flexibility for sovereign issuers 52

Sovereigns are important issuers of green bonds: public sector green bond issuances represented more than one third of global issuances of green bonds in 2018 53 . In order to cover the market for green bonds, the EU GBS should also cater to sovereigns. This section explores the extent to which specific flexibility in meeting the requirements of the EU GBS is justified to allow sovereigns to make use of the standard on a voluntary basis.

The TEG proposed that the EU GBS should apply equally to private and public (including sovereign) issuers. In their report, they specified that green expenditures for sovereigns and sub-sovereigns could include relevant public investments, subsidies and expenditures. This section will focus exclusively on the case of a voluntary EU GBS for sovereign issuers – there is no policy option for a mandatory standard for sovereign green bonds, as the chosen legal basis – Article 114 TFEU – does not warrant such type of legislative action (see Annex 13 – discarded options).

Specificities of sovereign issuers

The process of issuing a Sovereign green bond is similar to that of issuing a corporate green bond, with some specificities. Stakeholders have mentioned the following particularities of Sovereign green bond issuers, and how it might affect their use of the EU GBS:

·Types of expenditure funded: Although Sovereign green bonds may directly finance tangible assets such as infrastructure, they also target more indirect and decentralised expenditures, such as subsidies and operational expenditures. Intangible assets, such as research and innovation, also appear more frequently in sovereign bonds than corporates.

·Lack of project level overview of impacts: It may be difficult for a sovereign to state with certainty that all items funded are aligned with the Taxonomy, in particular the Do No Significant Harm (DNSH) criterion. Sovereigns typically fund grant schemes, and are not always in the supply chain for individual projects. Energy efficiency grants which are distributed to firms in many different industries were mentioned as a potential example.

·A preference for state auditors: public issuers may prefer to use existing state agencies specialised in government accounts rather than external third parties for the review of the allocation of bond proceeds.

·Legal restrictions on committing unspent proceeds: In some cases, a forward-looking approach to the allocation of green funds is not possible. This could be for example if the Green Bond Framework of a sovereign issuer cannot commit a Parliament or pre-empt the final decision on the allocation of state funds.

This means that two types of flexibility may be relevant for Member States wishing to apply the EU GBS: flexibility linked to the EU Taxonomy Regulation (i.e. on use of proceeds) and flexibility linked to other requirements. These two will now be discussed in order.

1)Flexibility linked to the EU Taxonomy Regulation

In its draft report on the EU GBS, the TEG advocated for the inclusion of a limited degree of flexibility related to the specific technical screening criteria set out in the Taxonomy Delegated Acts, by relying on the fundamental principles of the Taxonomy Regulation to verify that investments align with the Taxonomy (the “TEG approach”). This was justified by the need to handle gaps in the gradual development of the Taxonomy, and areas where the criteria would not directly applicable, such as outside the EU’s borders or for particularly innovative projects.

While Member States that responded to the targeted consultation on the EU Green Bond Standard were in general supportive of the core components of the EU GBS as proposed by the TEG, and especially of the alignment with the Taxonomy, a number of Member States also agreed with the TEG’s proposal for flexibility.

However, there is an important legal dimension to the question of flexibility from the requirements of the EU Taxonomy Regulation. Article 4 of The EU Taxonomy Regulation specifies that: “Member States and the Union shall apply the same criteria set out in Article 3 to determine whether an economic activity qualifies as environmentally sustainable for the purposes of any measure setting out requirements for financial market participants or issuers in respect of financial products or corporate bonds that are made available as environmentally sustainable. “

Given that the EU GBS initiative will pursue, as its core objective, the aim of delineating the boundaries of what shall constitute an ‘environmentally sustainable’ bond, the EU Taxonomy will need to be applied fully to determine the eligibility of the proceeds of the bond issuance, for corporate issuers. This excludes the type of flexibility suggested by the TEG for corporate bonds.

However, although the EU is not legally allowed to deviate from the Taxonomy Regulation when setting out standards for green bonds issued by corporates 54 , this restriction does not apply in the case of Sovereign issuers. Accordingly, there is legal scope for affording flexibility around the definition of eligible green proceeds for potential sovereign issuers of EU GBS green bonds. Two such potential flexibility approaches are explained below.

1)“Flexibility pocket” approach

One potential approach is to allow Sovereign issuers to include as proceeds in their EU GBS-aligned bond expenditure that has a positive environmental impact, but is not Taxonomy aligned. Under such a “flexibility pocket” approach, the proceeds of the sovereign EU GBS bond would be clearly divided into two parts: one part that would be 100% aligned with the criteria of Article 3 of the Taxonomy Regulation, and a second part (the “pocket”) where there would be flexibility to diverge from the Taxonomy.

The size of this pocket would be capped, and subject to some minimum criteria: for example, only economic activities not covered by existing Technical Screening Criteria under the EU Taxonomy, because those criteria are not yet developed for a specific sector or a specific environmental objective, would be eligible for the flexibility pocket. Furthermore, economic activities would still need to (i) substantially contribute to one of the six environmental objectives as set out in the Taxonomy Regulation, (ii) do no significant harm to any of these objectives, and (iii) meet the minimum safeguards of the Taxonomy Regulation. The projects in the flexibility-pocket would not be considered Taxonomy-aligned.

The separation into two parts would facilitate the task for financial institutions holding these bonds of disclosing Taxonomy-alignment under the Sustainable Finance Disclosures Regulation. 55  Any use of flexibility would be accompanied by appropriate disclosures, to ensure that investors are fully aware of its extent, and can discount the Taxonomy-alignment of the bond accordingly.

Member States were consulted on the “flexibility pocket” approach using a targeted questionnaire (see Annex 9 for full results).

2)Applying the “TEG approach” only to sovereign issuers: applying the Taxonomy by relying on its fundamental principles

Another potential approach would have been to follow the TEG approach outlined on the previous page, but only for sovereign issuers.

In practice this approach could lead to certain paradoxical outcomes: given that sovereigns and corporates often ultimately fund the same economic activities, flexibility in the application of the Taxonomy could lead to inconsistencies. In particular, such flexibility could lead to the exact same economic activity being judged differently based on the source of its funding.

For example, a project outside the EU could potentially be deemed Taxonomy-aligned while an identical one inside the EU would not be. Or a project in a sector not yet covered by the Taxonomy could be deemed Taxonomy-aligned if it’s funded by a sovereign, but not if it’s funded by a corporate. This could lead to unwanted outcomes, such as allowing public actors to crowd out private actors by being able to offer “Taxonomy-aligned” funding where the private sector is not. In order to avoid this inconsistency, it is not recommended to give sovereigns the flexibility to interpret or apply the Taxonomy differently to corporates. For these reasons, Member States were not actively consulted on the “TEG approach” to flexibility.

2)Flexibility linked to other requirements

Taking into account the issues mentioned by sovereign respondents to the consultation, potential flexibility for sovereign green bond issuers could also be possible with regards to other aspects, such as the reporting and review requirements of the EU GBS. In particular, the following types of flexibility could be considered for sovereign issuers of EU GBS-aligned green bonds:

·Allowing, if necessary, sovereign issuers and the reviewers of their EU GBS-aligned green bonds to assess the alignment with the criteria of the Taxonomy Regulation based on the terms and conditions of funding programmes, rather than at project level. This could greatly facilitate the process of assessing Taxonomy-alignment for sovereigns, especially in case of government programs funding multiple projects according to Taxonomy-aligned terms and conditions.

·Allowing sovereign issuers to rely on internal state auditors instead of external third parties for the review of the allocation of proceeds.

5.5.1.Policy options

Based on this feedback, the following three options are proposed to grant flexibility to sovereign issuers wishing to make use of the EU GBS when compared to the requirements for private issuers:

-Option 1: No flexibility compared to corporate issuers

-Option 2: Flexibility regarding other requirements, but not the EU Taxonomy Regulation)

-Option 3: Flexibility regarding other requirements and the EU Taxonomy Regulation

These options are cumulative in the level of flexibility, i.e. option 3 includes the flexibility of option 2 but goes further by adding flexibility on taxonomy requirements. Keeping this in mind, the following assessment will focus on the impact of the additional flexibility introduced for each option.

5.5.2.How do the policy options compare?

1)Option 1: No flexibility compared to corporate issuers

PROs: Full consistency. No preferential treatment of the public sector. The credibility of the standard will be boosted.

CONs: Additional difficulties for sovereign issuers to make use of the EU GBS.

Table 10- Impact of no flexibility option

2)Option 2: Flexibility regarding other requirements, but not the EU Taxonomy Regulation

PROs: Consistency with regards to the Taxonomy. Coherent definitions of what is green. Flexibility on EU GBS requirements overcomes the main obstacles sovereigns would face in using the EU GBS. Feedback from MS shows that they are mostly in favour of flexibility related to other (i.e. non Taxonomy-related) requirements.

CONs: Sovereigns may struggle to apply the Taxonomy 100%, which would be challenging for them and may limit their use of the EU GBS.

Table 11 - Impact of some flexibility option

3)Option 3: Flexibility regarding other requirements and the EU Taxonomy Regulation

PROs: Sovereigns would be fully facilitated in their use of the EU GBS, and their ability to identify EU GBS-eligible expenditure on their balance sheets may be higher, potentially allowing them to more easily issue EU GBS-aligned green bonds if they choose to.

CONs: Feedback from MS shows that they are divided on the question of flexibility on Taxonomy-related requirements, with some expressing significant reservations. So far, the green bond market has not operated with separate requirements for sovereigns and sovereigns, so this would be an untested approach. Inconsistencies within the EU GBS could lead to paradoxical situations, and it could weaken the usefulness of the EU GBS as a gold standard for high quality green bonds, as it would give less certainty on the positive environmental impact of use of proceeds.

Table 12 - Impact of full flexibility option

Comparison table:

The following table summarises the assessment of the options against those objectives which are relevant for the green bond market. The options are assess compared to each other (not compared to the baseline).

5.6.Options discarded at an early stage

The following options were considered but discarded at an early stage:

(1)Non-legislative measure: Commission Communication on an EU GBS

(2)Developing other standards and labels as part of a framework

(3)Tasking national competent authorities (NCAs) with managing a regime for external reviewers

(4)Flexibility for corporate issuers with regards to Taxonomy-alignment

(5)A mandatory standard for sovereign issuers

(6)Banning the refinancing of existing green assets and expenditure by the EU GBS

(7)Options which may imply the loss of green status before the bond matures.

Annex 13 describes each of these options in detail and the reasons for discarding them at an early stage.

6.Preferred option 

The chosen option builds on market best practices in the field of reporting and external review, and on the alignment with the EU Taxonomy. The alignment with market best practices is justified based on the desire to position the EU GBS as the foremost standard in terms of transparency, legal certainty, and environmental credibility. It will also help avoid fragmentation and reduce confusion for issuers and investors. The link with the criteria in the Taxonomy is legally mandated. In feedback from the targeted consultation on the EU GBS, the vast majority of respondents agree with these choices.

6.1.Policy dimension 1: scope of application

The current data and stakeholder evidence indicates that under the mandatory option, there is a risk of strong disruption to the green bond market. In contrast, the voluntary standard achieves many of the same objectives, while minimising market disruption. Whereas a mandatory standard forces net costs on some, a voluntary standard will likely only be used by those who see a net benefit in doing so. For this reason, the voluntary option avoids discouraging issuers from issuing green bonds, and impairing the development of green bond markets.

A voluntary standard would in particular appeal to issuers of high quality green bonds, allowing them to highlight more clearly to investors and others their environmental credentials. For these issuers, the potential additional costs of complying with the EU GBS (in particular related to the assessment of taxonomy-alignment and external review) would more likely be cancelled out by higher benefits, such as investor demand and a potential green bond premium, would also likely be higher. This possibility is supported by the strong interest shown from stakeholders in the EU GBS.

In the targeted consultation, several respondents made the comment that it was important to keep the standard voluntary, and expressed worries that existing green bonds could otherwise lose their status as green. Only a very small group (3 respondents out of over 160) called for a mandatory standard.

The conclusion of this assessment is therefore that option 1 (EU GBS alignment voluntary for green bond issuers) is the best policy option. This means that green bond issuers in the EU and elsewhere will be free to align their green bonds with the standard if they wish to, based on their own cost-benefit assessments. The voluntary nature of the EU GBS will apply to all potential issuers, whether private or public. Issuers will also have the option of using the EU GBS alongside other standards, for example. This facilitates the creation of a competitive market environment that allows investor demand to drive future issuances rather than regulatory requirements.

6.2.Regulatory treatment of external reviewers of EU GBS-aligned green bonds

The second policy dimension concerns the nature of a registration and supervision regime for external reviewers.

Based on the analysis of the available policy options and taking into account stakeholder feedback, the EU GBS should proceed with option 1. This option would require external reviewers to seek registration from ESMA with limited ongoing supervisory requirements, which are proportionate to the size of the market and the non-systemic nature of their activities. This approach would also limit the additional supervisory and organizational costs for external reviewers and supervisors.

Given the non-systemic nature of external reviewer activity and the relatively small size of the market, a more stringent regime which would incur greater organisation and supervisory costs is not required at the present time. However, developments in the market should be monitored to ensure the framework is functioning as intended and the number of external reviewers that have sought registration would be a key performance metric.

