EU’s new Green Bond Framework

On Tuesday, June 6th, The European Union put forth a new European Green Bond. The agreement aims to fund projects that will work towards reducing carbon emissions. In line with the Paris Agreement and the European Green Deal, The EU plans to be “climate-neutral by 2050 – an economy with net-zero greenhouse gas emissions.”, according to their website.

“Net-zero” carbon emissions mean the balance of greenhouse gases produced and the amount removed from the atmosphere.

A green bond is a fixed-income instrument in which the issuer makes a non-binding commitment to designate the sale’s proceeds for environmentally friendly projects. Aside from the interests, green bonds come with tax incentives and a better public image. The global market for green bonds has passed $1 trillion in total size, though it is still 2-4% of the overall bond market.

The framework will form a ‘gold standard’ for governments and corporations to fund eco-friendly programmes and projects. It is a part of the second iteration of the EU’s Sustainable Finance package. EU’s standard will be based on the list of activities the bloc considers to be green.

The standard will diminish ‘green washing’, which is when products and policies are marketed to look more environmentally friendly than they are and the misleading information lets companies and governments gloss over activities harmful to the environment.

“Our EU Green Bond Standard proposal will set a gold standard in the market, and responds to the needs of investors for a trusted, robust tool when investing sustainably,” said Mairead McGuinness, Commissioner in charge of Financial Services, Financial Stability, and Capital Markets Union.

The framework is voluntary and the issuers are not obliged to use it, but according to Reuters “the more rigorous oversight of those which do is likely to lead many companies to adopt it”. Upon adopting the regime, if the issuers fail to comply with the disclosure rules, they can be fined by their national regulator. The standard can be used by issuers within the region of the bloc and outside it too.

As is the standard, before issuing a bond, a fact sheet allocating the funds to projects must be provided. Additionally, under the framework, the plan of the issuer to align the projects with the standard is also needed.

An external check by verifiers overseen by EU’s markets regulator, as well as yearly reports of how the money is being spent will be asked of the issuers. Once all of the money is spent, an Environmental Impact Report is required to calculate the total impact of the bond.

The EU hopes that the framework will help companies and financial market participants

demonstrate that their investments are in line with the EU’s climate goals.

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