European Green Bond Standard – banks may not always go for gold
At the time of writing, the policy discussions between the European Commission, Council and Parliament on the voluntary European Green Bond Standard (EUGBS) were still ongoing. The European Green Bond Regulation has the ambition of setting the “gold standard” for the issuance of green bonds. To that purpose, the designation “European Green Bond” or “EuGB” can only be used to finance assets related to economic activities that meet the EU taxonomy requirements, and the transparency and economic review requirements set by the European Green Bond Regulation.
Whether all issuers will immediately go for “gold” after the European Green Bond Regulation enters into force remains to be seen, and will depend on the outcome of the substance of the final agreement. Some issuers will only gradually phase in the taxonomy compliance of their green loan portfolios. There are also countries where the NZEB definition has not yet been implemented, and for buildings built after 31 December 2020 a 15% best-in-class approach is still applied. Furthermore, issuers may not always be fully comfortable that the do not significantly harm requirements and minimum safeguards are met for all loans in the green portfolios, particularly for loans made outside the EU. They will be cautious before using the designation “European Green Bond”.
Banks may be cautious before claiming that a bond is a European Green Bond
Besides, the European Parliament favours the application of civil liability provisions towards persons responsible for any damages caused to investors due to a breach of the European Green Bond Regulation. This stretches beyond the European Commission’s proposals to include the European green bond factsheet and a statement that a bond is issued in line with the European Green Bond Regulation in the prospectus. Civil liability may make issuers more hesitant to market a bond as a European green bond.
That said, ultimately the European Green Bond Standard may still become the format most used by issuers to show the taxonomy alignment of their green bonds. Especially as investors will not always have the resources or the willingness to perform a full taxonomy compliance assessment themselves for every green bond. Besides, the ECB could at some point take the European Green Bond Standard as a reference for assigning more favourable haircuts to sustainable bonds under its collateral framework. The same will hold for the central bank’s reinvestments of redemptions of its assets purchases in the primary market. The latter would be relevant for banks if the central bank expands the decarbonisation of its asset purchases towards covered bonds.
Green TLTROs could support the growth of eligible green loan portfolios
The expiration of the ECB’s TLTRO-III operations in 2023 and 2024 will likely result in a higher capital markets’ refinancing need for banks. Due to the anticipated slower bank lending growth, it is debatable whether this will coincide with higher sustainable bond issuance. Against the backdrop of the energy crisis and the huge task at hand to make the economy more climate neutral, it is not unthinkable that the ECB will decide to establish targeted green refinancing operations. These operations could grant banks favourable borrowing conditions, but only if they grow their financing of environmentally sustainable projects.
Green TLTROs could come in favour of the issuance of green bonds as the green lending balances targeted to grow would likely be decoupled from the green TLTRO borrowings (ie there would probably not be a use of proceeds linked to such green TLTROs).
Financing of other environmental objectives – an area to explore
Green bonds issued by banks mostly (re)finance activities supporting the climate change mitigation objective. However, they could also increasingly serve the purpose of funding other environmental objectives, such as climate change adaptation. This environmental objective and its respective Taxonomy criteria have already been enshrined into EU law. Think for instance of the financing of the implementation of physical and non-physical solutions that would reduce the most important physical climate risks identified for real estate assets. The EU’s Taxonomy do no significant harm criteria for climate change adaptation require climate risk and vulnerability assessments (CRVA) and an assessment of adaptation solutions to reduce the relevant physical climate risks identified. These assessments will increase the banking sector’s knowledge of where such adaptation solutions may be needed.
Transition bonds could support the financing of energy efficiency improvements
The evolvement of the taxonomy classification system for significantly harmful activities will likely see new opportunities arise for the sustainable bond market. Think for instance about the financing of transitional activities. Transition bonds could help fund the upgrade of environmentally harmful activities towards intermediate performance activities, or environmentally sustainable activities.