Registration and limited supervision by ESMA would support a harmonized application of rules as well as uniform supervision and ESMA staff would also be able to leverage their experience from the supervision of credit ratings agencies and trade repositories. While this option would impose compliance costs on external reviewers, all investors and users of opinions from external verifiers would benefit from the same level of investor protection, transparency and integrity across the market. In contrast, if a national competent body were to fulfil the same function, this could lead to divergent approaches and fee levels across the Union and additional national rules could restrict the ability of reviewers to provide their services on a cross-border basis.

6.3.The extent of flexibility for sovereign users of the EU GBS

The third policy dimension concerns the extent of flexibility which should be given to sovereign issuers of the EU GBS.

According to the responses to a dedicated stakeholder questionnaire on the matter, Member States are evenly divided on the idea of a flexibility pocket for non-Taxonomy aligned expenditure, but the strongest arguments weigh against such flexibility. In particular, having two grades of green expenditure within the use of proceeds could lead to a singling out of sovereign users of the EU GBS as less green, or it could harm the credibility of the standard, or undermine its legal certainty and transparency. Some MS also argued that as sovereigns, they should set the bar, and they feared that the flexibility pocket would introduce additional complexity.

However, Member States are broadly very positive to the suggestions for flexibility with regards to other requirements, such as on project-by-project reporting, such as on external review, and refinancing.

Hence, the chosen approach is option 2 (flexibility with regards to other requirements, but not the requirements of the Taxonomy Regulation). By pursuing this option, MS should be able to make use of the EU GBS (on a voluntary basis) on a level playing field with corporates, while still benefiting from some flexibility that takes into account their institutional specificities. In particular, the flexibility to assess government spending programmes based on their terms and conditions, instead of assessing each of the individual projects funded, would greatly facilitate the process of assessing Taxonomy-alignment for sovereign issuers, and could support increased sovereign use of the EU Taxonomy.

It is important context that any Commission proposal on the EU GBS would need adoption by co-legislators before it can enter into force. This means that the Taxonomy-alignment of sovereigns today is less relevant than the expected and actual Taxonomy-alignment in 2022, when the EU GBS may actually be available to use. Meanwhile, given the dynamic nature of the taxonomy, regular monitoring and evaluation is also foreseen to update technical screening criteria in line with market developments.

In addition, the Commission is currently assessing how to give more space within the taxonomy level 2 rules for transition or other activities in line with the taxonomy’s objectives. Creating more flexibility or widening the scope also for Sovereign issuers in this way seems to offer a more coherent, reliable approach than doing this for sovereign EU GBS issuance alone.

6.4.Alignment with objectives

As shown in the table below, the preferred option package is aligned with the objectives detailed in section 4.

Table 13 - Alignment with objectives

6.5.Analysis of the expected take-up of standard

The following section will assess the expected take up and use of the EU GBS, provided that a legislative initiative as proposed in line with the preferred option identified in this impact assessment. The analysis begins by assessing the extent to which current green bond issuers be able to meet the requirement for 100% taxonomy-aligned use of proceeds. It then conducts a partial and high-level cost-benefit analysis of using the EU GBS compared to other green bond standards.

6.5.1.Taxonomy-alignment – general results

The first condition for an issuer to use the EU GBS is that they can locate enough Taxonomy-aligned assets, operating expenditure, or capital expenditure on their balance sheet to match the amount of the prospective EU GBS bond.

Annex 8.3 contains a summary of the most relevant studies that have been carried out to gauge the level of Taxonomy alignment, usually by estimating the share of Taxonomy-aligned revenue for a set of European or global equities. This exercise is rendered more difficult by a range of constraints, notably the fact that no part of Taxonomy is yet finalised, and that requirements for Taxonomy- aligned disclosures are not yet in force, so there is a lack of available data. These studied indicate that for companies in the EU today, the percentage of taxonomy-aligned activities would likely be in lower single digit number (likely below 5%) 56 .

However, it is important to note that the Taxonomy is a tool for encouraging transition towards Paris-alignment. In that sense, a lower percentages today indicates a greater need for more effort. Crucially, while the study results mentioned above give us a rough indication of the current state of play, what matters for EU GBS issuance is the ability of companies to invest and create Taxonomy-aligned assets going forward. If so, the share of Taxonomy-alignment will increase over time.

In this respect, a study by EY where a group of consultants identified over €200 billion of shovel- ready green investment projects across the EU is a useful reference. EY identified at least € 20.6 billion worth of Taxonomy-aligned projects spread over several sectors. While the study does not give a comprehensive overview of the potential for Taxonomy-aligned investments in Europe, it gives an indication of the sheer scale of green and Taxonomy-aligned projects potentially in the pipeline, and which could be funded using EU GBS bonds. 

6.5.2.Taxonomy-alignment – the case of high-emission manufacturing specifically

As explained further in annex 8.4, the link of the EU GBS with the Taxonomy may facilitate green bond issuance by certain sectors currently lagging behind in issuance. The Taxonomy sets out criteria for investments in certain transitional activities to be considered as green even if they are not low-carbon activities per se. One example is the sector of energy-intensive industry, which has been insufficiently covered by market-based taxonomies, and where green bond issuance is relatively low. According to the TEG, the fear of adverse publicity because a deal is deemed “insufficiently green” has prevented some issuers in such sectors from tapping the green bond market.

Potential green bond issuers in this sector are likely to benefit from being covered by the clear criteria of the EU Taxonomy. Annex 8.4 explains how sectors such as steel, aluminium, cement, or chemicals, which are among the largest emitters in the EU, may be able to use the EU Taxonomy to grow their green bond issuance, with significantly less fear of accusations of green-washing from sceptical investors or civil society. For this reason, the EU Green Bond Standard can, thanks to its link with the EU Taxonomy, help companies in this sector enter the green bond market.

6.5.3.Cost-benefit analysis of issuing a green bond using the EU GBS, versus another green bond standard

An issuer would likely only choose to make use of the EU GBS if the net benefits of doing so exceeds the net benefits of all other options for raising financing, including issuing a green bond using one of the other available green bond standards, issuing a conventional bond, or raising financing using other means.

In line with the mandate given to it by the Commission, the TEG has proposed an EU GBS draft standard based on market best practice. Given the additional requirements for use of proceeds to be Taxonomy-aligned, and to contract only registered external reviewers, the standard would likely be more costly - on average - for issuers to align with, compared with current market standards. However, for issuers already following market best practice, alignment with the potential EU GBS would be less costly.

At the same time, the EU GBS would likely also bring in more of the benefits typically associated with green bond issuance, such as a reputational boost for the issuer, a diversification of the investor base, and a potential green bond premium. These benefits would increase with the greenness of the bond. For these two reasons, issuers of high quality green bonds are the ones who are the most likely to make use of the potential EU GBS, in order to reap higher benefits from their existing green credentials. The positive feedback from many green bond issuers to the targeted consultation indicates that there are many such issuers who are eager to make use of the EU GBS.

6.5.4.Costs of issuing using EU GBS (compared to current green bond standards)

Issuing a green bond usually implies extra costs compared to a conventional bond, such as for administrative efforts, staffing and training needs related to the creation of a green bond program, the management and monitoring of the use of green bond proceeds, and carrying out of reporting requirements after issuance. In addition, there are costs for external review (ranging from EUR 20.000 to 40.000 per issuance, based on stakeholder input).

Although views vary, the average expectation from stakeholders is for slightly higher costs for reporting and external review for those using the EU GBS (in particular those who not otherwise follow market best practice, such as aligning with the more ambitious CBI standard).

The following section goes through the various costs in details to see how the EU GBS would differ from existing market standards.

1)Costs of reporting obligations

If the EU GBS follows market best practice, it would require the publication of a Green Bond Framework, of yearly allocation reports, and an impact report following full allocation of proceeds. The related costs are unlikely to vary significantly from current green bond standards.

2)Costs of external review 57

If the EU GBS follows market best practice, it would require issuers to obtain external review of the green bond framework and of their final allocation report. This indicates that the costs of external review obligations under the EU GBS will not vary materially from the cost of current green bond standards, in particular the CBI standard, which requires both forms of external review. 58  

The real change in costs might therefore come from the effect of the potential registration and supervision regime for external reviewers, under which external reviewers who wish to cater to EU GBS issuers may need to pay a fee to ESMA. Many respondents to the targeted consultation indicated that the additional costs would depend on the design of the future regime for external reviewers. Annex 3 quantifies the average additional cost per issuer of using the services of an external reviewer registered and supervised under a regime set up by the EU GBS. The result of the analysis is that additional costs per client are likely to be in the range of EUR 1,334 to EUR 3,281. For larger entities with significant organisational capacity, the costs may be lower.

At the same time, the TEG found that the range of approaches and services provided by external reviewers can create uncertainty for issuers and investors on the actual value, quality and impact of the external reviews, and can also lead to increased costs, for example, where an issuer must obtain more than one external reviewer second opinion, or an ESG rating. For this reason, it is possible that the intended standardisation brought to the market for external review by the EU GBS could help to bring prices down, provided that enough external reviewers apply for registration to review EU GBS bonds to encourage meaningful competition.

In the targeted consultation, several respondents from the financial sector were of the view that the EU GBS would reduce costs for issuers in the long-run, due to standardisation, consolidation, and more competition among external reviewers (by reducing the ability of external reviewers to differentiate their offers based on content).

3)Cost of identifying and tracking assets aligned with the EU Taxonomy

Issuers using the EU GBS would need to integrate the taxonomy criteria into their internal assessment of what is considered sustainable, and use it to identify green assets for the bond. In the targeted consultation, many pointed to the additional cost from screening proceeds against the EU Taxonomy as the main factor of increased costs. Some mentioned in particular the need to carry out due diligence according to the DNSH criteria as a major cost factor.

However, as mentioned in section 1 parallel disclosure requirements under the SFDR 59 and the Taxonomy Regulation mean that such costs would likely need to be absorbed regardless. In particular, companies under the scope of the NFRD 60 will have to report as of January 2022 their share of Taxonomy-aligned expenditure and revenues. This would incur a cost linked to collecting relevant environmental data, matching them with financial data at activity level, and disclosing on the resulting alignment. The disclosure requirements enter into force in a phased way over the first few years, alleviating these effects. As the Commission published a proposal to extend the scope of the NFRD, it is increasingly likely that any Corporates considering issuing according to the EU GBS would already fall under the requirement to publish these Taxonomy-alignment metrics.

Due to these legislative developments, a large part of the internal costs related to the assessment of Taxonomy-alignment may already be incurred by issuers, irrespective of the EU GBS.

6.5.5.Benefits of issuing using EU GBS (compared to current green bond standards)

For reasons discussed previously, the alignment of EU GBS with market best practice and in particular with the EU Taxonomy Regulation may allow issuers to more clearly and easily demonstrate their green commitment. The additional benefits of the external review process for the EU GBS may also be valued by both investors and issuers in terms of the additional assurance and transparency it provides regarding the greenness of their investment.

This should increase the signalling effect of the green bond, allowing the EU GBS to amplify some of the benefits for green bond issuers:

1)Increased reputational boost

For example, issuers of green bonds typically obtain a reputational boost, as the label of being a green bond issuer can be a strong signal about the environmental credentials of a corporation. Such a signalling effect is likely to be at least as strong, if not a stronger, in the case of the EU Green Bond Standard. The EU is also known worldwide to have some of the highest environmental standards, so EU GSB alignment could help a company establish itself as a green front-runner internationally.

2)Increased demand from investors

According to Agliardi and Agliardi (2019) 61 , the rising environmental awareness among investors contributes to increased demand for green bonds and to oversubscriptions. According to Climate Bond Initiative, 62% of green bonds in 2018 achieved a higher oversubscription and spread compression than their vanilla equivalents after 28 days. A separate effect on demand may come from the SFDR, which may facilitate the process for holders of EU GBS-aligned bonds to report their share of Taxonomy-aligned assets.

3)Increased green bond premium

There is growing evidence that issuers of green bonds benefit from a so-called green bond premium, a small but consistent pricing advantage due to investors accepting a lower yield on green bonds, which allows issuers of green bonds to borrow more cheaply. Although there is no definitive proof on the extent and pervasiveness of such a green bond premium, academic research indicates that it ranges between 1 and 20 basis points, and in some cases even higher. Stakeholders, including a prominent investment bank, have suggested estimates ranging from 2 to 30 basis points, although these depend on the sector and issuer type. For more information on the estimated size of the green bond premium, please see Annex 6. 

The size of the green bond premium also seems to correlate rather strongly with the level of green commitment from the issuer, such as the extent to which the issuer has made use of external review, as well as their history of green bond issuance. This would suggest that there is positive relation between the ability to trust the greenness of a bond and the size of the potential green bond premium for the issuer. If so, issuers making use of the EU GBS may benefit from an – on average – higher green bond premium than those using market standards, given the rigorous requirements and high green quality of the EU GBS.

6.5.6.Cost and benefits: Summary table

The following table sums up the potential costs and benefits for green bond issuers of using the EU GBS, versus using another green bond standard.

Table 14 - Costs and benefits for issuers of using the EU GBS

7.How will actual impacts be monitored and evaluated?

A robust monitoring and evaluation mechanism is crucial to assess the extent to which the envisaged standard meets its policy objectives. This will allow the Commission to review the legislation effectively at a future stage. It will also facilitate the early detection of potential unintended consequences and enable the Commission to address any such issues in a timely manner.

