On December 21, 2024, the European Union Green Bonds Regulation [1] came into effect. This new Regulation is designed to boost the credibility and transparency of these financial instruments, helping to further increase investment opportunities and facilitate the identification of environmentally sustainable investments through clear labels.
What are green bonds and why are they important?
In recent decades, sustainability has gained significant importance in society and the business and financial sectors. Alongside the rise of “corporate social responsibility”, sustainable finance has grown considerably, thanks in large part to the increasing use of environmentally sustainable bonds.
What distinguishes environmentally sustainable bonds from traditional bonds is not the way they are issued or generate returns, but rather how the funds are used. Indeed, green bonds are one of the main instruments for financing investments related to environmentally sustainable technologies, energy and resource efficiency, as well as environmentally sustainable transport and research infrastructure. They’ve become increasingly popular because they allow investors to combine financial returns with environmental benefits. However, until now, the lack of consistent standards across the EU has impeded the ability of investors to identify, trust, and compare environmentally sustainable bonds, and the ability of issuers to use these bonds to transition their activities towards more environmentally sustainable business models.
The Regulation addresses this by introducing the label of “European Green Bond” (the “EuGB”), a clear and standardized framework for issuing these bonds. This move is part of the EU’s broader strategy to promote sustainable finance and achieve its climate goals.
How does the Regulation work?
Specifying quality requirements for EuGBs in the form of a regulation should ensure uniform conditions for the issuance of such bonds by preventing diverging national requirements that could result from the transposition of a directive. It should also ensure that those conditions are directly applicable to issuers of such bonds. Issuers that wish to use the designation EuGB should follow the same rules across the European Union to increase market efficiency by reducing discrepancies and thereby also reducing the costs for investors of assessing such bonds.
The new framework sets clear rules to ensure green bonds meet high sustainability standards. Here are the key features:
- Clear allocation of funds: at least 85% of the proceeds from EuGBs must be allocated to projects that meet the EU’s Taxonomy for sustainable activities. These include investments in areas like renewable energy, sustainable water management, and circular economy practices.
- Transparency and reporting: issuers must provide detailed information before and after issuing a bond. This includes a pre-issuance factsheet explaining which projects will be funded and how they align with the issuer’s environmental goals, as well as annual reports on how the funds are spent and the impact of the projects.
- External oversight: independent reviewers will check that issuers comply with the rules, ensuring transparency and building trust among investors.
- Flexibility for other bonds: issuers of non-European green bonds can voluntarily adopt parts of the framework, encouraging broader use of best practices without imposing strict obligations.
A broader push for sustainability
This Regulation is part of the EU’s commitment to sustainable finance, which aims to direct private and public investments toward projects that support environmental and social goals. It aligns with the EU Green Deal and the Paris Agreement, providing a critical tool for achieving Europe’s climate targets.
The creation of the European Single Access Point (the “ESAP”), expected to be operational by 2027, will further support these efforts. ESAP will serve as a centralized platform where investors can easily access information about companies and investment products, making the market more transparent and accessible.
What does this mean for companies and investors?
For companies, this Regulation offers an opportunity to access a growing market of investors who are increasingly prioritizing sustainability. For investors, it provides a reliable framework to assess the environmental impact of their investments and make informed decisions. However, challenges remain: issuers will need to meet detailed rules and standards, while investors must continue to scrutinize the actual impact of green bonds to ensure they deliver on their promises. Regulation EU 2023/2631 is a significant step in this direction. By creating a common standard for green bonds, it not only strengthens the credibility of the market but also encourages the flow of capital toward projects that could make a real difference for the planet.
[1] N. 2023/2631.
