Landmark EU deal to combat bond greenwashing

If a bond doesn’t manage to fulfill its commitments under the standard, its issuer will be liable for any damages suffered by investors through the EU’s prospectus regulation, a source said. — Bloomberg

BELGIUM: European Union (EU) negotiators reached a deal to establish a green bond standard, giving investors long-awaited clarity that their money is aligned with the region’s climate ambitions.

Companies that use the standard will have to prove that the proceeds from their green bonds are in line with the bloc’s list of environmentally friendly activities, known as the taxonomy.

They will, however, get a 15% “flexibility pocket” for activities that aren’t yet covered by the rulebook, according to the terms of the agreement reached by EU lawmakers and member states.

“This regulation creates a gold standard that green bonds can aspire to,” said Paul Tang, parliament’s chief negotiator.

“Any green bonds not using this system will likely be looked at with increasing suspicion.”

The long-awaited deal has been plagued by disagreements over how strict the rulebook needs to be, and whether all issuers marketing green bonds in Europe should be required to comply.

Negotiators failed to reach a deal in December, as parliament and member states debated how much flexibility issuers should get when investing the proceeds.

The EU’s green bond standard “had to show some flexibility in matters related to taxonomy alignment” as that is still a work in progress, said Remus Negoita, an environmental, social and governance (ESG) credit analyst at Bloomberg Intelligence.

A key aspect of the agreement is the legal onus it places on issuers to meet the green promises they make.

If a bond doesn’t manage to fulfill its commitments under the standard, its issuer will be liable for any damages suffered by investors through the EU’s prospectus regulation, according to a person familiar with the negotiations.

The agreement also gives bond issuers seven years to tweak their investments in case of changes in the taxonomy, according to people familiar.

The full text of the agreement is due to be published in the coming days.

The rulebook is intended to help creditors navigate a market with annual issuance of US$500bil (RM2.23 trillion), and which is currently shaped by a mishmash of industry guidelines and voluntary standards.

Companies will have to commit to transition plans, parliament said in a statement.

A key point of contention that prevented negotiating parties from reaching a deal in December was the extent to which the green bond standard should also apply to other kinds of ESG debt, such as sustainability-linked bonds.

The agreement that’s now been struck allowed for “voluntary disclosure requirements” as a form of compromise, according to a statement published on the website of the European Council.

The clause will help “prevent greenwashing in the green bond market in general,” by making room to extend the framework to include “other environmentally sustainable bonds and sustainability-linked bonds issued in the EU,” Elisabeth Svantesson, Sweden’s finance minister, said in the statement.

According to Negoita, the agreement “sets a high target for disclosures and post-deal reporting, while still incentivising not-yet-compliant companies to improve their transparency. — Bloomberg