The intrinsic link to the Taxonomy Regulation 62 implies that the information gathered will provide key insights not only on the functioning of the EU GBS but also on the practical applicability of the Taxonomy. Given the taxonomy-based constraints for defining ‘economically sustainable economic activities’, the uptake of the standard will critically depend on the availability and/or economic feasibility of taxonomy eligible assets and projects. The taxonomy thereby sets the limits within which issuers can adopt the EU GBS (i.e. full market penetration is only possible if the whole market converges on a taxonomy-based system). There are likely to be links also to other related sustainable finance initiatives, such as the Ecolabel where the monitoring of the EU GBS will add useful information.

For the monitoring and preparation of a future evaluation of the impact of the legislative initiative, the following non-exhaustive list of sources could provide for a basis for information gathering:

a.ESMA database on registration of external reviewers,

b.ESMA database regarding regulatory fees and charges,

c.ESMA/NCA database on notifications and complaints,

d.External databases on bond market

The data and indicators for monitoring and evaluation linked to these sources would include the following output:

 Table 15 - Data and indicators

The timing of the monitoring needs to consider the application date of the legislation. No sooner than five years following this date, the Commission shall carry out an evaluation of this initiative, unless underlying legislation provides for an earlier evaluation deadline. The Commission will take the sources and indicators mentioned above into account and rely on a public consultation and discussions with ESMA and competent authorities.

In particular, the evaluation could assess the extent to which:

-The yearly issuance of EU GBS-aligned green bonds grows faster or at the same pace as the yearly issuance of all green bonds

-A large share of green bonds backed by Taxonomy-aligned projects are issued using the EU GS.

-EU GBS-aligned bonds are associated with larger green bond premia than other green bonds on average.

-The yearly issuance of EU GBS-aligned bonds is sufficient to sustain the activities of at least 3 registered external reviewers.

-The EU GBS reduces the search costs of investors seeking high quality green bonds, and the number of complaints receive by supervisory authorities stays relatively low.

The evaluation shall be conducted according to the Commission's better regulation Guidelines.

Annex 1: Procedural information

1.Lead DG, Decide Planning/CWP references

This Impact Assessment Report was prepared by Directorate C (in conjunction with Directorates B and E) “Financial Markets” of the Directorate General “Directorate-General for Financial Stability, Financial Services and Capital Markets Union” (DG FISMA).

The Decide Planning reference of the initiative “Proposal for a Regulation of the European Parliament and of the Council on the Establishment of an EU Green Bond Standard” is PLAN/2020/7030.

This initiative is part of the Commission Work Programme 2021 (COM2020 690 final – 19.10.2020) and is one of the actions proposed (number 16) by the European Commission in the context of “an Economy that Works for People”.

2.Organisation and timing

Several services of the Commission with an interest in the initiative have been involved in the development of this analysis.

Four Inter-Service Steering Group (ISSG) meetings, consisting of representatives from various Directorates-General of the Commission, were held in 2020.

The first meeting took place on 19 February 2020, attended by DG ENV, CLIMA, ECFIN, EMPL, DEVCO, TRADE, ENER, BUDG, TAXUD, MOVE, RTD, MARE, NEAR, GROW, CNECT, EEAS, JRC, SJ and the Secretariat General (SG).

The second meeting was held on 28 May 2020. Representatives from DG ENV, CLIMA, ECFIN, EMPL, DEVCO, TRADE, ENER, BUDG, TAXUD, MOVE, RTD, MARE, NEAR, CNECT, JRC, SJ and the SG were present.

The third meeting was held on 20 November 2020 and was attended by DG ENER, TRADE, RTD, NEAR, ECFIN, DEVCO, EMPL, MOVE, ENV, MARE, CLIMA, GROW, BUDG, EEAS, JRC, SJ and the SG.

The fourth meeting took place on 10 December 2020, attended by DG CLIMA, ECFIN, EMPL, TRADE, ENER, BUDG, MOVE, RTD, MARE, CNECT, JRC, DEVCO, EEAS, SJ and the SG. This was the last meeting of the ISSG before the submission to the Regulatory Scrutiny Board on 20 January 2021.

The meetings were chaired by SG.

DG FISMA has considered the comments made by DGs in the final version of the IA. In particular, it has simplified the structure of the policy options, reduced the length of the report and clarified the links with other EU legislation and initiatives. The analysis of impacts and the preferred option takes account of the views and input of different DGs.

3.Consultation of the RSB

The Impact Assessment report was examined by the Regulatory Scrutiny Board on 17 February, 2021. The Board gave a positive opinion with reservations. Taking into account the feedback received from the Board, the Impact Assessment was especially revised on the following aspects:

·Further specification of the problem definition/ problem analysis: e.g. concerning deficiencies of current green bond market standards, shortcomings on use of EU Taxonomy, description of moral hazard problem of the green bond market linked to lack of clarity on green investments, justification for regulating an area before significant problems arise, risks of not regulating the area of external reviews, different treatment of sovereign green bond issuers due to specificities of sovereigns.

·Better assessment on how market standards would evolve in the absence of a new EU initiative.

·Adjustment/ deletion of option that corresponds to the baseline on external reviews.

·Additional clarification for the need for further supervision on external reviews, also in context of problem description and definition of options. In addition, better reasoning for choosing a more proportionate approach to regulating evolving segment and not considering an option to regulate the external review of existing market standards, in addition to the EU GBS.

·Clarification of explanations on legal reasons for discarding the option of a mandatory standard for sovereign issuers.

·Explanation in further depths of the purpose and consequences of allocation and impact reporting.

·Providing additional details on the degree of grandfathering which is foreseen for the EU GBS.

·Addressing possible challenges of aligning the EU GBS with the EU Taxonomy, for example related to the inclusion of the greening of brown sectors.

·Description of reasons for the mainly qualitative assessment and the limitations regarding quantitative data, and the efforts made in that respect.

·Explanations on how success of the EU GBs initiative will be measured (taking into account the estimated costs and benefits of the preferred options of this initiative).

4.Evidence, sources and quality

The impact assessment draws on an extensive amount of desk research, expert group meetings, in-depths interviews with selected stakeholders, call for feedback, open public consultation, targeted consultation, opinions and advice by the potential supervising authorities, targeted questionnaire, academic research papers and other.

The material used has been gathered since the Commission Services started the EU GBS initiative as set out in the Commission’s Action Plan on Financing Sustainable Growth as of March 2018 (see “Action 2: Creating standards and labels for green financial products”). This material includes but is not limited to the following:

·As set out in Action 2 of the Action Plan on Financing Sustainable Growth and at the request of the Commission, the Technical Expert Group (TEG) on Sustainable Finance started its work in June 2018. As a result of many meetings (13 physical TEG meetings) and intense discussion, the TEG prepared a comprehensive report with recommendations for an EU GBS that was published in June 2019. The TEG suggested the establishment of an official and voluntary EU GBS based on the EU Taxonomy, building on existing market standards. Next to that, it provided a usability guide in March 2020, including an updated proposal for an EU GBS. The mandate of the TEG ended in September 2020.

·Regarding the draft TEG report, the TEG conducted a call for feedback that ran from 6 March 2019 until 7 April 2019. It received 104 replies from a balanced group of stakeholders (issuers, investors, banks, verifiers, NGOs, main associations and NCAs) with a strong majority of respondents supporting the creation of a voluntary EU GBS standard as well as a strong link to the EU Taxonomy. The results from this call for feedback were considered in the final June 2019 TEG report.

·The Commission launched an open public consultation on the Renewed Sustainable Finance Strategy on 8 April 2020 that was open for 16 weeks (due to the corona virus pandemic the deadline for responses was extended by one month and closed on 15 July 2020). This consultation provided for over 100 questions, including several questions on standards and labels for financial products as well as on the EU GBS. The Commission received over 600 replies to this consultation from a large range of stakeholders. A Feedback Statement providing an overview of the contributions to this public consultation will be published on the Commission’s website.

·DG FISMA carried out a set of in-depth interviews on the EU GBS with 11 selected stakeholders different sectors and various Member States in the months of May and June 2020.

·As part of the process, DG FISMA also launched a targeted consultation on 12 June 2020 to seek further input from stakeholders on the EU GBS. This consultation was open for 16 weeks (due to the corona virus pandemic the deadline for responses was extended by one month) and closed on 2 October 2020 after receiving 167 responses. The replies have been published on DG FISMA webpage. The consultation document consisted of 19 questions in total and focused on two main topics, namely on the EU GBS as well as on Social Bonds and COVID-19. Contributions were received from a large range of stakeholders, including company/business organisations, business association, consumer organisations, NGOs and public authorities. Geographically, replies were received from 20 EU Member States, 2 other European countries and 2 non-European countries. DG FISMA has analysed the feedback to this targeted consultation and prepared a Feedback Statement, which will be published on DG FISMA website.

·A targeted “Questionnaire on Sovereign green bond issuance using the EU Green Bond Standard” was shared with EU Member States on 2 December 2020 (DMOs) and 9 December 2020 (Finance and Environment Ministries) for feedback by 15 December 2020. The questionnaire focused on the usage of the EU GBS by sovereign issuers and provided 10 questions. A large number of Member States (17 responses) provided concrete feedback to this questionnaire.

·DG FISMA had calls with European Securities and Markets Authority (ESMA) for its opinion and advice (e.g. on 19 November and 8 December 2020) regarding a potential registration/supervision regime of external reviewers at EU Level (giving a new role/ task to ESMA).

·The JRC prepared several academic / working papers / reports regarding green bonds: (1) “Green bonds and companies’ environmental performance: a feasibility study”; (2) “Green bonds and use of proceeds reporting: what do we know from market data providers?”; (3) “The pricing of green bonds. Are financial institutions special?”; (4) “Green Bonds as a tool against climate change”.

·The EU GBS has been on the agenda of the Member State Expert Group on Sustainable Finance since 2019: Member States have been updated on the ongoing EU GBS initiative a regular basis and specific issues, as e.g. the link to the EU Taxonomy or the format and the nature of a potential EU GBS have been discussed.

The material used to inform this impact assessment comes from reputable and well-recognised sources that act as benchmarks and reference points for the topic. Findings were cross-checked with results in different publications in order to avoid biases caused by outliers in the data or vested interests by authors.

Annex 2: Stakeholder consultations and selected interviews

This section presents the full or partial results of two stakeholder consultations:

1.Targeted Consultation on the EU Green Bond Standard (12/06/2020 to 09/10/2020)

2.Online consultation on the Renewed Sustainable Finance Strategy (2019)

1.Targeted Consultation on the EU Green Bond Standard

On 12/06/2020 DG FISMA launched a targeted consultation on the Establishment of an EU Green Bond Standard (EU GBS).

The initiative forms part of the Commission’s overall effort to encourage greater investment in green and sustainable investments. It is a follow-up to the Commission Action Plan on Financing Sustainable Growth of March 2018, which tasked the Commission Technical Expert Group (TEG) on Sustainable Finance to prepare “a report on an EU green bond Standard, building on best practices” (Action 2: Creating standards and labels for green financial products). In its final report of June 2019, the TEG put forward concrete recommendations for an EU GBS. It included alignment of the use of bond proceeds with the EU Taxonomy, the publication of a Green Bond Framework, mandatory reporting on the use of proceeds (allocation reports) and on environmental impact (impact report), and independent verification of the compliance with the Green Bond framework and final allocation report by an external verifier. This work was supplemented by the TEG’s usability guide (with updated proposed Standard and Green Bond Framework) from March 2020.

Building on this work, the purpose of this targeted consultation was to collect further views and opinions of interested parties on the content for the establishment of an EU GBS. Respondents were invited to provide concise and operational suggestions on measures that can be put in place to deliver the policy goals.

The consultation document consisted of 19 questions in total and focused on two main topics, namely on the EU Green Bond Standard as well as on Social Bonds and COVID-19. The questions focussed on several issues such as inter alia the rationale for establishing an EU GBS, possible core components of a new standard, and other issues such as use of the EU GBS by public sector issuers as well as establishment of additional standards and labels.

DG FISMA received 166 responses by the end of the consultation period on 09/10/2020. Contributions were received from a large range of stakeholders (see Table 16 ).

Table 16 - Replies by type of stakeholder and field of activity

Geographically, replies were received from 20 EU Member States, 2 other European countries and 2 non-European countries (see Table 17 for a detailed breakdown).

Table 17 - Replies by country

This feedback statement summarizes the responses received to each question. It is not intended as a detailed analysis of the responses, but seeks to give a general assessment of the contributions received and highlight any common themes or issues related to the EU GBS as well as to Social Bonds and COVID-19. The summary of the responses provides particular insight into new areas for action proposed by the respondents. This feedback statement does not give any indication of potential initiatives, which the European Commission may or may not undertake in the future in this area.

Summary of individual responses

Q1) In your view, which of the problems mentioned below is negatively affecting the EU green bond market today?

Based on the average scores among respondents for each of the questions, it is possible to identify clusters of problems which issuers identify as having a similar degree of negative impact on the green bond market today, ranked from most to least impactful:

Q2) To what extent do you agree that an EU GBS as proposed by the TEG would address the problems and barriers mentioned above in question 1?

Based on the average scores among respondents for each of the questions, it is possible to identify clusters of barriers and problems mentioned above in question 1 that issuers identify as being addressed to a similar degree by an EU GBS as proposed by the TEG. In the following, they are ranked from most to least impactful:

Q3) To what extent do you agree with the proposed core components of the EU GBS as recommended by the TEG?

160 respondents answered this question, and the vast majority of them strongly agreed or rather agreed with all the main requirements of the EU GBS as proposed by the TEG. Investors argued that the core requirements of the EU GBS would respond to their needs for clarity, consistency, comparability, transparency and assurance that the financed projects are aligned with the EU Taxonomy.

