08 April 2019

EBF response: EU green bond standard

The EBF provides its feedback on the key elements of TEG’s interim report. This report proposes the content of an EU Green Bond Standard (EU GBS), explains its purpose, sets its ambition level, and explains how TEG thinks the creation of this EU GBS will address the barriers to the green bond market’s further development and will support its role in channelling substantial financial flows to green projects.

Low number of projects in combination with the focus on refinancing certain pure play assets is the single natural barrier for further green bond market’s growth. Green bond volumes are naturally limited by the investments in the real economy. The bond market is not designed or fit to finance projects that would otherwise not have been financed or that are too risky.

Some examples of further barriers:

• strict second party opinion providers requirements,
• narrow definition of “green”,
• short look-back periods that limit issuers to combine existing and new projects,
• no or very limited pricing difference but higher costs in comparison to other funding methods,
• uncertainty with regards the type of assets and expenditures that can be financed by green bonds,
• lack of clarity with regards to the practice for the tracking of proceeds.

Issuers are also less flexible mainly in two ways: use of proceeds (limitation to the defined categories,)    and timing. A green bond transaction needs more time for preparation, so issuers often cannot tap the market as opportunistic as with a plain-vanilla bonds.

The EU GBS should therefore include the possibility for a numerous of small green assets to be refinanced by a large green bond. It has to enable any kind of issuer and all size of assets to be refinanced through the EU GBS. Green financial assets need to be defined as broad as possible and not be limited to single projects. In many cases it is not a project that is being (re)financed but an organisation in general (balance sheet financing).

The EU GBS should, similarly to the taxonomy it is based on, be a functional tool ensuring comparability. The standard should be capable of uniform application without discrepancies or distortive effects. There must be a balance between flexibility ,a gradually phased-in system  and comparability as well as the different preconditions of each sector. While the  EU GBS  should remain voluntary, its use should be encouraged. A gradual approach, i.e. a transitional period before taxonomy becomes stable and mature will be positive for issuers.

There is a consensus on the absence of look-back period to be imposed with regard to the refinancing of eligible green assets, but the look-back period on green expenditures is questionable. It will to depend on the nature, size and sector of the issuer, the portfolio considered, type of assets etc. An alternative could therefore be to include in the reporting the information of the actual look-back period of the assets/portfolio financed/refinanced. It would enable the investors to make up their mind according to this additional information.

The EBF supports the incentives proposed by the Technical Expert Group to stimulate the growth of the green bond market. Concerning the preferential prudential  treatment , this should be considered where reduced ESG related financial risk is assumed. If green bonds benefit from a favourable treatment, this should also apply to other ways of financing sustainable activities through the capital markets, ensuring  competitive innovation and a level playing field.

EBF is also in favour of verification and could take advantage of financial and non financial auditors to verify the quality of the assets in issued green bonds. The review before/at issuance and the review after allocation should however not be perceived as assessments requiring the same level of effort. The ex-ante assessment relates to whether or not the commitment of the company is in line with the Green Bond Standard, while ex-post verification provides actual assurance that the green bonds proceeds have been allocated as intended at issuance. It is important to properly distinguish the difference between the two and consider the cost of the verification.

EBF recommends inclusion of adherence and/or commitment to the UN Guiding Principles on Business and Human Rights.

The EU GBS refers specifically to green bonds. The market for green loans is growing and also became more standardized with the publication of the Green Loan Principles in 2018. Given the (almost) identical requirements in the Green Bond Principles and in the Green Loan Principles, the possibility of having an “EU Green Loan Standard” or an “EU Green Financing Standard” could be assessed.

Full response

© EBF