Explainer: Why the EU is backing a new standard for green bonds

The European Commission on Tuesday announced a plan to introduce a European Green Bond Standard (EGBS) to strengthen oversight of the burgeoning sector and funnel money to projects and programmes that help it meet its climate goals.

Green bonds typically raise money for environmentally friendly projects such as solar or wind power, low-carbon transportation infrastructure or resource-efficient housing. Governments are also keen to raise green sovereign debt.

Total issuance, globally, recently passed $1 trillion for the first time and demand is set to grow strongly in the coming years.

Below are some of the main features of the new standard.

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What is the commission proposing?

The new standard (EGBS) aims to help companies raise money for projects and governments for programmes which are in line with the bloc’s climate goals. The standard will use the definition of green economic activities as laid out in the European Union’s taxonomy, or classification, of climate friendly assets, and aims to be the “gold standard” framework for issuance globally, with tougher regulatory oversight than for existing, market-driven frameworks.

Why is it coming now?

Green bond issuance has surged fivefold in the bloc over the last five years, accounting for more than half of global issuance in 2020, with 49 per cent denominated in euros. Despite this, green bonds only make up 2.6 per cent of EU bond issuance and policymakers are keen to see this jump considerably as they look to achieve the EU’s climate goal of being net zero emissions by 2050. The commission also believes that doing so will help reinforce the role of the euro in international markets and bolster its Capital Markets Union aims.

Who can use it?

The standard is voluntary and will be open to companies and governments both inside and outside of the bloc. It will cover all types of bonds including covered bonds, asset-backed securities and project bonds.

What are its main features?

As well as being voluntary and open to all, the EGBS will require issuers to allocate 100 per cent of the proceeds to taxonomy-aligned activities by the time the bond matures, with duration of up to 10 years. The bonds will also be subject to external review, with reviewers overseen by the bloc’s markets regulator, the European Securities and Markets Authority.

Why does the market need a new framework?

The commission believes that the market suffers from a lack of clear definitions about what constitutes a green project, raising uncertainty and costs for issuers and investors. The EGBS aims to be compatible with existing market-led frameworks including the widely used Green Bond Principles from the International Capital Market Association. – Reuters