Several respondents also pointed out that the EU GBS is largely aligned with current voluntary market practices, not least with regards to the requirements for publishing a green bond framework, reporting, and verification. Some respondents however worried that the requirements would be difficult to meet for SMEs wishing to issue green bonds, especially with regards to reporting and external review.

Several respondents made the comment that it was important to keep the standard voluntary, and were worried that otherwise existing green bonds could lose their status as green. Only a very small group (3 respondents) called for a mandatory standard.

Specific comments made on each of the sub-questions:

Requirement to align eligible green projects with the EU Taxonomy:

An overwhelming majority of respondents (136/160, or 87%) strongly agreed or rather agreed with this requirement (while only 8 strongly disagreed or rather disagreed). A large number of comments concerned suggestions for flexibility with regards to the Taxonomy, for example with regards to the TSCs, Transition activities, or DNSH, in particular with regards to the progressive finalisation of the Taxonomy. Some respondents suggested that the EU GBS should allow for general corporate purpose issuance, or target-linked approaches.

Requirement to publish a Green Bond Framework before issuance

An overwhelming majority of respondents (145/160, or 90.5%) strongly agreed or rather agreed with this requirement. Some respondents asked that the standard should be defined within the legal documentation (as an addition, or instead of the green bond framework)

Requirement to publish an annual allocation report

An overwhelming majority of respondents (145/161, or 90%) strongly agreed or rather agreed with this requirement (while only 6 strongly disagreed or rather disagreed). Some issuers pointed out potential synergies, such as including the allocation reporting in the issuer’s non-financial statement under the NFRD, or potential flexibility, such as giving issuers the choice between a final report and yearly allocation reports. A small number of issuers pointed out that the ongoing reporting obligations (i.e. the Allocation Report and the Impact Report) would prove particularly burdensome for SMEs.

Requirement to publish an environmental impact report at least once before final allocation

A very large majority of respondents (126/159, or about 79% ) strongly agreed or rather agreed with this requirement (while only 15 strongly disagreed or rather disagreed). However, a number of comments mentioned that the requirement to publish an impact report before full allocation of proceeds, as mentioned in the question, was impractical. The consultation question was not clearly worded, as it should have said: “after full allocation and before the end of the bond’s lifetime” (as in the TEG’s usability guide).

Stakeholders in favour pointed out that such reporting was already established market practice, and that reporting on environmental impact based on standardised metrics is key to facilitate investments in line with dedicated impact strategies. More sceptical respondents mentioned that the monitoring of impact could be a considerable cost for issuers, and advised against requiring issuers to disclose methodologies and assumptions for the calculation of KPIs ex-ante. One respondent pointed out that the Taxonomy already has built-in impact reporting, as the criteria are set according to impact, hence separate impact reports were not necessary.

Requirement to have the (final) allocation report and the Green Bond Framework verified

An overwhelming majority of respondents (139/157, or 81.5%) strongly agreed or rather agreed with this requirement (while only 12 strongly disagreed or rather disagreed).

Respondents argued that including these requirements would strengthen the credibility, trust, and integrity of the EU Green Bond Standard, thereby adding to its value, while ensuring full transparency, a simplified due diligence process, and increased accountability towards potential and current investors. Some also asked that the requirement for external review should be extended to the impact reporting. A few respondents argued that deals with external verification benefit from higher market liquidity.

While few - if any - respondents objected to the requirement for external review of the green bond framework, some respondents criticised the requirement for external review of the final allocation report. One line of argumentation was that this requirement had limited value added, as the allocation of proceeds is quite straightforward, allowing market participants to spot any misuse without help. A few respondents also pointed out that issuers would in any case not dare to misallocate proceeds due to the potential reputational risk. Another criticism related to the effort required by issuers, with some pointing out that issuers with several small projects would suffer disproportionately. For this reason, verification of the methodology for choosing eligible projects should suffice.

Finally, a small minority of respondents were concerned that the external review requirement for the final allocation report was not appropriate for issuers employing the so-called portfolio approach, where the portfolio of underlying assets is dynamic and therefore bonds are never fully allocated (this is due to the fact that the project portfolio changes over time and green bonds are not linked to individual projects).

Q4) Do you agree with the proposed content of the (a) Green Bond Framework, (b) Green Bond allocation report, and (c) Green Bond impact report as recommended by the TEG?

The vast majority of respondents agreed with the content of the TEG’s proposed Green Bond Framework, Green Bond allocation report, and Green Bond impact report, though with some minor suggestions for improvements for each of the three documents. Some respondents also clarified that while they agreed with the spirit or the intention of the documents, they had different views on how to design each document, and often reserved to answers given to other questions in the consultation.

Q5)  Do you expect that the requirement to have the Green Bond Framework and the Final Allocation report verified (instead of alternatives such as a second-party opinion) will create a disproportionate market barrier for third party opinion providers that currently assess the alignment of EU green bonds with current market standards or other evaluation criteria?

The majority of respondents responded positively that the requirement for verification could create a disproportionate market barrier for third party opinion providers while a minority responded negatively that it would not. However, there were no detailed responses provided by negative respondents.

In the detailed responses, concerns were raised about potential additional costs of the proposed verification requirement, particularly for smaller entities, given the need for additional experience and expertise to carry out the assessment of an issuers overall sustainability strategy, the alignment of the EU GBS use of proceeds and DNSH.

Other responses raised concerns about potential professional indemnity and liability issues for verifiers as they may face increased risks given the need to also provide an explicit opinion on the issuance’s alignment with the taxonomy and an assessment of DNSH. One response suggested that post-issuance verification could be conducted by auditors as part of the issuers annual report which would reduce the burden on other verifiers that could instead focus on providing second opinions.

Another issue relates to the “portfolio approach”, where multiple green bonds finance a portfolio of green loans. Given that the EU GBS is a bond-by-bond approach with specific project allocation of proceeds there could be difficulties maintaining the link between bond and project as the bonds mature and are replaced with new issuance.

A number of respondents expressed concern about the use of the term ‘verifier’ in the EU GBS as it may inadvertently exclude other types of entity from engaging in this activity and limit the number of firms that can provide these services for the EU GBS. It was recommended that the EU GBS use more established terms such as external reviewer or second opinion provider and build upon existing market practices.

Q6) Do you agree that 100% of the use of proceeds of green bonds should be used to finance or refinance physical or financial assets or green expenditures that are green as defined by the Taxonomy?

Almost all respondents agreed that 100% of use of proceeds being of green bonds should be to finance or refinance assets or expenditures that are defined as green by the Taxonomy. However, a large majority of them are inclined for some degree of flexibility on its alignment with the EU Taxonomy.

Majority of respondents have not proposed any threshold for percentage of alignment with the Taxonomy. Those who did, their proposals varied for alignment varied mostly between 70% and 99%. Most respondents acknowledge that a lower threshold will damage the credibility of the EU GBS and would risk greenwashing practices.

The main reason for this need of flexibility in the majority of responses is that the EU Taxonomy is not yet completed, so this threshold would apply to activities not covered by existing TSC; they usually believe that this flexibility should disappear as future criteria is progressively added to the Taxonomy, but additional transparency should be ensured during this period.

In the detailed responses, some respondents expressed concerns that certain existing green bond market issuers might not be able to adapt to a 100% of alignment requirement, in particular small projects or large and granular portfolios. In addition, the possibility of constraining the innovation and a future alignment with international standards have been put forward as reasons to implement some flexibility.

Some of the responses also reflect a concern related to the differences between the Taxonomy criteria and current market practices, specifically for the renovation of buildings and green mortgages.

Other responses highlight the possible negative effect that a 100% alignment requirement without flexibility would have on transitioning activities.

Q7) Do you agree with the TEG’s approach 63 to flexibility with regards to applying the Technical Screening Criteria of the EU Taxonomy? Do you see any other reasons to deviate from the technical screening criteria when devising the conditions that Green Bond eligible projects or assets need to meet?

A large majority of responses support allowing the issuer to rely on fundamentals of the Taxonomy when it comes to verify the alignment of their green projects. The main reasons put forward are avoiding that innovation is stifled, and ensuring non-EU companies have a chance to comply with the standard.

The main concerns centre on the role of the verifier and the increased costs this will imply. Respondents ask for flexibility on Taxonomy interpretation, deep knowledge of both the Taxonomy and the national specifics, and clear guidelines while maintaining a solid bond with the Platform on Sustainable Finance (which, in turn, should be inclusive, transparent and follow up on innovation and ESG changes).

There are also some suggestions to limit the involvement of the verifiers to the verification of the issuer´s eligibility criteria for green projects or assets, instead of the assets themselves.

Most of the responses emphasize the need for reinforced transparency and reporting obligations for issuers making use of this type of flexibility and suggest that issuers explain why they are not complying with Taxonomy’s technical screening criteria (TSC) through additional disclosures, such as disclosing at project level, or providing the details in GB framework and in allocation reports.

A minority of the responses raise concerns about the treatment of cases enjoying this flexibility when detailed TSC covering them are developed in the future. For all of those respondents, reassessment could be a problem and therefore they suggest a grandfathering system as an alternative.

Some responses ask for further clarification of the do no significant harm criteria.

As regards the last sub-question, the majority do not see other reasons to deviate from the technical screening criteria when devising the conditions that Green Bond eligible projects or assets need to meet. For the minority, who take the opposite view, there is some correspondence with the concerns expressed in question 6 with respect to renovation and green buildings. Those respondents suggest that activities that currently qualify for a green bond according to market standards should be able to be qualified as green under the EU GBS.

Q8) As part of the alignment with the EU Taxonomy, issuers of EU Green Bonds will need to demonstrate that the investments funded by the bond meet the requirements on do-no-significant-harm (DNSH) and minimum safeguards. The TEG has provided guidance in both its Taxonomy Final Report and the EU GBS user guide on how issuers could show this alignment. Do you foresee any problems in the practical application of the DNSH and minimum safeguards for the purpose of issuing EU green bonds?

A large majority of respondents thinks that there will be problems in the practical application of the DNSH and minimum safeguards for the purpose of issuing EU green bonds.

The main problem identified in the detailed responses is the complexity of demonstrating compliance with the DNSH and minimum safeguards criteria. Respondents consider this a difficult procedure. They suggest that the Platform on Sustainable Finance and the EC should offer more guidance on how the compliance should be demonstrated, further clarifying the criteria or providing additional examples.

In the same way, many respondents see qualitative aspects of the DNSH and minimum safeguards as a source of subjectivity and ambiguity, with a room for interpretation.

Respondents offer various suggestions to overcome the abovementioned difficulties: allowing some flexibility in terms of compliance with DNSH and minimum safeguards criteria, using national and EU legislation as a basis, and developing equivalence between those criteria and existing international standards.

Respondents generally also voice concerns related to lack of data. Not all issuers seem to have access to the information needed to prove compliance at present. Although the problem of lack of data could be solved over time, respondents express their concern about the costs of collecting the information needed, especially for third country issuers and SMEs.

The banking sector is particularly worried by this lack of data. Banks are not able to easily check DNSH at a project/loan level mainly because projects are owned by their customers and is difficult for financial companies to gain access to that level of detail.

Lastly, a minority of the respondents refers to difficulties in complying with DNSH and MS criteria for issuers from non-EU countries because DNSH principles are mainly based on EU regulations and because not every country complies with ILO Declaration on Fundamental Principles and Rights at Work.

Q9) Research and Development (R&D) plays a crucial role in the transition to a more sustainable economy, and the proposed EU GBS by the TEG explicitly includes such expenditure as eligible use of proceeds. Do you think the EU GBS should provide further guidance on these types of activities, to either solve specific issues with green R&D or further boost investment in green R&D?

Responses to this question are fairly divided. Among those who answered and considered the issue relevant, opposite views regarding the question whether R&D area should be further clarified or is sufficiently clear are similarly represented. Comparatively smaller share of respondents are of the view that the proposed EU GBS by the TEG should be changed to boost R&D.

Responses mostly offer considerations of the specific features of R&D activities (outcome uncertainty, long term profile), and few substantive changes are proposed even in the (b) responses group.

All of the respondents are aware of the relevance of R&D for contributing to the environmental objectives and highlight the necessity of further clarification/classification to benefit market participants. Some of the suggestions ask for a new R&D category with own criteria under the Taxonomy, while others prefer to treat R&D activities within the respective green activities as an eligible expenditure, and provide additional information to investors, preventing greenwashing at the same time.

Other responses propose the creation of robust impact and allocation reporting and verification for R&D activities (there is no prevailing view whether this should be mandatory or voluntary).

Only a few of the responses address more tangible and direct measures, like providing tax relief to investors and issuers regarding R&D activities, or requiring a minimum percentage of proceeds to be allocated to R&D activities or allowing the entirety of proceeds to be allocated in R&D activities.

Overall, there is such disparity in the suggestions offered that none of them are widely shared.

Q10) Should specific changes be made to the TEG’s proposed standard to ensure that green bonds lead to more new green investments?

A large number of respondents across all categories agreed with the content of the standard as proposed by the TEG and stated that no specific changes are necessary at least for the time being. The proposed standard promotes comparability and high quality of disclosures for investors. They are overall satisfied with the standard as it stands, which will be sufficient to drive the standardization, transparency and simplification of the green bond market in EU and steer capital flows towards green investments.

Next to that, some respondents underlined that possible future changes to the standard could only be made after the standard has been used in practice for a certain period of time. In addition, there is also enough flexibility to incorporate dynamic developments. Any possible revision of the standard in the future should take into account the practical experience gained by market participants as well as the developments of relevant legislation, as e.g. the EU Taxonomy Regulation.

