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Upcoming standards in green bond issuing in EU

States, aware of the environmental problems and catastrophic scenarios the world is facing today, are undertaking various activities to ensure compliance with the environmental protection obligations foreseen by numerous international agreements. However, states themselves cannot be the only actors in building more sustainable infrastructure and financing projects that contribute to sustainability, which is why they encourage private entities – corporations and financial institutions – to invest in sustainable projects, and as regulators facilitate these private actors’ investment in sustainable, i.e. “green” projects.

One of the main ways of financing projects that lead to the reduction of greenhouse gas emissions and global warming, the increase of energy efficiency, and the development of green technology is the issuance of green bonds. In this way, investors in “green” projects collect capital for investment, and buyers are sure that they are investing in an investment that contributes to environmental protection, which is associated with less strict regulation and relatively lower costs due to the increase in carbon prices on the EU ETS and other levies suffered by “dirty” technology projects.

For decades, the European Union has been actively taking steps towards the implementation of sustainable financing for the transition to climate neutrality. After the European Commission in July 2021 presented a proposal on the creation of unique standards in the issuance of Green Bonds, the novelty in these steps is the agreement of the Council and the European Parliament on the creation of European Green Bonds (EuGB), which will be specified in official regulations.

Such regulation of green bond issuance will be tied to the standards of the EU taxonomy, which sets comprehensive conditions that an economic activity must meet in order to qualify as environmentally sustainable.

The new bond emission standard serves first of all to avoid green washing, as it allows bond issuers to prove that they have financed a project that is truly “green”, i.e. that really contributes to the reduction of greenhouse gas emissions, the reduction or remediation of pollution, and similar environmental protection goals. In addition, investors who buy bonds will be able to more easily access green financing, compare different types of investments and most importantly – be informed about the investment they are investing in.

The green bond issuance standard will create unique requirements for bond issuers who want to characterize these bonds as “European Green Bonds”, which will have to be adapted to the EU taxonomy, assuming that those sectors are covered by the EU taxonomy, with little room for flexibility that is conditioned by further movements of the European Union towards climate neutrality. It also establishes a registration system and oversight framework for external reviewers of European green bonds. In order to prevent green washing in the green bond market in general, the regulation also foresees some requirements regarding the voluntary reporting of other “sustainable” bonds issued on the territory of the EU.

The supervision of the implementation of this regulation will be carried out by the competent state authorities of the member states, as the member states arrange it.

European Parliament negotiator Paul Tang states: “With €100 trillion in annual trade, the European bond market is the single most popular option for businesses and governments to raise finance. Tonight, the European Union took a big step in greening this huge market by adopting the world’s first regulation on green bonds. But we also went further by tying green bonds to the overall green transition of the company as a whole.”

It is absolutely clear that the green transition will not come only through financing and efforts made by public authorities. In order to achieve the goals set by the Paris Agreement and the goals of the SDG agenda, it is necessary to include the private sector, that is, to encourage private entities to invest in green projects. Further standardization in investing in sustainable development and green technologies will make it easier for all interested parties, and prevent green washing.

Foto by Đorđe Vukojičić