European Commission Adopts New Sustainable Finance Strategy and Proposes European Green Bond Standard

On July 6, 2021, the European Commission announced that it has adopted a new Sustainable Finance Strategy and proposed a European Green Bond Standard (and published related annexes and FAQs).

The Sustainable Finance Strategy includes the following six actions:

• Extend the existing sustainable finance toolbox to facilitate access to transition finance
• Improve the inclusiveness of small and medium-sized enterprises (SMEs), and consumers, by giving them the right tools and incentives to access transition finance
• Enhance the resilience of the economic and financial system to sustainability risks
• Increase the contribution of the financial sector to sustainability
• Ensure the integrity of the EU financial system and monitor its orderly transition to sustainability
• Develop international sustainable finance initiatives and standards and support EU partner countries

The proposed European Green Bond Standard is intended to create a voluntary “gold standard” available to all issuers (private and sovereign) to help the financing of sustainable investments.

There are four key requirements under the proposed framework:

• The funds raised by the bond should be allocated fully to projects aligned with the EU Taxonomy;
• There must be full transparency on how bond proceeds are allocated through detailed reporting requirements;
• All European green bonds must be checked by an external reviewer to ensure compliance with the EU Taxonomy and that funded projects are aligned with it. Specific, limited flexibility is foreseen here for sovereign issuers;
• External reviewers providing services to issuers of European green bonds must be registered with and supervised by the European Securities Markets Authority. This will ensure the quality and reliability of their services and reviews to protect investors and ensure market integrity. Specific, limited flexibility is foreseen here for sovereign issuers.

The framework also contemplates “transition” financing by making sure that the related funds raised by the bond are allocated to environmentally sustainable investments. There are three main ways in which European green bonds can be used by companies to support their sustainability transition:

1. Funding long-term projects: Issuers may use European green bonds to fund multi-year EU Taxonomy-alignment projects, such as converting a production facility (such as a steel plant) to reduce its emissions and meet the EU Taxonomy thresholds. The condition is that the transformation results in an EU Taxonomy-aligned project.
2. Transitioning toward EU Taxonomy-alignment: A company could issue a European green bond to acquire or construct an EU Taxonomy-aligned asset, such as a new energy-efficient building. In this way, the company is gradually increasing its share of EU Taxonomy-aligned assets.
3. Funding transition activities: A company could issue a European green bond to perform an activity that meets the criteria for “transition activities” (e.g., cement and steel manufacturing) as set out in the EU Taxonomy.