However, a majority of respondents was also of the opinion that specific changes should be made to the TEG’s proposed standard. It was stressed that the EU GBS should not be a static document, but should be flexible enough to adapt to any new market developments. The areas for suggested changes are as follows:

·Some respondents underlined the need for more flexibility than the current taxonomy allows, e.g. in the case of financing renovations of buildings.

·There was a clear call for putting in place comprehensive grandfathering rules for eligible green projects/assets (project level or/and portfolio level).

·Regarding the scope of this initiative, some participants favoured a broader approach and see the need for a broader approach that would also address transition bonds or sustainability-linked bonds. The aspect of refinancing and green loans should also be taken into account.

·Some respondents called for additional requirements for the impact reporting. Some further guidance/ details on how to measure the impacts would be needed.

·Many respondents highlighted the need for a defined limited look-back or re-financing period in the green bond framework to push new green investments (additionality). There was the request that both capex and opex should have a limited look-back period. There were several calls for a maximum look-back period of one year. E.g. projects that are more than 10 years old should not qualify under the framework, because these bonds would not contribute anything new/additional to the green transition.

Q11) The EU Taxonomy technical screening criteria will be periodically reviewed. This may cause a change in the status of issued green bonds if the projects or assets that they finance are no longer eligible under the recalibrated taxonomy. In your opinion, should an EU Green Bond maintain its status for the entire term to maturity regardless of the newly adapted taxonomy criteria?

The overwhelming majority of respondents across all categories, issuers and investors, agreed that an EU Green Bond should maintain its status for the entire term to maturity regardless of newly adapted EU taxonomy criteria. This means that green at issuance should be green for the entire term to maturity of the bond. According to these respondents, a strong grandfathering regime is needed, as this would provide legal certainty and avoid confusion in the market once a bond is issued. Clarity, certainty and predictability are crucial for issuers and investors when making investments. Any changes to the status of the green bond before maturity would have consequences in terms of investors’ appetite for these products and prices. Furthermore, additional reviewing would increase the costs and make the whole process more burdensome. It could also cause strong volatility in the price. Some respondents even stated that it would generally not be possible to adapt already launched projects to the newly recalibrated criteria of the EU taxonomy.

On the contrary, only a very few respondents were of the opinion that there should not be any grandfathering at all, if the updated EU Taxonomy technical screening criteria are no longer met. In this case, the EU Green Bond should lose its status. It was also suggested that a non-compliant green bond could then also be labelled differently.

However, a minority of respondents was also of the opinion that in the case of adapted EU taxonomy criteria an EU Green Bond should not maintain its status, but some kind of grandfathering would be necessary. A grandfathering period would provide the possibility for issuers to adapt the activities to the revised EU taxonomy. Some respondents underlined that a limited grandfathering period would also avoid greenwashing. In this context, most respondents favored a maximum amount of 5 years for grandfathering. Few respondents suggested a maximum amount of 3 years as well as 10 years. Only one respondent was in favor of a maximum of 20 years. However, few respondents also chose a “different approach all together”. Among those, some explained that is depends on the financed asset or protect. Grandfathering criteria should not be quantified in years, but rather on a combination of the duration of the project and the extent of projected environmental improvements. An alternative could also be a grace period allowing for realignment with new taxonomy standards.

Q12) Stakeholders have noted that the issuance process for a green bond is often more costly than for a corresponding plain vanilla bond. Which elements of issuing green bonds do you believe lead to extra costs, if any?

The respondents find that verification, reporting, and additional planning and preparation are all factors of the EU GBS that will lead to extra costs.

Most respondents indicate that the extra costs are somewhere between moderate and high for all three factors, although additional planning and preparation (including the identification of green assets) is considered as the costliest of the three, while verification and reporting are roughly tied as the two least costly. Some respondents also mentioned other costs, such as IT costs or communication costs.

Many respondents also mention that smaller issuers will have more difficulties absorbing these costs, as they will represent a larger fraction of their bond (thereby affecting the cost benefit calculation of green bonds for smaller issuers). The costs are also typically higher for first time issuers. There are also differences in ongoing costs, as conventional bonds require almost no surveillance after issuance and allocation, whereas green bond needs roughly 20% more of human capital at issuance.

Concerning the overall additional cost impact, the estimates vary. Some think the additional costs will not be significant, while others do. For example, one investment bank does not see the additional costs as a concern, while some stock exchanges do.

Q13) In your view, how would the costs of an official standard as proposed by the TEG compare to existing market standards?

Although opinions vary, the average view seems to be that there may be a small cost increase for EU GBS users compared to other green bond standards (in particular those who use GBP without CBI or without following market best practice otherwise), but this cost increase should normally not be large or particularly dissuasive (although for smaller issuers, this might be a concern). It should be noted that several respondents from the financial sector were of the view that the EU GBS would reduce costs for issuers, thanks to standardisation, consolidation, and more competition among external reviewers. One respondent welcomed that the proposed GBS allows for incorporation of multiple projects into a green bond framework as well as for allocation and impact reporting to be done at portfolio level for multiple projects. However, others indicated that costs of the EU GBS would be significantly higher than for ICMA GBPs. Many respondents also indicated that a lot would depend on the future regime for verifiers (e.g. under ESMA).

Many pointed to the additional cost from screening proceeds against the EU Taxonomy as the main factor of increased costs. Some mentioned in particular the need to carry out due diligence according to the DNSH criteria as a major cost factor, not least due to the need to change internal processes. There was broad agreement that use of the Taxonomy would raise costs. However, some respondents pointed out that parallel disclosure requirements under the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation itself means that these higher costs would have to be absorbed anyway, independently of the EU GBS, and this widespread adoption of the Taxonomy would also facilitate the screening process according to its criteria.

The second most widely mentioned source of additional costs for the EU GBS was the need for a verification of the green bond framework and post-issuance verification of the allocation, compared to just a second party opinion being required for the ICMA GBPs. One issuer mentioned that they had received a first proposal for an external verification that was more than double the cost of a normal verification (i.e. a second party opinion). However, not all respondents agreed that the review requirements for the EU GBS would raise costs compared to current standards, given that many existing green bonds already make use of post-issuance verification. Several respondents noted that, in terms of structure, the external review requirements of the EU GBS as proposed by the TEG are pretty much in line with best market practice of GBP and therefore no material additional costs are expected. Others noted that the standardisation of verification requirements would improve clarity and reduce the ability of verifiers to differentiate their offers based on content, which could have a stabilising effect on prices, in particular for those seeking high quality verification. On the verifier side, one company active in this sphere noted that the need to verify against the requirements of the Taxonomy would require more data.

Q14) Do you believe that specific financial or alternative incentives are necessary to support the uptake of EU green bonds (green bonds following the EU GBS), and at which level should such incentives be applied (issuer and/or investor)?

For each of the four types of incentives asked about in this question, the average respondent answered that that this incentive would have somewhere between “a certain impact” and “rather high impact”, with regards to supporting the uptake of the EU green bond standard.

Ranking of the options from most to least popular:

1.Other incentives or alternative incentives for issuers.

2.Other financial incentives or alternative incentives for investors.

3.Public guarantee schemes provided at EU level, as e.g. Invest EU”

4.Alleviations from prudential requirements received the least positive response.

Q15) Do you foresee any issues for public sector issuers in following the Standard as proposed by the TEG?

The majority of respondents, mostly coming from the private sector, did not foresee any issues for public sector issuers in following the Standard as put forward by the TEG. Many respondents highlighted that there should be a level playing field between private and public issuers of green bonds. It was also put forward that representatives coming from the public sector have been closely involved in the development of the EU taxonomy and the EU Green Bond Standard so far. Next to that it was mentioned that the purpose of the EU GBS is to be globally relevant and accessible to issuers located in the EU as well as to issuers located outside the EU.

However, at the same time, a significant minority with many respondents from the public sector/ authorities stressed that there are some issues for public sector issuers, including sovereign green bond issuers, following the TEG’s standard. The respondents put forward the following issues:

Many respondents mentioned challenges with respect to the EU taxonomy. There are difficulties in assessing the EU taxonomy alignment of environmental policy related public expenditures or the requirements to make representations on DNSH. Moreover, the availability of data to demonstrate EU taxonomy compliance might be problematic. Furthermore, the one-size fits all approach adopted by EU taxonomy screening criteria may prove discouraging to countries of smaller size due to liquidity problems in issuance, lack of natural resources and other issues inherent to smaller, particularly very small public issuers. Further work would be needed in order to take into account the special nature of public expenditures.

Next to that, some respondents underlined the issue of “additionality” that may be difficult for public issuers, such as sovereigns, and should not be required. A direct allocation of funds to green projects is not possible, as public issuers normally take a backward looking approach. Impact reporting could often not be done for 100 % of assets, because projects are not established directly for the bond and thus not designed in a way that guarantees to collect data. Thus, data for impact reporting would often not be available. More flexibility on the format of the impact report would therefore be needed.

Concerning the area of verification, it was suggested that in case of a sovereign bond the allocation report should not necessarily be verified by an external third party. It should possible that the allocation report could be provided by an internal auditor of/ an agent specializing in auditing the State’s accounts.

Moreover, a potential governance issue was mentioned with respect to possible penalties. If a national body is in charge of supervising the green bond standard and applying penalties for any breaches by the issuing public entity, this may lead to difficulties.

Q16) Do you consider that green bonds considerably increase the overall funding available to or improve the cost of financing for green projects or assets?

A majority of respondents across all sectors confirmed that green bonds increase the overall funding available to or improve the cost of financing for green projects or assets.

Regarding the increase of the overall funding, many respondents were of the opinion that green bonds help issuers to identify, select and channelize funding to green projects and consequently assist in increasing the funding to green projects/assets. The green bond market has considerably increased the number of investment portfolios and the level of dedicated investment for the financing of green projects and assets. It was highlighted that green bonds are generally oversubscribed, which was explained with market driven dynamics. It was also mentioned that the issuance of green bonds could play a decisive role in the companies funding strategy that could considerably increase the overall funding available. Such a strategy change may come when the issuance of green debt redirects flows towards greener assets. However, at the same time it was also stressed that the availability of green funding is not always an issue, but a lack of eligible projects could be a limiting factor.

When looking at the EU GBS, it was stated that the EU GBS could have a great potential to channel funding, making it easier for issuers to finance them. It is vital that the EU GBS could give due consideration to market dynamics in its design in order to achieve its full potential. It would further enhance investor confidence in this asset class.

When looking at financing costs, it was stated that green bonds are an efficient way for investors to steer money to sustainable projects. An increasing demand may reduce funding costs for issuers and make issuance and investments into green more attractive. It was also mentioned that for “dark green” investments the financing costs have considerably improved. Currently, as there is a limited supply of green bonds, a “greenium” would be visible and the costs of issuing a green bond would be lower than issuing a normal bond. For the future, some respondents were of the opinion that the costs of financing green projects would definitely improve, as the market would grow and there would be more competition regarding investors' appetite.

On the contrary, a relevant minority took a negative approach. Some respondents were of the opinion that greens bonds would not considerably increase the overall funding or improve financing costs for green projects or assets. There is no real evidence that green bonds would lead to any additional green investment, especially since they are associated with an increase in certain costs in comparison to plain vanilla bonds. Given the lack of financial advantage, it would not be obvious. Furthermore, as current markets provide sufficient liquidity due to the general low interest rate environment, it would not be clear whether green bonds have an impact at all. Nevertheless, this may change in the long run, when small improvements may gradually lower the financing costs for issuers, essentially resulting in better costs of financing green projects. In this context, the issue of (financial) incentives was raised, which could encourage to access further financing via green bonds.

Finally, few respondents underlined that it would be too early and very difficult to confirm or assess at this state, whether green bonds would increase the overall funding available or improve the cost of financing for green projects or assets. A possible price difference may evolve only over time, as the interest in the green market seems to be growing.

Questions 17, 18, and 19 of the targeted consultation on the EU GBS asked about social bonds. The summary of the responses can be found in Annex 16.

2.Online consultation on the renewed sustainable finance strategy

On 11 December 2019, the European Commission adopted its Communication on a European Green Deal (EGD), which significantly increases the EU’s climate action and environmental policy ambitions. The EGD announced a Renewed Sustainable Finance Strategy to help channel private capital towards sustainable investments. The aim of the public consultation was to collect views and opinions of interested parties in order to inform the development of the renewed strategy. The online consultation was open from 8 April until 15 July 2020 and consisted of 102 questions addressing subjects of interest in the area of sustainable finance.

A total of 648 organisations and persons provided a response to the questionnaire. The largest groups of respondents came from business associations (23%), financial companies/ business organisations (14%) and other companies/ business organisations (12%). Other groups with a significant number of responses include NGOs/ Civil Society (11%), EU citizens (22%) and public authorities (7%).

The following section will present the responses to some of the questions that are the most relevant for the initiative on the establishment of an EU Green Bond Standard. 64  

Overview of responses to selected questions

Q22 asked stakeholders if they agreed that verifiers of EU Green Bonds should be subject to some form of accreditation or authorisation and supervision, as recommended by the TEG.

74% of the responding stakeholders agreed that EU Green Bond (green bonds using the EU GBS) verifiers should be subject to accreditation or authorisation and supervision at a European level. A smaller proportion of stakeholders thought this should be achieved at a national level (7%). Overall, only 3% of stakeholders disagreed with the TEG recommendation. A slightly larger proportion of responding stakeholders indicated that they do not know or have no opinion (16%).

