Publication of European Green Bond Regulation Provides Welcome Certainty

Introduction

The European Green Bond Regulation (“Green Bond Standard” or “GBS”) was published in the Official Journal of the EU on 30 November 2023 and will come into force from 21 December 2024 (with a transitional regime applying until 21 June 2026). The GBS sets out uniform requirements for issuers of bonds that wish to use the designation ‘European Green Bond’ or ‘EuGB’ for their environmentally sustainable bonds.

This update looks at key points to be considered by debt capital and securitisation participants who are considering entering the new market for green bonds.

GBS: Key Terms

The final text of the GBS confirms the following:

(a) the GBS will be a voluntary standard available to EU and non-EU issuers alike. However, countries listed in Annex I to the Council conclusions to the revised EU list of non-co-operative jurisdictions for tax purposes or high-risk countries and issuers established in those jurisdictions will not be authorised to use the designation “European Green Bond”;

(b) issuers who wish to issue a European Green Bond will be required to publish a prospectus that complies with the requirements of the Prospectus Regulation ; unless they are capable of availing of an exemption (i.e. they are an EU sovereign state or quasi-sovereign issuer). As a result, European Green Bonds will need to be issued on a regulated market and comply with the strict disclosure requirements of the Prospectus Regulation. While the GBS does not impose disclosure obligations in relation to the prospectus itself, it is expected that the forthcoming EU Listing Act will require specific ESG-related information to be included in a prospectus for green, social or sustainability-labelled bonds in the form of a disclosure annex;

(c) it expressly permits the use of the GBS for the issuance of “use of proceeds” bonds that have environmental sustainability as their objective. This is an important recognition of the reality of green transition given the current lack of green assets. In the context of green securitisations, the use of proceeds requirement will be applied to the originator of securitised assets on the proceeds obtained from selling securitised exposures to an issuer;

(d) securitisation structures are to be expressly facilitated, both through the use of proceeds approach described above and the recognition of the securitisation special purpose entity and sponsor/originator traditional set-ups and roles in such transactions;

(e) issuers will have to provide a European Green Bond factsheet prior to issuance, which may be incorporated by reference into a prospectus, as well as annual allocation reports, impact reports and a cap-ex plan (if applicable). Issuers will be required to comprehensively describe the activities concerned and the estimated percentage of the proceeds intended to finance such activities as a total and also per activity;

(f) proceeds are required to be invested in economic activities aligned with the EU’s Taxonomy Regulation . For those sectors not yet covered by the taxonomy and for certain very specific activities, a derogation will be applied which will allow issuers to allocate up to 15% of the proceeds of a Green Bond to activities for which there are no technical screening criteria in force on the date of issuance;

(g) a regime for the registration and ongoing supervision of independent third party external reviewers by European Securities and Markets Authority will be established. As part of the registration process, external reviewers will have to show that they have sufficient expertise to act in this capacity and ensure that they have corporate governance arrangements in place to address any conflicts of interest. As part of the verification process external reviewers will have to assess Green Bonds in detail and to provide an independent opinion to investors as to whether an issuer has aligned with the Taxonomy requirements and complied with the GBS. Such third party certification should bridge the subjectivity, trust and labelling gaps problematic in ESG investing currently;

(h) external reviewers have 12 months to put in place the internal verification and assessment processes necessary to confirm compliance with the GBS. It remains to be seen whether there are any practical difficulties in implementing these complex frameworks. One thing is clear – external reviewer readiness will be a key influencing factor in the timing of the first issuance under the label;

(i) to prevent greenwashing in the green bonds market the GBS provides for an optional disclosure regime for other EU bonds with environmental objectives that do not meet the 85% Taxonomy alignment requirement for use of proceeds and for sustainability-linked bonds; and

(j) the designated national competent authorities (“NCAs”) of the home member state (in line with the Prospectus Regulation) shall supervise issuers’ compliance with their obligations under the new standard.

Why Ireland

Ireland is ideally positioned to become a leading jurisdiction in the issuance of European Green Bonds. It has a number of key advantages given its continued popularity as a jurisdiction for the issuance of debt securities (whether into the bond or securitisation markets (including through the use of Irish SPV issuers)), and its unique bridge position between US, EU and UK markets.

A key consideration for issuers in choosing a GBS jurisdiction will be the readiness of national regulators to embrace the requirements of this product and to seamlessly integrate it into their existing prospectus approval process or into a separate GBS stream. Given the professionalism and efficiency with which the Central Bank of Ireland (“CBI”) manages prospectus approvals, it is our view that it will be well positioned to approve the first issuances of this product.

Although the GBS is directly applicable in Ireland, transposing Irish regulations will be required to appoint a NCA (the CBI) with powers to supervise, impose sanctions for breaches and so on. This normally results in an integration of the EU standard into the existing Irish regulatory framework and operating environment without local Irish gold-plating.

Looking Forward

The GBS provides market participants and prospective issuers of European Green Bonds with the necessary certainty to move towards actively planning for future issuances from Q4 2024 onwards.

From a Maples Group perspective, we believe that this represents an exciting new development and we are proactively engaging with other market participants to assist with planning and ensuring that the necessary frameworks are in place to facilitate the issuance of the first European Green Bonds.

For further information, please reach out to your usual Maples Group contact or any of the persons listed below.

The Global ESG Advisory Group page on our website has information on various related topics.