Green bonds: more transparency, no greenwashing

The EU is establishing the European green bond standard, the first in the world, to help prevent companies presenting themselves as more environmentally friendly than they really are.

What is a green bond?

A green bond is a fixed-income instrument designed to support climate-related or environmental projects. Green bonds are used to finance or re-finance investments, projects, expenditure or assets helping to address climate and environmental issues. Governments and private companies use them to finance the transition to a more sustainable and low-carbon economy.

Why does the EU need a green bond standard?

The global and EU green bond markets grew by an average of 50% per year between 2015-2020, but represented only 3 to 3.5% of overall bond issuance of overall bond issuance in 2020. More rapid growth of a high-quality green bond market is needed to meet the targets in the Paris Agreement and in the European Green Deal.

However, there is no uniform green bond standard and this is an obstacle to developing the market. The European green bond standard would allow better regulation of the green bond market, improving supervision, making it transparent, and preventing firms from presenting themselves as more environmentally friendly than they really are, a practice known as greenwashing.

What will the green bond standard look like?

On 28 February 2023, MEPs and Council reached a provisional agreement on the European green bond standard.

It will be available to companies and public entities that wish to raise funds on capital markets to finance green investments and meet tough sustainability requirements. All the money raised by bonds issued under the European green bond standard must be invested in activities that are aligned with the EU taxonomy for sustainable activity.

What is the EU taxonomy for sustainable activities?

Part of the EU’s sustainable finance framework, it is a classification system setting out criteria for economic activities aligned with achieving net zero by 2050, as well as broader environmental goals.

All companies and public entities choosing to use the standard when marketing a green bond will be required to disclose information about how the proceeds will be used and show how those investments feed into the transition plans of the company as a whole.

The regulation also establishes a framework of registration and a supervisory framework for the independent reviewers responsible for assessing whether a bond is “green”.

“This Regulation creates a gold standard that green bonds can aspire to. It ensures that the money raised must go to green activities and that bonds are vetted by professional and independent third party reviewers. This is a world apart from current market standards,” said Paul Tang (S&D, the Netherlands), the MEP responsible for steering the legislation through Parliament.

Parliament is expected to approve the new law during the plenary session on 2-5 October.