Figure 2 - Should verifiers of EU Green Bonds be subject to some form of accreditation or authorisation and supervision? (n=402)

Q23 asked stakeholders if any action the Commission takes on verifiers of EU Green Bonds should be linked to any potential future action to regulate the market for third-party service providers on sustainability data, ratings, and research.

Most stakeholders responded that any actions taken by the Commission on verifiers of EU Green Bonds should be linked to future potential actions on market regulation for third-party service providers on sustainability data, ratings, and research (46%). 35% of stakeholders indicated that they do not know, and smaller proportion disagreed (13%). 18% of business associations, 22% of financial companies/ business organisations and 17% of other companies/business organisations made up the majority of those that provided a “No” response. However, 47% of business associations, and 54% of NGOs/ Civil Society indicated that they either do not know or have no opinion.

Figure 3 - Should any actions the Commission takes on verifiers of EU Green Bonds be linked to any potential future action to regulate the market? (n=374)

Q24 asked stakeholders if they envisage any issues for non-European issuers to follow the proposed standard by the Technical Expert Group (TEG).

The responses by stakeholders were largely mixed, however, single largest group indicated that they envisage issues for non-European issuers to follow the standards of the TEG (34%). 25% of responding stakeholders indicated that they do not envisage issues. Many of the stakeholder types were further split among the different options, with few cases where stakeholder types generally favoured one option. 59% of financial companies/ business organisations responded that they envisage issues.

Figure 4 - Can stakeholders envisage any issues for non-European issuers to follow the proposed standard by the TEG (n=365)

Q25 asked stakeholders if they agree that requiring the disclosure of specific information on green bonds in the prospectus would improve the consistency and comparability of information for such instruments and help fight greenwashing.

Most stakeholders responded that they either agreed (27%) or strongly agreed (28%) that requiring the disclosure of specific information on green bonds in the prospectus would improve the consistency and comparability of information. 64% of academics, 71% of consumer organisations, 58% of NGOs/ civil society stakeholders and 80% of trade unions strongly agreed with this statement, while the largest proportion of public authorities responded that they agree with this statement (47%). Business associations and companies were largely split across the various options following the general data trends in the Figure below.

Figure 5 - Would requiring the disclosure of specific information on green bonds in the prospectus would improve the consistency and comparability of information for such instruments and help fight greenwashing? (n=383)

Q30 asked stakeholders whether the EU should develop standards for different types of sustainability-linked bonds or loans.

A substantial minority of stakeholders either agreed (26%) or strongly agreed (20%) that the EU should develop standards for different types of sustainability-linked bonds or loans. In comparison, 12% of stakeholders disagreed and 6% strongly disagreed with this. NGO/ civil society stakeholders (44%) and trade unions (75%) were the stakeholders that had the largest shares of their group strongly agreeing. Public authorities’ responses were spread across the options with most stakeholders indicating that they are neutral (39%) or agreeing (30%).

Figure 6 - Should the EU develop standards for different types of sustainability-linked bonds or loans? (n=388)

Q70 asked stakeholders if the EU Taxonomy, as it is currently set out in the TEG report on Sustainable Finance, is suitable for use by the public sector, in order to classify and report on green expenditures.

Overall, most stakeholders agreed that the EU Taxonomy as it is currently set out is suitable for the public sector (56%). Of those that agreed, half indicated that while they agree that the Taxonomy is suitable as it is currently set out, it is only partially so (29% of all responses). 27% of stakeholders did not know or had no opinion. The smallest share of responses indicated that stakeholders do not agree that the Taxonomy as it is currently set out is suitable for the public sector (16%).

The stakeholders that had the highest proportion of stakeholders selecting “Yes” included academics (43%), consumer organisations (67%), NGOs/ Civil Society (45%), and “other” (43%). Public authorities (21%) and other companies/ business organisations (34%) had the highest relative shares of responses stating “No”.

Figure 7 - Is the EU Taxonomy suitable for the public sector for classifying and reporting green expenditure? (n=334)

Q73 asked stakeholders if public issuers should be expected to make use of a future EU Green Bond Standard for their green bond issuances.

The majority of stakeholders responded that public issuers should be expected to use the EU GBS for green bond issuances (69%), with a minority share saying they should not (8%). 23% of stakeholders responded that they do not know/ have no opinion.

Figure 8 - Should public issuers be expected to make use of a future EU Green Bond Standard for their green bond issuances? (n=316)

Annex 3: Who is affected and how?

1.Practical implications of the initiative

The proposed voluntary standard in conjunction with a light supervisory approach ensures that the objectives are reached in the most cost-effective manner. At the same time, it avoids disruptive impacts on existing green bond markets which can continue to operate freely. This facilitates the creation of a competitive market environment which allows investor demand to drive future issuances rather than regulatory requirements. The limited flexibility provided for sovereign green bond issuers under the standard, simplifies sovereign issuance while also safeguarding the integrity of the taxonomy classification system (harmonised definition of green) and increased transparency.

The initiative will require limited investments both by ESMA as well as external reviewers that decide to opt-in. On the side of ESMA, there will be one-off costs in the form of additional labour resources, training as well as IT setup costs. Newly hired staff would equally lead to increased on-going costs. Training and IT may also give rise to on-going costs but are expected to be minimal after initial setup.

External reviewers will equally face costs if they want to comply with the standard. Supervisory fees should be kept to a minimum for the time being given the market size and revenues. Reviewers will however face other direct compliance and legal advisory costs as well as organisational costs to meet all requirements. The extent of these costs will strongly depend on factors such as the type of service currently offered, ancillary activities and entity size. Some market actors are also already complying with other regulatory frameworks. This may decrease the one-off costs if certain organisational requirements are met already.

Issuers will still be able to issue green bonds under different market standards. Similarly to external reviewers, they can avoid costs if they do not opt-in. The costs of using the standard arise mainly due to cost that are passed on from external reviewers as well as costs relating to the application of the taxonomy. The application of the taxonomy will however also be required under other initiatives (e.g. NFRD) meaning that parts of these costs are incurred already. The standard will provide clear advantages in terms of trust which may translate into offsetting pricing advantages and thus provide incentives for issuers to use it. Likewise, issuers may want to demonstrate a stronger green commitment by issuing under the standard. The positive reputation effects are not directly measurable but may easily outpace any costs disadvantages over existing market approaches.

Investors will be provided with a green bond segment which ensures a high degree of market integrity, transparency and comparability. Likewise. It provides for a common definition of green thereby increasing comparability and trust. The initiative will provide increased choice to investors and will benefit especially the most committed green investors which value a stricter green definition. These investors can clearly set themselves apart from the rest of the market by focusing their bond investments on EU GBS. Depending on the success of the standard, investors may even start to fully converge on it driving issuance in the same direction. Although it is impossible to estimate this benefit quantitatively, the increased transparency under the standard will ultimately allow a more efficient allocation of capital in the green investment market.

2.Summary of costs and benefits

(1) Estimates are relative to the baseline for the preferred option as a whole (i.e. the impact of individual actions/obligations of the preferred option are aggregated together); (2) Please indicate which stakeholder group is the main recipient of the benefit in the comment section;(3) For reductions in regulatory costs, please describe details as to how the saving arises (e.g. reductions in compliance costs, administrative costs, regulatory charges, enforcement costs, etc.; see section 6 of the attached guidance).

(1) Estimates to be provided with respect to the baseline; (2) costs are provided for each identifiable action/obligation of the preferred option otherwise for all retained options when no preferred option is specified; (3) If relevant and available, please present information on costs according to the standard typology of costs (compliance costs, regulatory charges, hassle costs, administrative costs, enforcement costs, indirect costs; see section 6 of the attached guidance).

Calculation of overall costs for external reviewers under EU GBS regime over a hypothetical 4-year period.

NB: These costs are calculated from the point of view of a small entity which does not already have any of the administrative capacity that would be required. For a larger entity, organisational costs may be lower than the lower estimate calculated below.

Assumptions:

-One-off costs are distributed over four years

-4 external reviewers will register as EU GBS reviewers

-160 EU GBS-aligned bonds are issued per year

-External reviewer split the market equally (i.e. each would have about 40 EU GBS-related clients per year).

-External reviewers pass on all the additional costs, but only to issuers of EU GBS-aligned green bonds.

The result of the analysis is that additional costs per client are likely to be in the range of EUR 1,334 to EUR 3,281. For larger entities with significant organisational capacity, the costs may be lower.

Overview over current external review market

The current market participants belong to four categories (see more in Annex 7 on external reviewers):

a.Credit Rating Agencies: Moody’s, S&P Global Ratings, Fitch, as well as more recently Beyond Ratings 68 ;

b.Non-financial rating agencies and sustainability consultancies specialised in second party opinions: Vigéo-Eiris (recently acquired by Moody’s), Sustainalytics, ISS-oekom and the research organisation CICERO;

c.Big-four audit firms providing mostly post-issuance verification or “assurance” services: Deloitte, KPMG, PwC, EY;

d.Global technical inspection and certification bodies: e.g. DNV-GL, Bureau Veritas, TÜV, etc.

The majority of external reviewers are currently not under any form of financial regulation. However, the entities active in this market are not homogenous. It is the final category (d) for which the imposition of a regulatory and supervisory regime would most probably require new resources to comply with the regime.

The basis for this being that (a) already have a compliance structure in place to deal with global regulatory requirements of credit ratings (b) are large multi-national firms with significant internal support structures to meet wider compliance and fiduciary responsibilities (c) are already subject to national regulatory oversight for the provision of audit services and provide consultancy services to firms on regulatory compliance and should therefore be in a position to adapt to new regulatory requirements for EU GBS reporting.

For (d), a regulatory and supervisory regime would bring new costs and expertise requirements which may not be already in-house. From ESMA’s experience of supervising smaller CRAs, which could be considered comparable in terms of revenues and scope of activities to the activity of Green Bond external review, and in particular the class of entity under (d), the following may be required in terms of compliance personnel.

Resources can typically involve 1 to 1.5 FTE for compliance, with up to an additional 1 FTE spread across internal audit, risk management, internal review and information security. However, it is also possible for the smallest entities to have 1 FTE for compliance, with and additional ~.5FTE spread across the other internal control functions. There may also be ICT development costs required to meet any record keeping and security requirements.

According to research conducted by CBI in 2018, the external review market was dominated by a group of mainly European service providers currently holding more than 90% of the market with six specific providers account for almost 75% of the market – CICERO, Sustainalytics, Vigeo Eiris, EY, ISS-oekom and DNV GL. 69 As the table below shows, these entities already have significant scale which will mitigate the impact of any additional compliance burden.

Annex 4: Market Context and controversies

Use of proceeds

In the use of proceeds model, which dominates green bond markets, the issuer commits to earmark the use of proceeds for (specific) green projects. This market has been characterized by a strong focus on climate change mitigation. According to research by the Joint Research Center 70 , 585 of around 1000 analysed bonds supported mitigation. 318 pursued mixed environmental objectives, while only 83 pursued dedicated other environmental objectives, of which only eight pursued adaptation. The non-climate space sees a focus on circular economy, although the market has also seen innovation recently with the first ‘blue bonds’ issued by Seychelles and the World Bank in October 2018 71 , and recently even a ‘Rhino bond’ aimed at protecting biodiversity. 72  

Since the agreement on and adoption of the Taxonomy Regulation, the market has begun to see an increasing amount of references to the Taxonomy in the use-of-proceeds documentation of green bonds (known as the “green bond framework”). For more information, see annex 7. 

Controversies relating to use of proceeds green bonds

While the premise of use of proceeds is a good one, there have been certain criticisms and controversies. This section sets out the main types of controversies affecting use of proceed green bonds on the market today.

1)Controversy regarding use of proceeds:

The first is when the underlying project intended to be funded by the proceeds of the bond has fallen short of investor expectations, despite being in line with market standards, such as the ICMA Green Bond Principles. In this case, the controversy relates to the use of proceeds itself. Some examples include:

·Repsol - Repsol’s green bond (2017, EUR 500m) was left out of the main green bond indexes and rejected by some investors on secondary markets, despite being compliant with ICMA’s green bond principles, and having received a second party opinion from an external verifier 73 . The bond proceeds were used to fund energy-efficiency improvements in a petroleum refinery plant ( Link )

·Mexico City Airport trust - Mexico City Airport Trust issued USD 6 billion of green bonds in 2016 and 2017 to finance a new energy-efficient airport, and the bond received green ratings by Moody’s, S&P and Sustainalytics. In 2018, a political decision was made to discontinue the airport project, but some of the green bonds remain outstanding 74 . The cancellation of the project did not lead to default of the bond, but it has since been expelled from some ESG indices 75 .

·Coal efficiency- Green bonds have in certain instances been used to finance coal-efficiency  projects , for example in China.

2)Controversy regarding the profile of the green bond issuer

The second common type of controversy is where the sustainability of the green bond issuer itself has been subject to criticism or controversy, and where this controversy has affected the willingness of issuers to buy green bonds despite the sustainability of the underlying projects to be funded by the green bond. Some examples include:

·China Three Gorges Dam - A USD 840 million green bond issue by the operator of China’s Three Gorges Dam in 2018 caused controversy, with accusations of greenwashing, due to the Three Gorges Dam having been cited as a source of water pollution and damage for its surrounding ecosystems 76 . This was despite the proceeds being intended to be used for backing wind power projects in Europe. Despite the controversy, the bond proved popular with investors.

