EU Green Bond Rules Will Be Voluntary, Draft Shows

The European Union’s green bond standard will be voluntary rather than binding for issuers, according to a draft document seen by Bloomberg.

The new bond rules, which will be tied to the bloc’s blueprint for environmentally-friendly investments, will be ready for use in 2022 and aim to “set the global standard,” according to the document obtained ahead of its planned publication next month.

“The bond market can facilitate green transition investments and thereby help reach the EU’s environmental targets,” the draft said. “The proposed voluntary standard in conjunction with a light supervisory approach would ensure that the Union’s objectives are achieved in the most cost-efficient and effective way.”

A European Commission spokesperson declined to comment.

Green debt issuance has emerged as one of the fastest-growing corners of finance, with Europe taking a lead as nearly a quarter of its bond sales this year are related to ethical factors. Still, there is debate over what exactly counts as environmentally friendly, given a mishmash of rules across the globe, giving rise to concerns over “greenwashing” where the benefits may be exaggerated or misrepresented.

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Sovereign issuers will be granted some flexibility to assess government spending programs based on their terms and conditions, instead of assessing each of the individual projects funded, the document said. That does not apply to corporate sales.

Markus Ferber, a key lawmaker in the European Parliament, raised concerns about the complexity of the proposal. A “lack of flexibility and excessive reporting requirements” mean that the framework may not be attractive for many issuers, he said in an e-mail.

The 27-member bloc itself is set to become one of the largest issuers, with 30% of its 800-billion-euro pandemic recovery funding planned as green debt. Should the EU follow its own standards, that could pave the way for others to follow. The taxonomy and green bond standard will underpin the region’s economic program centered around the Green Deal, a sweeping strategy to reach net-zero emissions by 2050.

The European Securities and Markets Authority will determine whether a bond is green or not, with external reviewers to be approved by the body. Issuers should disclose impact assessments at least once, as well as annual allocation reports for how the funds were used, and will be free to align their bonds alongside other standards.

While the extra costs involved in the administration of the EU’s standard will cause an extra burden, the document says that issuers will also be able to benefit from a so-called “greenium” -- that is lower bond yields due to the stronger demand for such securities.

“The standard would provide clear advantages in terms of trust, which may translate into pricing advantages in the bond and provide a new incentive for issuers to use it,” the document said.

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