·Saudi Electricity Company, a state-owned Saudi company, raised EUR 1.3 billion from a green bond sale in 2020 to invest in the installation of smart meters across its grid, which caused controversy among investors 77 .

·The Australian state of Queensland has issued green bonds which have been described as “a clear greenwash” Ulf Erlandsson of the Anthropocene Fixed Income Institute, an advocacy group.  While the projects being funded by the bond are environmentally friendly, such as to preserve the Great Barrier Reef, Erlandsson believed they cannot be seen separately from the state’s expansionary coal policy.

This type of controversy has a significant effect on the green bond market as a whole, as it limits the number of issuers that are able to operate in the green bond market, and forces those green bond issuers that are susceptible to be criticised for their overall sustainability to take additional steps when issuing green bonds, for example by an obtaining ESG rating for their entire company or institution.

This controversy stems from a view that green bonds exist not just to fund a particular type of project, but to fund a particular type of company. And this view is shared by many in the investor community. In a report by NN Investment Partners (NN IP), a Dutch asset manager, the company claims that “only around 85% of green bonds deserve the label” 78 . They base this conclusion on the logic that the greenness of the bond is linked to the greenness of the company.

NN IP finds that the remaining 15% of green bonds are issued by companies that may use the proceeds for environment-friendly projects, but which are involved in activities that incur negative impacts elsewhere. As an example, they mention a railway company that could finance low-carbon transportation through green bonds, while still being heavily involved in fossil fuel freight. NN IP conclude that investors need to closely scrutinise the credentials of green bonds and their issuers.

In a 2019 article by Louise Bowman 79 , numerous banks and asset managers explain that they require issuers to have obtained an ESG rating with a good score, in order to invest in a green bond from this issuer. One theory that is put forward to explain the reticence of investors to fund green bonds by companies with existing controversies is that the existing definitions of green are not clear enough. In other words, because the definitions of green are not clear enough, issuers can not reliably commit to use the proceeds on sufficiently green assets, and investors use the profile of the company as a proxy for the greenness of the bond. Another theory that is put forward in the article is that there are no clear and accepted paths for how a green bond issuer can use the proceeds to improve its profile and become more sustainable.

Other types of sustainable bonds besides green

In addition to ‘use of proceeds’ green bonds, other types of sustainable bonds are also growing in popularity among issuers, in particular since the beginning of the COVID-19 crisis in 2020.

Sustainability-linked bonds (SLBs): There is a small but growing market segment for target-linked, or sustainability-linked bonds, where the return of the bond is dependent on the issuer achieving certain pre-determined quantitative sustainability targets, often in the form of reaching certain Key Performance Indicators. If the target is not met, the investor is typically compensated monetarily via a coupon step-up. SLBs are typically general purpose corporate bonds, with no dedicated use of proceeds, although it is possible to combine the two approaches into a “sustainability-linked green bond”. Due to the fact that the two formats are not mutually exclusive, it is possible that we will see more such hybrids in the future, although at the moment they are scarce.

Some issuers and investors see this target-based approach as a positive development, as it can be a better fit for a number of issuers, notably in asset-light corporate sectors (such as wholesale). It also involves less effort on the part of the issuer in terms of reporting and transparency on use of proceeds, as well as less need for extensive external review. For investors, the format is attractive as they are compensated in case the issuer does not reach its targets. Others highlight the increased risk of greenwashing and criticize the fact that investors receive far less sustainability-related information. It may also be seen as a way to side-step questions on the definition of what is a green asset – i.e. the EU Taxonomy - which has been a fundamental development in the market in the past year. For the moment, the target-based approach is often seen as a complement to the use-of-proceeds approach.

As of December 2020, four corporates had issued SLBs: Enel, the Italian utilities company; Suzano, the Brazilian pulp & paper company; Novartis, the Swiss pharmaceuticals company, and Chanel, the French luxury goods company. The variety of sectors demonstrates the versatility of SLBs. The asset manager Amundi evaluates the size of the SLB market at USD 10 billion, compared to USD 950 billion for use of proceeds green bonds 80 . In June 2020, the International Capital Markets Association published its first ever principles for sustainability-linked bonds .

Social bonds: these are ‘use of proceeds’ bonds, whose proceeds are dedicated to promoting positive social outcomes, such as the creation of affordable basic infrastructure, access to essential services, housing, employment, and the general socioeconomic empowerment. In 2017, the International Capital Markets Association published its first ever principles for social bonds .

Sustainability bonds: These bonds are a combination of green bonds and social bonds. In other words, they are ‘use of proceeds’ bonds where the issuer dedicates proceeds to a combination of green and social outcomes. In 2018, the International Capital Markets Association published its first ever guidelines for sustainability bonds .

Transition bonds: While there are diverging opinions as to what constitutes a transition bond, the idea for the moment is that these are bonds issued by companies that promise to become greener but where the outcome may not yet be sufficiently green under existing green bond market practices. By December 2019, however, only three such bonds had been issued globally (BNP Paribas, 2019).

Figure 9 - Annual issuance of green, social, and sustainability bonds in USD billions (Source: Environmental Finance, 25 September 2020)

Annex 5: Market developments

This annex presents the latest figures on the development of the green bond market. Unless otherwise indicated, the figures in this annex are based on data from Climate Bonds Initiative (CBI), retrieved on 11 January 2021. In these figures, “EU” refers to green bonds issued in one of the EU’s 27 Member States, plus those green bonds issued by the European Investment Bank, the Nordic Investment Bank, or the European Bank for Reconstruction and Development.

The CBI database operates with a more restrictive definition of a green bond compared to most comparable databases. To be considered for inclusion, bonds must have at least 95% use of proceeds financing or refinancing green/environmental projects, and proceeds should be broadly aligned with the  Climate Bonds Taxonomy (so for example, bonds financing so-called “clean coal” are excluded).

Growth of the market

Since the first green bond was issued by the European Investment Bank in 2007, the green bond market has grown exponentially on the back of strong investor demand. While 2014 saw about EUR 28 bn in global issuance, 2019 reached around EUR 239 bn of annual issuance. Although the issuance of green bonds decreased in the first half of 2020 due to the COVID-19 pandemic, 2020 still beat 2019, with around EUR 520 bn in global issuance. The total amount of green bonds issued over the period 2007-2020 is approximately EUR 936 bn.

Table 18 - Annual data on green bond issuance (EU and worldwide) (Source: CBI data) 81

Figure 10 - Volume of green bonds issued in EUR (source: CBI data)

Figure 11 - Number of green bonds issued (source: CBI data)

Projected future market growth

This section attempts to give a very approximate estimate of the expected size of the green bond market in 2023.

Current growth in the green bond market is driven by inter alia the following factors:

-Increased investment in climate change mitigating assets, such as low-carbon technology and infrastructure

-Increased demand from institutional investors and their clients for green investments, for example to hedge against the risk of stranded assets and make a positive impact against climate change.

-The overall legislative and political environment, which favours transparency on the sustainability of investments.

These factors are likely to remain relevant for decades or more, as they are all linked to the risk of climate change, which is an underlying driver that will be present for the foreseeable future. For this reason, it is reasonable to assume that the green bond market is likely to continue growing, potentially at or close to its current course.

Should the current average annual growth (from 2015 to 2020) continue in the next three years, yearly green bond issuance in 2023 would stand at approximately EUR 430 billion in the EU, and EUR 830 billion worldwide. Using a similar projection, the number of green bonds issued per year is estimated to be about 1470 in the EU and about 2900 worldwide.

It is impossible to project the market share of the future EU GBS. However, by making assumptions about this market share, one can arrive at different estimates of the number of EU GBS-aligned green bonds that may be issued in 2023. If for example the EU GBS should manage to capture 30% of the future EU green bond market, and none of the global market, this would represent about 440 EU GBS-aligned green bonds, or about EUR 130 billion in volume, based on the projections in this annex on overall green bond market size. These figures (for potential EU GBS issuance in 2023) are similar in size to the overall EU green bond issuance in 2019 or 2020, all standards included, which is illustrative of the current rapid growth of this market, and the potential situation should this growth continue.

Legal status of green bond

Green bonds are legally often general corporate purpose bonds, where issuers make a commitment to spend an equivalent amount as that raised on green assets. The proceeds technically go to the treasury however, and as such finance the entire balance sheet of the company. For this reason, the credit risk of the green bond is not related to the green projects, but to the credit risk of the entire issuer.

Other types of green bonds also exist, including project bonds, which are commonly used to finance sustainable infrastructure projects. In the case of project bonds, the risk is directly related with the asset being financed and how this asset is operated. Table 19 below provides more information on the types of green bonds.

Table 19- Types of green bonds (source: CBI)

Currencies

In 2018, euro-denominated issuance represented 38% of the annual market by volume, overtaking the US dollar (46% in 2017). Euro-dominated issuance continued to increase its relative position, taking 42% of the total market in 2019, and 48% in 2020.

Table 20 - Share of the euro in yearly global green bond issuance volume (source: CBI data)

Figure 12 - Share of the euro in yearly global green bond issuance (source: CBI data)

Green bond issuers

Analysis of the current market for green bonds in the EU and world-wide indicates that the market is growing rapidly. In Europe, the number of issuers entering the green bond market for the first time every year grew by 30% yearly on average between 2015 and 2020.

Table 21 - First time green bond issuers (source: CBI data)

Once an issuer has entered the market, published a green bond framework, and issued their first green bond, they may reissue up to several times a year using the same framework. According to Climate Bonds Initiative, 56% of bond volume for 2019 was made up of issuers who issued several times during 2019 alone, with a significant number of issuers (79) issuing twice a year, and 53 issuers issuing more frequently than that.

Table 22 - Frequency of green bond issue per issuer (source: CBI)

Regional breakdown:

Europe (52% in 2020) is the largest overall green bond market. In terms of individual countries, however, the US is the largest green bond market, not least due to large amounts of green mortgage-backed securities issued by Fannie Mae. China is the second largest green bond market. In 2020, the Asia-Pacific regions had the third largest volume after Europe.

Figure 13 – 2020 Regional green bond issuance (Source: CBI data)

Types of issuers

While there are all kinds of issuers, the market has historically been led by public sector issuers and financial corporates. As Figure 17 shows, more than half of the market comes from public-related issuers, such as national and local governments, and development banks. Financial corporates also play a strong role, as many banks issued green bonds. Recently, non-financial corporate issuance has been rising as well.

Figure 14 - Green bonds per type of issuer (CBI)

Sectors

Both financial and non-financial corporate issuances have mostly revolved around either housing or electricity production (60% of market in 2019). While these are important sectors in the transition to a more sustainable economy, it also means that many industrial sectors have so far not yet issued green bonds.

Annex 6: Costs and benefits of issuing green bonds

This annex analyses the potential costs and potential benefits faced by issuers of green bonds, to support the analysis in section 7 – preferred option. This annex does not specifically cover the costs and benefits of issuing under the EU GBS, but for green bond issuance in general.

Issuing a green bond requires additional work in terms of administrative effort and costs compared with a conventional bond. According to the TEG, such internal costs represent the main share of overall issuance costs. These costs relate to:

·staff and training needs related to the creation of a green bond program,

·the management and monitoring of the use of green bond proceeds,

·monitoring the environmental impact of the green projects,

·carrying out of reporting towards bond investors after issuance.

In addition, there are costs for external review/verifiers (roughly EUR 20.000 - 40.000 per issuance based on stakeholder input).

When a profit-maximising corporation issues a green bond, it can be assumed that:

-The net benefit (benefits-costs) of issuing a green bond for the issuer is positive.

-The net benefit for the issuer is higher than the net benefit of issuing a conventional (non-green) bond.

Unless these two conditions are true, it is likely that the issuer would rather issue a conventional bond or use other sources of finance.

1)Costs of issuing green bonds compared with conventional bonds:

During interviews with stakeholders, there was broad agreement that the issuance of green bonds is more costly than a regular bond, as it requires more work in terms of gathering and presenting the relevant information. However, in the CBI Treasurer survey 82 , just under half of respondents (48%) agreed that the cost of funding green bonds was similar to that of vanilla equivalents, while 42% considered the costs to be lower.

One issuer responding to the targeted consultation indicated that the total additional costs of issuing a green bond (for verification, translation, communication etc, but not including internal costs) range from € 40,000 – €60,000 annually. According to the figures of one large investment bank responding to the targeted consultation, for green bonds issued according to the ICMA Green Bond Principles, additional costs for green bonds (over conventional bonds) linked to verification are around €20,000. For reporting, the costs vary between €5,000 and €10,000, while for planning and preparation, there are additional labour costs due to the need for a dedicated person that collects data (at least part time at certain times within the year). Other respondents gave more extreme numerical estimates on the overall cost of green bond issuance, corresponding to € 100,000 and € 200,000.

One stakeholder indicated that most issuers cover the internal costs from existing resources. Another stakeholder indicated that the additional costs are fairly limited when viewed in the context of the scale of the big investment projects, e.g. when issuing a € 500 million bond. Finally, a stakeholder mentioned that digitalization (e.g. digital impact reporting, databases shared between clients and investors) could be a solution for reducing the costs for sustainable finance products.

Many respondents to the targeted consultation also mention that smaller issuers may have more difficulty absorbing these costs, as they will represent a larger fixed cost fraction of their bond (thereby affecting the cost benefit calculation of green bonds for smaller issuers). The costs are also typically higher for first time issuers.

The costs of issuing a green bond can be categorised as follows:

1.2)Internal resources 

This relates to the staff and IT systems required to put in place the procedures that allow for the issuance of a green bond (as part of a green bond programme), but also to the reporting requirements after issuance, which are sometimes seen as cumbersome.

This is especially needed for setting up the framework, implementing the selection process, tracking the proceeds/projects and an enhanced/changed investor relation work. The preparation of an impact report involves the monitoring and collection of data, which requires additional staff for data analysis and reporting requirements.

There are also differences in ongoing costs, as conventional bonds require almost no surveillance after issuance and allocation, whereas green bond needs roughly 20% more of human capital at issuance.

1.3)Uncertainty and delays

Setting-up a green bond requires more time, i. a. more internal coordination among different department but also external coordination. For many issuers, green bonds are a new instrument they need to familiarise themselves with.

1.4)External review: 

The issuance of a green bond entails a second opinion/verification. Green bonds require recurrent impact reporting and potentially verification of the impact report and/or allocation of proceeds. The TEG estimated that the costs for second-party opinions and/or external verification was roughly in the range of EUR 20,000 to 40,000. Further estimates from stakeholder interviews and targeted consultations confirmed this. (see table below)

Table 23 - Costs of external review

2)Benefits of issuing green bonds compared with conventional bonds

During interviews with stakeholders, the following potential benefits for issuers of issuing green bonds were identified:

-Increased investor demand, more diversified set of investors, opportunities to attract overseas investors (for emerging markets) and opportunities to advance individual sustainability objectives/business models;

-An improved reputation on sustainability in the market: communication of commitment to national/regional/global targets and a capacity building exercise in dialogue with investors that increases the understanding for more ambitious longer-term sustainability strategies;

-In some cases a price “green premium” – small consistent price benefit for issuing green bonds;

-More consistency as green bond investors tend to be more stable;

-Very strong internal learning process for an entity and after first issuance of a green bond entities are in a better place to understand the green process and issuance as well as broader sustainability issues and manage future environmental risks;

-An enhanced coordination among different departments within the company may have a positive effect on the corporate culture.

Given the growing amount of green bonds that are issued, it can be assumed that in some cases these benefits outweigh the existing costs of issuing green bonds, making green bond issuance a net beneficial activity.

More information on the benefits of green bond issuance:

-Communication and signalling. Issuing a green bond is a way to signal to investors a strong focus on environmental issues. This, in turn, can lead to an overall lower funding curve as investors become convinced that the company is transition to a more sustainable business model.

-A diversification of the issuer’s investor base. According to a study by the Harvard Business review (2018) 83 , green issuers attract long-term investors with an increase of 21% (the share of long-term investors increases from 7.1% to 8.6%). This in turn, makes green bonds less volatile.

-Higher demand for green bonds, which provides benefits during the execution, and which may be evidenced by lower new issue premiums. For example, according to Climate Bond Initiative, 62% of green bonds in 2018 achieved a higher oversubscription and spread compression than their vanilla equivalents after 28 days. According to Agliardi and Agliardi (2019) 84 , the rising environmental awareness among investors contributes to increased demand for green bonds and to oversubscriptions.

Green bond premium (greenium)

While green bonds entail additional costs for issuers, there is growing evidence that issuers of green bonds are to some extent directly compensated for those costs through a pricing advantage on primary markets (i.e. issuers receive a higher market price when they sell the bond). This is referred to as a green bond premium (or even “greenium”). Such a green bond premium would imply that investors accept a lower yield on the bond due to its green characteristics.

Causes

Legally, green bonds are no different from regular bonds: although the issuer promises to spend the raised amount on the projects as outlined in the green bond framework, the use of proceeds are technically for general corporate purposes and therefore finance the entire balance sheet of a company. Green bonds rank pari-passu with bonds with the same rank and issuer. The green bond holder does not own any additional right on the underlying projects and is subject to the same market dynamics. This means that the credit risk and market risk of green bonds are similar to regular bonds. A green premium for the issuer is therefore somewhat of a market anomaly.

According to Ben Slimane et al (2020), demand for sustainable investments is increasing faster than supply, which is still relatively limited, creating a potential mismatch of supply and demand that can trigger scarcities and thus larger premia. According to Agliardi and Agliardi (2019), the rising environmental awareness among investors contributes to increased demand for green bonds and to oversubscriptions. In Zerbib (2019), the difference in pricing is attributed largely to investors’ environmental preferences, rather than to risk. As those preferences manifest themselves in growing demand for green bonds, in particular from institutional investors who wish to have green bonds in their portfolios to attract clients and boost the green credentials of their funds or products, it is possible that the green bond premium will continue to grow.

Size of the green bond premium

It is not always straightforward to identify a green bond premium, as the price of the same bond without the green bond label is not known (i.e. it is a counter-factual). However, reports from stakeholders and studies seem to indicate that the green bond premium exists and is in fact growing in line with rising market demand for green bonds.

In May and June 2020, stakeholder outreach pointed to the existence of a small but consistent price benefit for issuing green bonds, consisting of a few basis points. According to one prominent investment bank interviewed in September 2020, outstanding green bonds at the time held a pricing advantage of 3-5 bps to plain vanilla bonds.

According to another stakeholder, representing a major European bank interviewed in January 2021, the average green bond premium has been increasing over time, to the point where it became a regular occurrence in the market. The growth in the green bond premium over time is also observed in the market for US municipal green bonds, Karpf and Mandel (2018).

The green bond premium is also present for sovereign issuers: in a study published by CBI in 2021 85  based on feedback from sovereign treasurers, France, the Netherlands and Germany reported that their green bond issuances had benefited from a green bond premium.

Studies

·The average premium ranges between two (Zerbib 2019) and eighteen basis points (Gianfrate and Peri 2019).

·Kapraun and Scheins (2019) examine both primary and secondary market effects and find that green bonds listed on the London and Luxembourg secondary markets with a dedicated green bond segment are traded on average 7 bps lower.

·Ben Slimane et al find (2020) use two methods to estimate green bond premia, and find significant premia of respectively 4.7 bps and 2.2 bps.

·In a meta-study by MacAskill et al (2020) that examined 15 separate studies on green bond premia on primary and secondary markets, only the analysis focused on secondary markets yielded conclusive results, with spreads there mostly focused between 1 and 9 basis points.

Determinants of the green bond premium

Green bond premia vary significantly around the average levels indicated in the previous section. Some of the key determinants for variation include:

·Sector and geographic region: According to stakeholders, the size of green bond premia correlates with the supply of green bonds for a given sector or geographic area (lower supply of green bonds leads to more important green bond premia). For example, one stakeholder estimates the average green bond premia in the energy and utilities sector at around 5-10 bps. In the automobile sector, however, premia are higher. Ben Slimane et al (2020) report that, according to Bloomberg, the €1 billion 10-year green bond issued by the automaker Daimler AG priced more than 13 basis points tighter than its conventional spread curve. Likewise, Volkswagen AG sold eight-year and 12-year green benchmarks with a volume of €2 billion, 15.4 and 13.6 basis points lower in yield versus the rest of its bonds. Green bond premia for bonds from central and eastern Europe, where green bonds are less frequent and hence could be more in demand, are currently at between 5-30 basis points.

·Issuer heterogeneity: the size or existence of the premium depends crucially on the type of issuer. (Fatica, Panzica and Rancan, 2021) finds a green bond premium for green bonds that are issued by supranational institutions and non-financial corporates, but no price difference for green bonds issued by financial institutions, all other factors equal. One possible reason behind such heterogeneity is that financial institutions are less clearly able to signal their environmental attitudes, as bond funding is arguably used to finance green loans. The same study also finds that repeat issuers display an additional premium, potentially motivated by the build-up of a reputation on the green market and better ability on the part of investors to screen borrowers.

·Importance of external review: the literature also suggests that the price premium critically depends on external verification. Fatica et al. (2021) looked at the primary bond market worldwide and found that certified green bonds benefit from larger premia compared to self-labelled green bonds. This could be because external review acts as a signalling device for bonds with strong climate- or environmental benefits, which means they are able to sell at a premium even compared to other green bonds if those do not have external review. Similarly, Bachelet et al. (2019) find that green bonds of private issuers have a higher borrowing costs compared to non-green bonds unless they have third-party verification.

·Alignment with strong standards: MacAskill et al (2020) find that the systematic rules and standardisation that accompany strong GB governance reduce informational asymmetries, which helps to overcome investors’ doubts on the ‘greenness’ of a particular green bond, both at issuance and reporting of ongoing performance. These findings confirm that investors are willing to pay a premium for investments that offer clear ESG-related reporting on fund proceeds, by up to 15 bps on secondary markets (Hyun et al., 2019; Baker et al., 2018).

Annex 7: Standards and definitions of green

The green bond market has considerably progressed the debate on what is green by facilitating the emergence of both market-based and regulatory definitions of green eligibility and their transparent comparison 86 . This section provides an overview over existing green bond standards and taxonomies for the definition of green, in order to enable a comparison of their span and enable further analysis. The main standards and taxonomies covered in this annex include:

1) ICMA’s Green Bond Principles

2) Climate Bonds Initiative: Climate Bonds taxonomy and eligibility criteria  

3)France: Climate and Energy Transition Label Taxonomy (recently renamed “Greenfin”)

4) China Green Bond Endorsed Project Catalogue  

5)Other standards and definitions of green

6)The Draft/Concept EU Green Bond Standard as proposed by the TEG

The EU Taxonomy for sustainable finance  is covered in annex 7.

In Europe, the two most common standards are ICMA’s green bond principles (GBP) and the Climate Bonds Standard (operated by the Climate Bonds Initiative, CBI), which also manages the Climate Bonds Taxonomy. The former, the GBPs, covers nearly the entire market, and focuses on process-related recommendations as well as high-level categories for eligible sectors.

The latter, CBI’s standard and taxonomy, comes with stricter requirements for eligible projects (since it is also a Taxonomy) and is consequently used by fewer issuers. In their own assessment, CBI estimates that, out of USD 212 billion in value of green bonds issued in the first ten months of 2020, green bonds worth USD 163 billion were aligned with the Climate Bonds Taxonomy. Of these, green bonds worth USD 49.5 million requested and obtained the CBI certification.

Following the publication of the Commission’s Action Plan on sustainable finance in March 2018, the Commission set up the Technical Expert Group on Sustainable Finance (TEG). One of its tasks was to draft a proposal for an EU Green Bond Standard. The TEG its report on the EU GBS in June 2019, followed by a usability guide in March 2020. On this basis, some issuers have already begun to make use of the standard, despite it not yet being officially adopted by the EU (see box 1).

Some Member States have developed labels of green financial products which also include taxonomies. One notable example is France, whose Greenfin label (old name: TEEC) is based on the CBI Taxonomy. Although the label itself is typically used for funds, the underlying criteria have strong indirect implications for green bonds. For example, France’s sovereign green bond was aligned with the Greenfin standard. International actors have also developed their own taxonomies/bond standards, including the People’s Bank of China Green Bond Catalogue.

In feedback from a 2018 public consultation on institutional investor’s and asset manager’s duties regarding sustainability, stakeholders indicated that there are too many standards without a single, commonly-accepted framework.

Although these standards and taxonomies were primarily developed for use in the green bond market, they are also currently used as the basis for several existing national eco-labelling initiatives.

For example, the TEEC Label (France) and the FNG Siegel (Germany) are based on the CBI taxonomy. The Nordic Swan Ecolabel is based on ICMA's Green Bond Principle. And the Luxflag Climate Finance Label (Luxemburg) is based on the MDB/IDFC taxonomy (see Table 24 - Other definitions and standards relating to green bonds Table 24 ). On the other hand, the Austrian Ecolabel only specifies exclusion criteria but does not stipulate the use of a specific taxonomy.

In each case, the taxonomies have been adjusted to reflect national priorities, as well as having been narrowed down or made more granular for certain sectors. Using the French case as an example, the taxonomy used for the TEEC label is based on that of the CBI, with a few amendments to take account of the considerations of the stakeholders consulted and national public policy guidelines. Among others, certain activities that appear in the CBI taxonomy have been excluded from the TEEC label taxonomy, or, in some cases, descriptions of certain activities appearing in the CBI taxonomy have been specified in the French example.

Next to the market-based standards, some regions and countries have developed or are developing standards or guidelines for green bond issuances. Several jurisdictions, including China, India, Morocco, as well as the ASEAN countries, have green bonds regulations issued by financial services authorities. Several other jurisdictions, including Chile, Mexico, and South Africa, have listing requirements. In some cases, the requirements are part of a voluntary standard. The requirements usually revolve around disclosure and reporting issues, and they often build on the Green Bond Principles. Most of them contain use of proceeds requirements or guidance, although they are often high-level, building on the green project categories from the Green Bond Principles. Almost all of them have some form of mandatory external review.

The International Capital Markets Association’s Green Bond Principles (GBP)

Developed in 2010 and annually reviewed by the Green Bonds Working Group through the coordination of the International Capital Markets Association, the GBP explicitly recognise broad categories of eligibility for green projects that contribute to several environmental objectives, including:

-climate change mitigation and adaptation,

-natural resource conservation,

-biodiversity conservation, and

-pollution prevention and control.

Climate Bonds Initiative: Climate Bonds taxonomy and eligibility criteria

Figure 15 - Sector breakdown of Climate Bonds Taxonomy

France: Energy and Ecological Transition for the Climate (TEEC) Label

China Green Finance Committee: China Green Bond Endorsed Project Catalogue 89

Other definitions and standards relating to green bonds